In this episode of the PSR PowerTALK Podcast Chris Fisher, Power Systems’ Senior Commercial Vehicle Analyst, discusses the Q4 2020 global production facts and related forecasts for medium and heavy trucks.
Transcript
Welcome to PowerTALK Truck podcast February 2021. Produced by Power Systems Research, the leading supplier of global production data and forecasts to the engine power products and Components industries. Here’s today’s host, Emiliano Marzoli, Manager of Power Systems Research, European Operations.
00:22 Emiliano Marzoli:
Hello everybody. From Power System Research, I am Emiliano Marzoli; your host today. And I have with me Chris Fisher to introduce you to PowerTALK truck news.
Chris is our Senior Commercial Vehicle Analyst. He’s got more than 20 years of experience in the trucking industry and is a very regular contributor to different industry publications. So, we have a lot of knowledge here for you guys.
Chris, you create a report every quarter that looks at global track production. What are the changes you saw in Q4 2020 compared to the third quarter of last year?
01:12 Chris Fisher:
Thanks Emiliano, uhm yes, you’re correct. We do put together a truck production index that does measure quarterly, and we’ve definitely seen some major changes. A lot of times it doesn’t change that much, but in this situation it really did, and this is on a global basis.
Overall, we’re seeing stronger momentum for commercial truck orders and sales, which will definitely bode well for production next year. Let me say that truck index is a production index. However, we are still seeing and you’re really picking up a bit more. But supply chain issues will impact short term production as companies are still having difficulty with staffing numbers and, of course, various, you know, the virus protocols that often disrupt production. These problems are expected to continue definitely through (the) the first quarter; most likely the first half of the year.
02:03 Emiliano Marzoli:
When we compare year over year, do you see a different trends compared to the last two quarters of 2020 or is it similar?
02:12 Chris Fisher:
Well, what we’re going to, or, expecting to see next year is, with the exception of China, PSR does believe the worst of this pandemic is over and the effects to the commercial truck market are behind us. And while we do not expect production levels to generally return to pre pandemic levels, we do believe demand will be significantly higher in 21 than it was last year.
02:36 Emiliano Marzoli:
So (so) Chris, in your view, what are the drivers? The most critical drivers that are that are impacting the transfer of 2021 in commercial vehicles and buses?
02:51 Chris Fisher:
Well, basically everything is kind of settled down a little bit. You know everyone remembers when this first hit last spring, you know, it was pretty much a lot of shock and awe. Everyone was traumatized by this, but since this is, uh, the shock and awe’s went away, the global economies are starting to become generally stronger than they were six months ago.
Basically, freight continues to be hauled by fleets and the fleets need to be upgraded. While we expect the negative effects of the pandemic to remain throughout this year, we don’t believe it’s as nearly as dramatic as it was last year. So, hopefully we’re getting better moving forward.
03:29 Emiliano Marzoli:
And (and) Chris so North America and the US (was) at one of the steepest declines last year. Do you have any insights for us regarding the US and North America?
03:42 Chris Fisher:
So within North America, commercial truck demand rebounded in the fourth quarter 2020. We’re all pretty pleasantly surprised about it. Particularly in the Class 8 segment. Order rates for Class 8 commands stronger than expected, which bodes well for production through at least the first half of this year.
However, there is concerns surrounding the supply chain. Currently the supply chain is struggling with a surge in demand and companies are having difficulty hiring enough workers. We’re also seeing that imported parts are experiencing delays at the ports. I think I read something where it’s up to two weeks so that really can set you back. We’ve seen in the automotive segment where they’re starting to idle plants as they’re short of, like, semiconductor chips. Any supply chain issues are expected to continue through again the first half of the year; definitely the first quarter.
Freight rates remain relatively high and this trend is expected to continue throughout the year. Strong consumption, inventory, restocking and solid growth in the single-family housing builds are positive factors affecting the freight — the trend in freight.
I also notice Congress passed another round of economic stimulus, which bodes well for commercial vehicle adoption, and they’re working on more of that. I don’t know how long this is going to continue.
So while the coronavirus continues to negatively impact the economy, PSR does not believe the effects will cause a significant slowdown in demand this year.
Increasing vaccinations should also lead to a stronger economy heading into the latter half of the year.
And finally, looking ahead we believe the heavy truck production will continue to improve through at least 2023, as truck capacity rebalances in the market. We’re a little bit out of whack right now.
05:29 Emiliano Marzoli:
Yeah, that’s that’s a good point, because, uh, it’s great to hear that (that) the industry is coming back. But correct me if I’m wrong, we’re still far away from pre covid volumes, particularly in North America.
