The competitive profile of the Asian medium and heavy commercial vehicle industry has been undergoing fundamental change in the last few years, and a lot more change is on its way. Some potentially very powerful groups are emerging from the developing markets of India and China, helped by strong internal market growth, industry consolidation and from direct and indirect protection from outside competition. Tony Pugliese reports.

By contrast, the more advanced Japanese truck manufacturers have been struggling with one of the most severe and prolonged recessions in their history, and are struggling to define long-term survival strategies. In all these markets, all truck and bus manufacturers are very heavily dependent on their domestic markets - for the moment - which leaves them extremely exposed to prolonged cyclical downturns.

Change has not been unique to Asia, however. The markets for heavy trucks in most other regions are also undergoing steep cyclical downturns, which has also forced significant restructuring and M&A activity among the manufacturers. Heavy truck demand in North America looks like heading towards another negative year in 2002, compared with the already depressed 2001 levels. In this region, heavy truck and bus volumes declined by over one-third in 2001 to 171,000 units - roughly half the 1999 levels. In Europe, medium and heavy truck demand has also been falling sharply, with many in the industry expecting a volume decline of around 20%.

With the exception of China, which now boasts of being one of the world's largest medium and heavy commercial vehicle markets, demand for medium and heavy vehicles in Asia has so far failed to recover from the 1997 Asia crisis. According to figures released by the industry, Asia is the largest regional market for these vehicles, though it is far from being an integrated market. Each market operates independently, and with widely varying technical standards offer added protection to the national industries.

The current problems of the global truck market ar


"Few predict that a significant upturn in new truck demand will take place anytime soon. "
e reflective of the significant over-capacity that exists in the broad industrial sector, of which it is a fundamental part. The sharp decline in global economic growth over the last two years, and the resulting sharp decline in capital investment, has caused significant over-supply of road haulage capacity in most countries worldwide, thus depressing demand for new trucks. Thus, any increase in road transportation capacity requirement that may result from a pick-up in global economic and trade activity in the near term is likely to be fulfilled by the huge over-supply of redundant used trucks. Few predict that a significant upturn in new truck demand will take place anytime soon.

Asian medium and heavy truck and bus sales* by country
==============================================================
  1997  1998  1999  2000  2001
==============================================================
China  237,449  251,918  266,020  270,305  369,069
Japan  166,634  107,959  102,500  88,959  87,458
India  82,252  78,746  108,814  92,568  84,711
ASEAN  113,452  22,055  33,294  58,300  61,000
S Korea  47,000  21,000  29,000  35,000  37,000
Taiwan  13,530  12,250  10,477  6,589  6,484
--------------------------------------------------------------
Total  660,317  493,928  550,105  551,721  645,722
--------------------------------------------------------------
Total  422,868  242,010  284,085  281,416  276,653
(excl China) --------------------------------------------------------------

* Includes estimates. Sources: industry sources.

Due to competition regulations, divergent emissions standards, differing end-user demand requirements and even nationalism among fleet and private buyers, the markets for medium and heavy trucks around the world are at best regionalised, and at worst localised. This leaves truck companies over-exposed to localised economic cycles. In the West, this divergence is slowly being bridged, but it will take longer for this process to take place in Asia. While the actual assembly process does not require the huge economies of scale that the car industry needs, in terms of actual volumes, economies of scale are extremely important in funding R&D programmes to meet increasingly stringent emissions regulations and in reducing component and raw material outsourcing costs.

In Europe, for example, Volvo's take-over bid for Scania was blocked last year by the European Commission on the grounds of regional competition concerns. In developing markets, the build up of significant market positions by European and US manufacturers has been held back by slack emissions regulations, allowing local manufacturers to prosper with older, lower-cost technologies. This in itself provides indirect market protection to truck manufacturers in countries such as India and China, which boast of many of Asia's largest truck manufacturing companies.

In the US and Europe, significant restructuring has already taken place, with M&A activity having been stepped up in the last few years to compensate for falling demand. Many European and US truck manufacturers have come together, creating cross-regional powerhouses that are able to pool R&D resources, component manufacture and other key areas of operation. Volvo has merged its operations with Renault VI and the French company's US subsidiary Mack Trucks, to form the second largest heavy truck manufacturer in the world with combined output volumes of around 150,000 units per year. DaimlerChrysler, the largest truck company in the world, owns Freightliner of the US and boasts of combined volumes typically of around 200-250,000 units. Paccar of the US owns Daf Trucks of the Netherlands and ERF of the UK, forming a group with output of around 100,000 units per year.


