Understanding the Health of the Current Commercial Vehicle Market
Gain a deeper insight into the current commercial vehicles market by exploring the class number distribution and weight ranges per class for cv, along with the relevant regulations.
A commercial vehicle (CV) is a type of vehicle used for moving goods, freight, or passengers. A bus, truck, tractor, van, or recreational vehicle (RV) are all types of CVs. CVs are divided into 8 classes based upon the gross vehicle weight (GVW). Below is a breakdown of the class number and weight range per class. Classes are also often summarized into categories.
Classes 4-8 Breakdown
LIGHT DUTY: A light-duty CV is classified as GVW Class 3 (10,001 – 14,000 lbs.) and Class 4 (14,001 – 16,000 lbs.) and includes trucks, buses, and RVs.
LIGHT MEDIUM: A light medium-duty CV is classified as GVW Class 5 (16,001 – 19,500 lbs.) and includes trucks, shuttle buses, and RVs. Light medium-duty vehicles take on a variety of job types dependent on the up-fit (or body type) applied to the chassis.
*ACT Research does not use light medium as a classification in data or reports (See graphic below for a breakdown of how ACT Research classifies the truck market.)
MEDIUM DUTY (MD): GVW Classes 6-7. An MD CV is classified as GVW Class 6 (19,501 – 26,000 lbs.) and Class 7 (26,001 – 33,000 lbs.) and includes all fuel types and applications including school buses. *The term midrange is also used in the CV industry and classifies Classes 3-7 trucks. This refers to the typical operating range of vehicles, which is primarily of a local or regional nature.
HEAVY DUTY (HD) or CLASS 8: Defined as a straight truck or tractor over 33,001 pounds and is often referred to as a semi-truck or big rig truck.
STRAIGHT TRUCK or TRACTOR: A straight truck or tractor is a CV with a cab and body consisting of one unit—all axles are attached to a single frame.
Truck OEs & Suppliers
Commercial vehicle (CV) OEMs, or original equipment manufacturers, are the original producers of buses or trucks. The major heavy-duty truck OEMs in North America are
Ford Motor Company, Daimler Trucks North America LLC (includes Freightliner, Western Star, and Sterling Trucks),
Navistar International Transportation Corporation,
Isuzu Commercial Truck of America, Inc.,
PACCAR (includes Kenworth Truck Co. and Peterbilt Motors Inc.),
Mac Trucks Inc.,
and Volvo Trucks North America, Inc.
CV OEMS rely on suppliers for parts, systems, and equipment needed for vehicle production. Tier 1 suppliers (like Cummins, Dana, and Eaton) work directly with OEMS. Tier 2 suppliers provide parts, systems, and equipment to OEMS but do not directly sell to those OEMS. While Tier 3 suppliers sell raw or close-to-raw materials, like metal or plastic, to OEMs.
Looking for current truck and tractor market data?
ACT Research publishes a monthly report on the current state of the North American Classes 5-8 truck market.
Backlog (BL): The backlog is the number of vehicles that have been ordered but have not yet been built. Backlog is calculable: Past backlog + current net orders – current build = new backlog.
Build (BU): Build, or production, pertains to the number of vehicles produced for a given market, NOT the country in which the actual production takes place. When a unit leaves the assembly line it is counted in the build data.
New Orders: New orders are the total number of orders received by the industry each month. Also referred to as gross orders.
Cancellations: Cancellations are units that have been ordered previously and are then canceled. Order and cancellation cannot occur in the same month.
Net Orders: New Orders – Cancellations = Net Orders.
Inventory: Inventory is the number of units that have been built, but for which no factory shipment has yet taken place. Inventory is a calculable number, rather than an additive, number: Past inventory + current build – current factory shipments = current inventory.
Retail Sales: Retail sales are the number of units sold to end users.
Factory Shipments vs. Retail Sales: For the trucking industry, ACT tracks monthly and annual retail sales data. These numbers differ from factory shipments (see Trailer Market Indicators below). Total OEM build is not equal to or the same as factory shipments. A factory shipment takes place when the truck leaves the factory. A retail sale takes place when the truck is actually sold. The timing of a vehicle’s build, its subsequent shipment from the producing factory, and the final retail sales are three different events that do not occur on the same day.
The stock-replacement model helps conceptualize how many Class 8 units need to be replaced every year. Economic activity helps to determine how many new trucks need to be added to the population.
New vehicle demand is supported by three things: freight in need of hauling, carriers making money to drive the cycle, and whether the current price of used assets is above or below book value.
Freight in Need of Hauling
Assuming the economy and productivity are growing at about the same rate, and trucker profitability is middling, conditions should be in place for replacement levels of demand. At present, that’s something like 225k-230k units per year. When the economy is generating freight above the rate of productivity, there is a need for replacement vehicles. And population growth is necessary to move more freight. If we include carrier and trucker profitability, and the fact that confidences are rising, more trucks need to and will be added to the population to deliver the new freight.
