DON MILLS, Ont. - If you want to silence a crowd of heavy-duty truck dealers, just ask them how the used truck market is these days. After a communal groan, you might get a series of one-word answers ...
BARGAIN HUNTER: A customer checks out the selection at SelecTrucks of Toronto, as seen through the window of the sales office. (It ain't backwards on the other side!!)(Photo by John G. Smith)
DON MILLS, Ont. – If you want to silence a crowd of heavy-duty truck dealers, just ask them how the used truck market is these days. After a communal groan, you might get a series of one-word answers ranging from “dismal” all the way to “pathetic”.
Some of the answers aren’t suitable for print.
“It’s a crisis,” says Bobby Bates, the Toronto center manager for Freightliner SelecTrucks, which operates locations in Toronto, Calgary and Montreal. “In my 25 years in the business, this is the greatest challenge I have seen face the used truck market.”
Peter Swartzentruber, used truck sales manager for Carrier Truck Centers of Woodstock, Ont., echoes those feelings. “We have seen the market for used trucks decline drastically over the course of the past year,” Swartzentruber says, referring to his International dealership. “I would say it’s off at least 25 per cent – 35 to 40 per cent in some cases.”
Those estimates are probably quite accurate, if not a little low. According to Donald Broughton, an industry analyst with A.G. Edwards based in St. Louis, Mo., there are now a record number of Class 8 used trucks on the market in North America, and 35 of the 50 largest used truck retailers in the U.S. are reporting above-average inventories.
“Normally, there would be between 10,000 and 20,000 first-trade used trucks – that’s three- or four-year-old trucks with about a half-million miles on them (800,000 km) – on the market nationally,” says Broughton of the U.S. situation. “Now there are 120,000 in inventory.”
Although there are no hard figures covering the situation in Canada, anecdotal reports suggest our used equipment situation echoes that of our southern neighbors.
Why all the used trucks? There are a number of reasons, Broughton explains, starting with the record rate of new truck production over the course of the past few years that only recently came to a screeching halt. Everyone in the industry knows that 1999 was a record-breaking year for new Class 8 truck sales.
According to the U.S.-based National Truck Equipment Association, Class 8 sales topped 262,316 units in 1999, up 28 per cent from 1998. The demand came mostly from carriers, flushed with cash from the booming economy and eager to recycle their fleets to attract and retain both customers and drivers.
Although sales on new Class 8 trucks are down in the U.S., they are actually up a bit in Canada. Sales statistics for the first half of 2000 show U.S. sales at about 121,700 units, down 4.5 percent from about 127,500 units during the first half of 1999. In Canada, meanwhile, the Canadian Vehicle Manufacturers Association reports that there were 15,937 new Class 8 trucks sold during the first half of this year. That is up about 6.0 per cent from 14,958 during the same period last year. Probe a little further, however, and truck makers say the orders have begun to dry up in Canada, too.
The push to turn over equipment more rapidly has driven the average age of Class 8 trucks in the U.S. to its lowest level in 20 years, according to research by ACT Research Co. and A.G. Edwards. However, that push to update to the latest technology also pushed more and more late-model used trucks onto the market in the form of trade-ins. Unfortunately, says Broughton, as 2000 rolled around, various forces combined to make the market for first-trade trucks dry up.
That’s been exacerbated by fleets cashing in on guaranteed trade-in values that had been promised by truck makers hungry to grow their market share.
“The people who normally buy first-trade trucks lacked both the need and the ability to buy,” Broughton says. “The need to buy depends on getting new business and having new drivers to fill the trucks. But smaller carriers have been finding it hard to compete for new business with core carriers, and no one can find drivers, so the need to buy is diminished.
“Then the price of both fuel and capital – or the cost of borrowing money – went up in the first part of this year. That meant margins were squeezed for owner/operators and smaller carriers, meaning their ability to buy a newer used truck was restricted. Those factors, combined, mean no demand.”
That lack of demand has translated, naturally, into a steep decrease in the value of used trucks. Broughton estimates, in some instances, the value of first-trade trucks has dropped as much as 50 per cent in the last 18 months. That estimate is confirmed by Bates: “A late model truck that was selling in the fall of ’99 in the mid-$80,000s, you could buy that same truck now in the high-$40,000s to mid-$50,000s in some cases.”
