Q&A – Commercial Vehicle: Supply Shock

By | October 2, 2020

Following Commercial Vehicle: Supply Shock, the third session of the FTR Engage virtual speaking series, the FTR Experts sat down with Tim Farney (Dana Incorporated) to answer listener questions beyond what was covered during the Q&A within the presentation.

Listen to the full discussion on the State of Freight Podcast (also included at the bottom of this post) or read below for the fully transcribed Q&A.

Table of Contents:

  • Q1: What are the risks to the recovery?
  • Q2: What affect will a lack of further stimulus have?
  • Q3: Where does production stand in the CV supply chain?
  • Q4: What can you tell us about the August production numbers?

DISCLAIMER: This text was automatically transcribed from an audio recording and may include typographic, grammatical, and contextual errors that differ from the speaker’s intention.

Question 1: What are the risks to the recovery?

Avery Vise: One of the questions that has come up is about risks. What are the risks to the recovery, and do we see those risks increasing or decreasing? Tim, why don’t we start with you since you’re our guest in this podcast. What your thoughts are on that and we’ll go from there.

Tim Farney: Ok, thank you, Avery. Appreciate you letting me be part of the follow-up session as well. As far as risk, I think forecasts coming from OEM customers, that’s vital. You know, if that’s not accurate, that’s obviously a risk. As I mentioned during my presentation, people are trying to look at balancing inventories, balancing cash in these times and if there’s a big spike, I think that could be a potential risk. But right now, we’re not necessarily seeing that. Perhaps another risk is COVID around the world, whether it be with shipping lanes, spikes that come back for COVID could be a potential risk as well. But nothing is on the immediate horizon.

Avery Vise: Don, why don’t we go to you, how do you assess the situation? I know you did spend a fair amount of time during the session talking about risks, but now that you’ve had another few days to think about it, do you have any other thoughts?

Don Ake: I do think that we’re going from a high risk environment a couple of months ago to, for lack of a better term, a mid-risk environment now and over the last couple of weeks, maybe that that risk has moderated some. I think that the industry is gaining confidence on a weekly basis. So they’re getting more confident and they’re ordering more equipment, which is a great sign for the industry.

Avery Vise: So Eric, do you have any additional thoughts?

Eric Starks:  I’ve been the pessimist of the group about how I’m feeling about the recovery. Now, some of it I think has to do with where we’re each kind of sitting. And I have some kids going through school and we’ve been doing the at-home virtual schooling, all of these types of things. So it still keeps me awake at night to think about where the market is going. Now, obviously, the market has done better than I initially thought, and I think that is welcome. That is great, but I still have not gotten over that anxiety of the what-ifs, and for me, that’s a big risk. All of that just feels like there are so many what-ifs out there. Now, if I take all those what-ifs, get those out of my head, then yeah, I think things start looking better in a lot of ways and we could see some upside here. But those what-ifs still keep lingering and so that for me is really what keeps pushing my risk parameter, to keep re-evaluating each day to say where it’s going. Most of you who know me, right, I am Mr. Optimist, man, I’m always seeing the world in a rosy light. I’m trying to understand is this a data-driven feeling? Am I looking at the right data or is this an emotional feeling? And I think it’s a little bit of everything at the moment. So back to you, Avery.

Question 2: What affect will a lack of further stimulus have?

Avery Vise: Following up on that, for months now, several of us, myself included, have been saying one of the big risks would be that Washington does not ultimately step in with some further financial rescue or stimulus. Given where we are and throwing into it a Supreme Court nomination that really muddles the politics, it’s beginning to look that like that will not happen. So I’ll throw it up to whoever wants to jump in. But it looks like we will not have any significant stimulus probably until next year. What does that mean?

Eric Starks: Every so often the administration suggests they are willing to talk about stimulus. And then Pelosi comes out, says, oh, I’m willing, but nothing seems to be progressing. So it’s kind of one of these things you’re kind of hopeful. For me, there’s this lingering sense of I think the administration and the House want something to happen. But the question is, will you ever get anything through the Senate? No clue. And so I get to throw that softball back to the Tim and Don so you guys can blow everything up.

