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Prelude to a Pre-buy?

These are good times to be working at a truck lot. The 2,726 Class 8 trucks sold in Canada this March and the 3,146 sold in April were just shy of the record. The 2,576 sold in February actually eclip...


These are good times to be working at a truck lot. The 2,726 Class 8 trucks sold in Canada this March and the 3,146 sold in April were just shy of the record. The 2,576 sold in February actually eclipsed that month’s record set in 2000, and some vehicle manufacturers have already written enough orders to keep assembly lines busy until the end of the year.

Perhaps the strong numbers shouldn’t be that surprising. According to Statistics Canada, spending on transportation and warehousing is up 5% over last year, and more business means a need for more trucks.

But many of these sales may be linked to fleets that want to avoid purchasing engines designed to meet 2007 emission standards.

A recent survey by Motortruck and TruckNews suggests almost 30% of Canadian for-hire fleets revised their replacement plans by embracing what’s become known as a “pre-buy” of equipment in 2002 – in essence, stocking up on engines built to meet existing rules, as a strategy to delay using the next generation of trucks. And 77% were happy enough with their decision to repeat it for 2007. While manufacturers are all chanting a common mantra that the next round of emission standards can be met by building on existing technology, largely matching today’s fuel economy, the equipment is still expected to carry a higher price tag thanks to the addition of components such as diesel particulate filters, and systems designed to capture crankcase emissions.

“The sales volumes we’re seeing, we don’t believe have anything to do with pre-buy. It’s the robustness of the business in North America,” insists Mark Kingsley, Caterpillar’s general manager in Canada. Granted, he suggests some fleets may be looking to shift buying patterns to avoid purchases early in ’07.

The Ontario-based QuikX Group of Companies is among them.

“We have definitely programmed ourselves to be doing that,” fleet president Gary Babcock says, referring to an accelerated purchase plan designed to delay the introduction of the next generation of diesel engines. “I’d like to have nine months to a year to watch what happens.”

The last time emission standards were updated, introducing equipment such as Exhaust Gas Recirculation systems, he was shocked by lost fuel economy, and new maintenance issues linked to such byproducts as higher underhood temperatures.

“This time,” Babcock says, “I’d rather someone else be the guinea pig.”

“I haven’t spent a lot of time trying to analyze what [portion of today’s sales] is just strong demand, a strong economy, and what’s been pulled forward,” says Jim Schumacher, president of International Truck and Engine’s Canadian operations. “It’s hard to gauge.”

But the full effect of the 2002 pre-buy wasn’t experienced until about six months before the standards were introduced, he adds.

The impact of that buying trend was significant. The U.S. General Accounting Office estimates that between 20% and 26% of the trucks bought in the six months before October 2002 were sold to fleets scrambling to buy familiar technology rather than investing in cleaner-running designs. Sales south of the border plummeted in the months that followed.

This time, however, a strong economy could actually deny some fleets the opportunity to order trucks made before the 2007 deadline, says Cummins Diesel of Canada general manager Alasdair McNellan. “It’s almost too late already,” he says, referring to how some plants have orders booked into 2006. “How can you even expect a pre-buy?”

It’s one of the reasons Babcock has already placed orders for pre-2007 equipment. “Lead times [in late 2002] were such that by the time I woke up, I couldn’t get there,” he says.

“Lead times obviously are longer than they were six months ago, and that’s probably true with most OEMs. There may be a little frenzy going on with the dealers trying to protect their customers [by ensuring stock is available],” adds John McQuade, Mack Canada’s vice-president of sales and marketing.

Still, many manufacturers suggest the QuikX approach has so far been rare. “What we’ve been seeing through 2004 has been a major replacement of equipment because of the previous three years of recession in the industry,” says Scott Kress, senior vice-president of sales and marketing at Volvo Trucks North America. “Right now, the economy has been strong, the industry has been strong. The previous technology has been proven.”

The latter point is often being used to convince nervous buyers to stick with existing replacement schedules. The last round of emission standards introduced the trucking industry to such things as Exhaust Gas Recirculation systems and Caterpillar’s ACERT technology for the first time, and the resulting changes led to losses in fuel economy, higher under-hood temperatures and heavier weights.

“Customers don’t fear ’07 because the technology is just a little more of an advancement of the equipment we’re using,” Kress says. “There’s been talk the impact of the fuel economy in ’02 wasn’t all that great, either.”

(Individual reports of lost fuel economy vary from two or three per cent to double digits.)

“There is not going to be any detriment as far as fuel consumption or performance,” McNellan adds, referring to the next generation of engines.

That may be why some fleets have decided to stick to their existing replacement schedules.

While Highland Transport did shift replacement cycles in 2002, there were other circumstances at play, says Geoff Scott, the fleet’s vice-president of operations. “We had a market for our existing equipment, so it gave us an opportunity [to trade-in trucks earlier than planned].” This time, the fleet will stick to its original plan.

But industry analyst Martin Labbe insists today’s numbers already mark the beginning of another pre-buy phenomenon. “The number of trucks being put in the market is in excess of what’s required to move the freight,” he says. “For some time now, carriers have said they’ve been updating their replacement rate.

