While the global commercial vehicle business can never be said to stand still, even by its standards the next five years or so look set to be a period of frenetic development.
The reasons for this are numerous. On the one hand, as the Triad markets move away from the demands of the clean air acts and towards a regulatory environment founded on greenhouse gas (GHG)-based legislation, so will the design and the technology that underpins the next generation of commercial vehicles change. But, at the same time, so too will the market served by those same vehicles. Fundamentally, goods will still be moved between two points by that vehicle, but that which surrounds the process is already changing, and will continue to change markedly.
The Triad markets
The shift towards a regulatory environment predicated on the control and ultimate reduction of GHG emissions from heavy trucks is already ongoing. The proposals for Phase 2 of the joint NHTSA / EPA standards were published in June 2015 and we should see clarification as to what the period following 2021 will look like some time during 2016. It’s clearly premature to speculate in terms of detail at this point, but we can now begin to consider what the shift from oxides of nitrogen (NOx) and particulate matter (PM) towards GHG will do in terms of industry structure.
While the United States has taken a lead in terms of GHG reduction, it seems probable that Europe will not lag far behind. What also seems probable is that – despite the NHTSA / EPA proposals currently being constituted of separate standards for both vehicle and engine – the direction in which we are heading is one that will eventually favour a holistic approach to emissions control.
This is a trend that will play clearly to the OEMs, for whom the adoption of a European verticalised model now looks to be a core strategic aim. Only recently, Daimler announced the launch of an integrated medium duty driveline for North America, thus mirroring its approach to this segment in Europe. Increasingly, therefore, it becomes difficult to see quite where Tier 1 suppliers will fit into this altered marketplace.
This is a discussion that has been ongoing for a while, and the future of concurrent sourcing within the North American marketplace has been increasingly questioned over the past couple of years. However, it may now be time to consider this from a different angle. It is not that Tier 1 suppliers cannot produce that which is fit for market in the post-2021 era; it is that they may not be able to do so at a unit rate that justifies their continued participation. Consider for a moment the impact of, on the one hand, a diminishing addressable market – something the Tier 1s clearly now face – coupled with a likely significantly increased unit cost of design and production of those same products. At some time, a tipping point is reached and for simple commercial reasons, a supplier confronted with that tipping point has to consider either addressing the cost-benefit disparity or exiting the market. It becomes increasingly difficult to see how the former can be achieved; that leaves the latter as the logical commercial strategy to adopt.
While this may seem an outcome that favours the OEMs, the direction that GHG looks set to take the industry in is not without strategic risk. As the North American market now seems to be into the down-cycle, we are seeing clear examples of overbuilding. Inventory is bloated, and, rather than a manufacturing philosophy based upon demand pulling product, what we have seen is a more European approach of manufacturing pushing product. The days of a lean approach appear to be on the wane.
Push manufacturing is fine when the market is in the upswing; it is anything but fine when it is in a downturn. Arguably, the OEM that can predict the point at which the market turns is – to a certain extent – insulated from this problem. Unfortunately, changes to the regulatory environment – we are likely to no longer see the pre-buy volatility of previous cycles – make such predictions rather less easy to get right. This makes control of the trading cycle far more important than previously.
Exercising control over a trading cycle is a tough call, but one that is made markedly simpler if the supplier-buyer relationship is changed to a supplier-lessor relationship. Leasing of some form now accounts for a significant volume of trucks sold within the Triad. The relationship between OEMs and independent leasing companies has never been a particularly easy one, and now it seems likely to be one that gets rather more fractious. If the OEMs desire to exercise control over the trading cycle, those same OEMs have little choice but to extend – or even develop – a presence within the leasing market. This puts those same OEMs squarely in competition with their customers, and it is difficult to see how this can end happily.
If the Triad markets are evolving as a function of regulation, what then of the non-Triad markets? Here, too, regulation is playing an increasing role, but the challenges for OEMs competing in the BRICs markets are clearly distinct from those confronting the Triad.
It’s difficult to see how anything other than the passage of time can cure the malaise that now bedevils not just Brazil’s truck industry but the country’s broader economy. However, the issue of at what point the industry might be said to have been cured is one worthy of some debate. FINAME is the key driver for truck and capital equipment sales in Brazil. During the era in which FINAME amounted not just to an interest-free but an effective interest bearing loan to buyers – net out inflation and subsidy against prevailing SELIC and you end up with an effective payment to buyers – quite obviously trucks were sold. That situation has now reversed and trucks are not being sold. At issue here, therefore, is the question of which of the two scenarios is more sustainable in the long run. If it is the former, then we should hope to return to a level of demand witnessed during the height of FINAME impact. If it is the latter, then such hope is rather misplaced.
So it comes down to a judgment call in terms of what happens with FINAME. Given that Brazil seems to be in a period of increasing monetary tightening, it seems improbable that FINAME will drive sales. Until this is reversed, Brazil looks set to remain static.
Russia has also been in a parlous state over the past few months. World Bank data now implies a return to growth – of 1.5% – in 2017, but clearly there any number of exogenous factors may yet impact this, with sanctions and depressed oil price being just two. As with Brazil, the truck industry in Russia is a hostage to a broader economic malaise. And as with Brazil, recovery looks to be a function of time rather than strategic change.
China and Brazil are linked in many ways. So too are they comparable; reversion to mean is a well documented theory and one which – in terms of fundamental economics – has much to recommend it. But if that same mean is at odds with reality – let us say that someone has kept a finger on the scale – then a reversion to that which is not a reflection of a long-term average is less easy to argue for. China, like Brazil, is an economy that has depended in no small measure on marked and sustained intervention on the part of government for past success. The extent to which this can continue is difficult to assess. China at present is suffering. In time, things may well improve. But the extent to which they improve is difficult to gauge. As an analytical proposition, at present China remains a case of piercing a mirage.
A recent HSBC report predicts that India’s rate of merchandise exports will grow faster than that of China – by 6% a year – during the period 2025-2050. A nearer-term view – that of the IMF – sees India’s growth rising to 7.3% in 2016. India benefits at present from a low oil price, and, arguably, when compared with the three other BRICs markets, currently presents itself as a beacon of stability.
Does stability sell trucks? Recent data shows signs of an improving market, with Tata posting 15 straight months of increasing domestic sales. But longer term, the India truck story seems to be one predicated more upon exports; Daimler Asia head Marc Llistosella sees 25% of its Indian production going to export markets, while Tata is reportedly looking to treble unit exports by 2020. In terms of future development, India seems to be all about exports.
Expect significant and far reaching change
This article has divided into two parts; Triad and non-Triad. As of late 2015, that remains a relevant means of analysis. But increasing regulatory homogeneity and the prospect of more free trade agreements look increasingly likely to blur this distinction. Ultimately, inexorably, we are moving towards a global marketplace in which traditional barriers to entry may not be removed but will certainly be lowered. The extent to which this will change things will be a focus of industry debate for the next few years. That it will create significant and far reaching change, however, remains beyond doubt.