Over the past five years Frost & Sullivan’s global commercial vehicle program has monitored, tracked, and analyzed business models of disparate commercial vehicle manufacturers from both developed and developing markets to come to a clear conclusion: this industry is at the cusp of a historic transformation, where the central focus for market participants is shifting decisively from products to services. Many adjacent and non-adjacent industries have undergone similar transformation and transition only to realize that they have actually, in turn, embarked on a path of another transition: from services to solutions. The global commercial vehicle industry is not at that stage yet.
The past two years have experienced proliferation of several connectivity and soft technologies (electronics-enabled technologies) that have catalyzed the trucking industry’s focus on leveraging electronics as the fuel for this change. The continuing proliferation of telematics, regulations amending advanced electronics-based safety technologies, entry of mobile-based freight brokering, OEM focus on autonomous driving, rising share of OES (Original Equipment Service) channel and contract service and maintenance contracts, and rising demand for services such as prognostics are all evidences of this trend.
Amidst these changes, the global commercial vehicle industry is entering a rather precarious phase where economic and political concerns in key markets such as China, South America, and Russia are likely to offer strong headwinds to global sales of medium-heavy duty (MD-HD) truck sales. In 2015, the global market for MD-HD trucks absorbed 2.62 million units. Frost & Sullivan is forecasting sales growth of 2.4% in 2016 that will drive the global MD-HD truck sales towards 2.68 million units. A major cause for concern in the market this year will be the forecast of a 3.2% projected decline in the Chinese MD-HD truck sales. Who would have thought a market that was growing at double-digit rates for the past many years will experience such a reversal of fortunes. This could spell a lot of unintended consequences, not only in China but also in global markets, as many global OEMs, tier-1s, and tier-2s made significant investments in China hoping for a different reality.
Until recently, the global GDP growth rate was a fairly strong indicator of the global truck sales. We now seem to be noticing a lower degree of correlation between these two metrics. 2016 will be a year when we will see more decoupling of the global GDP and global truck sales than what we saw in 2015. Despite the downturn in truck sales in China (which accounts for almost 30% of the global truck demand), strength in markets such as India, Next 11, Europe, and other rest-of-world markets will likely provide upside forces. After benefiting from factors such as pent-up replacement demand and a relatively strong economy, the North American truck market will face the impact of cyclicality, causing the overall MD-HD truck sales to decrease by 2.7% despite the MD truck market growing by approximately 5%. Exhibit 1 below shows the global MD-HD truck forecast for 2016. (Please refer to the end of the article.)
Global economic uncertainty, products, and services for Next 11 and African markets in an era of BRIC market concerns, fuel price volatility, and transition to service-based business focus are expected to emerge as CEO’s top-of-mind issues in this industry. 2016 is also expected to be the year when industry consolidation and M&A recalibrations will continue despite global economic instabilities. Our focus remains on 2-3 OEMs and over 7 suppliers in this space.
In 2015, Daimler retained its positioned as a global leader among all OEMs in the global MD-HD truck market. Despite its acquisition of significant stake in DongFeng and a rising share in markets such as India, Volvo’s exposure to markets such as China and Latin America provided hurdles to its goal of emerging as the world’s largest manufacturer of MD-HD trucks. The battle between these two giants will intensify further against a backdrop of market weakness in China, Americas, and Russia. Both these OEMs have made remarkable inroads into the rapidly growing global market for value trucks. This will not only serve these OEMs well in 2016 and beyond; similar strategies executed by Chinese, Indian, and Korean OEMs will enable them in protecting, and possibly growing revenues owing to higher margins facilitated by value trucks relative to low-cost trucks. We expect the share of value trucks to increase from 17% of the total truck sales in 2015 to 19% in 2016, while the share of low-cost trucks will shrink by 2% to 35% of the total sales. This is also the year when global engine platform strategies of major OEMS and tier-1 companies such as Cummins will be on full display. Our recently completed study on global HD truck engine platforms of major global OEMs and tier-1s shows that by 2022, half of all heavy-truck engine production will be based on global platforms.
Our team has also developed a study on Iranian commercial vehicle market. Our research leads us to believe that Iranian commercial vehicle market will start to experience higher growth rates in 2016, expanding at a healthy compound annual growth rate (CAGR) of 10.4% till 2022. However, substantial geopolitical concerns remain in the Middle East that could further exacerbate global economic uncertainty and fuel price volatility. Despite continuing fuel price volatility, we expect diesel engines to feature in 93% of all MD-HD trucks sold in 2016. While low fuel prices will only delay the inevitable (that is, the rising penetration of natural gas and hybrid trucks, we have strong reasons to believe this), 5% of all MD-HD trucks sold in 2016 will feature natural gas engines. However, taking a long-term outlook to 2022 and beyond, this current phase of fuel price volatility seems less of a concern as fuel’s contribution to TCO will slowly but surely decline as driver-related cost components take a higher share of TCO relative to fuel, definitely in markets such as North America and Europe and possibly in emerging markets. This is already leading OEMs to focus more on “in-cabin” technologies that will eventually make driving easier, more comfortable, and more connected. The rising penetration of semi/fully automatic transmissions in global MD-HD trucks is an example of this. Frost & Sullivan’s study on global MD-HD truck transmissions forecasts 44% penetration of automated manual transmissions (AMTs) and automatic transmissions (ATs) in MD-HD trucks sold in 2025. The year 2016 will see OEMs increasing their focus on health, wellness, and wellbeing technologies for drivers in an attempt to differentiate their brands from their competitors. This will attract several companies from the medical technologies industry towards the trucking industry and create interesting partnerships.
Telematics services are expected to be used by over 9.3 million MD-HD trucks this year. These trucks represent the first wave and faces of the change in business model transformation we referred to at the beginning of this article. The business of trucking is changing from one where the relationship with the customer would end when the truck was sold to one where it is beginning at that moment. Our research and insights into business model modifications resulting from this affirms that 2016 will be the year where OEMs will focus on a wide array of technologies and services that will shift both manufacturer and customer focus from product (that is, trucks) to services. From Stuttgart to Gothenburg, Bellevue to Lisle, Mumbai to Shanghai, Sao Paolo to Tokyo, and Seoul to Moscow, corner offices and board rooms will buzz with possible opportunities arising from this transformation, which brings into focus something Sun Tzu (legendary Chinese military strategist) had said over 2,500 years ago in the context of the art of war: Opportunities multiply when they are seized.
