SUMMARY: In this article we provide a global overview on a regional basis of the medium and heavy commercial vehicle market (GVWR > 6 MT’s) along with current trends and OEM happenings in North America.
NORTH AMERICA. MHCV production in North America is expected to decline by 35% in 2020 compared to 2019. However, orders for class 8 trucks improved significantly in Q4 2020 as large fleets placed their orders for a 2021 build. This appears to signal an improvement in demand for 2021 as the market aligns itself with the expected freight level moving forward. The consumer segment was strong during the last half of the year and the industrial segment is now expected to improve, as well.
Within the consumer side, reefer, flat bed and dry van carriers have performed relatively well. We have also seen contract and spot rates improve primarily due to tightening truck capacity and an on-going driver shortage.
Throughout 2020, freight was also very uneven. For example, the trucking sectors that haul for the industrial and energy industries did not see the surge in freight like the consumer side of the economy. Early in 2020 it looked like class 8 truck production could decline to as low as 135k trucks compared with a current production forecast of approximately 200k trucks.
During the past few years there have been some significant trends taking place in the medium and heavy truck segment in North America. In order to retain drivers, fleets have been transitioning their focus on more regional haul rather than long haul. Basically, truck drivers do not want to “live on the road.” E-commerce has helped facilitate this trend by distributing inventory to a wider range of locations.
Widening the Panama Canal has been a factor since more imported goods can be delivered closer to their end destinations. During the past decade, the commercial vehicle market has come under pressure to adopt alternative fuels such as natural gas, hybrids, electric and more recently hydrogen fuel cell technology. Hybrid vehicles have not gained traction and natural gas is currently relegated to specific applications.
Currently, electric trucks are still in the test phase while hydrogen fuel cell trucks are just beginning the test phase. Much like the rest of the world, major OEMs have electric and hydrogen trucks in the testing stage with series production expected to commence in the 2023-2024 time-frame. However, numerous barriers still will need to be overcome before adoption can take place on a large scale.
For several years, we’ve been seeing companies shifting production to China as they seek lower production costs, but now this trend has started to reverse as companies seek to decentralize production. The United States Tariffs on Chinese products, new global trade deals and the introduction of the Coronavirus shed significant light on the risks to the supply chain.
We should note there is significant investment into technology which could move China into a different spot in the supply chain. South Asian nations and Mexico will primarily benefit from this transition.
While the trend toward electrification has been slower for medium and heavy trucks, the transit bus segment is on a somewhat faster track to series production. Since transit buses typically have pre-defined routs and good access to a recharging infrastructure, they are good candidates for electrification. It also helps that this segment is not-for- profit and a payback is not typically required. The significant barriers to adoption appear to have been overcome. During the past few years, numerous large municipalities have set target dates to have their entire bus fleet converted to all electric vehicles.
In California, CARB has established a mandate requiring all transit buses to be zero-emission compliant by 2040. The Los Angeles Department of Transportation plans to have an all-electric bus fleet by 2028. They recently ordered 155 electric buses from BYD and Proterra to be delivered during the next two years.
San Francisco plans to have a zero-emission bus fleet by 2035 and plans to purchase only zero-emission buses starting in 2025. In Seattle, King County Metro plans to transition to 100% zero-emission buses no later than 2040.
New York currently has over 5,000 buses which is the largest transit fleet in the country, and the city plans to convert the entire fleet to all electric by 2040. The Chicago city council also approved the transition to a 100% zero-emission bus fleet by 2040.
Besides the trend toward vehicle electrification, there are some other significant OEM recent developments in North America.
In November 2020, Volkswagen’s TRATON group and Navistar announced a merger agreement in which TRATON will acquire all outstanding shares of Navistar. Previously, TRATON held 16.7% of Navistar’s common shares. The deal is valued at $3.7 billion and is expected to be finalized in mid-2021. Navistar has been in collaboration with TRATON’s brand MAN for numerous years primarily in engine development. PSR believes additional engine offerings will be one of the primary goals to improve profitability and long-term market share improvement within the class 8 truck segment.
