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2014 Commercial-Vehicle Industry Outlook Is Challenging, but Several Opportunities Exist to Improve Performance and Grow Sales, According to AlixPartners Study

Opportunities lie in emerging markets, optimizing costs, supply-chain management, and investments in emissions and fuel-efficiency improvements

October 23, 2013

NEW YORK (Oct. 23, 2013) – The year ahead will be challenging for commercial-vehicle makers globally as they continue to feel the hangover effects of the double-dip recession in Europe and face intensifying competition from emerging-market players, ever-tightening environmental regulations, and increased commoditization of their product.  However, amidst the increasingly complex environment, there are growth opportunities for commercial-vehicle original equipment manufacturers (OEMs) who can craft strategies to drive sales in emerging markets, rein in costs, apply more strategic supply-chain management techniques, and make the right investments in emissions and fuel-efficiency improvement.  That’s according to a new study of the global commercial-vehicle industry from AlixPartners, the global business advisory firm.

The AlixPartners 2014 Heavy Equipment Outlook: Commercial Vehicles, a comprehensive study of the industry, also found that the major market trends shaping the industry are changing and vary markedly across geographies, further adding to the complexity confronting industry players.

“The coming year will no doubt be an uphill battle for commercial-vehicle makers as they face a confluence of forces pressuring their bottom lines,” said Francesco Barosi, managing director at AlixPartners and co-lead of the firm’s Heavy Equipment Practice.  “Now more than ever, it’s critical for commercial-vehicle makers, especially Western OEMs, to craft innovative strategies to achieve growth and profitability.”

State of the IndustryWhile developed- and developing-market commercial-vehicle OEMs came close in 2011 to a full recovery from the global recession, profit margins came under pressure in 2012 due to deteriorating market conditions.  The strain on profit margins has continued into 2013, according to the AlixPartners study, with the average operating profit for Western OEMs at only 1.7% as of Q1 2013, versus 5% in 2012 and 7.7% in 2011. 

“The pressure on the profit margins of Western OEMs is not going to let up,” said Barosi.

Despite increasing margin pressure, the news is not all bad for commercial-vehicle OEMs.  Global sales are expected to increase at a compound annual growth rate (CAGR) of 5.4% through 2016, according to the AlixPartners study. Industry sales growth, however, will largely be driven by emerging-market players, particularly China, which could see a CAGR as high as 7.1% through 2016.  Western markets, on the other hand, are facing tepid sales growth prospects, with the CAGR in North America forecast to be just 2.3% through 2016, according to the AlixPartners study.  

On the production side, following a decline in 2012, the AlixPartners study forecasts global production volume growth of 6.9% CAGR by 2017.  As with sales growth, the industry’s manufacturing footprint is also shifting to emerging markets, with Asia (including China) accounting for more than half (59%) of global commercial-vehicle production as of the first quarter of this year.
Against this backdrop, the study identifies four likely routes to growth that, if capitalized on, will help position commercial-vehicle makers to overcome the challenges of the current environment and outpace competitors. 

Route #1: Focus on Emerging Markets

With emerging markets expected to be the main industry growth driver in the coming years, the AlixPartners study finds that commercial-vehicles OEMs may be able to drive volume growth by adapting business strategies – including product, manufacturing and distribution strategies – to the trends unfolding in these markets.  Notably, while emerging markets previously experienced demand for low-cost and low-tech products, forces such as rising energy costs, new emission and safety regulations, and improved local infrastructures have shifted demand toward more sophisticated products, particularly in the heavy-duty truck segment.  To compete in these markets, companies will have to reconfigure their product range and would likely do well to develop offerings tailored to country-specific requirements.  

To fully capitalize on the growth available in emerging markets, companies potentially will have to increase their manufacturing capacity to accommodate volume.  According to AlixPartners, local production is often key as it generally helps companies to better fulfill local demand and produce local variants of products.  And, according to the AlixPartners study, some of the easier means of increasing manufacturing capacity and gaining entry to local markets and resources are typically through partnerships and joint ventures with local business.  Unfortunately for North American OEMs, though, the AlixPartners study finds that European players have already snapped up most of the available partners in BRIC countries.

“Beyond adjusting product and manufacturing strategies to fuel growth in the BRICs, establishing dealership outlets in high-growth regions and segments may be critical for consolidating a company’s foothold in emerging markets and achieving a sustainable market presence,” said Steve Aschkenase, a director in AlixPartners’ Heavy Equipment Practice.  “The upfront investment to establish such a distribution network is substantial, but companies that are willing to invest often stand to gain in the long run as their product range becomes more visible in the market.”

Route #2: Cost Optimization

The AlixPartners study finds that markets are increasingly considering commercial vehicles as a commodity product, especially in the high-growth mid-size vehicle segment.  As commoditization in the industry pushes price points to converge, cost optimization will be more important than ever for OEMs. 

According to the AlixPartners study, to achieve this, OEMs should be mindful of differing sales drivers among regions, with emerging-market customers usually valuing vehicle purchase price and reliability more, and Western customers usually focusing on total cost of ownership and fuel efficiency.

“To safeguard profit margins and remain competitive, companies in all regions will have to focus on market requirements and relevant product specifications, regional production and local content, and low-cost-country sourcing,” said Giacomo Cantu, a director in AlixPartners’ Heavy Equipment Practice. Another key to success, according to the study, will be to standardize parts and products, which can be achieved through deploying “platform” strategies – similar to those being employed by automakers – that allow for increased flexibility, productivity and efficiency.

Route #3: Strategic Supply-Chain Management

To compete in varying regions and the increasingly complex industry environment, proactive supply-chain management will be absolutely vital for commercial-vehicle OEMs.  A key area of focus, according to the AlixPartners study, must be working with customers to arrive at more precise demand forecasts, which in turn should assist OEMs in better balancing their business capacities.  

The AlixPartners study also calls for a greater focus on managing supplier risk, which has often become harder to manage with the globalization of the industry’s manufacturing footprint.  

“With demand for commercial vehicles expected to increase over the next several years, tighter management of supplier risk is essential to prevent the capacity bottlenecks they we typically see in periods of growth,” said Barosi.  “Supply-chain transparency, while always important, becomes even more important in a complex and competitive environment like the one we’re in now, as inefficiencies between OEMs and suppliers can drive up costs and disrupt continuity of supply.”

Route #4: Investing in Emissions Reduction and Fuel Efficiency

As environmental regulations tighten around the globe, commercial-vehicle makers will likely have to invest more than ever in emissions reduction and fuel-efficiency improvements to stay in the game, according to the AlixPartners study.  Potential areas of investment and improvement include powertrain and exhaust management, and weight reduction through the use of lighter materials.  The use of aluminum, for example, can reduce a vehicle’s weight by 10 to 60%, according to the AlixPartners study, which in turn reduces fuel consumption.

In the near-term, AlixPartners expects that OEMs will focus their investments on alternative-fuel powertrains, including the development of engines and fueling systems, and perhaps even infrastructures for compressed natural gas (CNG) and liquefied natural gas (LNG). According to the AlixPartners study, such investments could prove timely, particularly in the United States, given the decreasing cost of natural gas resulting from the hydraulic-fracturing, or “fracking,” boom in the U.S.

“The opportunities for commercial-vehicle makers that can reconfigure business strategies to capitalize on trends such as ever-increasing environmental regulations are great,” concluded Barosi.  “However, these opportunities also bring to the fore challenges that collectively call for exceptional change-management and decision-making skills – to ‘win’ in this environment and fully capitalize on these opportunities, companies will need to be smarter and more nimble than ever.”