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Trucking Industry Insight | Summer 2020

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This document focuses on a number of topics that affect the trucking industry as a whole, including the adverse impact of COVID-19 on new truck sales, trends transforming the trucking industry, the industry’s push to suspend federal excise tax on heavy-duty trucks, actions being taken by UPS and FedEx to prepare for shipping a COVID-19 vaccine, and a major deal reached by Nikola to manufacture electric, zero emission garbage trucks. It also includes a brief summary of trends in used equipment values.

New Truck Sales Plummet: New truck and trailer sales have taken a hard hit due to COVID-19. Fleets have backed away from prior commitments in reaction to the plunge in business conditions. In April, Class 8 truck orders dropped to the lowest level since 1995 and for two months this year cancellations exceeded new orders. Only 4,100 net orders were taken in April compared with 14,859 a year earlier. Truck makers were hit with not only customer cancellations but also with supplier shutdowns and temporary closures of their plants. However, while truck sales hit bottom in April, May started the recovery as truck orders rose to 6,700. While that number is disappointing compared with 10,886 orders a year earlier, it is a sign that things are moving to whatever the new normal is now.

U.S. trailer orders also fell to an all-time low in April after heavy cancellations. The net order volume dropped to 209 as 5,700 new orders were placed, but 5,491 were canceled. This was the lowest order level since 1990. Last year in April net orders totaled 14,577. North American trailer production is forecasted to drop to 110,000 units this year from 325,000 in 2019. Overall, new orders for cars, trucks and auto parts shrank 52.8%.

The U.S. is probably in the midst of its deepest recession in the 75 years that the nation’s gross domestic product (GDP) and unemployment rate have been tracked. While the first quarter’s GDP declined by 5%, it’s looking like we could see a second-quarter drop of 30% to 40%. Although GDP growth could increase as much as 6% in the third quarter and 9% in the fourth quarter, the damage resulting from the second quarter shutdown of the economy could result in a 15% to 20% drop in annual GDP, or a loss of nearly $4 trillion in economic activity from the $21.5 trillion generated in 2019. It may likely be year-end 2021 before the economy returns to pre-pandemic levels. In the meantime, fleets are waiting and watching to make sure freight stabilizes. Due to high unemployment, consumer buying power, which spurs freight demand, is vanishing from the economy and going forward no one is really certain about what to expect. On the positive side, trucking may escape the worst of the recession because of its essential nature. Fleets will continue to keep operational changes they’ve implemented such as telecommuting for their office workforce and digital proof-of-delivery processes that have reduced costs and streamlined operations. Hopefully, in a year we will have a clearer picture of what the “new normal” will be.

Trends Transforming the Trucking Industry: Over the past one year, the trucking industry has witnessed tremendous changes to the way it operates and the kind of trucks making their way to market. In addition, trucking and other industries all over the world are experiencing rapid development owing to the application of technological advances. With these things in mind, the 10 industry trends likely to surface in the coming year are as follows:

