Month after month, industry experts report new Class 8 preliminary and net truck orders, providing pictures of a sector that experiences peaks and falls every two years of an economic cycle.
Preliminary orders do not include orders that a fleet or manufacturer may cancel for a variety of reasons. Net orders, which arrive roughly 15 days after the initial cut, provide a more accurate picture of what happened. The two integers have a directional relationship. Cancellations are a good indicator of how customers feel about their company’s prospects.
Manufacturers scrub some truck orders, but usually only on a paper basis. If a manufacturer is unable to fulfill a given order before the end of the calendar year, the order will be carried over to the next model year, which begins on Jan. 1 across the industry.
OEMs used to have personalized model year starts, but new Environmental Protection Agency and California Air Resources Board restrictions went into force on January 1st. As a result, automakers began producing 2023 versions earlier this month.
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“It’s the same customer, same color truck.” The only difference is that the OEM canceled the 2022 model year vehicle and subsequently bought a 2023 model year truck,” Kenny Vieth, president, and senior analyst at ACT Research told FreightWaves.
Customers often do the majority of the cancellations. They can cancel without penalty up to three months before the scheduled build date. That’s when manufacturers start spending money on materials and pieces for the truck’s assembly.
Manufacturers are doing the majority of the canceling these days due to COVID-related supply chain delays and a continuing shortage of microchips used throughout the automotive and commercial vehicle industries.
“Typically, clients will remark, ‘I purchased too many vehicles,’ or ‘The business cycle has changed, so I don’t need as many trucks,'” Vieth explained. “Those were mostly OEM developed in the last two or three months.”
Making the transition to production
Net orders are placed in a metaphorical barrel, from which manufacturing dates, or build slots, are formed. Orders that do not have a defined build date are added to the backlog. Inventory includes everything slated for assembly and everything that leaves the production line.
Inventory includes vehicles that have been produced but have not yet been sent, trucks in transit to dealerships, particular client orders that have not yet been delivered, and stock units for retail sale.
The inventory-to-sales ratio is an excellent indicator of supply and demand equilibrium. In normal circumstances, the ratio for tractors is around 1.8 to 2.2 months. Because bodybuilders are fitting a chassis for a specialized job such as a tow truck, garbage truck, or street cleaner, vocational trucks normally take three months to complete.
Approximately five weeks of merchandise is “in process” from the plant to the dealership. That leaves about a month’s worth of dealer stock.
There are no more available.
However, given the OEMs’ challenges in obtaining a consistent supply of parts, led by semiconductors, the current inventory-to-sales ratio is 1.5 to 1.6 months. After subtracting process inventory, there leaves around one week of trucks that a customer may go into a dealership and buy.
Even that is likely exaggerated in the current situation, as OEMs are unable to recruit enough haul-away drivers to transport trucks from their plants to dealerships.
“There was essentially no for-sale stock inventory for virtually the entire year of 2021 and into 2022,” Vieth stated. “We have a situation where the OEMs are not taking orders.” You won’t be able to establish supply chain fluidity by snapping your fingers.”
Because of the production shortage, ACT predicts that pent-up demand for new trucks will exceed 100,000 by 2023. Manufacturers manufactured 265,000 units in 2021, compared to ACT’s prediction of 330,000. This year, the industry is expected to produce 365,000 trucks. It will most likely have a population of 300,000 people.
The pull-ahead situation
Pull-ahead orders, in which fleets attempt to purchase the last model year of a vehicle before regulatory changes drive up prices, exacerbate the truck availability issue. The calendar year 2023 is one of those years since new CARB emissions requirements go into force in January 2024.
The sum of all variables appears to make satisfying demand impossible.
“Let’s say the North American Class 8 production volume is 275,000 units. You have 100,000 units of pent-up demand and, say, 25,000 or 30,000 units of pre-ordering in the end. “I’m not going to argue that 2023 maybe 400,000 units, but there will be demand at those levels,” he said.
In 2021, manufacturers shipped around 250,000 Class 8 trucks in the United States and Canada.
There is nothing to trade.
The unprecedented demand for new trucks has resulted in previously unheard-of rates for secondhand equipment. According to J.D. Power Valuation Services, the average auction price for newer used trucks increased 96.3 percent last year compared to 2020. Fleets are hoarding equipment that could have been turned in for new iron.
“Because the new vehicle segment of the market is constricted, you have constrained trade-ins,” Vieth explained. “The folks who ordinarily buy 4-year-old trucks can’t buy them, and the guys who buy 8-year-old trucks can’t buy them because the guys with 4-year-old trucks aren’t trading them in.”
Lengthening the trade-in cycle is presenting problems for the largest fleets because maintenance expenses climb beyond 300,000 miles and continue to rise from there.
“A lot of the big fleets in our nation are built on core skills,” said Vieth. “‘We’re not built to repair trucks; we’re built to move freight.’ The issue for truly large fleets is that they often lack the bandwidth to operate a much older fleet. They must have new trucks.”
