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Sales Shocker

North America's truck manufacturers must have found some comfort in Canadian sales figures this fall, as several of them plunged into their annual budget deliberations. Canadian fleets and owner/opera...


North America’s truck manufacturers must have found some comfort in Canadian sales figures this fall, as several of them plunged into their annual budget deliberations. Canadian fleets and owner/operators purchased 9,931 Class 8 trucks in the first half of 2003 — a 14.2% gain over the same period in 2002 — even as U.S. sales plunged by 7%.

It should be little surprise that Canadian sales have outpaced those south of the border. In words evoked by U.S. President Bill Clinton, “It’s the economy, stupid.” The construction market is on the rise, the value of the Canadian dollar has given carriers additional purchasing power, and business in Alberta’s Oil Patch is strong.

“I find the size of the percentages surprising, not the direction they’re going in,” says Bob Pielsticker of KPMG’s Transportation Services practice. “I’ve not met a carrier this year whose revenue has not increased over last year.

” The situation contrasts with life south of the 49th parallel, adds the consultant. “Their volumes are down, rates are down, profits are down. It’s a real depressing scene.”

“The short answer is basically that the Canadian economy has been stronger in recent quarters, and economic factors drive truck sales,” says Volvo Trucks spokesman Jim McNamara, adding that a strong Canadian dollar has been matched by a “strong increase in orders and sales.”

“There’s been a significant reduction in the cost of vehicles,” agrees Brad Thiessen, general manager of Freightliner’s Canadian operation. And the dollar that drives it is expected to remain strong. The BMO Financial Group expects the exchange rate to remain at current levels until the end of next year.

Since North America’s truck manufacturers are headquartered in the U.S., exchange rates are a factor in sticker prices. But there’s a catch – a healthy Loonie could weaken exports that fill lucrative cross-border lanes, and those shipment volumes declined throughout the second quarter of 2003.

It’s an unsettling trend. While domestic freight accounts for 74% of the total tonnage hauled by trucks, cross-border shipments account for 46% of the revenues (more than 50% if you include only carriers with at least one million in annual revenues), according to Statistics Canada. And revenues are the ultimate driver of truck sales.

Thiessen uses words such as “reasonable” and “stable” when describing the current Canadian truck market. “We’re not tickled pink with the market in Canada by any respect,” he says. “I don’t want to give the impression that the Canadian market is booming. I want to give the impression it’s more stable than the U.S. scenario.”

But the 22,000 Class 8 truck sales that he expects in 2003 is still an improvement over the 20,289 sold in 2002.

THE ‘PRE-BUY’

This year’s sales weren’t linked exclusively to economic forces, however.

Fleets in the U.S. rushed to buy truck engines built before October 2002 — the deadline for new emissions standards — because of questions relating to how fuel economy would be affected by associated changes in technology.

Among sales executives, it became known as the “pre-buy”.

“The U.S. was impacted a little bit more,” says Bill Kozek, Kenworth’s general sales manager, North America. “There was a six-month period where there was definitely a reduction in order intake.”

“The good news is that the EGR (Exhaust Gas Recirculation) experience has been nowhere as big a problem as people thought it would be,” Thiessen says, noting how the emission-cleansing technology has proven itself.

The southern sales patterns, though, may have affected some Canadian buyers.

“We had some engine shortages because of it,” says Jim Schumacher, president of International’s Canadian region. “Some of the business I might have done in ’02 was pushed into ’03.”

International also faced a six-week strike at its production facilities in Chatham, Ont.

The urge to jump at the 2002 engines was also more likely to be experienced in the U.S., where huge truck fleets account for a bigger share of the business, he says. “It’s more of an impact to larger fleets, where a quarter mile fuel economy is a more significant number.”

VOCATIONAL SPECS

Some of the strongest Canadian sales have been associated with vocational trucks and municipal markets.

