April 27, 2009 3:15 AM, EDT

Trucking Faces Core Changes, Hebe Says

By Jonathan S. Reiskin, Associate News Editor

This story appears in the April 27 print edition of Transport Topics.

OXON HILL, Md. — The entire North American trucking industry is in the midst of a fundamental reshaping, which will lead to flat tonnage levels for fleets and fewer truck manufacturers producing much more expensive vehicles and mostly in Mexico, said a senior executive of Navistar Inc.

James Hebe, the truck maker’s senior vice president for North American sales operations, said at the American Truck Dealers’ annual meeting here on April 20 that, although the current recession started in late 2007, trucking’s downturn began a year earlier.

The long slump has created “a time that shapes our industry,” he said. “We are a long way from being out of the woods, and we will continue to feel the effects of the recession long after it ends.”

Hebe, former chief executive officer of what is now Daimler Trucks North America, spoke out against a variety of federal policies and said trucking eventually would bid farewell to a number of institutions long associated with the industry, including “long and tall” tractor design, owner-operators and independent maintenance shops.

He said he anticipates something of a truck sales surge during the second half of this year, but only so buyers can avoid more expensive 2010 trucks equipped with new emissions controls.

“It will be the consummate suckers’ rally,” he said, adding that new truck sales will fall back after the brief flurry of activity.

After reflecting on his 38-year career, Hebe launched into a detailed dissection of the truck manufacturing industry, connecting trends in data and concluding that truck-making will change profoundly in response to new freight patterns, changed labor relations and permanently higher fuel prices

Starting with his trucking company customers, he emphasized the shift from longhaul irregular routes to regional hauling and dedicated contract carriage for distribution. The availability of truck-rail intermodal for many linehaul movements of more than 1,000 miles and the shock of $4.75-a-gallon fuel last year mean “fuel prices have changed the world.”

Carrier managers, he said, are ever more selective about the freight they haul. Furthermore, he said, there might be fewer loads to haul.

Hebe predicted higher federal taxes will cut consumers’ discretionary spending, resulting in slow growth or no growth in demand for trucking services. However, his forecast contradicted numerous freight projections by American Trucking Associations and other groups that predict steady, long-term growth in freight volumes.

Owner-operators, Hebe said, will vanish because of high fuel and equipment prices and the anticipated rise of electronic onboard recorders.

EOBRs are noteworthy, Hebe said, in that a key strategy for some owner-operators has been to run longer than federal hours-of-service rules permit.

“That is the death knell for owner-operators. They can’t survive by running legal,” he said.

As for the trucks being sold today, Hebe said they are of far higher quality than those made years ago, which means they last longer. Coupled with less freight and shorter routes, the result will be lower truck sales and production, leading to a contraction in truck manufacturing.

“We will be a smaller industry.

There will be fewer OEMs. Sterling will not be the last to go,” Hebe said of the Daimler unit that built its last truck in March (click here for previous story). Hebe was the chief engineer behind Daimler’s acquisition of Ford Motor Co.’s heavy-duty truck business, which became Sterling.

Less production means fewer economies of scale and, therefore, higher per-unit costs. Adding in a prediction for a return of high inflation, Hebe said truck prices will rise sharply.

“Truck pricing will increase dramatically. If you think the pricing in 2010 is bad, you haven’t seen anything yet,” he said.

The medium-duty sector is particularly crowded, Hebe said, and is the most likely target for thinning. The original equipment manufacturer of the future, he said, will have to make a full range of products in all weight classes, 3 to 8.

This comment does not mean, he said, that Navistar will resurrect its deal with General Motors to buy GM’s Class 4-7 business, but he hinted that Navistar will buy production facilities in the Class 3-5 range. “Hang on,” he told reporters after his speech.

Surviving OEMs probably will assemble trucks in Mexico, he said, and they will not be able to ramp up production quickly.

“It remains to be seen if anyone can live through this administration without becoming unionized. . . . The cost base of unions is driving manufacturing principally to Mexico,” he said, adding that Freightliner and Navistar already have substantial presences there.

Hebe said the labor situation in Mexico argues against sharp swings in production levels.

“There are no unemployed truck workers sitting around in Mexico. We will have to train truck builders who have never built trucks before — and that means a ramp-up will have to be slow, or quality will have to suffer.

“Truck jobs in the U.S. are gone and will not be coming back,” Hebe said.