05:45 Chris Fisher:
I would say North America were at least a year off. And remember though, 2019 was an exceptionally high year. I believe it was it like 320 or 330,000 Class 8 trucks, which really we should be around 270,000 as standard replacement level. So we’re thinking that it’ll be most likely 2022, maybe 2023 before we get back to your more replacement level. It’s good question.
06:12 Emiliano Marzoli:
Right.
And you mentioned Congress earlier, and obviously there is a lot going on on the political scene of the US. We have a new government and President Biden is already taking some action and is definitely, uh, he seems to be very, very active on the on the climate, uh, changes and he’s willing to go back in the in the Paris agreements. Can you see any impacts, uh, short term or maybe medium term for the trucking industry? Or is it still too early now to to judge that?
06:49 Chris Fisher:
Well it’s, it’s still pretty early. We know what they want to do, you know, directionally; but whether they can get it done, that’s always the question. Then is it a lot more lip service? We don’t know, but I would have to answer that as basically not — not much at all in the in the near term.
However, though I do want to talk a little. If the administration effectively implements their agenda, we can expect heavy investment infrastructure, OK? Which would include recharging and refueling stations for electric and hydrogen fuel. This is where their focus is going to be, I believe, on infrastructure. Well, it has to be, if they’re going to, if they have the goals of converting everything to electric, you know, down the road, they’ve got to get started.
Currently, the largest barrier to adoption for the regional long-haul trucks is the lack of infrastructure for the technologies.
In the meantime, we should expect stricter emission regulations on diesel powered trucks at both the federal and the state level state. A lot of times we think of California CARB
And one thing I do want to, I want to get into this a little bit. It’s a little different from your question. But really, on a side note, many larger municipalities have already implemented or suggested legislation requiring transit buses to converted to all electric between 2025 to 2040. And since many of these barriers of adoption have been overcome, we really do think this could happen.
So let me give you a few examples. So, in California, CARB has established a mandate requiring all transit buses to be 0 emission by 2040. In Los Angeles, their Department for Transportation plans to have an all-electric bus fleet by 2028. It’s pretty aggressive.
08:31 Emiliano Marzoli:
Yeah, that’s very aggressive, wow.
08:32 Chris Fisher:
Yeah, well what they’ve done, they’ve recently ordered 155 electric buses from BYD and Proterra to be delivered during the next few years. BYD is really, is really the electric bus maker of choice. We’re seeing a lot of those. Proterra’s out but BYD is, is really up front.
08:51 Emiliano Marzoli:
Yeah, I I. I agree here in Europe as well. We we see a lot of BYD. They were very dominant in the, in the airport, uh, space before the covid. That (that) segment now has gone out of whack a little bit obviously. But yeah, BYD is doing a great job. Is really aggressive and taking a lot of orders from, from utilities, municipalities and other governmental bodies.
09:16 Chris Fisher:
Right, but of course I’ll be brief here, but San Francisco they’re willing to have an all zero-emission fleet by 2035, and they’re going to start purchasing their buses in 2025. ‘got Seattle the same thing, 100% zero-emission, no later than 2040. You’ve got New York, Chicago, and also Canada has pledged to begin converting the urban bus fleets to zero-emissions again. They’re starting in 2025 with full-on full implementation in 2040. Seems like 2040 tends to be the,the target for this component.
09:51 Emiliano Marzoli:
Hey, it’s got to be something special with 2040 because here in Europe as well we hear a lot about that. And uh, yeah it is actually a target and I guess that the Paris, Paris Agreement has to do with that.
10:06 Chris Fisher:
But they, correct me if I’m wrong Emiliano, but isn’t the European Union wanting to be all electric by, Is it 2040 for all their transit buses?
10:15 Emiliano Marzoli:
I think I think they have these goals as well. And, uh, once again the infrastructure right now is really lacking. That’s, that’s, uh, one of the major issues that we are facing.
But it’s true that, uh, if there is a will, then there is the possibility to implement the infrastructure; particularly for the for the European buses where they have set routes. They, they’re back very regularly to our depot. So that it’s, it’s a bit easier to manage. Definitely it’s, uh, it’s a good place for it to start.
And, uh, when you think about it, it’s where China started a few years ago too. They, they converted the bus fleet to electrical. It’s, it’s already been a few years now. And I I’m wondering if Europe and the USA are looking up at that as a case study.
11:13 Chris Fisher:
It could be. Because China is far ahead. I believe the number is about 50% of all their urban buses, transit buses we would say, are electric.
11:23 Emiliano Marzoli:
Yeah, so talking about China, uh, you earlier you said that they’re following some a little bit of a different trend. And then in fact, they last year they were the only region, pretty much, having, uh, positive indicators. And what do we expect for this year? Is again something different from everybody else, don’t we?
11:47 Chris Fisher:
Yeah, that’s a good point. China. I mean they hit their heavy truck production record, they just blew it away and they’ve had some strong years. And you know, we’re sitting there thinking, OK, what, what is going on? And we worked with our Chinese office.
