By Boris Ladwig, The Republic
bladwig@therepublic.com
North American heavy-duty truck sales this year are expected to plunge because of new federal emissions standards. Most industry insiders project a reduction near 50 percent, but estimates run as high as 80 percent. For Columbus-based engine maker Cummins Inc., the scenario in some ways mirrors what happened in 2002, the last time new standards took effect.
Truck sales fell about 70 percent after October 2002, requiring engine and truck makers to adjust production to a drastically changing market. Only weeks earlier, factories were operating at full tilt because trucking companies wanted to buy as many older engines as possible to avoid the new product, which was more costly and, the customers feared, less reliable.
Cummins' heavy-duty engine shipments fell from nearly 92,000 in 2000 to less than 53,000 in 2003.
For the projected drop-off this year, "you'll hear numbers all over the place," said Mike Brezonick, associate publisher and editor-in-chief of Diesel Progress magazine.
One analyst at a recent show pegged the decline at 80 percent, Brezonick said, though he preonly to last year's record profit of $715 million, which was 30 percent better than the previous record in 2005.
Chairman and Chief Executive Officer Tim Solso has said that the company has reduced its exposure to the North American heavy-duty truck market through forays and expansions in other markets and areas, particularly India and China.
The heavy-duty segment used to generate about 75 percent of company sales, but now accounts for about 19 percent. dicted the drop would be somewhere between 40 percent and 50 percent.
Transportation company Schneider National, which has a fleet of 11,000 heavy-duty trucks, projects its truck purchases to decline by 50 percent this year.
"We're not planning on buying anything in the third and fourth quarter," said Steven Duley, vice president of purchasing.
Different situation
Cummins expects earnings per share to fall 21 percent this year - which would be second-best.
Last year, for the first time in its history, Cummins launched entries into light-duty diesel markets in China and the U.S. The company will manufacture a light-duty diesel engine for the North American market at Columbus Engine Plant. DaimlerChrysler is the first major customer.
Economic conditions, too, differ markedly from the last time emissions standards changed. In 2002, the economy was coming out of a recession, whereas heavy-duty sales reached a new peak in 2006.
In 2002, the market saw the confluence of some unique events, Brezonick said.
The Environmental Protection Agency had decided to move emissions standards from 2004 to October 2002, which meant engine makers did not have as much time to make the engines, and truck manufacturers and fleets did not have as much time to test the engines.
"That made them all very nervous," Brezonick said.
"In 2002, we had a very different dynamic," agreed Tina Vujovich, Cummins' vice president of marketing and environmental policy.
Cummins rival Caterpillar Inc. could not meet the standards and wanted them changed, Vujovich said.
Caterpillar, Detroit Diesel and American Trucking Association also tried to delay the standards and reduce penalties levied against manufacturers whose engines failed to meet the new standards.
Cummins and Caterpillar also waged a public relations battle over which company had the better technology to meet the standards. Vujovich said the campaign initially pushed some competitors from Cummins to Cat. Since then, however, Cummins has gained market share.
Before the 2002 standards, truck makers and trucking companies also worried about the cost and reliability of cooled Exhaust Gas Recirculation, the technology that engine makers used to meet the 2002 standards.
Engine makers again are using EGR, coupled with new exhaust system devices, to help meet the 2007 standards.
Truck makers and trucking companies perceived the 2002 technological change to be more significant because it altered the base engine, said Duley, of Schneider National.
This year's change is being perceived as the second step in the EGR engine's evolution, and therefore has produced tamer reactions, he said.
"They weren't reinventing the wheel (for 2007)," Brezonick agreed. "A lot of the (technology) fear isn't there."
The new engines
Schneider's drivers like especially the new trucks' responsiveness and acceleration, Duley said.
Some of the 10 pre-production engines the company received suffered from some assembly or manufacturing problems that stranded some trucks on roadways and delayed deliveries, he said. He expects those problems to be resolved over time.
The company has bought 50 production models in the first quarter, but most have been driven for fewer than 20,000 miles.
He said he could not talk about fuel economy for the Cummins and Caterpillar engines, because Schneider has extensively tested only the Detroit Diesel engines, which power most of its fleet.
Those engines use about as much fuel as the engines from previous years, but the added exhaust technology increases fuel use up to 2 percent, Duley said. As truck makers and trucking companies familiarize themselves with the new engines, he expects that penalty to drop as low as 1 percent.
Still, for a company with 11,000 trucks, that percentage point could translate to a cost increase of $5 million per year.
Also, the new trucks cost between $8,000 and $10,000 more, "which is huge," Duley said. That's about a 10 percent increase from one year to the next. A 1 percent or 2 percent increase is typical. For a company that buys about 2,500 new trucks per year, that translates into a cost increase of about $19 million.
The next hurdle
Brezonick, who has visited Columbus as part of his research into the heavy-duty trucking industry, said one of his colleagues wrote that truck makers right now are little bit like toy makers after Christmas: Although the toy makers still have plenty of shiny new toys, most customers already have all the toys they want and can afford.
However, if the economy remains steady, some companies will have to buy trucks later this year, Brezonick said.
Duley, too, projected a normal fourth quarter so long as the economy holds up and the new trucks perform adequately.
Brezonick warned, however, that the next standards, scheduled for 2010, are ly will affect the industry much more significantly.
The 2010 standards are much tougher, he said, and they will require significantly different technology.
Cummins spokesman Mark Land said the company has not chosen a path for the 2010 standards and that it therefore is too soon to speculate about engine design or potential impact on the market.