To reduce costs, Ford recently ended production of the heavy Cargo series truck in Brazil. Ford has always struggled with profitability in this region and decided to focus their efforts elsewhere.
Mack has a strong presence in the heavy vocational market and has recently introduced their MD medium truck lineup which is produced at a new facility in Virginia. Their new medium truck line-up covers class 6 and 7 and Mack should be a strong competitor in this segment.
EUROPE. In Europe, commercial vehicle demand was down significantly in the second quarter but has since improved and this is expected to continue into 2021. During the first half of the year, medium and heavy truck registrations in the EU declined by 43% compared to the first half of 2019 while bus registrations were down by 35%. Export demand has also declined sharply this year primarily due to the impact of the coronavirus on the global markets. We believe MHCV production for Europe will decline by 25% in 2020 over 2019.
SOUTH AMERICA. In South America, Brazil is the largest producer of commercial vehicles. Through the first 10 months of 2020, production declined by 31% comparted to the same period in 2019. While there has been some improvement during the past few months, domestic and export demand continued to be soft through the end of 2020.
Production was down sharply in April as most of the OEMs and suppliers shut down production facilities because of the COVID-19 outbreak.
On a positive note, we are seeing an outstanding performance in the agricultural segment in both production and commodity prices. Construction continues to recover primarily due to low interest rates for home construction. Fiscal stimulus was also enacted by the government for people who have lost their earning capacity and financial incentives for businesses to keep their employees.
Looking into the future in Brazil, we expect some level of truck pre-buy in 2022 as P8 (Euro 6) emission requirements take effect in 2023. The additional cost of the emission technology with little improvement in fuel economy typically leads to a vehicle pre-buy.
CHINA. After declining sharply in February and into March, medium and heavy truck production in China has been extremely strong in 2020. Much of this activity has been driven by the government mandate to eliminate the current Euro III and earlier emission complaint trucks and replace these with new Euro V compliant vehicles. The plan is to have this completed by the end of 2020.
This program, along with stricter punishment for overloaded vehicles in big cities and some small cities and rural areas, has helped drive strong demand this year. As a result of this, PSR expects demand to decline significantly during the next few years. Much like the other regions, bus demand is down significantly.
SOUTH ASIA is a diverse region with the largest production of commercial vehicles located in India. Coupled with price hikes from the BSVI (Bharat Stage 6) emission regulations, increasing fuel prices, economic recession, lower freight demand and driver and labor shortages, the headwinds in the commercial vehicle industry continued in 2020, marking one of the worst years for the Indian commercial vehicle market.
Driven by social-distancing and work-from-home policies, there is little demand for buses from the education sector. The transit bus segment is also one of the worst hit with our estimates of only 10-15% in-service transit bus fleets being operational. The improving rail freight infrastructure, the proposed vehicle extension policy, shifting focus on used-truck market and under-utilization of in-service vehicle population are likely to further dampen the commercial vehicle outlook in the mid-term.
Much like the rest of the world, medium and heavy vehicle production in Japan and South Korea declined sharply in late Q1 2020 and into Q2 2020 as a direct result of the Coronavirus pandemic. While demand has since stabilized in both the domestic and export markets, it will still be a few years before vehicle replacement levels improve to more historic levels.
Over half of the medium and heavy truck production is exported out of the region. Over the last number of years, we have seen the Japanese OEMs face stiff competition from the Chinese OEMs in the Asian export markets.
Early in 2020, Isuzu purchased UD trucks from Volvo. Volvo purchased UD trucks in 2007 but never reached their profitability target. Isuzu will likely leverage UD Trucks assets and possibly work with Volvo on future initiatives including vehicle electrification and autonomous vehicles. PSR
Chris Fisher is Senior Commercial Vehicle Analyst at Power Systems Research
