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Trucking Industry Insight | Winter 2018

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This document focuses on a number of topics that affect the trucking industry as a whole, including the anticipated fallout from the recent GM Plant Closings, contributing factors and related solutions to the truck driver shortage, the impact of digital logging on truck drivers’ behavior, and how the demand for faster, cheaper deliveries may benefit the makers of autonomous vehicles. It also includes a brief summary of trends in used equipment values.

Trucking Industry Braces for Fallout From GM Plant Closings: On November 26, GM announced plans to stop activities at assembly plants in Ohio, Michigan and Ontario in Canada, and in factories in Baltimore and Warren, Mich., that make transmissions for cars and light trucks. This is anticipated to result in layoffs of as many as 14,700 factory and white-collar workers, and to disrupt business for scores of transportation suppliers. GM said the plant closings will save roughly $6 billion a year by the end of 2020, and will free up resources so the company can invest in new autonomous models and electric propulsion technology. “We recognize the need to stay in front of changing market conditions and customer preferences to position our company for long-term success,” GM Chairman and CEO Mary Barra said. Even though the economy is strong, Ford Motor Co. is expected to make similar adjustments in its production capacity in response to changing consumer preferences and elevated costs due to new and higher tariffs.

Bob Costello, chief economist for American Trucking Associations, said he has not heard directly from carriers that may be affected by the GM plant closings, and it’s “too early to tell” what the final impact may be. “Overall, light vehicle sales, including SUVs, light trucks and cars, are expected to ease slightly over the next few years, but remain at levels above the average since 2000,” he said. “However, there continues to be a shift in the U.S. away from cars to SUVs and light trucks.” A February report by the Center for Automotive Research documented the change in vehicle preferences showing that sport-utility, crossover-utility and light trucks accounted for nearly two-thirds of all vehicles sold in the U.S. in 2017. “Sales of these high-priced and high-margin vehicles are producing record profits that companies are pouring into new products, processes and technologies,” the report stated.

GM’s announcement drew an angry response from President Donald Trump, who said he may try to eliminate electric car subsidies for GM if the company goes through with plans to close its plants in Ohio and Michigan in 2019. Trump said he expects GM to replace the production lost with something new or by bringing production back to the U.S. from China and Mexico.

Factors Contributing to the Truck Driver Shortage and How We Can Fix It: Throughout the past decade, the trucking industry has struggled with a shortage of truck drivers. This affects the entire economy, as over 68% of all freight is moved on U.S. highways. With the shortage causing an increase in driver pay, it can have a significant impact on supplier costs and consumer pricing. It can also increase shipping delays and shortages at stores.

The two largest factors affecting driver shortage are the demographic of the current workforce, primarily age and gender, and truck driver lifestyle. The trucking industry relies heavily on male employees, 45 years of age or older. In fact, the average age of a commercial truck driver in the U.S. is 55 years old. With an alarming number of these drivers retiring within the next 10-20 years, we are quickly approaching a serious problem. Hiring younger drivers has proven to be difficult since the federal requirement states that drivers must be at least 21 years old to hold an Interstate Commercial Divers License. This leaves a 3-year post-high school gap in which potential employees become distracted by other employment opportunities. Another major demographic issue is the shortage of women drivers. Women make up 47% of the nation’s workforce, but only account for 6% of commercial truck drivers. Compounding the problem is the lifestyle of a truck driver, which steers many people away from even considering such a career. Most drivers, when new to the industry, are assigned to routes that keep them on the road for extended periods of time, returning home only a few times a month. This, coupled with sleep deprivation and limited options when it comes to nutrition, can lead to serious health issues such as diabetes, high blood pressure, and digestive issues.

There is no one solution to solving the driver shortage, but a number of potential policy solutions include: (1) increasing driver pay, (2) decreasing time on the road, (3) lowering the required driving age, (4) targeting minorities, women and veterans, and (5) autonomous trucking. Unless carriers start to think more strategically about untapped workforce pools, continuing to offer comprehensive benefit packages with competitive pay, and reducing time on the road, the current driver shortage of 48,000 could grow to 330,000 by 2024.

Digital Logging Affects Truck Drivers’ Behavior for Better and Worse: After almost a year of the federal mandate requiring Electronic Logging Devices (ELDs), truck drivers have changed some behaviors for better and some for worse. Unlike paper logs, ELDs don’t allow drivers to falsify the time they spend behind the wheel. ELDs digitally track driving time and monitor compliance with the rest-break rule, and the restriction that allows long-haul drivers behind the wheel for 11 of 14 hours before taking a 10-hour break. Driver productivity is affected as the on-board ELDs count down minutes whether they are driving, sitting in traffic or waiting for cargo to be unloaded. Some drivers admit they are speeding to beat the clock on a mandatory rest break after eight hours of driving. This puts a lot of drivers in danger because they are tired. However, they don’t dare take a nap because the clock is ticking.

Understandably, ELD tracking compliance with hours-of-service rules aggravates some drivers. “Leave us alone with the old rules and we would be miles ahead,” said Luke Foster, a 36-year long-haul veteran from the Outer Banks, N.C. However, according to the American Transportation Research Institute’s 2018 survey of issues critical to the trucking industry, the ELD mandate is less of an issue for drivers and motor carriers today than a year ago. Still, some long-haul drivers worry ELD information could be used for purposes beyond logging hours of service.

