PORTLAND, Ore. – North America’s largest truck manufacturers says it is time somebody did something to prop-up used-truck prices, and the company’s president and chief executive officer Jim Hebe says he’s just the man for the job.
“I wouldn’t call it a crisis, I would call it a challenge. The used truck challenge,” says Hebe. “We look at it now as an opportunity.”
He insists, however, that before you can understand how to fix the problem, you first have to understand why used truck prices have dropped so dramatically of late.
According to Hebe, the recent boom years saw manufacturers, dealers and credit companies concern themselves with nothing more than volume.
“Dealers were getting killed on leases,” he explains. “They had all of the tax liability up front of the cash flow, so (they) demanded to be paid up front by the finance companies.”
Credit companies were forced to accept all of the risk in leasing trucks to owner/operators, which they gladly accepted at the time for fear of missing out on a flood of revenue.
“Not to be critical of the dealers, but dealers had no recourse,” complains Hebe. “Credit companies were left standing alone … If a contract was repossessed, everything was put on the finance company.”
Since dealers were unwilling to pay realistic prices for repossessed rigs, which fetched even lower values at auction, Hebe says US$85,000 worth of truck would sell for only $20,000 to $15,000.
As a result, finance companies boosted lease rates to help recoup their losses and truck payments, of $2,000 to $2,400, became commonplace for O/Os. Once fuel prices spiked, the independents didn’t stand a chance, Hebe contends.
“We absolutely killed a lot of O/Os – guys who otherwise would’ve made it in this business,” admits Hebe.
“Auctions destroyed the value of used trucks and that has to stop.”
He says Freightliner’s plan is to revamp the way it markets used trucks by improving the financing of smaller operators.
The policy will “startle the industry, but it will … preserve and protect the value of used trucks,” insists Hebe. For dealers it means “the dreaded ‘R’ word: recourse. That’s going to make me unpopular, but it’s time somebody said it.”
While he didn’t give exact details of the new credit scheme, Hebe did promise that the risk will be shared among Freightliner LLC, dealers and finance companies so that the credit rates on second-hand trucks will come under control. Key to the plan will be a doubling of the number of Selectruck dealerships, over the next year, to almost 70 across Canada and the U.S. The company’s research indicates truckers simply won’t travel far to buy equipment, be it new or used.
“We can’t continue to sell new trucks to people who should be in used trucks,” he says. Given the price of diesel, he insists O/Os need to keep their truck payments in the neighborhood of $1,500 or less.
“If you’re over $1,600 to $1,800, you’re dead,” adds Hebe. He says its, “no coincidence” that Freightliner spent a Saturday talking to its captive finance company. The alternative is to do nothing, and let depressed used-truck prices change the way large carriers do business, he argues.
Depreciation rates would jump, from eight cents-a-mile to 20 cents, and truck load fleets would need to hold equipment longer and shift to the business model of LTL fleets. This would mean shouldering the cost of adding repair and maintenance facilities where few exist today, Hebe explains. (To say nothing of the work it would take to find mechanics, given the current shortage.)
“Unless something dramatically happens on the used-truck side of our business, the industry structure will change forever,” says Hebe. “(We’re trying to) not only protect our dealers, but also our customers … No one else is doing anything about it, we have to.” n
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