In this episode of PSR PowerTALK, Chris Fisher, senior commercial vehicle analyst at Power Systems Research, talks about the reasons for the 42.5% first quarter 2021 drop in global truck production.
Transcript
Welcome to the PSR PowerTALK podcast, produced by Power Systems Research.
00:06 Joe Delmont:
From Power systems Research I’m Joe Delmont, editor of PSR PowerTALK. Today we’ll discuss global truck production with Chris Fisher, PSR, senior commercial vehicle analyst.
Chris, you produce a report of global truck production each quarter. Tell us how you do that and what you’re seeing today.
00:28 Chris Fisher:
Good Morning Joe.
The Power Systems Research Truck Production Index draws data from our OE Link product; and this is a proprietary database maintained by Power Systems Research.
00:41 Joe Delmont:
Does the TPI measure production only in North America?
00:47 Chris Fisher:
Well, it does measure truck production in North America; but it also measures production globally across five additional regions, China, Europe, South America, Japan, and Korea, as well as the emerging markets, which (is) primarily dominated by South Asia.
01:04 Joe Delmont:
Well, that’s quite inclusive that’s, that’s excellent.
Chris, what do you see in the first quarter? Or, what is the TPI in the first quarter show?
01:14 Chris Fisher:
Well, the TPI index dropped 42 1/2% for the three-month period ended March 31st of 21. It declined from 186 to 107 from the fourth quarter of last year. And I, we believe this is due to extremely high levels of production, primarily in China during Q4. And that’s a significant reason for this.
01:37 Joe Delmont:
So that big change that you’re talking about, that’s quarter over quarter change, correct?
01:41 Chris Fisher:
Correct.
01:44 Joe Delmont:
OK.
What about the past year? What was the performance there?
01:49 Chris Fisher:
Well actually the performance improved over last year from the first quarter of 2020 to the first quarter of 21. The TPI index climbed 15% as it moved from 93 to 107. Basically the global production has increased significantly during the past six months. That would be the driver.
02:09 Joe Delmont:
Our listeners can find many of the TPI details by going to our website, powersys.com, and looking at the TPI section, but let’s take a few minutes now and talk about some of the major items from this quarter’s report.
02:27 Chris Fisher:
Well, across the globe, improved demand is expected in all regions except for China. However, the decline in commercial vehicle demand in China will lower the overall, overall global vehicle demand this year.
So, except for China, demand for the medium and heavy commercial vehicles has bottomed out and is expected to increase his share and into 2022 as most economies improve and the coronavirus vaccinations do increase.
02:54 Joe Delmont:
Chris, what’s going on in China?
02:58 Chris Fisher:
Well, demand for heavy trucks is expected to be down this year as a result of the Chinese government requirement to replace all China three and lower emission vehicles with vehicles meeting China five or six emission standards by the end of last year. This, along with stricter punishment of overloaded vehicles and the implementation of Euro 6 emission regulations in July, will slow demand, particularly in the last half of the year.
PSR estimates that approximately 70% of the China 3 trucks have been replaced. So, really, it’s not about the Chinese demand being significantly down for any negative economic reasons. It’s just that they did a lot of replacement last year. And then, of course, the first half will be stronger as the emissions come into, into play.
03:49 Joe Delmont:
It’ll be interesting to watch that.
Chris, do you think, uhm, the Euro 6 regs in China will generate any pre-buy?
03:58 Chris Fisher:
Well cost of the emission technology for the Euro 6 vehicles won’t be offset with any significant improvement in fuel economy, so this will probably lead to some level of pre-buy during the first half of the year.
04:12 Joe Delmont:
Well, how, how significant do you think that pre-buy will be?
04:16 Chris Fisher:
Well, the increased sales during the first half of the year is expected to be offset significantly by lower sales in the second half. So at this point we, we really can’t determine that level. But we do expect to be somewhat strong.
04:32 Joe Delmont:
You know, uh, that’s a very positive overall global truck demand; but will there be any problems with the supply chain that will cause difficulties for OEM’s and meeting this demand?
04:48 Chris Fisher:
Well, unfortunately, I mean, the global market will experience periodic supply chain disruptions, primarily due to the impact from the coronavirus for sure.
04:58 Joe Delmont:
What can you tell us about these shortages in the supply chain? What will we see there?
05:06 Chris Fisher:
Uh, interesting, it’s a good question.
The shortage of semiconductors currently is the most significant problem in the supply chain. Surveys have also indicated significant problems with the shortage of foam for reefer bodies as well as exhaust gas recirculation coolers.
Supply chain, you know, supply chain disruptions, Joe, are really not uncommon when demand quickly goes from very low level, as seen during the 1st 3/4 of last year, to very high demand, which started in the fourth quarter of last year. So really, it’s the semiconductors that seemed to be more of a shock.
05:43 Joe Delmont:
Well, it seems like semiconductors are used in many, many many applications and industries. How long do you think it’ll take to work through these supply chain problems?
05:56 Chris Fisher:
Well, the industry currently believes it’ll certainly be through the second quarter and most likely, I would suspect, into the third and maybe even, I hope not, into the fourth quarter; but hopefully the third quarter will, will shake this out.
You know, another issue I want to talk about too is, is the ports, on the issues we’re having with the ports. The ports of LA and Long Beach continued to be a bottleneck to the supply chain, and I think I was probably somewhat aware of this.
Although backlog at the ports are not uncommon, the result of the pandemic has significantly increased the problem. Not only are the ships delayed reaching the ports, but freight is being further delayed after being off loaded onto trucks or rail cars to exit the ports.
