Interview: Sandeep Kar, Global Program Manager, Commercial Vehicle Research, Frost & Sullivan

By: AWPresenter.com, Tuesday, April 26, 2011,

Tags: Daimler AG, Fiat SpA, Manufacturing, Navistar International Corporation, OEM Strategy, Paccar, Production Data, Sales Data, Scania.

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Sandeep Kar manages Frost & Sullivan's global commercial vehicle research programme. This includes regional and global commercial vehicle technologies and their markets, and covers areas as diverse as powertrain, chassis, safety, telematics, hybrid vehicles, regulations and compliance technologies.

The Frost & Sullivan global commercial vehicle research programme has analysts in 15 offices in 23 countries worldwide, and according to Kar, has become one of the company's fastest-growing research programmes.

In an interview conducted by AWPresenter.com, the online conferencing division of AutomotiveWorld.com, Sandeep Kar discussed the emergence of the low-cost truck sector, its implications for fleets, logistics and shipping companies worldwide, and the impact it will have on established brands and markets. The interview coincided with a webinar presentation given by Sandeep Kar.

AWPresenter.com: The truck sector has been neglected to some degree because it does not have the volumes or indeed the glamour of the car side. Do you now see it at the forefront of change?

Sandeep Kar: Yes. The perception of the truck sector has changed because when the global economy took a hit and the automotive sector went down, car industry suppliers and others started to look for revenue opportunities in adjacent markets. The truck market globally is also a good leading indicator of economic activity. When truck sales go up, economic growth goes up, and then car sales go up as a lagging indicator. Car manufacturers and suppliers are now looking at entering this market because they can bet on it with more certainty. Of course it does not offer the same volume, but it does offer a robust market and one that is now the arena for tremendous levels of technology and product innovation. As an industry observer, I feel there has never been a better time to research and analyze this industry: truck manufacturers and suppliers are going global, and competition from new participants is on the rise. New regulations and legislations are being introduced at a frantic pace, new technologies and products are being developed and introduced, and in many cases market pull rather than OEM push is dictating product development - these are exciting times in the global truck industry.

AWPresenter.com: Are margins better on the commercial vehicle side than in the car industry?

SK: For the most part, yes. The level of competition is much lower in the commercial vehicle supply chain. There are fewer suppliers, so if you have a good product then the chances of success are higher and you can maintain margins because your competitors will not undercut you. The good thing about trucks, particularly in a North American or European context, is that they are heavy objects manufactured using heavy sub-systems and components. It does not always make logistical sense to source components from China, so that work and those jobs can be protected and preserved in the context of the global economy. From an economic perspective, or from a socio-political perspective, the truck market is becoming very important. Moreover, the truck market mirrors the Dow Index, so we are all looking at the truck market to see which way the economy is headed because it will tell you whether the economy is on track for a recovery or not.

AWPresenter.com: Can the truck sector take a leading edge in terms of technology, or is it the car sector that draws in new technologies?

SK: It's a two-way street really. Some technologies get introduced first in the truck sector and then find their way into the car sector, and vice versa. Increasingly we are seeing the integration of electronics in trucks, which happened a long while ago in cars, but now trucks are increasingly featuring advanced electronic systems and embedded-in truck architectures, which shows that trucks are finally coming of age.

In North America, the end-user has much greater influence...over which engine, which transmission and which of many other features go into the truck. In the European market there is more market push; in North America there is more market pull.

AWPresenter.com: To what degree can modernisation in the truck sector be attributed to the professionalization of the customer base in the form of large logistics companies?

SK: Large logistics companies have been very important. OEMs will only do what their customers, the fleet managers, tell them. These customers have realised that energy price volatility is here to stay. They have realised that driver shortages will continue to be a challenge in their business for a long time. They have realised that they have been running their businesses far too inefficiently for too long. All of these factors have been recognised by the major fleets and owner-operators on both sides of the Atlantic. This has resulted in them demanding new technologies. On a related note, we at Frost & Sullivan perform fleet manager research on a yearly basis. We talk to the top fleet managers and ask them about their familiarity with, and desire and willingness to pay for new advanced technologies. This is an annual tracking study conducted in all key areas of the truck. Fleet managers are increasingly telling us through our 'voice of the customer' research that they want something, anything that can help them reduce operating costs, and they are willing to pay for that.

AWPresenter.com: Can you please provide an example?

SK: Yes, take the example of prognostics. In this case, prognostics is the ability of a truck to detect an impending failure and to report it to the operations control. We asked the leading fleet managers whether they were willing to pay US$6 per month for a collection of back-office functions such as routing and scheduling, or whether they would be willing to pay US$12 per month for prognostics. Fully 50% of the fleet managers we interviewed in 2009, in the depths of a recession, said that they were willing to pay US$12 to get prognostics. On a similar note, we asked which, of all available safety technologies, from Electronic Stability Control to lane departure warnings to TPMS (tyre pressure monitoring system) they would be most likely to buy in the next 12 months. They chose TPMS. It is not even a safety technology - it is a fuel efficiency enhancement technology, but they are choosing this technology because a 1% or 2% efficiency improvement delivered means thousands of dollars of savings. It is the same with EGR compared with SCR technologies that use urea: there is a fuel efficiency gain. There is a change in mindset, a change in philosophy, away from the traditional way of thinking. Fleet managers are telling us: give us anything that can save on operating costs and we will pay, even in a recessionary environment.

