Truck Dominated Diesel Engine Production In North America Expected To Cool Off In 2000

Diesel Progress North American Edition, Dec, 1999 by Thomas A. Rhein

It's interesting to hear comments in the field like, "Thank God our order rate is slowing down so we can catch up," and, "We all need a breather before demand starts up again." The truck market has been on fire since 1996, with diesel engine shipments responding in kind. Only recently have truck manufacturers noticed a slight softening in their order boards.

Diesel engine production for on-highway applications (truck, bus & coach) makes up some 75 percent of the total diesel engine production in the U.S. and Canada. It's not too much of a stretch to say that as truck sales go, so goes total diesel engine production. And as housing starts to go, so goes on-highway diesel engine production, typically after a six- to nine-month lag. We continue to believe U.S. housing starts, as reported by the National Association of Homebuilders, is a reliable leading indicator for on-highway and total diesel engine production.

To add credibility to housing starts as a leading indicator, the last housing starts decline was in 1995, foreshadowing the on-highway and general diesel engine production decline in 1996. The housing rebound through the first quarter of 1999 has been reflected in the strong diesel production to date.

Housing starts were expected to weaken by late 1998 in response to inflation and higher interest rates. Interest rates did not rise and inflation remained low, resulting in steady housing starts growth through the first quarter of 1999 and high diesel engine production volumes. Recently, interest rates have turned up and housing starts have declined in the late second and third quarter of 1999. With interest rates forecasted to continue their rise, we can expect housing starts to be affected and continue to decline through the end of 1999.

Using this as an indicator means we can expect strong on-highway diesel engine production for the first half of 2000 -- similar to 1999 -- with a decline in the last half. In other words, the breather the market has been anticipating.

To add fuel to our expectations, the stock market seems to be headed down, many diesel engine related companies are cutting budgets and consumer confidence is on the wane. Y2K may only be a hoax or a minor irritation at best, but investor physiology could pull serious money out of the market affecting the economy. The U.S. government has printed extra cash to keep the banks solvent at the end of 1999.

Not all North American diesel engine applications have shared in the prosperity of the truck market. Agriculture has experienced a major decline of almost 30 percent in 1999, thanks to low commodity prices and weak overseas economies. Many analysts feel the decline will continue in 2000, but at a lesser rate.

Off-highway mobile and industrial stationary diesel production has softened in reaction to the import assault and weak overseas markets. This trend is expected to continue in 2000. Power generation has enjoyed a good year, with the continuing effects of utility deregulation and Y2K fears, which has accelerated standby generator set use for commercial and residential buildings. The strong 1999 demand is expected to slow down in 2000, although a rising overseas demand should keep larger generator sets alive.

Marine demand has held its own in 1999, particularly on the commercial side, and will do so again in 2000. Locomotives have shown increased activity with healthy railroads, more productive diesel models and attractive leasing plans. As a result, 2000 should be a continuation of the short term prosperity with the upshot a younger and smaller national fleet.

One reason 2000 is forecast lower than 1999 is the large increase in the number and unit volume of imports in the high volume under-100 hp applications. Not only do the imports include the usual names like Perkins, Kubota, Yanmar, Isuzu and Deutz, but the domestic manufacturers are becoming more significant import players. (Caterpillar dealers expanding Perkins offerings, Cummins importing from Japan, Deere importing from Mexico and Detroit Diesel importing its VM product line from Italy). This trend should continue until importers find it easier and more profitable to compete from North American plants. The factors determining domestic manufacture appear to be the strength of the U.S. dollar, an improved world economy equating to higher capacity utilization and/or increased transportation costs.

Deutz, Yanmar and Kubota appear poised for North American production when the climate is right. But that may not yet happen in 2000.

Our forecast for 2000 is a good year, declining just over 10 percent from the peak 1999 level. In 1999, North American diesel engine production is expected to exceed 1.2 million the third straight year above the 1 million mark. The year 2000 is also predicted to exceed 1 million, but closer to the 1997 production level of 1,050,000.

The truck market is expected to maintain its 75 percent share of total diesel engine production despite a decline of almost 15 percent to just under 800,000 diesels. Other markets predicted to show similar declines are off-highway mobile, agriculture, industrial stationary and power generation. The counter-cyclical markets of locomotives and marine are forecasted to hold their own.