  1. Carrier Bankruptcy. Retail companies are moving fewer goods from one place to another, causing many trucking companies to close their doors due to lack of work. This trend is not likely to change in the coming year unless there is a large spike in the retail industry and a significant increase in the flow of freight.
  2.  Improvement of Technology. Offices are beginning to use a number of software programs to make their operations more efficient and streamlined. At the same time, trucks are being equipped with far better technology than ever before, and more trucks are beginning to incorporate “smart” technology to improve their functionality.
  3. Higher Number of Mergers. While a large number of companies are going under as a result of harsh market conditions, many are choosing to merge with other companies. In 2020, numerous trucking companies are likely to move in this direction if the market doesn’t improve and if they don’t have any other alternative to turn to.
  4. Shift in Production Locations. Trucking companies are starting to look at alternative locations to be able to conduct their production operations and to be able to meet the demand for trucks that currently exists. This trend is taking place across the entire transportation and freight industry.
  5. Market Flip. Because of the decline the industry experienced during 2019, many experts believe the industry is likely to turn around with a gradual increase in 2020 as a result of new developments coming to the industry.
  6. Changes in Pricing. During 2019, compensation for truckers declined significantly because of the shortage of jobs and lower prices for trucking services. If the market continues to decline, trucking companies may have to lower their prices even further. Conversely, If the industry experiences positive growth, prices can rise to what they were before the decline. Either way, there are going to be significant changes to the pricing of trucking services.
  7. Influence of E-commerce. People have shown a preference for shopping online and the e-commerce industry is dependent on truckers to move their goods from one place to another. Because the e-commerce industry is likely to continue to grow, one can be hopeful that the trucking industry will also experience some positive growth.
  8. Rising Fuel Costs. Rising fuel costs have always been a concern for companies operating within the trucking industry. While alternative fuel trucks or even electric trucks provide a means to cut fuel costs, the investment that must be made to acquire such vehicles is often an expense that trucking companies currently cannot afford.
  9. Urbanization. One of the more beneficial developments that the industry is likely to experience in the coming year is the growth of urbanization, which makes it easier for trucks to navigate through parts of the country that they weren’t able to travel through before. As a result, the trucking industry is now able to offer its services to a much wider customer base, thereby generating significantly more business in the process.
  10. Incorporation of Data Analytics. Many companies in the trucking industry have already realized the benefit of incorporating data analytics into the work they do, and more companies are likely to follow in their footsteps in the coming year. The use of data analytics can help the industry identify areas that need development and understand where improvements can be made to make operations more efficient.

All of the above developments are likely to alter the manner in which the trucking industry will function in 2020.

Trucking Industry Wants Congress to Suspend Federal Excise Tax on Heavy-Duty Trucks: Those in the trucking industry believe Congress should suspend the 12% federal excise tax (FET) on heavy-duty trucks as the country continues to struggle through the COVID-19 pandemic. In 1917, Congress imposed a federal excise tax on heavy-duty trucks to help fund America’s military during World War I. That tax remains on the books and has grown from 3% back then to 12% today. It currently adds about $22,000 to the price of a new tractor-trailer.

A group of House lawmakers is urging Speaker Pelosi to suspend the antiquated tax, thereby adding a boost to our recovering economy. Trucks are the central link in our supply-chain and the lifeblood of our economy. Not only do they bring all of the basic and essential goods we depend on for daily living, but the industry is also one of the largest employers in the U.S. More than 1.3 million jobs across the country are tied just to the manufacturing and sales of Class 8 trucks and trailers, and a total of 7.9 million Americans work in a wide variety of trucking related jobs. The pandemic is expected to depress new truck sales by more than 50% this year, putting these key manufacturing jobs in jeopardy and threatening to intensify the unemployment crisis. By temporarily lifting the FET on heavy-duty trucks, Congress would put the trucking industry back in a purchasing mode. A recent ATA survey shows that 60% of fleets would be somewhat likely or very likely to buy additional trucks and trailers beyond currently scheduled purchases, supporting countless jobs at truck manufacturing plants and dealerships. Moreover, suspending the FET would put newer, cleaner and safer trucks on the road. This 12% tax is the highest excise tax rate placed on any good in our economy and disincentivizes carriers from upgrading and modernizing their fleets. As a result, more than half of the Class 8 trucks on the road today are over ten years old.

UPS & FedEx Gear Up to Ship COVID-19 Vaccine: While the medical community works overtime to develop a vaccine for the COVID-19 virus, transportation and logistics companies are hard at work on strategies to ship it safely around the world once it is ready. For example, UPS is building two freezer farms, one at its air hub in Louisville, Ky., another in Venlo, Netherlands, both of which will be used to store millions of vials of a vaccine at temperatures as low as minus 80 degrees Celsius, or minus 112 degrees Fahrenheit.

 

“I think this ranks right up there with one of the biggest challenges we have ever had in the health care space.”