AWPresenter.com: In the car sector, OEMs are bigger than their suppliers. Are the power relationships different in the truck industry?

SK: No, the relationships are similar in the truck sector, although in North America, the end-user has much greater influence. The fleet manager has more influence over which engine, which transmission and which of many other features go into the truck. In the European market there is more market push; in North America there is more market pull. This means that if I as a customer want, for example, an Eaton transmission, then you as a truck manufacturer must oblige or I will take my business elsewhere.

Car buyers want esoteric things, good quality and a good finish. In trucks, the focus is on the duty cycle and the need to achieve this at the lowest possible cost. The low-cost concept should have been introduced in trucks first, not cars.

AWPresenter.com: Are there any parallels between the low-cost truck concept and the Tata Nano? That model has been something of a disappointment so far.

SK: The Tata Nano has indeed been a bit disappointing. One would imagine that under recessionary conditions the market would favour such a product. The fact is that the product has not been successful, but there are key differences between cars and trucks. Trucks are business machines. Car buyers want esoteric things, good quality and a good finish. In trucks, the focus is on the duty cycle and the need to achieve this at the lowest possible cost. The low-cost concept should have been introduced in trucks first, not cars.

AWPresenter.com: Does the low-cost truck concept therefore have a much firmer grounding than the low-cost car concept?

SK: Yes. Businesses are in the front line of market activity, and they rely on solutions that help reduce operating cost. We have already discussed the way in which North America demands vehicles that reduce total cost of ownership. Total cost of ownership is a function of up-front cost and operating cost. Up-front cost can be reduced by purchasing low-cost trucks. Obviously operating costs will be a little higher but when you do the maths and ask yourself how long you want to keep this vehicle, then the total cost of ownership works in favour of the low-cost truck over the first few years. It depends upon the location and the duty cycle, but there are many cases where it makes perfect sense to opt for a low-cost truck.

AWPresenter.com: Are OEMs worried about the erosion of brand value, of commoditisation, and the erosion of margins with low-cost trucks?

SK: They are indeed concerned, which is why Daimler has not launched its low-cost truck under the Mercedes-Benz logo. But it is also more complicated than that, because it results in strategy dilution and the addition of a new brand. The question is, would you rather have strategy dilution as a concern and generate profit over the next five to ten years? Truck manufacturers have to be concerned with shareholder value, and to identify where there is growth over this time period. So this is one market where you have to be present, because it is where the growth is. This is precisely why there are 29 platforms being created for that segment. Clearly there are some brands that will always remain premium brands. In North America that means Peterbilt, in Europe it means Scania and DAF; but even Volvo and Mercedes-Benz, which are borderline premium are in this game now. The buyers of these premium trucks are not fleet buyers; they are primarily owner-operators. Fleet managers do not care about all the features that the premium trucks offer. Fleets buy IVECO and Navistar and those sorts of trucks.

Low-cost truck producers will target North America because the market is more open, the competition is less fierce, and because it is easy to target due to the absence of an existing compatible product.

AWPresenter.com: Can you please discuss some of the regional opportunities for low-cost trucks? What role, if any, will low-cost trucks play in North America, for example?

SK: Low-cost truck producers will target North America because the market is more open, the competition is less fierce, and because it is easy to target due to the absence of an existing compatible product. Low-cost truck producers have seen that American manufacturers did not react fast enough in the case of low-cost cars when Toyota entered the market in the 1960s. This time, the North American truck manufacturers know they cannot allow history to repeat itself, and that they cannot take this threat lightly.

AWPresenter.com: Will the European market behave differently?

SK: European manufacturers have not been able to gauge the threat effectively, because they are more complacent than North American OEMs. On a global scale, European products are in most cases more technologically advanced than North American products, but nobody can sell a product like an American can. European OEMs might be able to produce a superior low-cost truck, but once American OEMs put their marketing muscle behind their low-cost products, the European OEMs will face stiff competition. It is therefore important that European OEMs understand that the low-cost truck is a fact, it is coming, and that we have identified 29 new low-cost truck platforms that are being created globally between now and 2016. Some are being created by European OEMs, some are not, but all can and will be suitable for the European market. So, OEMs either defend their market share, or take the battle overseas, or do nothing and watch their market share vaporise. These are the only three options.

AWPresenter.com: What opportunities does the Brazilian market offer for low-cost truck manufacturers?

SK: We were baffled by Brazil. The levels of taxes for imports or even locally-built trucks are very high. The Europeans are there, but the trucks are very expensive. Except for Agrale, there are no indigenous producers of trucks in Brazil, so it is a microcosm of the European market. Sinotruck (CNHTC) has introduced a low-cost truck to the market, so the segment is being developed. Brazilian customers therefore tend to keep trucks much longer in Brazil than most other markets, because the capital outlay for new trucks is very high. The trucks on average are old and dilapidated, so the opportunities are there in theory but in reality the market is more constrained. The entry barriers are high, so it is a moderate opportunity.

