Month after month, industry analysts report new Class 8 preliminary and net truck orders, snapshots of an industry in which peaks and valleys come about every two years of an economic cycle.
Preliminary orders don’t take into account orders that a fleet, or a manufacturer, might cancel for any number of reasons. Net orders, which follow the first cut by about 15 days, lock down a better read on what happened. The two numbers directionally correlate. Cancellations are a barometer of how customers feel about their business prospects.
Some truck orders are scrubbed by manufacturers, but usually only on a paperwork basis. If a manufacturer cannot produce a specific order before the calendar year ends, the OEM will carry over the order to the next model year, which begins on Jan. 1 across the industry.
OEMs used to have individualized starts to the model year, but new Environmental Protection Agency and California Air Resources Board regulations go into effect on the first day of the year. So, manufacturers began building 2023 models earlier this month.
Turn the page
“It’s the same customer, it’s the same color truck. It’s got the same everything, except the OEM canceled the 2022 model year truck, and then ordered a 2023 model year truck,” Kenny Vieth, president and senior analyst at ACT Research, told FreightWaves.
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Typically, customers do most of the canceling. They can pull out without penalty until about three months before the scheduled build date. That’s when manufacturers begin spending money on materials and parts needed for assembling the truck.
With COVID-related supply chain disruptions and an ongoing shortage of microchips used throughout the automotive and commercial vehicle industries, manufacturers are doing most of the canceling these days.
“Typically, it’s customers saying, ‘I ordered too many trucks,’ or ‘The business cycle has changed, so I don’t want so many trucks,’” Vieth said. “The last two or three months, those were largely OEM generated.”
Moving to production
Net orders go into a figurative barrel, from which production dates, or build slots, are generated. Orders without a specific build date become part of the backlog. Everything that is scheduled for assembly and 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 in supply and demand is the inventory-to-sales ratio. In normal times, the ratio is about 1.8 to 2.2 months for tractors. Vocational trucks typically run three months because bodybuilders are upfitting a chassis for a specific function such as a tow truck, refuse truck or street cleaner.
About five weeks of inventory is tied up “in process” from the plant to the dealership. That leaves about one month of inventory for dealer stock.
Out of stock
But given the OEMs’ difficulties in getting an uninterrupted flow of parts — led by semiconductors — the present inventory-to-sales ratio is 1.5 to 1.6 months. Subtracting process inventory, that leaves about one week of trucks someone could walk into a dealership and purchase.
Even that is probably overstated in the present environment because OEMs cannot hire enough haul-away drivers to take trucks from their plants to dealerships.
“Essentially there was no for-sale stock inventory for virtually all of 2021 and into 2022,” Vieth said. “We’ve got a situation where the OEMs are actually 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 heading into 2023 because of the shortfall in production. In 2021, manufacturers built 265,000 units versus ACT’s estimate of 330,000. The industry this year should produce 365,000 trucks. It probably will build about 300,000.
The pull-ahead predicament
Worsening the truck availability picture are pull-ahead orders where fleets try to purchase the last model year of a truck before regulation-driven changes push up prices. The 2023 calendar year is one of those years because new CARB emissions regulations take effect in January 2024.
The total of all the variables appears to make meeting demand unattainable.
“North American Class 8 production volume is, say, 275,000 units. You’ve got 100,000 units of pent-up demand and you’ve got, say, 25,000 or 30,000 units of pre-buying at the end. I’m not going to make the case that 2023 could be 400,000 units, but there’s going to be demand at those kinds of levels,” he said.
Manufacturers delivered about 250,000 Class 8 trucks in the U.S. and Canada in 2021.
Nothing to trade
The overwhelming demand for new trucks has led to unheard of prices for used equipment. J.D. Power Valuation Services reported that the average auction price for newer used trucks rose 96.3% last year compared to 2020. Fleets are holding on to equipment that they would have traded in on new iron.
“The fact that the new vehicle part of the market is constrained means you’ve got constrained trade-ins,” Vieth said. “The guys that normally buy the 4-year-old trucks can’t buy those, and the guys that buy the 8-year-old trucks can’t buy those because the guys with the 4-year-old trucks aren’t trading those in.”
Lengthening the trade-in cycle is causing headaches for the largest fleets because maintenance costs rise after beginning around 300,000 miles and escalate from there.
“A lot of the big fleets in this country are built on core competencies,” Vieth said. “‘We’re built to haul freight, we’re not built to maintain trucks.’ The challenge for the really big fleets is they typically don’t have the bandwidth to maintain a significantly older fleet. They’ve got to have new trucks.”
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