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CRISIS IN THE MAKING

Those who build the heavy trucks on which this industry runs have enjoyed a booming market in recent years. Canada's Class 8 truck business has grown from 21,394 trucks in 1996 to 27,205 in 1997, 29,1...


Those who build the heavy trucks on which this industry runs have enjoyed a booming market in recent years. Canada’s Class 8 truck business has grown from 21,394 trucks in 1996 to 27,205 in 1997, 29,152 in 1998, and an estimated 30,973 in 1999. But there is a dark cloud on the horizon, according to the head of the truck company that has profited the most from the bullish market. When briefing a select group of business press editors in Portland, Ore., recently, Freightliner president Jim Hebe, spoke grimly about the resulting dire straits of used-truck values, and how they could impact the industry as a whole.

MT: Just how serious is the problem of dropping used-truck values?

JH: Fuel prices, driver pay, they’re nothing compared to this one. Once used-truck values deteriorate, this is not going to be a real fun business. If TL carriers can’t trade trucks every three or four years, it means we’re going to see trucks run longer, you’re going to see older technology; you’re going to see less adaptation of safety and new environmental technology; you’re going to see the re-appearance of large support infrastructures to take care of older trucks. All the things that made this industry efficient over the course of the last 10 years are going to reverse themselves if we go back to longer trade times. When it changes, it’s not going to be to the benefit of a lot of the carriers who are operating out there today, that are operating very efficiently, very effectively and very profitably.

MT: How dire is the dip in values expected to be?

JH: If the major finance companies in North America do what they are going to do, and reduce the advance rate on used trucks that are sold, I would bet you that two-thirds of the fleets out there today are upside down in negative net worth and practically bankrupt.

MT: What led to such dire straits?

JH: First, nobody is making enough money. A used truck buyer is not able today to generate enough revenue to allow himself a decent lifestyle and make the payments on his truck, simply because the freight rate off which his revenue is based is too low. Secondly, we have put far too many people in new trucks that should have been used truck buyers, and we’ve put them in new trucks with no money down and high payments, and we’ve made them marginal players, marginal performers and marginal owners of these trucks. Trucking companies have used the ability to bring drivers in as owner/operators, and finance them cheaply in new trucks as a recruiting tool beyond which it is beneficial to the industry. We have taken what should have been a good used truck buyer and we’ve made him a marginal new truck buyer.

MT: Why is this financing approach and recruiting practice such a problem?

JH: That has never been a sound practice. Look at some of the fleets that started business with no money down. They rolled over and they’re dead. You’ve got to go back to building equity in the equipment, and making long-term, sound owner/operators. There was nothing wrong with the business model that said a guy buys one or two used trucks, builds up some equity and then goes to put some money down on a new one. (But) we changed it as an industry 10 years ago. The industry has not recognized, nor supported, the value of a used truck. A three-year-old used truck today is as good as what new trucks were 10, 15 years ago. From a valuation perspective, we as an industry have not recognized that.

MT: What role do manufacturers need to play?

JH: We’ve got to plug the leakage of used trucks, and by that I mean that manufacturers had better start taking care of their own used trucks. When we allow finance companies or we allow independent used truck buyers to somehow get access and dump multiple used truck volumes on the market at very low prices, it impacts everybody. All it takes is one auction somewhere in the U.S. to, 24 hours later, impact everyone’s used truck values. From a fleet’s perspective, it impacts their balance sheet.

MT: How can small fleets and owner/operators be convinced to return to the idea of buying used iron?

JH: Give them a good, sound used truck as attractive as a new one from an efficiency and an appearance perspective, but at a much lower cost. It could also mean totally re-manufacturing three-year-old trucks to bring them back to new condition.

MT: What about new truck prices?

JH: The spread between new truck price and used truck price is not great enough. What am I telling you? New truck prices have to go up and they’re going to go up over the course of the next few years. They’re going to be driven up by mandates on the EPA side, they’re going to be driven up by safety and they’re going to be driven up just because of inflation.


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