AWPresenter.com: The European car business has been able to retain technological leadership and differentiation, and thereby a profit margin. Can you foresee an escape up-market for the European truck sector?

SK: Not really. Those luxuries are behind us now. A person buys a car using their own money, and if the recessionary conditions in Europe and North America prevail for another five years then we shall see buying preferences change substantially. In the case of the commercial vehicle sector, the case for simply wanting a vehicle to go from A to B is even stronger. Those luxuries and features that can sell a vehicle in the light passenger car segment are not a priority in the truck segment, where it is all about getting freight from one point to another for the lowest cost and for the lowest total cost of ownership.

We think that North America is going to be the biggest hot-spot for the global low-cost truck market. It is going to grow from about 82,000 units to about 159,000 units in a span of about five years.

AWPresenter.com: You mentioned Sinotruck. How important will Chinese and Asian products be in this sector, compared to specifically-developed models by US and European brands?

SK: It should not be forgotten that the leading edge enjoyed by North American and European OEMs is shrinking rapidly. Asian vehicle manufacturers are now producing cars that are much less inferior than US and European cars. This is because they are moving quickly up the learning curve, and, because they have high rates of growth, they have more money to spend on R&D than many of the Western producers have been used to. The technological gap is definitely shrinking.

AWPresenter.com: Brand characteristics change more slowly than technology and price issues. Do you think Europe is still very 'badge aware', and that this may constrain the advances that could be made in terms of low-cost cars?

SK: Yes. That is why I think Europe will be a tougher battleground for many of the Asian OEMs, whether on the truck side or the car side, compared with North America, where that sort of brand inertia does not hold people back as much. This is why low-cost truck producers are targeting North America. We think that North America is going to be the biggest hot-spot for the global low-cost truck market. It is going to grow from about 82,000 units to about 159,000 units in a span of about five years.

AWPresenter.com: How important is the manufacturing location to the low-cost truck business model?

SK: It is important to find a place on the map where you can manufacture at the lowest cost, where you can access suppliers at the lowest cost, where material, capital and labour costs are the lowest. Then comes 'design to cost', and then de-contenting, in that order.

There are of course some risks, and some markets are hyper-inflation markets that can result in much higher overhead expenditures. It is crucial to undertake due diligence studies, and socio-economic analysis, to find out whether it makes sense to go into a particular country.

AWPresenter.com: Shipping finished trucks is an expensive business. What role does finished vehicle logistics play when calculating margins for low-cost trucks?

SK: At Frost & Sullivan, we have forecast production, not sales, but some of these trucks will end up in export markets. Daimler is producing low-cost trucks in India, but not all of these trucks will end up on the market in India. Companies like Hyundai are using India as a hub for low-cost cars, and that is the ideal strategy: use the low-cost location for the local market and other markets, because it still works out cheaper to do this.

Fleets no longer need heavy-duty, long-distance trucks to support this kind of function - they just need medium-duty and shorter-range trucks, which do not need to be as desirable, so inter-modal transportation encourages low-cost trucks.

AWPresenter.com: Will faster depreciation undermine the total cost of ownership calculation for low-cost trucks?

SK: I think it will happen, depreciation will be faster. OEMs in these areas are using inferior materials and technologies, but do so knowing that these vehicles will have a shorter life-cycle than conventional trucks. Although the total cost of ownership will be lower, because of the lower purchase price, every case will have to be examined in relation to the particular duty cycle.

AWPresenter.com: Your findings show that you expect the cost edge of the low-cost truck to reduce over time. Will this lead to the low-cost and mainstream segments eventually converging?

SK: Low-cost truck prices will increase and come closer to mainstream trucks. Although manufacturing and material costs will rise, and safety and emissions regulation will add cost, there will continue to be a price difference. The low-cost truck segment will not overthrow the conventional market, but it is an important new segment with significant growth rates. That is why this particular segment cannot be ignored, especially when other OEMs around the world are hungry for market share and are willing to attack where others are not prepared to defend. They will steal market share from competitors' comfort zones and from high-margin activities.

AWPresenter.com: Will other modes of transport displace the truck market globally, especially in the important emergent markets?

SK: Yes, and we are already seeing evidence of that in some emerging and developed economies, but that is why low-cost trucks will be even more important in these markets in the future. Look at India with the creation of the North East and North West rail corridor; look at China and the creation of the Yangtze corridor. This is the creation of multi-modal and inter-modal transportation. How does this benefit low-cost trucks? Fleets no longer need heavy-duty, long-distance trucks to support this kind of function - they just need medium-duty and shorter-range trucks, which do not need to be as desirable, so inter-modal transportation encourages low-cost trucks.

This interview first appeared on AWPresenter.com, the online conferencing division of AutomotiveWorld.com

Published on Tuesday, April 26, 2011

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