What changes do you see in the PSR Truck Production Index in the fourth quarter compared to the third quarter of 2020?
Overall, we are seeing stronger momentum for commercial truck orders and sales which bode well for production in Q1 2021.
Supply chain issues will impact short term production as companies are still having difficulty with staffing numbers and various virus protocols that disrupt production. These problems are expected to continue throughout at least the first half of the year.
What about year over year?
With the exception of China, PSR believes the worst of the pandemic effects on the commercial truck market are behind us and while we do not expect production levels to generally return to pre-pandemic levels, we believe demand will be significantly higher in 2021 than last year.
What are the primary drivers causing these changes?
In general, the “shock and awe” of the pandemic has passed and the global economies are generally stronger than they were six months ago. Freight continues to be hauled and fleets need to be upgraded. While we expect the negative effects of the pandemic to remain throughout the year, it is not nearly as dramatic as it was last year.
What is your outlook for global production medium and heavy truck production?
Overall, this year is expected to be an improvement in commercial vehicle demand compared with 2020. While the Coronavirus is expected to remain through much of this year, the negative impact on the global economy should not be as significant as it was in 2020.
In Europe, the fourth quarter showed significant improvement in sales and orders which will bode well for production this year. The medium and heavy bus segment also showed significant improvement toward the end of the year. While the Coronavirus will continue to be a drag on the regional European economies, PSR expects the worst to be behind and gradually improving demand is expected moving forward.
In South America, Medium and heavy commercial vehicle production declined by approximately 27% in 2020 with heavy truck and buses seeing the sharpest decline. Much like North America and Europe, demand started to improve during the fourth quarter of 2020 and PSR expects production to increase this year to the level seen in 2019 prior to the Coronavirus outbreak. Production will be driven by both the domestic and export markets this year. Over the longer term, Brazil is expected to implement the Euro VI emission regulations in 2023 which will likely drive a pre-buy in the second half of 2022. Basically, the higher cost of the Euro 6 emission technology is not offset by any significant improvement in fuel economy.
In Japan and Korea, PSR expects medium and heavy commercial vehicle production to improve by double digits this year. However, it will likely be 2022 before demand improves to replacement and expansionary levels. Export demand is expected to improve quicker than domestic demand in both Japan and South Korea.
What do you see for North America?
Commercial truck demand rebounded in the fourth quarter of 2020 particularly in the class 8 segment. Order rates for class 8 came in stronger than expected which bodes well for production through at least the first half of 2021. However, there is concern surrounding the supply chain. Currently, the supply chain is struggling with the surge in demand and companies are having difficulty hiring enough workers. Imported parts are also experiencing delays at the ports. The supply chain issues are expected to continue through the first half of the year.
Freight rates remain relatively high and this trend is expected to continue throughout the year. Strong consumption, inventory restocking and solid growth in single family housing builds are positive factors affecting the trend in freight. Congress passed another round of economic stimulus which will also bodes well for commercial vehicle adoption. 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.
Looking ahead, we believe heavy truck production will continue to improve through at least 2023 as truck capacity rebalances in the market.
President Biden is pushing climate changes in the US. How will emissions changes in the US affect truck production?
In the near term not much at all. However, if the administration effectively implements much of their agenda, we can expect heavy investment in infrastructure which would include recharging and refueling stations for electric and hydrogen fuel. Currently, the largest barrier to adoption for regional and long-haul trucks is the lack of infrastructure for these technologies. In the meantime, we should expect stricter emission regulations on diesel powered trucks at both the Federal and State level.
On a side note, many large municipalities have already implemented or suggested legislation requiring transit buses to be converted to all electric between 2024 – 2040. Since many of the barriers to adoption have been overcome, I suspect this conversion will ultimately happen.
You said China might be an exception to general growth trends globally. What’s happening in China?
Medium and heavy commercial truck production achieved record levels in 2020 primarily driven by the government requirement to replace all China 3 and lower emission vehicles with vehicles meeting China 5 or China 6 emission requirements. This along with stricter punishment of overloaded vehicles not only in big cities, but also in some small cities and rural areas drove the sharp increase in demand. This will result in a significant drop in truck demand this year. The heavy truck segment will see the most significant decline. The China 6 emission regulation is scheduled to be implemented on July 1st which may cause some level of pre-buy in the first half of the year followed by a sharp drop off in demand in the latter half of 2021.
2020 was a very bad year for India, but there was strong recovery in production during the fourth quarter. What do you see happening to commercial vehicle demand in 2021?
Coupled with price hikes from the BS-6 emission regulations, increased fuel prices, economic recession, lower freight demand and driver & labor shortages the headwinds in the commercial vehicle industry were significant and 2020 marked the worst year for the Indian commercial vehicle market. Driven by social-distancing and work-from-home policies, there was little demand for buses from the education sector. The transit bus segment was also one of the worst hit with our estimates of only 10-15% in-service transit bus fleets were operational.
While demand was terrible during most of last year, the Indian commercial truck segment showed significant improvement during the fourth quarter of 2020. In the medium and heavy truck segment, class 6 & 7 performed better due to the rapidly expanding e-commerce sector and improving automotive sales. The utilization rate of the class 8 segment is improving but has yet to cross the threshold to trigger significant new long-term demand. The bus segment continues to struggle primarily because of the work from home push by the government, travel restrictions and people generally avoiding public transportation. We expect that trend to continue this year.
The industry is likely to witness a headwind due to overcapacity in the market, continued driver shortage along with rail transport gaining traction. The recently launched PLI scheme will provide an additional push to the market from 2022 (production linked incentive scheme).
While there are still issues negatively impacting the commercial vehicle market, the higher order levels in the fourth quarter continuing into the first quarter of this year signals much higher production levels. PSR
Chris Fisher, Commercial Vehicle, Senior Commercial Vehicle Analyst