And here’s what’s up, you know, little bit shocking is the West Coast ports account for about 1/3 of US imports and this problem is not expected to ease until later this year or even into early next year.
06:54 Joe Delmont:
Wow, that’s something you can’t just push a quick solution to.
06:59 Chris Fisher:
No.
07:01 Joe Delmont:
What’s, uh, what’s your outlook for North America?
07:04 Chris Fisher:
Well, since the latter part of last year, the heavy truck orders have been extremely strong and freight rates remain very high. Both contract rates and spot rates are currently in record territory, primarily driven by consumer spending and a strong housing market along with improved manufacturing sector. At this point, we believe production of Class 8 trucks will reach 300,000 this year.
However, without the supply chain issues, we believe productions would have exceeded this level. It’s still kinda early to tell, but we’re going to see some hindrance on production levels.
07:38 Joe Delmont:
President Biden’s pushing with his stimulus package, and he’s also talking about a huge infrastructure package. How much will these packages add to the activities in North America?
07:57 Chris Fisher:
Yeah, well when you pour that kind of money into an economy, you can bet there will be some activity going on.
So with regard the commercial vehicle market, included in the massive package that Congress is working through is 174 billion to increase electric vehicle demand. The plan proposes spending 174 billion to encourage the manufacturer and purchase of electric vehicles by granting tax credits and other incentives to the companies that make electric vehicle batteries in the United States as opposed to China. The goal here is to reduce the costs ’cause we know one of the main barriers to adoption for electric vehicles is cost.
The money would also fund the construction of about a half a million electric vehicle charging stations. However, many more stations would likely be needed to service the mainstream electric vehicle market.
The plan also proposes an additional 46 billion federal procurement programs for government agencies to buy fleets of electric vehicles. And 35 billion in research and development programs, so cutting edge, new technologies.
I think everyone probably heard, I think was about a month ago, Joe, that it was announced that Biden was, you know, really pushing to have all government vehicles be electric. So, this is where, this is what they’re talking about.
09:17 Joe Delmont:
I like the fact that they’re addressing the charging issue and, and talking about developing an infrastructure that would deal with that charging situation.
Chris, let’s, let’s move on to Europe. Europe has had problems with COVID and it’s also had to deal with Brexit. What’s the outlook there?
09:43 Chris Fisher:
Well, last year, — let’s give you a little overview of, of Europe — so last year medium and heavy truck sales declined by about 26% in the EU. Truck sales declined by 27% and bus registrations dropped by around 21% compared to 2019. However, order rates have shown significant strength during the past six months and sales are expected to improve significantly this year, primarily in the heavy truck segment.
Much like North America, the biggest impediment to improve sales will likely be issues surrounding the supply chain.
So, in order to help the recovery scenario in 2021, the EU and the UK found a last minute agreement to avoid a no deal Brexit. Negotiations went on and were able to complete, or were completed, to avoid a very bad situation on January 1st. Now where the agreement is, is far from perfect, it generally produces a free market for goods, although paperwork and various administrative barriers will cause some disruption here.
10:48 Joe Delmont:
We’ve, we’ve talked about China at some length, and obviously that’s an important player. But what’s going on with the rest of Asia?
10:59 Chris Fisher:
Well, Joe, commercial vehicle demand is expected to improve much of this, much of the region this year. So after a 53% decline in the Indian medium and heavy commercial vehicle production last year, do expect an improvement of about 35% this year.
While this is good news, it will still be a few years before Indian demand reaches more historic levels. The segment will continue to face headwinds due to excess capacity in the market. They’ve got, they also have prior problems with driver shortages, increase rail freight usage, and relatively consistent freight rate. So essentially, the commercial vehicle market in India has never been hit that hard as it was last year. So it has a ways to go before it improves.
11:43 Joe Delmont:
South America has been suffering badly from several waves of COVID. What do you see going on there?
11:52 Chris Fisher:
Well, the medium and heavy commercial vehicle production declined again by about 25% last year with heavy buses and, and heavy trucks seeing the sharpest decline. While orders in production improved during the fourth quarter of last year, concerns about the supply chain could hinder production levels this year. Now, hopefully, with increased vaccinations and most stabilized regional economy, PSR does expect production to return to pre-pandemic levels later this year or maybe into next year.
I know they’ve been having some setbacks, but we’re, we’re still kind of, we’re still positive as far as the production growth level through this year.
12:31 Joe Delmont:
Very good that’s encouraging.
Finally, Chris, what do you see for Japan and Korea?
12:37 Chris Fisher:
In Japan and Korea, after a significant decline in medium and heavy commercial vehicle demand last year, uhm, these countries production expected to rebound this year and into 2022 for both the domestic and the export markets. We got to remember the commercial vehicles, I believe, around 70 to 75% of production are exported outside of Japan and Korea. So an improving global economy, along with increased coronavirus vaccinations, will help drive the improvement in demand.
However, due to ongoing supply chain disruptions, we’ve heard that song a bunch, levels are expected to be somewhat volatile this year– pretty choppy.
13:17 Joe Delmont:
Well, Chris, thanks very much for your outlook. That, uh, truck production index seems to be a valuable tool for tracking what’s going on globally and in the, in the different regions that you follow. We appreciate your comments.
And listeners if you want more information on commercial vehicles and, uh, related components, visit powersys.com and look at the different product databases that we have there. Thank you very much.
13:54:
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