As anticipated, the Environmental Protection Agency's lower emissions requirements for diesel engines, and hard-stop deadline for compliance, have thrown a monkey wrench into the already cyclical heavy-duty truck market. The truck manufacturers' short-term response to an anticipated downturn in 2007 reflects an old-school strategy that logistics and transportation companieswould do best to avoid.
To recap, the EPA has set dramatically lower emission levels for nitrogen oxides and particulates for diesel engines sold after the end of the year. The new engines will work in combination with the nationwide transition to ultra-low sulfur diesel fuel, which went on sale last month. The new requirements have triggered significant spending on research and development of cleanerburning technology. All of the truck manufacturers say that their new engines will comply with the new standards with minimal loss of efficiency. These power trains, however, will cost more to buy and operate, and despite millions of test miles, they have an unproven service and reliability record. Such concerns have spiked demand forcurrent model year trucks.
Bellevue, Wash.-based Paccar Inc. (www.paccar.com), which manufactures Kenworth and Peterbilt trucks, has announced record revenues for the third quarter and first nine months of 2006. Net earnings are up 32% over last year. With buyers stepping up new truck purchases ahead of the EPA deadline, the company expects to sell 315,000 Class 8 trucks in the United States and Canada in2006. Next year is a different story.
For 2007 Paccar executives forecast a 27%-37% decline in North American truck sales. They attribute the sharp decline in part to higher truck prices, which will range from $7,000 to $9,000 per truck. They say these price increases are necessary because of the higher component costs required tomeet the emissions requirements.
Freightliner LLC is also planning to push price increases of 10% or more next year, from $7,000 to $12,500 per truck. Headquartered in Portland, Ore., the subsidiary of DaimlerChrysler (www.freightliner.com) is looking at a strong 2006 with annual revenues of $16 billion, compared to $14.5 billion last year. Still, in preparation for the anticipated market decline in 2007, Freightliner has announced a “voluntary termination of employment program” for white-collarworkers. Without giving any details, Freight-liner's CEO has also said that the company will lay off manufacturing workers at all of its North American factories, which includes six plants in the United States, one in Canada, and one in Mexico,in the coming months.
International Truck and Engine Corp., the operating division of Navistar International (www.navistar.com), has been running all out as well. In August the production rate at the company's Class 8 truck assembly plant in Chatham, Ont., was 23% higher than January of this year. At the same time that it released this news, the company announced the potential for layoffs at the factory by the end of the year. Other heavy-duty truckmanufacturers have made similar layoff announcements.
Unlike a lot of government-driven market disruptions, the consequences of these emissions changes have long been anticipated, and everyone's more or less prepared. Managers, union leaders and industry analysts all seem to accept that the layoffs are a regrettable but necessary responseto a down market. That's too bad.
While there's nothing wrong with being prepared for market realities, in a labor market increasingly short on technical skills—and projected to grow even more knowledge deficient when the baby-boom population officially starts retiring in 2008—it makes less and less sense for companies to layoff hundreds of people with years of experience, even for a short period of time. If it happens often enough, these folks will find other ways to earn a living and, given a choice between alternatives, will tell their children to look elsewhere for work too. In only takes a generation for an industryto create its own labor shortage.
Here's your opportunity. If you count the truck manufacturers and their suppliers, there will soon be thousands of skilled people looking for work. They may not have the most seniority but they'll be intimately familiar with today's heavy-duty trucks, their posh cabs, slick controls and other amenities designed to make the long-haul trucking lifestyle easier and more comfortable. If they don't have a commercial driver's license yet, I wouldbet that they'll be willing to learn.