Tim Farney: Well, I’ll take a shot at it and give it to Don. But I think it’s all about confidence in the economy. And that’s I think what Don was trying to say, is fleets are starting to have confidence in the economy. The stock market’s done fairly well. We’ve got some ups and downs, but overall, very, very positive. You look at the last three months’ trends as far as new orders. So, I’m more positive that the economy is going to take us up. And, yes, might we need some more stimulus? Of course. But I think they’re going to be cautious and slow about that. I think it’s going to slow down the trucking industry, but the good part is that we can continue to move forward without some of these stimulus packages. That is not across all different segments, for sure, but for our segment, I think we’re lucky that we have some motivating factors to make our industry come back, Don?

Don Ake: I think it will be harder to come up with a longer-term solution, and they’re struggling. There is a patchwork solution. In Ohio, people started getting an extra $300, I think, this week. So there is patchwork going on, but I think it will be difficult in this environment to come up with a longer-term solution. As usual, with the government, we probably will agree on something in early December and as Tim said, maybe at that point it may not be needed that much. So we’ll just have to wait and see. But I don’t see anything happening fast.

Eric Starks: I think I would agree in the short term because we’re going through right now the traditional shipping season. Once we hit October, things kind of start to slow down from a traditional freight perspective. However, we know that there’s a lot of inventory restocking happening. We know that people want to get things prepositioned for the holidays, for COVID potential impacts in the winter, all of these things. As we get to the end of the year, I think trucking does relatively well because of that. The big question then is as we go into Q1, any stimulus that would happen now would really have more of a broader impact on the transportation market as we move into the first quarter because it could stabilize some of those things. So from my standpoint, I think that’s where the risk parameter is for me, is having stimulus as you move into the first half of next year.

Question 3: Where does production stand in the CV supply chain?

Avery Vise: Well, speaking of needing to rebuild and inventories and all that, let’s talk about commercial vehicle production and where the supply chain stands, what that particular change looks like. Tim, when he started out, made some reference to that because he talked about information you’re getting from overseas and from your suppliers on the other end. And of course, that is a key part of it is knowing exactly where things stand. Tim, let’s start with you. How would you assess where things are right now in in production and where things are fairly smooth? Is there a lot of friction? Is it kind of, you know, geographically different or is it different by type of product?

Tim Farney: There is definitely some geographic differences as far as how fast the markets are coming back. Obviously, I think in North America, we’ve seen it very positively coming back. So I think the OEMs are trying to get back, especially in this month of October, to kind of a good run rate that they are comfortable with and I think that we’ll see some steadiness that they want to stay at that rate. A lot of them are trying to make up for what might have been lost in Q2. So we’re trying to balance that and then to look out in the horizon and I think they have things that they have to look at from a labor standpoint from which the supply chain is all in place. So they have a lot of different factors.  We’re not seeing and we’re trying to keep as close as we can to them as far as information, making sure we check our supply chain. We’re seeing a lot of hiccups, but we’ve got to make that balance, that we have the proper lead times, the balance of inventory, and that’s always a tricky thing to manage. Especially when you look at the global supply chains, South America still continues to be strong and coming back. Europe continues to do a nice job. I would say India is part of the slowest one to come back and even China continues to be a really good, strong truck industry.

Eric Starks: Can I ask a question, Tim, follow up on South America for just a moment? Because obviously North America fell off and just stopped production on the stuff. What happened in South America?

Tim Farney: Well, they saw what was happening as COVID kind of came across the world and I think they did some really appropriate things to lock down early and then wait. Where  I think in other parts of the world, you know, things happened so quickly, people locked down, but I think what they did, they locked down in advance of heavy breakouts in the proper protocol because they were learning and we’re all learning. But I think, they were really smart about it and the entire economy.  So I think, they did a nice job of managing that and then obviously managing back through as a start-up as well, so I think they’re bullish on the economy.

Eric Starks: So did you guys feel like you had more visibility going into that time frame there than in North America?

Tim Farney: Well, I think it was different. They had more people, most of their industry just shut down, here is a mixture. We had some essential and we didn’t shut everything down, we slowed things down, took shifts out, make sure we had proper safety protocol. But if there were customers who were still running because of essential needs, we kept running. South America took a more aggressive approach and I think actually locked everything down.

Avery Vise: Let’s come back to North America, but not the US, and let’s talk about what’s going on in Canada and Mexico, and I guess Tim, we can start with you and then Don and Eric add to that.

