Anatomy of a truck order: sometimes you just have to turn the page
Month after month, industry analysts report preliminary and net new orders for Class 8 trucks, snapshots of an industry in which peaks and troughs occur roughly every two years of an economic cycle.
Draft orders do not take into account orders that a fleet, or a manufacturer, might cancel for a number of reasons. Net orders, which follow the first cut by about 15 days, make it easier to read what happened. The two numbers are directionally correlated. Cancellations are a barometer of what customers think of their business prospects.
Some truck orders are cleared by manufacturers, but usually only on the basis of documents. If a manufacturer cannot produce a specific order by the end of the calendar year, the OEM will defer the order to the next model year, which begins January 1 across the industry.
OEMs used to individualize model year starts, but new regulations from the Environmental Protection Agency and California Air Resources Board take effect on the first day of the year. So manufacturers started building 2023 models earlier this month.
Turn the page
“It’s the same customer, it’s the truck of the same color. It has the same everything except the OEM canceled the 2022 model year truck and then ordered a 2023 model year truck,” Kenny Vieth, president and principal analyst at ACT Research, told FreightWaves .
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Typically, customers make the most cancellations. They can withdraw without penalty until about three months before the planned construction date. This is when manufacturers start spending money on the materials and parts needed to assemble the truck.
With COVID-related supply chain disruptions and an ongoing shortage of microchips used in the automotive and commercial vehicle industry, manufacturers are making the most of the cancellations these days.
“Usually it’s customers who say, ‘I ordered too many trucks,’ or ‘The business cycle has changed, so I don’t want as many trucks,'” Vieth said. “The last two or three months, these were largely OEM generated.”
Transition to manufacturing
Net orders go into a figurative barrel, from which production dates, or build slots, are generated. Orders without a specific build date are part of the backlog. Anything scheduled for assembly that leaves the production line is considered inventory.
Inventory counts trucks built but not shipped, trucks in transit to dealerships, specific customer orders not yet delivered, and stock units for retail sale.
A good indication of the balance between supply and demand is the inventory-to-sales ratio. Normally, the ratio is around 1.8 to 2.2 months for tractors. Professional trucks typically run three months because bodybuilders tailor a chassis for a specific function such as a tow truck, garbage truck, or street cleaner.
Approximately five weeks of inventory is locked “in progress” from factory to dealer. This leaves approximately one month of inventory for dealer stock.
But given OEMs’ struggles to get an uninterrupted flow of parts — led by semiconductors — the current inventory-to-sales ratio is 1.5 to 1.6 months. Subtracting inventory from the process, that leaves about a week’s worth of trucks that someone could walk into a dealership and buy.
Even that is likely overkill in today’s environment, as OEMs cannot hire enough haulage drivers to haul trucks from their factories to dealerships.
“Essentially, there was no stock inventory to sell for most of 2021 and into 2022,” Vieth said. “We have a situation where OEMs are not taking orders. You’re not going to snap your fingers and all of a sudden create supply chain fluidity.
ACT said pent-up demand for new trucks will exceed 100,000 as 2023 approaches due to the production shortfall. In 2021, manufacturers built 265,000 units compared to ACT’s estimate of 330,000. The industry is expected to produce 365,000 trucks this year. He will probably build around 300,000.
The predicament of the pull-ahead
The picture of truck availability is worsened by advance orders where fleets try to buy the latest model year of a truck before regulatory changes drive prices up. Calendar year 2023 is one of those years as the new CARB emissions regulations come into effect in January 2024.
The total of all the variables seems to make it impossible to satisfy the demand.
“The North American Class 8 production volume is, say, 275,000 units. You have 100,000 pent-up demand units and you have, say, 25,000 or 30,000 pre-purchase units at the end. I’m not going to argue that 2023 might be 400,000 units, but there will be demand at those kinds of levels,” he said.
Manufacturers delivered about 250,000 Class 8 trucks in the United States and Canada in 2021.
nothing to trade
The overwhelming demand for new trucks has resulted in unprecedented prices for used equipment. JD Power Valuation Services reported that the average auction price for new used trucks rose 96.3% last year compared to 2020. Fleets are keeping equipment they would have traded in for new iron.
“The fact that the new part of the vehicle market is limited means you have limited trading,” Vieth said. “The guys who normally buy the 4-year-old trucks can’t buy them, and the guys who buy the 8-year-old trucks can’t buy them because the guys with the 4-year-old trucks aren’t trading them.
The longer recovery cycle causes headaches for larger fleets, as maintenance costs increase after starting at around 300,000 miles and increase from there.
“A lot of the great fleets in this country are built on core competencies,” Vieth said. “’We’re built to haul goods, we’re not built to service trucks.’ The challenge for very large fleets is that they usually don’t have the bandwidth to maintain a much older fleet. They must have new trucks.
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