"The Japanese truck manufacturers have fallen significantly behind in the race to remain competitive global players. "
The Japanese truck manufacturers have fallen significantly behind in the race to remain competitive global players. Overall, they depend on Japan for around 85-90% of global sales, and have very little business outside Asia. The Japanese truck and bus market has dropped sharply for most of the last twelve years. Japanese demand for medium and heavy vehicles last year was well below half the levels seen during previous peaks. Hino Motors, the largest in Japan managed to produce just over 50,000 medium and heavy trucks last year - a fraction of DaimlerChrysler group's global output and hardly the level of business that will keep it in global contention. Mitsubishi's output came in at below 48,000 units, Isuzu's 33,000 around Nissan Diesel 27,000. Further pressure will come to bear on Japan's truck manufacturers as more stringent emissions regulations are introduced in 2003.

After years of making losses, Japanese truck makers have realised that cost-cutting alone cannot be the answer. With no sign of an upturn in domestic demand, these companies have been developing and expanding partnerships among each other and increasingly with foreign manufacturers as they look at expanding their global footprint.

Having failed to secure a broad partnership with Mitsubishi's truck division, Volvo is now evaluating other joint venture partners and is widely speculated to be in talks with Nissan Diesel - undoubtedly one of the most vulnerable Japanese truck manufacturers. Volvo has a weak position in Asia - it is mainly confined to the small, premium niche market segments. A close relationship with Nissan Diesel should provide both companies with the opportunity to strengthen volumes in Asia, and ultimately in other regions, with a broader product offering. Nissan Diesel's vulnerability has been highlighted by its recent decision to source some 10,000 engines per year from Hino from 2003, when new emissions regulations will come into force. While this will help offset R&D costs for both companies, it will leave Nissan Diesel uncomfortably dependent on outsiders for technology.

After a number of delays, u-turns and the distraction of Volvo's minority shareholding in Mitsubishi Motors,


"DaimlerChrysler finally seems to be prepared to add value to its partnership with Mitsubishi Motors in the truck sector. "
DaimlerChrysler finally seems to be prepared to add value to its partnership with Mitsubishi Motors in the truck sector. Last week, Mitsubishi said DaimlerChrysler's Freightliner subsidiary will take over its North American distribution operations and hopes to expand sales to 10,000 units a year in this region, from a few thousand units at present. Last year, DaimlerChrysler agreed to sell Mitsubishi light trucks in its dealerships in Europe, and further distribution synergies are likely to follow in other product segments.

With Freightliner having already started to adopt DaimlerChrysler engines and transmissions, it now appears only a matter of time before similar synergies are extended to Mitsubishi's trucks. DaimlerChrysler has also been active in South Korea, where it has launched a truck engine joint venture with Hyundai-Kia and is expected to take a major stake in Hyundai's main truck manufacturing plant. The DaimlerChrysler combine is clearly developing an unassailable global leadership position, with a strong presence in all regions of the world.

Hino Motors, 51%-owned by Toyota Motor, is committed to remaining independent and is attempting to expand its global footprint with selected alliances. The engine outsourcing contract with Nissan will clearly help offset costs. It has also merged its bus-making activities with those of Isuzu, and Nissan Diesel may well join the venture unless it manages to develop a more comprehensive partnership with another truck-maker. As part of its medium-term strategy to boost global volumes to 80,000 units, Hino has entered into a distribution partnership with Scania, the Swedish truck manufacturers in which Volkswagen AG has a large strategic stake. Both companies were adamant that the deal will not lead to equity exchanges, though this is likely later on if the two work well together. The deal itself will extend Hino's marketing reach in Europe and other regions, including South America and the Middle-East. Whether it will be enough to keep Hino in global contention in the long-term remains to be seen.

Asia's top medium and heavy vehicle manufacturers
====================================================
Manufacturer  Country  2001 volumes
====================================================

FAW  China  171,000
Dongfeng  China  133,000
Tata Engineering  India  59,000
Hino  Japan  56,000
Mitsubishi  Japan  48,000
Isuzu  Japan  33,000
Hyundai-Kia  S Korea  31,000
Ashok Leyland  India  30,000
Nissan Diesel  Japan  27,000
====================================================

The explosive growth of the Chinese medium and heavy truck market and the significant consolidation that has taken place in the country's automotive industry over the last decade has put the country's top two truck manufacturers at the top of the rankings regional manufacturer rankings. While few internal synergies have been developed so far, the Chinese domestic market does offer these companies the opportunity to develop world-class economies of scale and improve their technology base with the help of western component suppliers. Both Donfeng and FAW are also increasingly looking to other parts of Asia, particularly South-east Asia, for further expansion opportunities. The two Indian truck manufacturers, particularly Tata, have also developed good economies of scale and are increasingly looking overseas for further growth. As technology standards are improved, Japanese truck manufacturers will have to fight hard for what little overseas business that have.

 

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