Tim Farney: So we still have the challenge of, you know, we have a locked-down border between US and Canada, so that creates some challenges when we’re trying to help get people back and forth. We have operations up in Canada and so you have those challenges. Things continue to move on and come back especially, that’s a really heavy hub for our electrification operations that continues to be very steady. And in Mexico, we’re continuing to operate strongly in Mexico. They were slow to come back and they were very methodical. So we had a little bit of slowness in that April, May timeframe in Mexico. But once we had that turned back on, things have gotten a little bit back to normal, although we still have some continued making sure the safety. So they have some things in place to protect employees, which we fully support. So we’ve got some challenges to make sure that we appropriately scale where needed.

Avery Vise: Don or Eric, did you have any thoughts on what you’re seeing or hearing as well in that?

Don Ake: The Mexico situation right now is the ultimate good news, bad news scenario, and we saw in August that Mexico is, as Tim mentioned, they were back to normal, they were back to normal, strong, even a little pent up demand to try to catch up because they were slow for a longer time. And so the August numbers for Mexico were higher than expected, very good. However, just today, I got a report that just like in the US, where you had the hot spots, where you had the virus hit a peak and then come down and then you had hot spots. Unfortunately, there are some hot spots in Mexico, which, again, compared to the US, that’s not a surprise. Unfortunately, some of these hot spots are occurring in factory cities and it’s causing some production delays and some of the suppliers down there now, if it doesn’t get any worse, the OEM should be able to work around this without a lot of disruption. But it’s you know, it’s just kind of hit in the last week or so. So we’re watching that really close. So we have a disruption. We don’t think that it will be significant, but then it will have an impact short term in some cases

Eric Starks: I’ll throw in a little tidbit. I’m interested in what happens next year or the year after. This is where I think the election becomes a bigger deal only because it’s been pretty well telegraphed that in general, where Biden sits and he doesn’t want to upset the status quo in the sense of global trade and how we work with our NAFTA partners. What becomes more of an issue then is what the Trump administration would do going forward and there’s a lot of unpredictability there. So from a forecasting standpoint, it makes it much more difficult to understand how that relationship works and how that goes forward. You’ve got so much production of the equipment market happening in Mexico from suppliers to OEMs. And so this could be very interesting to see how this plays out.

Question 4: What can you tell us about the August production numbers?

Avery Vise: So we at this point, we have final commercial vehicle production numbers for August. Don let’s start with you. What are your thoughts on where we came in in August?

Don Ake: On the truck side, on the class 8 side, the production, the build was very good and again, that was helped by Mexico coming back stronger than expected. You also had a surprisingly strong month for retail sales, which is good. It’s a good sign if you want a good sign of fleet confidence. The retail sales number for August is a good one and the bonus, what goes along with that, with the higher retail sales inventory came down. So if the retail sales can maintain that rate. There’s a chance that this inventory situation, which has been a problem since last August, does get resolved by the end of the year and that’s what some of the OEMs told us would happen. On the trailer side, you have the build recovering from a slower July, the July was tempered by vacation days and holidays and all that. So production came back to around June’s level on a per-day basis, the orders, of course, as we said during the webinar, were great above, you know, getting above 28,000 and that stabilizes the backlog. So we expect that build rate to at least be stable, if not increase a little bit. We’ll have to see what the September orders look like. But we have momentum in the trailer market going into next year’s ordering season, which should begin in October. So, you know, in both cases, both class 8 and trailer, you saw that fleet confidence comes in there and in both segments had a good August under the circumstances.

Avery Vise: Tim or Eric, anything you want to add to that?

Tim Farney: Well, I agree with Don, it’s good to see trends both on the truck side and the trailer side as far as the orders, inventory going down.  So I think September is when we get those numbers because if we can have four months in a row of increasing confidence, that’s going to help overall that we feel better about how we head into 2021.

Eric Starks: I think we’re just today in that replacement market right now and which is a good number to be at for the moment given where we were. So, yeah, I think the next couple of months are going to be critical for us to see what happens, especially on the order front. You start seeing orders pick up. Then the ball is going to continue to move that direction and we know that the suppliers and the OMEs are willing and able to do that as best as they can. And honestly, I don’t mind a slow, steady market that creates a little bit more predictability and the ability to scale up or scale down. What I don’t want is something either to hit the brakes or to hit the gas pedal too hard because it makes it really difficult to move the needle there and then all you do is create more havoc in the industry.

Avery Vise: Well, I want to thank you all for listening, and I want to thank Tim and Don and Eric for coming back and having the session following Engage. And we look forward to seeing you in the next Engage session soon and we look forward to seeing you in Indianapolis next September.

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