Grim outlook for North American truck OEMs

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“[North American] OEMs, and their suppliers, must focus like never before on whatever is necessary to customize low-cost [truck] products for emerging markets. The alternative is to cede half of the global market and, thereby, perhaps a company’s long-term future.” –Francesco Barosi, managing director at AlixPartners and head of the firm’s commercial vehicle practice

It’s not exactly what you’d call a “positive” outlook, by any means, when you’re projecting that North American truck OEMs will get shut out of about half of the global vehicle market by 2014 if they can’t find a way to build cheaper commercial vehicles.

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That, however, is the conclusion reached in a recent study by AlixPartners LLP, which found that North American OEMs are being outflanked both by emerging-market-based OEM – now accounting for two thirds of global commercial-truck production – and by European competitors that gained “first-mover” advantage vis-à-vis partnerships with low-cost indigenous companies.

This comes of something of a shock as North American OEMs are also doing a lot better these days. After weathering an unprecedented global volume decline of 29% in 2009, AlixPartners said North American OEMs are recovering and production is expected to return to those experienced in 2008 within the next two to three years.

However, “native” truck builders in China, India and Russia together are also reviving – and are expected to boost their output by some 50% over the next four years, according to AlixPartners’ findings, due to the strength of domestic economies and demand from other emerging markets in Southeast Asia, Africa, the Middle East and Central America.

“North American OEMs are not well positioned to exploit this increasing demand in emerging markets because of a mismatch of product types, a lack of local partners and, especially, too-high costs,” noted Francesco Barosi, managing director at AlixPartners and head of the firm’s commercial vehicle practice, in the company’s report.

In fact, AlixPartners found that even with a growing demand for a so-called “middle segment” of more sophisticated trucks on the horizon in BRIC [Brazil, Russia, Indian, and China] and other emerging markets, the cost of these vehicles is still 40% to 50% less than the average North American-made truck.

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“The key for North American OEMs is to focus on how to quickly gain a foothold in the ‘middle segment,’” Barosi explained. “However, that’s all the more difficult today because there are now only a few ‘unmarried’ joint-venture partners left in China, India and Russia to aid in lowering costs.”

A similar ongoing study being conducted by Frost & Sullivan is also turning up some of the same warning signs. Ryan Carmichael, who’s working on the firm’s Strategic Analysis of the Global Low Cost Truck Market, told me that “low cost” for light commercial vehicles (LCVs) translates into a sticker price equivalent to $5,000-$6,000, with medium commercial vehicles (MCVs) running around $15,000 to $17,000, and for heavy commercial vehicles (HCVs), some $24,000 to $30,000.

“This isn’t just about the acquisition price point for commercial trucks in emerging markets, either,” he stressed. “If the global economy stays on its low-growth trend, even fleets in developed nations may start to look at low cost trucks as a way to significantly reduce their capital investments. So the question North American truck makers must answer is this: do you have a strategy to deal with this?”

According to AlixPartners, this puts immediate pressure on North American truck OEMs to engage in what the firm dubs “value engineering” – a systematic method to improve the value of products by a close examination of function, on a global level.

“North American companies must invest in producing simpler designs for commercial vehicle components so that they can generate the significant cost improvements – up to 50% – necessary to compete in the future,” noted Tai Li, a director within AlixPartners’ commercial vehicle practice.

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“Furthermore, in order to penetrate emerging markets, a key priority for suppliers as well as OEMs should be to invest in developing low-cost products better customized to the needs of these markets,” Li said.

Frost & Sullivan’s Carmichael, though, again pointed out that this “value engineering” must be applied in so-called “home-base” markets, too. “We think we’ll see low cost LCVs and MCVs start to enter the U.S. market in two to three years,” he told me.

Yet there’s a silver lining (of sorts) to be found in all of this, believe it or not, because Carmichael noted that his firm’s research also discovered that most U.S. fleet managers still remain more comfortable buying trucks with brand names they know well. That’s where the partnerships North American truck OEMs make with their overseas counterparts becomes critical.

Take Chicago-based Navistar’s joint venture forged with India’s Mahindra & Mahindra Ltd. five years ago, for example. The Mahindra-Navistar Automotives Ltd. (MNAL) joint venture is now rolling out a family of commercial trucks and tractors in the range of 25-, 31- , 40- and 49- ton (equivalent GVW ranges of approximately 56,000 up to 109,000 lbs) and eventually expects to be a “full-range commercial vehicle player” building from 3.5-ton GVW to 49-ton GVW commercial trucks, with variants of passenger transport, cargo and specialized load applications.

[You can view some comments Navistar's Dee Kapur made late last year in an interview with NDTV about the importance of this joint venture below.]

This is an example of a joint venture combining two engineering sets, Frost & Sullivan’s Carmichael said, specifically combining Navistar’s diesel engine and emission control expertise with Mahindra’s truck chassis design. “Together, they’ve created true global low cost truck platforms – ones that could make their way to the U.S. at some point down the road,” he said.

The truck, however, is to build trucks specifically tailored to individual market needs off such a global platform. That’ll be critical as the national rankings for truck demand are set to undergo a big shift, according to AlixPartners’ research:

• China’s commercial vehicle production volume increased by 22% in 2009, while volume globally decreased by 29%.

• Today, China accounts for 49% of total BRIC commercial vehicle production, which in turn accounts for 66% of global production.

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• As part of the expected Western OEM recovery, North American Class-8 truck production is expected to increase by 25% in 2010 to 150,000 units.

• By 2014, the global commercial vehicle industry is expected to grow by 1.8 million units, with China expected to account for 36% of total global growth.

“What this indicates is that we’re more firmly heading towards the creation of global truck and engine platforms that can be ‘tweaked’ to meet national, regional, and even local customer needs,” Frost & Sullivan’s Carmichael said. “They’ll be modified to meet various regulatory demands, in terms of emissions and safety.”

But another question remains, he told me: does “low-cost” offer a successful long-term strategy for OEMs overall? For building low-cost trucks is going to be a very low margin business no doubt – something tough to survive on, especially as national governments around the world keep tacking on new rules to reduce truck exhaust pollution and improve their safety profile.

It’s just one more complex set of trends OEMs must manage as the chart their future course.

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Trucks at Work: Sean Kilcarr comments on trends affecting the many different strata of the trucking industry.

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