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Running on empty

It's a full-scale recession for North American truckmakers, who must slash costs and eliminate jobs to survive.

With only four new models on display, Gary Yarbrough's Volvo commercial truck dealership in Livonia, Michigan, looks as empty as a factory parking lot 20 minutes after quitting time. This has not always been the case at VIP Truck Center. At the peak of the North American heavy-truck sales boom in 1999, Yarbrough sold about 22 new trucks a month. Now he sells six.

With prices starting at $85,000, heavy-truck sales offer a useful look at the health of the U.S. economy.

Historically, heavy-truck sales plunge about six months before the economy starts to decline. That is what happened in late 1999, when Yarbrough noticed what he calls a hiccup in heavy-truck sales.

'To order a truck, you had to wait a year to get it,' says Yarbrough, general manager of the dealership. 'All of a sudden, you didn't have to wait as long. It got down to six months, then three months. Now you can get a truck built in about 45 days.'

Yarbrough responded by cutting his inventory.

Truckmakers and their suppliers responded, too, laying off thousands of workers and trimming production. And the cutting may not be over. Freightliner Corp. - the largest North American truckmaker - replaced its chief executive in May and said it would get rid of 1,120 North American workers. It also will unveil a major turnaround plan this fall.

The U.S. truck market is not the only one in a slump. Sales in Europe this year are expected to dive as much as 20 percent. In Japan, sales may be 23 percent lower.

sudden downturn

Why did the U.S. industry crash? When trucking business began to wane, trucking companies began canceling and delaying purchase orders. As a result, truck manufacturers had excess inventory.

'We had trucks we thought would be built over the next year, and all of a sudden they were slammed on dealers' lots,' Yarbrough says. 'At that point, I just about quit ordering.'

That was just the beginning of a sharp sales decline that continues, though some signs point to a recovery.

Yarbrough blames the downward spiral on a decrease in freight shipments, soaring fuel prices and a glut of used trucks. Also, the industry enjoyed three consecutive years of sales exceeding 200,000 units - a trend few people expected to last.

The used-truck glut continues to affect the market. There could be as many as 100,000 surplus Class 8 - those weighing more than 33,000 pounds - used trucks in the U.S. marketplace, says David Fulghum, vice president of market research firm MacKay & Co. in Lombard, Illinois. That is in addition to the 30,000 used Class 8 trucks typically in the market.

Truckmakers' aggressive sales tactics are partly to blame. In 1993, Freightliner, owned by DaimlerChrysler, began promising customers it would repurchase their used trucks at guaranteed prices. The deal increased sales for a while, but as market conditions declined, used trucks piled up on dealership lots.

Freightliner's policy proved disastrous. DaimlerChrysler's commercial-vehicle division is expected to finish the year with a loss after a second-quarter operating profit of $110.3 million. That is down 69 percent from last year's comparable period.

DaimlerChrysler replaced CEO Jim Hebe, who resigned in May, with finance chief Rainer Schmueckle.

'In the past, we were very much focused on market share,' explains Daimler-Chrysler spokesman Michael Pfister. 'Now the new management will focus on profitability.'

Big changes

The market is in such a slump that it has created a shakeout among small truckers. About 3,600 U.S. trucking companies - mostly operations with fewer than six drivers - went out of business last year, according to the American Trucking Association, of Washington, D.C. More than 1,100 shut down in the first three months of this year.

There are 501,440 U.S. trucking companies. Eighty percent have 20 or fewer trucks.

Sales figures reflect the downturn. For the first six months of the year, Class 8 retail sales in the United States totaled 74,043 units, down 40 percent.

Truckmakers have slashed production, laid off workers and reduced spending. For example, Mack Trucks Inc.'s heavy-truck sales fell 26 percent in the first half of the year. To cope, it will cut 12 percent of its workers.

Mack is a subsidiary of AB Volvo, the world's second largest truckmaker.

hurting

Even conservative manufacturers such as Paccar Inc., which makes Peterbilt and Kenworth trucks, have been hurt.

Paccar's second-quarter earnings of $39.5 million were down about 70 percent from a year earlier. Paccar sold 15,013 Peterbilt and Kenworth heavy trucks in the first half of this year, down 44 percent.

As sales plunge, truckmakers and engine suppliers are forging closer ties. By sharing engineering expertise, they hope to cut the cost of introducing engines.

Freightliner is allied with Detroit Diesel Corp. under DaimlerChrysler, while Paccar has entered a supply agreement with engine maker Cummins Inc.

In May, Volvo agreed to sell engines to International Truck and Engine Corp., a subsidiary of Navistar International Corp.

Executives and analysts say the industry may have hit its low point, but many agree that a rebound will be gradual.

'It will probably be a matter of years, and by that I mean three to five years, before we see the production rates that we saw at the peak,' says Lud Koci, vice chairman of engine maker Detroit Diesel.

As truckmakers form these alliances, they will reduce the variety of engines available with their heavy-truck cabs. That means fewer choices for truck buyers.

THE END IS NEAR

There are signs of a recovery. Fuel prices are lower. In August, Bob Costello, chief economist of the American Trucking Association, reported that tonnage shipped in the second quarter rose 1 percent industrywide from a year earlier. That was the first year-over-year increase on a quarterly basis in five quarters. If that continues, it could mean the economy is picking up.

Yarbrough, the Michigan truck dealer, expects the industry's tough times will continue through mid-2002. To cope, he has shifted his focus from over-the-road trucks - semis that pull trailers - to vocational trucks, which are vehicles built for such purposes as hauling garbage. He also is emphasizing parts and service.

Says Yarbrough: 'We're focusing on giving customers excellent service. We always have, but we have to put a bit more emphasis on it now.'

E-mail writer Gail Kachadourian at gkachadourian@crain.com

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