Well, what they, what they did is they had a government requirement by the end of last year to replace all China three and lower emission regulation vehicles, right, with either China 5 or China 6 emission requirements. And you had that, along with stricter punishment of overloaded vehicles, not only in the large cities, but also getting out to some of the rural areas where they were the two situations that drove up demand so sharply.
And of course, because of this, this will result in a significant drop in demand later this year. Heavy truck segment will see the most decline.
Also they’re bringing into China 6 emission regulation scheduling that for July 1st, so we could expect some pre-buy in for the first half of the year. And the reason I, I think we’ll see a pre-buy is there’s really no economic benefit. There’s no fuel economy improvement or anything like that between the China 6 and the China 5. Just cost basically. So it’s just more expensive. So you, any, any purchases that are going to happen will most likely happen in the first half of the year.
13:07 Emiliano Marzoli:
Is this going to balance out in 2021? So we’re going to see first six months, very strong and then a decline in the second half of the year. But overall it’s going to be flat. Or do you think we’re going to see a negative, uh, growth compared to 2020?
13:24 Chris Fisher:
That’s a good question. It should be, should be down. Probably about a third, because that is, we’re talking like 1.4 million trucks, something like that, built. And on average these guys should be somewhere around 900,000. So we do and they have strong years before as well. So we think we could see up to a third, a third decline in the heavy trucks.
13:48 Emiliano Marzoli:
Do you think this is gonna have a repercussion in 2022 or, or do you think we’re going to go back to normal once the pre buy effect is, is over?
13:58 Chris Fisher:
We think 2022 will also be pretty slow. Demand will certainly improve in 2022, but it’s it’s going to be a little slower. It seems like these, when you have admission regulations it can take up to nine months before they, they start kind of panning-out and order rates get back to a more normal, a normal rate.
14:19 Emiliano Marzoli:
Right and, and, Chris, uh, another country that has been really dynamic is India and they, they’ve recorded the strongest decline last year was really crazy. But they are ready to bounce back this year, are they not?
14:36 Chris Fisher:
Yes, I mean there you really got hit hard when you couple the price hikes from the broad stage six emission regulations, which are Euro 6 basically. They had increase in fuel prices, of course the recession, lower freight demand, and driver and labor shortages. The headwinds in the commercial vehicle industry were, were very significant last year and actually marked the worst year in their history.
Also good point here too is driven by social distancing. You had all that work from home policies. There were little demand for buses from the education sector and our office in India estimated that the transit segment was really hit bad and at one-point last year, the service was only running around 10 or 15%, which we could all imagine.
Some other stuff we’ve got in here. While demand was also terrible for most of last year, the Indian commercial truck segment showed significant improvement during the fourth quarter of last year. In the medium and heavy trucks, that I meant the class six and seven, performed better due to the rapidly expanding ecommerce and improving automotive sales really helped. Utilization of the Class 8 segment is improving, we’ve seen that in the fourth quarter, but still has yet to cross a threshold to trigger significant, longer term demand.
Anyway, the bus segment also continues to struggle primarily from the work from home push and the travel restrictions. But we expect, we also expect that to continue. Now the level of, where we’re thinking the increase could be upwards of 40% for the medium and heavy truck segment this year. Not, not buses necessarily, but for the trucks. Really based off of good, strong fourth quarter. We will have to see. We’ll definitely know more as this first quarter comes to an end.
16:23 Emiliano Marzoli:
Chris, thanks a lot. This was, uh, it was very helpful and, uh, I think it was, uh, interesting. It’s, it’s nice to hear that, overall, we can expect positive 2021 for the commercial vehicles industry. North America. We see there is set up to have a good year on the truck side and on the bus side, we can see how the new administration and different states are already looking into alternative technology, particularly to move to electric buses in the coming years.
We have seen, also, quite something interesting in China, where they are following a completely different trend. They were up record level when the entire world was struggling and they’ve been struggling this year with everybody else. It is looking to have, uh, to have some positive results.
And as you just mentioned amongst those guys looking for positive results, we know India is probably the country that will report the highest growth rate in the world.
17:34 Chris Fisher:
Correct.
17:36 Emiliano Marzoli:
So Chris. Thanks again, folks. I hope you enjoyed the 1st edition of our PowerTALK Truck News. And if so, please make sure you visit powersys.com, where you can find the recording of these podcasts, our truck production quarterly index, and more information about the industry.
17:56
Thank you for joining Power Systems Research. This PowerTALK Truck podcast will be available on demand. Google “Power Systems Research” to sign up today for your copy of the Q4 2020 Truck Production Index report or to contact Emiliano Marzoli For more information about this podcast.
