On-highway trucks: the next Y2K? How will life after October 1 be for manufacturers in the heavy-duty truck market? - Industry News

Diesel Progress North American Edition, Oct, 2002 by Mike Mercer

For the better part of the last two years, the talk in the truck market has centered on two subjects -- the downturn in new truck sales and the implementation of the October 1 "pull-ahead" exhaust emissions regulations. Those two topics, which started out separately, converged for a time, creating a flurry of new truck buying which for a time energized truck and engine manufacturers alike.

It's no secret that sales of new Class 8 trucks have been slow since the record year of 1999 -- the second record year in a row -- when 262,316 trucks were sold. The slowing economy, along with a glut of late model used trucks flooding the market, crippled new truck sales. The shock of September 11 only added to the plunge and demand for new trucks continued to fall.

Enter October 2002. As the October deadline loomed, many looked ahead with trepidation at the new generation of engines, many of which would incorporate new (to truck engines) technology such as exhaust gas recirculation (EGR). By midyear, the rumor mill was operating at full tilt -- who would have engines to meet the new standards? How durable would they be? How much would they cost? Would truck operators take a hit in fuel economy?

The new emissions technologies used to bring engines into compliance were estimated to increase engine prices by approximately $3000 to $5000 per engine on average. Those engine manufacturers that didn't hit the 2.5 g/bhr-hr [NO.sub.x] and NMHC standard could still sell engines after October 1, but would pay a nonconformance penalty. The penalties were established on a sliding scale with totals as high as $12,000 possible.

Not surprisingly, the effect on the trucking industry was summed up by an electric message board seen at one truck dealer on the Wisconsin-Illinois border: "Buy Now, Beat Emissions."

And that's what a lot of fleet managers and owner operators did. The first quarter of 2002 was slow, but as the year progressed, orders swelled and by mid-summer, many truck manufacturers were reporting full order books and significantly better sales than the same period in 2001.

In July, Paccar Inc. reported second quarter net sales and financial services revenues of $1.8 billion, 18 percent higher than the $1.5 billion reported for the comparable period in 2001.

"Industry heavy-duty truck net orders in North America surged nearly 75 percent higher in the first half of 2002 compared to the first half of 2001," said Mark C. Pigott, Paccar chairman and chief executive officer. "Most of the increase in orders has been due to "pull-forward purchases," as fleets try to minimize the impact of more costly engines being introduced on October 1. Fourth quarter 2002 industry truck sales could be unfavorably impacted as a result of the current accelerated buying and slow growth of general freight."

In response to the higher demand, Kenworth and Peterbilt, like other manufacturers, steadily increased Class 8 production rates during the second quarter. Paccar's production at the end of the second quarter was 75 percent higher than the first quarter, according to the company.

Likewise most engine manufacturers noticed an increase in sales. Cummins Inc. reported a $13 million profit, on sales of $1.46 billion compared to an $82 million loss in the second quarter of 2001. Total sales in Cummins' engine business in the second quarter were $850 million, an 8 percent increase over sales of $786 million a year ago.

Yet not all manufacturers saw an October-inspired bump. Mack Trucks Inc. reported only marginally improved deliveries in North America for the eight-month period that ended in August. According to the company, truck sales in North America were up 1 percent, to 15,227, when compared to the same period in 2001.

With October 1 here and gone, truck and engine manufacturers have taken all the "pre-buy" orders they can and the consensus is that it will take until December to fill some of those orders. And now the real question: how will the post-October truck market fare?

The best guess from most sources seems to he pretty much like it did before the pre-buy. After current orders are filled, most expect a lull until the latter part of the second quarter or possibly the third quarter next year. It is hoped that by then, enough of the '02 compliant trucks will have operated successfully enough to give fleets and owner-operators confidence in the new engine technology Also by then, many expect the economy to be improved, stoking pent-up demand from fleets and operators who took a "wait and see" approach.

"We feel there will be pent-up demand for the 2002 compliant trucks early next year," said Susan Alt, vice president of marketing at Volvo Trucks North America. "There is always a reason to buy new when a manufacturer has a product that is more cost effective.

"From the standpoint of the anticipated problems with the new trucks and the 2002 compliant engines, I believe it will turn out much like Y2K. There has been a lot of concern over engine reliability, fuel economy and overall operating costs for 2002 compliant trucks. But we have gone to great lengths to test the engines and the trucks."