– UPS Healthcare President Wes Wheeler

 

“I think this ranks right up there with one of the biggest challenges we have ever had in the health care space,” UPS Healthcare President Wes Wheeler said. “We’ve been told that many times by our customers. Every vial counts. There is not any spare vaccine to go around. The logistics of this are complicated.” Wheeler noted that the temperature control requirements are one of the more challenging aspects of storing and shipping a vaccine. “How do you manage a minus 80-degree vial, or a pre-filled syringe, allow it to thaw for a certain number of hours and then administer it to a patient? All of these complexities are being worked on by the pharma companies and Washington,” he said. UPS has been invited to join the federal Operation Warp Speed task force that is coordinating with the pharmaceutical industry to develop a vaccine. “There is only so much capacity, and you’re trying to develop 4, or 5 billion doses of this drug, the vaccine,” he said. “Who gets it first, who gets it second, what countries get how much? This is not only the challenges these pharma companies have but also the governments of these countries have. Somebody has to make these choices.” Wheeler noted that the vaccines will be handled like other fragile medical supplies the company ships, packed in dry ice to maintain temperatures during movement between trucks and planes. With their proximity to UPS air cargo hubs, he said the freezer farms will accommodate overnight delivery to almost anywhere in the world.

Freezer farms are a standard solution in the pharmaceutical world for storing and cooling medical supplies, and UPS is not alone in expanding its capacity of this equipment. FedEx Corp. has added 10 freezer facilities, and more are in the planning stages. The company also said it believes it has the air cargo capacity to play an essential role in this effort. Over the last decade, FedEx Express has worked closely with the Federal Aviation Administration to dramatically increase the dry ice carriage amount for most of the aircraft in their fleet, allowing them to service more health care shippers.

Nikola Scores Deal to Make Thousands of 1000-horsepower Electric Garbage Trucks: On August 10, Nikola announced a deal with waste management giant Republic Services to manufacture 2,500 electric, zero emission garbage trucks. The dollar amount of the contract wasn’t disclosed, but the deal is expandable up to 5,000 trucks. Full production deliveries are expected to begin in 2023, with road testing set to start in late 2021 and early 2022. Each truck will have its powertrain software limited to 1,000 horsepower.

“Nikola specializes in heavy-duty, zero-emission Class 8 trucks. The refuse market is one of the most stable markets in the industry and provides long-term shareholder value,” said Trevor Milton, Nikola’s founder. The Republic Services deal adds to Nikola’s semi-truck backlog, which far exceeds 14,000 units valued at $10 billion in potential revenue. Nikola, which has not yet begun production, plans to have its first electric-powered semi-truck out on the market in 2021. Hydrogen-powered options are projected to follow in 2023. The company recently broke ground on its manufacturing facility in Arizona. Once phase three is completed, the site is expected to produce 35,000 units a year on two shifts. Nikola stock shares have been very volatile since the company debuted in early June. The stock nearly tripled to a high of $94 in under two weeks of being public amid hype around the company’s new technologies and its potential to compete effectively with Tesla. It has since come back down to around $36 as investors gain a better grasp the company’s production timeline and business model.

Trends in Used Equipment Values
During the first half of 2019, the used truck market was relatively strong, but has since struggled as both prices and sales of used Class 8 trucks have dropped significantly. The increased number of bankruptcies among weaker trucking companies have caused more inventory to flush into the secondary market, thereby contributing to the downward movement in pricing. In addition, widespread quarantines, business closures, and unemployment brought about by the COVID-19 pandemic have caused freight volumes to pull back resulting in what has been referred to as “a fear factor” in the used truck market.

During the first two months of 2020, the pricing for used trucks averaged 28.2% lower than the same period last year. In March, in-person auctions were scaled back in favor of those online, which limited sales volume during the first two weeks of the month. While pricing did improve, it was still down roughly 10%. Then, the pandemic struck causing huge declines in both the demand and pricing for used trucks in March, April and May in an industry already experiencing a glut. Compared with the prior year, used heavy equipment prices are currently down about 2% and those for truck tractors are down about 6%. Irontrax does not anticipate any significant improvement in used truck values until next year, but believes we may see some spikes in auction values depending on the condition and type of equipment being sold.

Access to credit still remains limited for many in the trucking industry. The current challenge is getting approvals for truck loans as financial institutions have tightened their financing criteria because of the “big scare” of the past few months. They are worried about the uncertainty in the market because they have been providing payment deferrals since the beginning of the outbreak.

 

Credit: Photo by Josiah Farrow on Unsplash