just-auto.com

Orders fade and layoffs commence in NA Class 8 truck sector

By Colin Whitbread | 10 December 2015

Volvo VN series Class 8 truck

Volvo VN series Class 8 truck

Volvo Trucks North America's decision to cut the workforce at its Virginia truck plant by around 25% in February 2016, is likely to send shivers through the entire North American heavy truck manufacturing sector. It is also a somewhat unfortunate baptism for Martin Lundstedt, the former president and CEO of major rival Scania, who replaced Olof Persson as Volvo president and CEO on 22 October. 

As Volvo's sister brand Mack, together with Navistar (International), Paccar (Peterbilt and Kenworth) and Daimler (Freightliner+Western Star) are all heavily reliant on the Class 8 sector, some further mothballing or outright elimination of industry capacity, probably fairly early in 2016, now looks inevitable. This will reflect inventory adjustments and a heavy-duty truck market that shows increasing signs that the party is over, a cyclical weakening progressing earlier than previously predicted.

With Navistar on the verge of publishing details of its performance in its financial year ended 31 October 2015, analysts will be sure to question management closely on current order trends. At the company's previous (Q3) post-results conference for analysts and investors held in early September, senior executives exuded some confidence regarding overall order prospects and the company's ability to regain some previously lost ground in the fleet business. The deterioration in industry Class 8 orders in the September-November period may now have undermined this confidence. 

Although Volvo has yet to issue formal confirmation of the layoff of 734 workers at the New River Valley (NRV) facility in Dublin, Virginia – the largest Volvo truck manufacturing facility in the world – the redundancies appear inevitable given recent trends. 

The company has noted that although North American [Volvo] brand deliveries were up just over 20%, or 5,670 units, in the first ten months of 2015 (33,872, versus 28,202) and demand is still solid, after last winter's record truck orders, peaking in early 2015, the second half of the year has been slow by comparison and the layoffs are a reflection of an industry-wide correction. Deliveries in North America in October 2015 alone totalled 3,738, just 5.5% ahead of the October 2014 total of 3,544. Importantly, when reporting Q3/9M results, Volvo acknowledged that Q3 2015 brand orders were down just under 30% year-on-year (6,600, versus 9,412), the decline being "an effect of dealers focusing on reducing their inventories and the comparison with a good quarter last year." 

According to local media reports, a company spokesperson was quoted as saying in early December: "We adjust our production in New River Valley to the current demand …This reflects the combination of the expected market decline and our need to wind up inventory in the supply chain." Another spokesperson added: "Highway customers, who drove much of the recent market growth, have largely accomplished the expansion and renewal of their fleets, so demand from that segment in particular is softening. The US economy also is navigating through a soft interval caused by high inventory levels, which has decreased manufacturing and freight levels."

Volvo added when reporting latest results: "The total market forecast for 2015 remains at close to record level of 310,000 heavy-duty trucks. For 2016 we expect demand to continue on a good, but lower, level. The market for 2016 is forecast to be at about 280,000 trucks." This relatively robust outlook for 2016, which has been shared by rivals such as Navistar and Paccar, is now coming under greater scrutiny as data for what is the peak season for new orders increasingly points to a more pronounced slow down. 

FTR and ACT Research have both reported unexpectedly weak Class 8 orders in November, the year-on-year decline being in the region of 60%, as orders tumbled to around 16,500 – the weakest monthly total since September 2012 and the lowest November total since 2009. The month-on-month decline was around 25-26% from October. FTR's estimate of November orders was 16,475, a result that was described as a "major disappointment, coming in significantly below expectations." It also added that "orders are expected to be better, but not necessarily good, for the next two months." 