Increased operating costs in the first half of 2000 also resulted in an unusually high number of trucks finding their way onto the used market through repossession.
Repossession rates basically mirrored the rising cost of fuel, Broughton says. The repo rate only stopped rising, he says, because the finance companies didn’t know what to do with the trucks.
“The finance companies have had to become more creative in order to limit the number of repos they take because their value has disappeared,” says Broughton. “Rather than take the truck, the companies are moving payments to the end of the schedule and upping the interest rate just to get these guys back on the road.”
The repossessions may be a direct result of a booming economy. Swartzentruber believes good margins (before fuel went up) and the high demand for trucking may have inspired some buyers to jump into a new truck when they probably should have bought used. “There were probably a lot of people in the business who shouldn’t have been. They were so busy hauling that they never bothered to check the bottom line, and by the time they did, it was too late,” he says.
As for the trucks that were repossessed, many were unloaded at major auctions at ridiculously low prices by finance companies afraid of getting stuck with them. And once the late model prices came down at the wholesale level, there was a domino effect on the dealer lots.
“It happened quite quickly, and lots of dealers were caught with inventory from trade-ins, and from repossessions,” says Swartzentruber. “But while the value of inventories has dropped, the cost of operating hasn’t declined, leaving dealers in a negative equity position in many cases.”
Regardless of how they got there, many used truck dealers are clearly in survival mode at the moment, and they are pulling out all the stops to make sure they grab a share of whatever sales there are to be had. A quick poll reveals that dealers are now offering a range of incentives, including: full and extended warranties, creative financing, payment vacations, free rubber, free fuel, added accessories and fly in-drive out reimbursements. Dealers say they have to work twice as hard today to make the same revenue as a year ago.
That also means taking a much harder line on what the dealership brings in. Bates says he was recently offered a 1996 model truck by an owner/operator who owed almost $10,000 more on the unit than the dealership would ever consider paying for it, simply because of the resale value.
Swartzentruber says Carrier Truck Centers has cut down drastically on the number of highway trucks it brings in because there is simply no demand for them. The dealership has actually shifted its attention, he says, to dumps, vocational trucks and deliveries. “It’s a matter of taking eggs out of one basket and putting them in another basket,” he says.
By all indications, the market for used trucks other than Class 8 highway trucks has not suffered nearly as much during the current glut. And that theory is confirmed by a number of used truck dealers.
“We were lucky in that we had the right trucks at the right time,” says Jacques Dube, general manager of Peterbilt of North Bay, Ont. “We didn’t get caught with highway trucks when we needed heavy trucks, at the start of the logging and construction season. This year has actually been good for dumps with all the construction going on.”
Richard Jackson of Humberview GMC Trucks in Toronto agrees: “There has been good growth in the mediu
m-duty market in the last five years, and the people who bought early are now flipping their units,” he says. “So there is a good supply of used medium-duty trucks on the market right now, and new product has seen significant price increases in the last 18 months.”
Even if the prospects are not as rosy for used truck dealers trying to move Class 8 highway trucks, individuals who happen to be in the market for such a vehicle have never had it so good. In fact, this might just be the perfect time for an owner/operator who can afford it to move up to a later model used truck or for a small carrier to expand its fleet.
“If I was running a private fleet and I was trying to decide whether to put my drivers in a new truck or a two- or three-year-old, low-mileage used truck, I would be looking very seriously at the used market. Even if I would normally be a new truck buyer,” Broughton says.
“There is probably a better selection of used trucks available now than we have ever seen,” adds Swartzentruber. “A year ago, as soon as there was a good used truck on the lot there were three people lined up to see it. Now consumers can pick and choose a little.”
Bates agrees: “There has never been a better time. I think the market has bottomed out, and it can only go back up.”
As for the used on-highway Class 8 market rebounding, most industry insiders agree that it will take time to recover, perhaps more than 18 months. First, however, the supply of new trucks will have to slow down, and the truck manufacturers have certainly done their part to make that happen by scaling back production.
“Eventually, the price gap between new and late-model used trucks will become so large that it will make sense for more and more carriers to take advantage of the bloated used truck market,” Broughton says. “When that happens, people’s purchasing decisions will change.” n