“This time around, the pre-buy is not as great percentage wise. [But] it will be greater in absolute numbers … The manufacturers will try to produce as many as they can, as fast as they can, and will put as big a gun to the head of their [component suppliers] as they can,” Labbe adds, suggesting between 150,000 and 200,000 North American trucks will ultimately be “pre-bought” prior to 2007.

The fleets most likely to shift buying habits are those that faced the biggest impact when changing to post-02 engines, he says. “Now they’re going into 2007 saying, ‘Burn me once, it’s your fault. Burn me twice, it’s my fault.'”

“It varies from customer to customer,” Schumacher says of whether customers will consider pre-buying equipment. “Some of them, having been through it once before, are more comfortable that it’s not a fall-off-the-cliff type scenario. Others have that issue with the new technology, and still others are unsure. There isn’t as much information out there as to what the new technology is, what the engine changes are. I expect to see more of that over the next six months or so.”

Indeed, several unknowns remain.

“There’s obviously a cost involved in 2007,” says McQuade. “Nobody knows what that cost is going to be, and that is probably fueling some of this … If I was a fleet owner, I’m not sure what I would do.”

There are other questions as well. Will the different lubricating properties of Ultra Low Sulfur Diesel fuel lead to problems with fuel pumps? And what temperatures will accompany accelerated Exhaust Gas Recirculation rates?

For now, engine makers are sticking to one piece of advice – don’t worry.

During the recent Mid-America Trucking Show in Louisville, Ky., Cummins engineers were showcasing components from a working EGR engine that had been torn down after traveling more than 965,000 km. All engine makers were announcing positive test results from early prototypes of equipment built to ’07 standards. Detroit Diesel director of emission projects, Tim Tindal, said his company’s modifications wouldn’t “significantly impact” existing equipment.

For that matter, there is even a price to be paid for deciding to pre-buy equipment.

“The cost of the engines will increase, yes, but that is not a very large increase compared to the other costs,” said Volvo Trucks North America president Peter Karlsten. “Fleets disrupt their own performance … They change their trade cycles, which affects their trade-in values and their capital expenditures.”

Linehaul trucks, for example, tend to be traded in for the first time once they’re four years old. Add a year to that, and they’re being traded at the time that warranties are expiring.

Not to be too altruistic about it, a pre-buy also affects the environment. In a damning report of the U.S. Environmental Protection Agency’s accelerated emission standards, the U.S. General Accounting Office suggested the resulting pre-buy actually delayed the use of smog-preventing equipment designs.

For its part, the Canadian Trucking Alliance has lobbied the Canadian government for incentives to promote engines built to meet the stricter standards, through the use of a “more aggressive” CCA rate. So far, the request has fallen on deaf ears, although it wouldn’t be entirely without precedent. Preferential CCA rates are offered for equipment such as scrubbers on factory stacks. And Canada is facing the reality that its Greenhouse Gas emissions are increasing faster than the economy itself – something that needs to be addressed to meet commitments under the Kyoto Accord.

Manufacturers also learned some important lessons during the last business cycle.

“One of the lessons learned [from the last pre-buy] is the need to have manufacturing flexibility in terms of schedule adjustments,” says International’s Schumacher. “Our ability to adjust manufacturing schedules without as big a cost burden is better.” (That means being able to build more trucks without adding to existing plants.)

Regardless of when the sales happen, the shift to engines made to meet the EPA’s next round of standards is expected to be much smoother than the experience in 2002. Back then, Exhaust Gas Recirculation systems were an unknown commodity. Everything from larger cooling systems to turbochargers had to be crammed under the hood, while fuel economy and oil drain intervals both took a hit. Some fleets reported a smooth transition, but others were plagued by failures of emission-related equipment from valves to injectors, changing coolant chemistry, and higher temperatures under the hood that wreaked havoc with everything from hoses to alternators.

“For 2007 you’re getting a Caterpillar engine with the same reliability, the same durability, the same or better fuel consumption,” Kingsley says of the latest changes.

The overall economy is also in a very different place. Manufacturers had been hit by a slumping economy that left plenty of room for those who wanted to pre-order equipment. The higher such sales go, the further they can drop. And drop they did.

But some level of pre-buy is inevitable. It’s a byproduct of the regulatory cycle.

“There was a pre-buy in 1976 and it was huge,” Labbe say as an example, referring to U.S. fleets that scrambled to avoid newly regulated anti-locked brakes. The truck market dropped by close to 60% after that.

Meanwhile, fleets worried about 2007 have to face the fact that they will face a similar challenge in 2010, as manufacturers look to address even-tighter standards.

“The opportunity for a bigger pre-buy is going to be out there,” Kress says.

Perhaps it’s easier to stick to existing purchasing plans.

“We’ve got pretty established cycles and we’ll stay to the plan,” says Clayton Gording, Reimer’s vice-president of operations. “Over the next 10 years, we know what we’ll be buying except for additions, expansion, that sort of thing.”

The Winnipeg-based fleet didn’t pre-buy any equipment in 2002, he adds, “and we’re still alive.”


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