Chris Fisher, Senior Commercial Vehicle Analyst at Power Systems Research, discusses the Q2 2021 global production facts and related forecasts for medium and heavy trucks, as reported in the quarterly PSR Truck Production Index.
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. Chris is Senior Commercial Vehicle Analyst at Power Systems Research.
Each quarter, Chris produces the Power Systems Research Truck Production Index. The Index draws production data from the PSR proprietary database OE Link and reflects global truck production by region.
Chris, tell us about the scope of the Truck Production Index, or the TPI as we like to call it. What regions does it cover?
00:47 Chris Fisher
Good morning, Joe.
TPI — what it does in measures truck production, in not only North America, but also the rest of the world. And the other regions would include, like, Greater China, South Asia, South America, Europe, Japan, and Korea.
01:03 Joe Delmont
Chris, what, what did the second quarter TPI show?
01:07 Chris Fisher
The TPI index actually increased pretty high around 194% over the second quarter of last year, where it moved up from 46 to 135. Basically, overall production in the, was very strong in this second quarter when compared to the very weak second quarter of last year. So, as you remember, last year, in Q2, that’s when everything just fell apart due to the virus.
01:34 Joe Delmont
Well, that was a very great year over year gain. What’s the change in the short term from the first quarter of 21?
01:42 Chris Fisher
Well, we’re still moving. We’re still going pretty good. ‘Think we increased around 15%, but it has slowed a bit in May and June. And, and, this is on a global basis. The rest of the world is doing good, except for China. China is having some problems. We might… you might ask questions about that later. Not really economic problems; but they’ve got a very, very high overcapacity of trucks due to a couple of factors.
02:09 Joe Delmont
Yeah, we’ll talk about China later as we talk about each region. But for now, what’s the global truck production picture? What’s your outlook?
02:19 Chris Fisher
Well, overall, it looks like the global production and demand level will finish this year on a strong note, pretty strong actually. And we are expecting this growth to continue into 2022 and possibly 2023.
02:34 Joe Delmont
What problems do you see? That picture is pretty bright.
02:38 Chris Fisher
Yeah, well, the big thing you’re going to… that we’ve been hearing, not just here in the ‘States and Europe, but all over the, the world, is the ongoing supply chain disruptions. And that was caused, kind of, you know, by the, like, stop again and start again situation when the, when the COVID hit, you know, everything shut down. And then demand ramped up much faster than expected and the supply just can’t keep up. And, for we understand, we’re believing this is going to continue through the rest of 21, and maybe, and possibly into next year.
03:11 Joe Delmont
Chris, are there specific shortages that you see in this supply chain?
03:16 Chris Fisher
There are a number of ‘em. Of course, the most talked about and most significant would be semiconductors. ‘Just don’t have the capacity to keep up. It’s not just for automotive, commercial vehicles. As you know, it’s anything, your smartphones, your TV’s, etc.
Other components, such as aluminum, steel, are also having difficulty being outsourced as well. At one point the EGR coolers were also a significant issue.
03:42 Joe Delmont
OK, back to the big picture. What are the overall trends in global truck production?
03:49 Chris Fisher
Well, the trends on the global production levels and medium and heavy, of course, declined last year, uhm, and in 2019, for that, for that matter. In 2019, they were down around 3.4%, and in 2020 global production was down around 5%. However, demand did start to rebound in the last half, primarily the last quarter of last year. And this rebound, the trend has accelerated throughout this year, and we expect that to continue well into next year as well.
Lower demand for heavy trucks is going to be a problem during the second half of the year, which will also continue to pull down the overall global growth, but we will still be positive.
04:31 Joe Delmont
We’ll talk more about China in a minute, but for now, what kind of global production volume do you expect for this year?
04:40 Chris Fisher
Yeah, the volume overall, you know, with China included, we are expecting about a 5.6% growth, and this is including medium and heavy buses as well. And of course, China being the exception, we believe them to be down around 12% this year compared to last year.
04:58 Joe Delmont
What kind of growth are you seeing for the other regions then?
05:02 Chris Fisher
Well, the strong commercial vehicle demand in 21 and 22, of course, and China, again that will also be down this year as a result of the China 6 emission regulations.
05:14 Joe Delmont
Our listeners, uh, can find many of the TPI details by going to our website, powersys.com, and clicking on the TPI section.
But let’s take a few minutes now and talk about some of the major items from this quarter’s report. What do you see for each region?
05:36 Chris Fisher
Well, most of these regions, we believe, will experience double digit growth in 21. We think North America is going to finish up around 30% ,South Asia around 45%. I mean, they really come off. India primarily come off of a very sharp hit last year. We believe Europe will come in with 21%. South America, we think they will also come in around 36% growth. And we do think there’ll be a modest recovery continuing in the next few years as well.