ACT's estimate of November orders was slightly more optimistic, at 16,700, but analysts at both FTR and ACT concurred on the performance. Don Ake, FTR Vice President of Commercial Vehicles, noted: "The November orders are very concerning. People were optimistic when orders held up well during the summer. Now we get into the peak order season and have the lowest orders of the year … Truck inventories are high and retail sales have stalled.  The industry would appear to have enough new trucks for now … Orders should stabilize soon, but backlogs will be shrinking, necessitating larger production cuts than were previously expected." Steve Tam, ACT's VP-Commercial Vehicle Sector similarly adopted a strong note of caution, saying: "Unfortunately, little of the decline can be accounted for by seasonality … A glut of inventory in the broader economy has led to slowing freight and lower freight rates. This, in turn, has caused truckers to hit the pause button on truck orders."

Much hinges on December orders, which could prove crucial in determining whether the November order slump was a short-term aberration rather than a true pointer to longer-term prospects. November 2013 saw a weak order total (21,000), which was then followed by a significantly stronger December (31,000), and some analysts view a 20,000+ result for December 2015 as an absolute necessity if serious downgradings of 2016 sales prospects are not to ensue. Although orders for the last 12 months are now annualized at 300,000 units, FTR's Ake is reported as saying that November's result doesn't support the company's current forecast for 272,000 total North American Class 8 sales in 2016, even though this forecast is now 15% down from its September guidance of 290,000 units. 

The major truck OEMs will also be viewing the trend in December orders with close interest. For Volvo, the imposition of 734 layoffs at NRV, which assembles the Volvo VNM, VNL, VNX, VHD and VAH trucks, represents a blow, coming as it does after a US$69m programme (initiated in June 2014) in state-of-the art equipment, processes and plant redesign, resulting in, among other things, an increase in North American paint capacity. This was followed in late-September 2015 by announced details of a further US$38.1m upgrade to the NRV facility, encompassing a new Customer Experience Center and additional projects to improve safety, quality and efficiency.

Workers at sister brand Mack's production facility at Macungie in the US could also be excused some nervousness. Although Mack's heavy-duty truck sales in North America continue to advance, rising 8.6% year-on-year in October, to 2,486 units, taking the year-to-date total to 21,235 (+9.3%), the order trend at the brand will be scrutinised with particular care. Similar to NRV, Mack announced in mid-June 2014 that the Macungie Cab & Vehicle Assembly facility would be upgraded through a US$26m programme. This included a realignment of sub-assembly and material handling to more efficiently support assembly operations. When reporting on October group deliveries, Volvo noted, somewhat vaguely: "Production in North America will be adjusted as a consequence of lower demand and high inventories in the distribution channel."

The consensus view is increasingly that economic trends across much of North America, including falling commodity prices and volatile manufacturing and non-manufacturing performance, are undermining freight demand and rates, leading to hauliers reviewing future fleet needs. For example, Swift Transportation, which describes itself as "North America's largest full truckload carrier" confirmed in October that it had cancelled orders for around 450 trucks, partly because of lower freight demand. Swift operates around 20,800 tractor units, 64,500 trailers and 9,200 intermodal containers. It noted in its report on Q3/9M performance: "We have pulled back on our initial growth targets given that the freight environment is softer than we originally expected, and peak volumes have not yet materialized as in years past. As we move into the fourth quarter and into 2016 our focus will be to drive improved utilization on our fleet." 

Amongst these concerns for short-term trends in the heavy-duty truck sector there are some rays of brightness however. 

First, a slowdown in Class 8 production to a sub-300,000-unit level in 2016 could ease some concerns about recent pressures in the supply chain. Major suppliers, most notably of big-ticket items such as axles and transmissions, have experienced delivery stresses in recent quarters and may look forward to more normalized capacity utilization rates going forward. 

Second, according to estimates from ACT, orders for medium-duty (Classes 5-7) remain at more robust levels, the November total for North America being put at 18,700, reflecting positive demand influences beyond just heavy-haulage needs. ACT's Tam noted: "Despite falling 15% month over month, the year-over-year and year-to-date comparisons reveal growth in the mid-single-digit percentage point range."