The State of Truck Manufacturing and How It Will Affect Freight Capacity and Rates

Combined with C.H. Robinson’s own technology and data from the largest network in the freight industry, our partnerships with research firms and universities help our customers stay on top of the trends that influence their supply chains. I had the opportunity to sit down with Tim Denoyer, vice president at ACT Research, to ask him about the current state of Class 8 truck manufacturing and what it means for truckload and less than truckload (LTL) capacity in the near future. His responses are below.

ACT Research’s Class 8 data delineates trailer-hauling tractors to exclude trucks that don’t haul highway freight, such as refuse haulers, dump trucks, and cement mixers. If you see Class 8 truck manufacturing data, in trade press or elsewhere, remember, it isn’t all highway tractors.

Why does Class 8 truck manufacturing data matter?

In the highly competitive trucking industry, freight rates are determined by supply and demand. Both are critical, but in our analysis, supply is the single best predictor of rates over the long term. If you understand where capacity is headed, you can plan more effectively for rate cycles in the future. Though drivers are a piece of the supply puzzle, expectations for truck manufacturing —including both tractors and trailers—plays a key role.

Where are Class 8 tractor sales headed, and what does this mean for capacity?

As I mentioned earlier, there’s a lot at play. Here are a few insights on the future of Class 8 tractor sales.

Mind the backlog. A Class 8 order typically takes six to eight months to turn into a sale, and the backlog of orders is already filling into 2022. Particularly in today’s environment, orders placed today will not turn into capacity for quite some time.

Replacement is fundamental. To understand whether trucking capacity might actually grow, we look at whether Class 8 tractor sales exceed tractor replacement. The number of tractors that need to be replaced varies over time and will rise over the next couple years. But as constraints in parts and materials begin to ease and production resumes its climb, we do expect the U.S. highway fleet to grow by nearly 50,000 tractors or ~3.7% this year and even more next year, after shrinking in 2020.

Return on investment is key. The factor that explains most changes in tractor sales is neither replacement nor freight demand. As shown in the chart below, sales vary with economic returns. In other words, truckers buy trucks to make money. With trucker earnings and tractor sales tracking toward record levels this year and next, we expect the acceleration in capacity growth to materially change today’s tight environment by next year.

Class 8 tractor sales

Supply chain constraints. With extremely strong equipment demand, our 2021 sales outlook would be considerably higher were it not for supply chain constraints. Risk remains that worsening shortages of semiconductors, resin, and other parts and raw materials could lead tractor sales to fall short of our forecasts into next year.

Why is the supply of trailers and intermodal chassis so tight?

Broadly speaking, trailer production is not as constrained as tractor production. Unlike tractors, trailers don’t have 17 microchip clusters. However, the trailer production process is still quite manual, and labor shortages are slowing the ramp-up of trailer production—perhaps even more so than lumber and metal shortages.

U.S. dry van trailer production began at a 150,000 annualized rate in Q1, compared to a five-year average of 177,000. ACT’s forecast anticipates production rising to an annualized rate of 200,000 by Q4 as constraints are resolved. That equates to a 40% increase in production this year. After 2015 through 2019 were five of the best years in van trailer history, 2021 production will still be below those levels due to supply chain constraints, adding pent-up demand for another push higher next year. Reefer van and flatbed production have experienced similar early year constraints, with materially higher 2021 exit velocities anticipated. But with anecdotal reports of an increase in trailers being used for storage, and the importance of drop-and-hook rising due to the driver shortage, the trailer market is likely to remain tight.

The intermodal sector is experiencing a historic surge in demand from strong retail spending, restocking, and higher truckload rates opening significant conversion opportunities. Chassis production has missed our expectations significantly this year despite a very strong order book, as the chassis supply chain is uniquely challenged. Since most chassis parts are imported, the chassis shortage can’t be cleared until the port backlog is cleared, and the port backlog can’t be cleared until the chassis shortage is cleared.

How did we go from oversupplied before the pandemic to undersupplied so quickly?

Cycles typically take more time to reverse, but the pandemic shook both key elements of the supply side: equipment and drivers. Major shifts in demand toward goods and away from services were a big factor, as were the widely discussed driver availability challenges.

Less well-understood is the impact of the unprecedented downtime at truck plants in the first few months of the pandemic, as manufacturers closed and planned how to return safely. This production shock removed about 15,000 tractors from the Class 8 highway fleet just as retail freight demand was roaring back. It typically takes considerably longer for freight cycles to rebalance, but the combination of positive demand effects and negative supply effects tightened the freight market significantly faster than ever before.

How long will it take to rebalance the truck manufacturing market?

From a truck manufacturing standpoint, we expect the market to rebalance by mid-2022, as shown in the chart below.Truckload rates

A diverse array of driver factors will also play a role in the rebalancing of the market. Demographics, drug testing, growth in local driving jobs, driver schools reopening, the end of extended unemployment benefits in September, and driver pay are key “it’s different this time” elements factored into forecasts in the monthly ACT Freight Forecast report.

For more information about the freight market and factors impacting supply and demand, visit C.H. Robinson’s North American Freight Market Insights hub.

Steve Raetz
Director, Research & Market Intelligence
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