06:05 Joe Delmont
OK, it’s time to talk about China.
06:08 Joe Delmont
China is the biggest problem you see. What is going on in China?
06:13 Chris Fisher
Well, the good news, heavy truck demand was strong during the first six months of the year. This is primarily due to the pre buy ahead of the China 6 emission standards; which were implemented by the government in July of 2021. And the problem with that is the cost of the emission technology for the China 6 emission technology is really not offset with anything significant in cost reduction. There’s really no fuel improvement.
So, the surge ahead of demand last year to the changing emission regulations will also continue to fuel this. The second half of the year, of course, we’re going to see some, some pretty low truck demand.
06:51 Joe Delmont
Truck production in China was doing pretty well early in the year, wasn’t it? What happened? Was it only the pre buy?
07:00 Chris Fisher
Well, for the most part, yes; however, there is something else. Last year the government required that all China 3 and lower emission trucks need to be replaced by China 5 and China 6 by the end of last last year. A number of them were, but some of them were also replaced during the first part of this year, so that also contributed to the strong growth the first part of the year. Well, with that being the case, between the pre buy and the scrappage scheme, this resulted in overcapacity of trucks, which will lower demand really through the rest of this year and ,we’re expecting, at least the first half of next year.
07:41 Joe Delmont
Well, considering that turn around, what do you see for the production in China for the rest of the year?
07:48 Chris Fisher
Well, we do believe, on the heavy truck front, production numbers are expected to finish up around 1.4 million units this year, which is a significant drop of about 15% compared to last year.
07:59 Joe Delmont
I think we’ve covered China for now. Let’s, uh, let’s look at the other regions for a moment. What’s the outlook for North America?
08:09 Chris Fisher
Well, North America is doing the best that it has. I mean, as far as commercial vehicle demand on the on the demand side, I mean, since I’ve been doing this doing this job. Basically the 2021 class 8 boards, order boards, in the states are filled.
Orders for next year are expected to be strong as well. Freight demand, extremely high. Freight rates are also very high. And we’ve got extremely high levels of consumer spending and the overall economy is also pretty good.
08:39 Joe Delmont
That’s optimistic, I like that. Are there any clouds on the horizon for North America commercial vehicles?
08:45 Chris Fisher
Oh yes, yeah. Again, we talked a bit about the demand side being strong, but the supply side has the issues. And again the supply chain issues are expected to continue this year and likely into early 2022. The OEMs continue to have difficulty sourcing components such as semiconductors, steel, and aluminum.
There’s also something that’s just really come up during the last, I don’t know, 2-3 weeks and that would be that Corona Virus Delta variant. Uhm, it’s really too early to tell if that’s going to have any impact later on this year or not. I imagine it will at least have some, but the level we just don’t know yet.
Another thing that’s concerning me a bit is higher inflation, and that could also derail the economy moving forward. You know at this point we’re not seeing it to do anything where it’s going to derail the economy, but that can happen pretty quick.
And higher inflation primarily is due, really is due, to the ongoing supply chain disruptions, right? That, worker shortage, and there’s also could be some negative effects coming in from the high levels of government spending. You know, essentially what you have is, you have too many dollars chasing too few products and that’s what leads to the inflation.
10:02 Joe Delmont
Chris, tell us about Europe. What’s the outlook for the EU?
10:06 Chris Fisher
Well< through April, the EU medium and heavy commercial registrations improved by around 29% compared to last year, which is really good. Order bookings also remain pretty strong as well, due to really an improved economy.
10:21 Joe Delmont
You’ve talked to us about supply chain problems in other regions. What about in Europe?
10:28 Chris Fisher
Same situation. The supply chain continues to dog the production, which makes it difficult to meet the demand. Sourcing of semiconductors continues to be a problem there as well. And also, the EU’s proposal to extend restrictions on steel imports into Europe remains a real point of concern. Normally that’s not such a problem, but with all the shortages and disruptions out there, they, they really need to have the steel come in.
10:54 Joe Delmont
Has this situation changed? Is it improving?
10:58 Chris Fisher
Well, supply chain disruption is expected to continue. I mean, the demand is mostly rebounded. The economies of Europe are relatively stable. Also, seeing export demand improvement, improve as well. So we do expect, in Europe, to see production and demand show good growth in, throughout this year and into 2022.
11:22 Joe Delmont
Electrification is growing in many segments in Europe. What about, uh, commercial vehicles? What are the OEMs there doing in this area?