ELDs still have “work to be done,” but compliance is strong, said Ray Martinez, administrator of the Federal Motor Carrier Safety Administration (FMCSA). “Of 1.4 million stops in the first nine months of the rule, less than 1% did not have an ELD,” he said. “Hours-of-service violations decreased by 48% in the same period.” The ELD rule also helped the FMCSA formulate ideas on how to add some flexibility to the hours-of-service rules. For example, the agency is considering breaking the mandatory 10-hour rest break each day into two parts that would allow drivers to take advantage of non-rush-hour periods in traffic. The American Transportation Research Institute said long traffic delays drain time from ELDs and cost the trucking industry $74.5 billion a year. Altering or dropping the 30-minute rest break rule for short-haul drivers accounted for a majority of the 5,200 public comments on the proposed changes.

Makers of Autonomous Vehicles Expected to Benefit from Demand for Faster, Cheaper Deliveries: According to analysts at global consulting firm KPMG, bots, drones and driverless cars and trucks are going to explode on the scene in coming years as demand for speedy delivery of goods skyrockets. By 2040, as many as 1 million self-driving vehicles will be in operation around the world, changing the way consumers shop and the way manufacturers, wholesalers and retailers do business. At the root of this is consumer demand for nearly instant delivery of goods and the growing shift to electronic commerce and away from physical trips to stores and malls.

“The development of autonomous delivery vehicles will harness the change in consumer behavior e-commerce has begun and drive it forward at an explosive pace,” said Gary Silberg, KPMG’s U.S. automotive practice lead and a co-author of the report, “Autonomy Delivers: The Oncoming Revolution in the Delivery of Goods.” According to the report, the demand for ever-faster delivery of goods could result in an annual increase of 23 billion to 78 billion delivery vehicle miles traveled by 2024, with many of those miles traveled by self-driving vehicles of various types. Already, numerous companies in Europe, Asia and North America are testing autonomous delivery services.

Further, some believe autonomous delivery can slash last-mile delivery costs by as much as 50%. The KPMG report agrees, citing “markedly lower cost of delivery” as both a reason for and benefit of autonomous delivery services. In addition, the report states that while autonomous vehicles will impact employment in the driving profession and in brick-and-mortar retail, they will also create other opportunities. It suggests that employment and business opportunities will arise in areas such as vehicle service; installation and maintenance of lock boxes and other local facilities where delivered goods can be stored pending pickup by customers; and in building, installing and maintaining fueling facilities for what in most cases will be all-electric delivery vehicles in need of frequent battery charges. Autonomous vehicles aren’t going away, and “shopping and last-miles logistics will never be the same,” said Tom Mayor, KMPG’s lead strategist for industrial manufacturing.repeal.

Trends in Used Equipment Values
According to a November 2018 report issued by J.D. Power, used truck prices are not showing any signs of decline. In October, the average sales price at auction of the benchmark model-year 2015 sleeper tractor was $55,000, which was $17,000 or 31.1% higher than in September. In fact, one would have to go all the way back to the 2011 models before seeing a month-to-month decline, a 10.3% drop to $19,500. Stable pricing in October, combined with a return to a more typical mix of model-year 2015 trucks, caused average depreciation in 2018 to turn slightly positive. Additionally, in 2018 trucks four to six years old have been selling for 18.1% more than in the prior year. Conventional wisdom in the market says that the record number of new orders for Class 8 vehicles will eventually pressure the used truck market. However, outside of typical fluctuations due to the holidays and winter weather, J.D. Power does not see much change into early 2019.

For sleeper tractors sold at retail, the market was not as strong. However, that observation is based on September data, while the auction data was for October. September sales of 2016 vehicles at retail averaged $79,382, down 4.2% from August. August sales for 2015 vehicles at retail averaged $64,398, up 3.4% sequentially, and sales of 2014 vehicles were up 1.3% to $50,983. Like the auction market, year-over-year results have been stronger this year. According to J.D. Power, in the first three quarters of this year late-model trucks sold for 8.6% more than in the first three quarters of last year, while depreciation declined 1.5%.

It is Irontrax opinion, based on our own experience and research, that prices for used base model trucks sold at auction over the past six months have been stable. Contrary to the inference in the J.D. Powers report, we did not see a 31% across-the-board increase in October sales prices. We found that prices for used fleet spec trucks such as the Cascadias, Volvo’s 670 and the Kenworth T680 with 475,000 to 525,000 miles were relatively unchanged. At the same time, prices for trucks like the Peterbilt 389 and the Kenworth W900L were quite a bit higher and may have had more influence in the data cited in J.D. Power’s November report.

Based on the strong market for new vehicles, J.D. Power expects some return to normalcy in pricing. According to their report, as long as orders remain stable or decline gradually, the build rate and deliveries should remain steady well into 2019. Eventually, this dynamic will result in enough used trades to place downward pressure on pricing. J.D. Power also expects the extremely long lead time in new truck builds to result in strong deliveries into the second half of 2019. Around that time, we should start to see used trucks depreciate at a more typical rate due to returning supply.