“The Alberta region has been one of our strongest,” Kozek says. Canada’s Oil Patch has been thriving, thanks largely to a boost in the price of crude oil. And that translates into businesses that need to buy equipment.

Granted, other sectors in Western Canada haven’t shared in the fortunes.

“That party could be threatened a little bit by the fallout of Mad Cow (Disease),” Thiessen says. “There’s not one guy hauling livestock these days who’s looking at buying new trucks.”

For that matter, shipments of lumber out of B.C. have been affected by the trade dispute with the U.S. concerning softwood lumber.

But where these markets have struggled, the construction business has been strong across Canada. As of July, building permits were up by 9%,when compared to the same period in 2002, Statistics Canada reports.

“Demand has been strong for concrete mixers, dump trucks and crane trucks all across the country,” says John McQuade, Mack’s regional vice-president.”The highway market, especially within Canada, has also been quite strong as a lot of material is being transported to supply the healthy construction industry. As the U.S. economy starts to recover, we should see more demand for highway product.”

LET’S MAKE A DEAL

Pielsticker says manufacturers also appear willing to negotiate attractive deals in Canada, particularly as U.S. sales continue to struggle. “I think in the sales side of things, salespeople are being pretty aggressive…we’re seeing some pretty sweet deals right now.”

Some fleets might also face a greater need to replace their used equipment, since they haven’t been able to stick to the three-year trade cycles adopted in the late 1990s.

“We have certainly seen, in some applications, trade cycles being extended probably by six to 12 months… there’s been a number of purchases out there that are obviously being extended,” Thiessen says.

Sam Barone of Transportation Partners in Ottawa suggests that fleets will want to stay as close as possible to the 36-month cycle, to maximize newer technology. Others will simply want to stick to their long-term expansion plans despite short-term troubles, he adds. “If you’re assuming growth in certain lanes, you’re going to have that accounted for in your fleet plan.”

MARKET LEADERS?

The question is whether Canada can retain its lead. There’s no doubt that Canada’s economy stumbled in the second quarter of the year. Exporters are facing a strong Canadian dollar for the foreseeable future; Toronto’s tourism industry was scarred by the emergence of SARS in its hospitals; and the beef industry has seen its products shunned over fears of Mad Cow disease.

Still, Canadian fleets bettered their financial performance when compared to last year. The nation’s largest for-hire carriers posted operating ratios of 0.95 in the second quarter compared to 0.96 during the second quarter in 2002, Statistics Canada reports. Anything less than 1.00 equates to an operating loss. (To put the number in perspective, however, it should be noted Canadian railways posted operating ratios of 0.75 in 2002 — making 25 cents on the dollar.)

The third quarter of 2003 also began with a 1.7 per cent increase in manufacturing shipments, after a dismal second quarter.

HISTORY AND FUTURE

History could also repeat itself within a few years.

“In 2007, the cost of the truck (specifically, its engine) could be raised significantly,” Kozek says, referring to the unknown commodity of a truck engine that has to meet the next round of emissions regulations mandated by the U.S. Environmental Protection Agency. “It’s a situation that’s kind of unknown. You don’t know about the impact they’ll have on fuel efficiency.”

Nor is the industry certain about the approach that will be taken to reduce emissions. Some discussions
have focussed on NOx absorbers (ie catalytic converters), while others have focused on diesel fuel with dramatically reduced sulfur levels.

The next question in the mind of OEMs could be whether truck buyers will look to embrace the fuel efficiency of current engine designs, pre-buying equipment prior to the next changes in EPA rules.

“There were a lot of engine sales out of fear,” one executive said of 2002, suggesting that the next generation of engines could face double-digit drops in fuel economy. “By 2007, they’ll be saying, ‘All we know and love is the 2004s.'”

For now, Canada continues to lead the way in sales.

“I would expect the next three years to be pretty strong in the U.S. and Canada,” Kozek says. “The economy is coming up, and interest rates are still pretty low … but I would expect for the rest of the year, Canada’s numbers will continue to have a pretty good gap.”


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