11:33 Chris Fisher
Well, currently electrification is taking hold in Europe, but primarily in the transit bus segment. Most major OEMs have introduced or plan to introduce electric trucks during the next few years. However, we still have the limitations. You’ve got higher upfront costs are an issue. But really, it’s more about the lack of a charging infrastructure and the battery weight tends to be a bit of a problem. So, this really limits, currently limits, electrified vehicles to short distance applications such as refuse, pickup and delivery, and some regional haul applications.
12:08 Joe Delmont
Sounds like acceptance for long haul applications is still a long way off though, isn’t it?
12:15 Chris Fisher
Yes it is. You know, again, the barriers which I just talked about, the costs, the weight, and the lack of infrastructure, is causing problems. And the weight’s really going to be bad for the long haul. It’s, it’s, I don’t know if they’re going to overcome it.
However, another technology that is has really taken hold lately, it’s really been the last three or four months, would be the hydrogen fuel cells may be the solution to long haul. We’re seeing joint ventures between the OEMs on the vehicle side. Really, sharing cost for their R&D to, to develop the technology. Another point that’s interesting, Daimler and Shell also had signed a joint venture to develop an infrastructure corridor. And this, I believe they’re doing this in Germany. And they’re just building, starting in Germany, and they plan to expand. And it seems like really everyone is targeting hydrogen for full production. Everyone likes the year of 2030. Now will it happen? It’s hard to tell; but, it seems like full production 2030 is when they really want to be able to do this. I mean, that’s, that’s a, That’s an interesting technology to follow.
13:27 Joe Delmont
We’re gonna have to be watching that 2030. That’s, uhm, that’s not that far in the future for developing a technology like that.
13:36 Chris Fisher
It’s pretty quick.
13:36 Joe Delmont
Yeah, uh, we’ve talked about China, a lot about China, actually. What’s going on in other parts of Asia?
13:47 Chris Fisher
Well in India, uhm, the commercial vehicle production is expected to hit 261000 vehicles this year; which is a significant increase, around, somewhere around 55%, over last year. And then, moving forward, moderate growth is expected in 2022 and 2023. But, we also see a bit of a decline in 2024, partly due to the election year coming in.
14:13 Joe Delmont
That’s promising. What about clouds?
14:17 Chris Fisher
Well in India there are. I mean you’ve got, currently we have a lot of excess capacity in the market, a lot of vehicles. They will also see an increased rail freight usage. They’re really pushing on rail freight, the government is. You know, freight rates are pretty high, fuel prices as we know are all increasing pretty sharply. Another point that’s really interesting too, we’re seeing a lot higher tonnage vehicles rising. They’re adopting the higher tonnage vehicles, which means, of course, fewer trucks are needed to hold the same amount of freight.
14:49 Joe Delmont
What about the rest of Asia?
14:51 Chris Fisher
Pretty much the same thing as far, as far as the supply chain disruption. I mean, they’re, they’re having difficulties. ‘really lead to choppy production levels by country. And they’re having difficulty meeting demand. Still positive. So, I mean, still much better than last year; but, they’re also having difficulties on the, on the supply side.
15:11 Joe Delmont
Does that apply to Japan and Korea too, Chris?
15:15 Chris Fisher
Hey, yes it does. It does. Like medium and heavy vehicle production in Japan and Korea, it is expected to increase 16% this year, which is lower than many other regions. South Korea is going to increase, or expect to increase, around 28%; but, Japan continues to have problems and their production only expect to improve by around 15%. And this is really due to Japan being really hit hard by the supply chain disruption. And remember they had, uhm, the factory catch on fire, about six months or so ago, that produce a number of chips for them and that that has hurt them. But they, they will, they will get over and I think they will improve over the next few years as well.
16:00 Joe Delmont
South America has been suffering badly from several waves of COVID. What’s your outlook there?
16:09 Chris Fisher
Well, they still have a demand for vehicles. I mean they have to replace their vehicles; so, we do expect strong growth this year over last year. And, of course, the demand growth drivers are: we are seeing increased vaccinations, which is helping a lot, and the overall improving regional and global economies are helping a lot too. Brazil exports a lot of, a lot of commodities, which really helps. However, we do, like everywhere else, we expect supply changes, interruptions to continue through at least the remainder of the year.
16:40 Joe Delmont
Thanks Chris. It’s always interesting to hear your analysis of the TPI report.
This data is pulled from two of the major Power Systems Research databases: OE Link is the database of OEM production and forecast data, and EnginLink provides engine production forecast and specification data.
And for more commercial vehicle news read the monthly PSR PowerTALK news report and listen to the PowerTALK podcast every week. Contact us for more information on commercial vehicles or off-road products.
17:12
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