Not all economic activity contributes to truck freight, though. Business and residential investment tend to be more freight intensive than consumer spending, generally. There are many parts and materials coming in and many parts and assemblies going out. It takes many parts to make a machine. While we tend to think of housing as medium-duty (MD) truck intensive, there are many Class 8 loads involved in turning land into a home.
At the other extreme, the services portion of consumer spending has equaled 45% of GDP over the past decade. While restaurants buy food, doctors buy pills, and lawyers buy office supplies, there isn’t much freight coming out of this type of economic activity.
In most years, offsetting rates of change among the different pieces of the economy make GDP a perfectly good stand-in for economic activity. However, during years when key freight components of the economy cycle together, GDP-only is a quick way to a bad forecast. For this reason, ACT developed a Freight Composite Index, a metric in which the different pieces of the economy are weighted to provide a proxy for freight activity.
It’s not just freight creation but also changes in utilization and density that impact work to be done. Because shippers expect transportation inflation to continue rising (new vehicle prices, driver wages) through the forecast period, the sense of urgency toward fleet productivity will remain high.
Carriers Making Money to Drive the Cycle
Given the consistent relationship between Class 8 demand and population growth from the late 1970s to the Great Recession, transportation productivity was roughly in line with productivity growth in the broader economy. Over that period, every percentage point of GDP growth generated a Class 8 population increase of 40 basis points (bps). From 2010 to the end of a robust 2019, the GDP grew 22.4%, and the Class 8 population expanded by 12.7%, or 57bps of population growth for every ppt of GDP.
The key to strong Class 8 demand into the future? Freight growth AND the rate of productivity growth.
The sharp increase in transportation costs from 2003 to 2010 (trucks, fuel, drivers) triggered a surge in transportation inflation. Truckers were unable to absorb, passing those costs to shippers. Shippers looked for solutions to mitigate the higher transportation costs. At the same time, productivity-enhancing technology trends were improving utilization. Railroads’ investments in intermodal transportation finally started to pay dividends.
Following is a review of the three primary drivers of productivity:
Density: Shippers have made dramatic improvements in freight density the past decade: improved packaging, new warehousing practices, or redesigned products. The impact higher freight rates have had on freight density? Prior to 2008, the indices basically moved in lock-step for 15 years. Post-recession, tonnage accelerated, reaching pre-recession levels by the end of 2011. The loads index did not surpass their mid-2000s levels until late 2017. While there are some items like frac’ing generating more heavy loads, ACT believes the widening spread between tonnage and loads is primarily related to greater freight density.
Utilization: Rising costs led to initiatives on improving capacity utilization. Companies needed to rein in transportation costs by better utilizing assets.
Harder to quantify? Utilization improvements driven by technology brought to bear on other sources of that marginal capacity. The explosion in asset-light and non-asset based 3PLs in recent years is indicative of this trend to better utilize the existing fleet.
Modal Shift: Another way to reduce transportation costs? Slowing the rate of transit. Carry some additional inventory by shifting some freight to rail. After stagnating for most of a decade, domestic rail intermodal hit its stride coming from the recession.
E-commerce has taken a bite out of the freight that used to be delivered to malls but now directly delivered to consumers. While the load numbers might not be all that different, greater warehouse density has impacted mileage and raised demand for premium service.
At the start of 2020, there were roughly 4.0%, or 56,000, too many tractors relative to work needed done. In 2H’20, there were 8% too many tractors relative to COVID-impacted economic activity. However, drivers, rather than tractors, are creating a significant capacity constraint for the trucking industry. Starting in 1H’21, we assume the driver situation will rapidly self-correct on stronger driver pay/ending unemployment benefits. At that point, US workforce growth, or lack thereof, becomes an issue as the industrial economy begins to gain steam.
Truckers use trucks to haul freight. Truckers buy trucks to make money, reduce op-ex, recruit drivers, and reduce their tax liabilities. Rising freight volumes are required to boost trucker profitability. But Class 8 production peaks coincide with carrier profitability peaks, not freight cycle peaks.
The relationship between truckers’ profits and Class 8 demand is straightforward: businesses tend to reinvest more when they have more to reinvest. For most truckers, their business is trucking in the US. They do not have alternative business units over which to spread the wealth during good times. So, when profits peak, truckers take advantage of the extra cash. They modernize their fleets, build up depreciable assets on their balance sheets, and reduce tax burden.
Used Asset Valuation
Used asset valuation, if above or below what truckers need to break even on a trade, makes the potential transaction more or less attractive and influences demand.
A problem that has plagued truckers and the industry for well over two decades is the syncing of new and used cycles. Used equipment volumes and new vehicle demand have been out of sync more often than not since the early 1990s, leading to boom-and-bust valuations on equipment.
New Truck Prices
From 2003 to 2019, new Class 8 prices rose from something under $100k to around $135k for a generic fleet spec’d tractor sleeper. This is due to regulations, primarily. Add to that 12% for the Federal Excise Tax (FET) and another ~8% for state taxes. On a tax-inclusive basis, our example generates a truck price today $44k higher than in 2002.
Looking forward, the EPA estimates the first step of the GHG-2 mandate will add another $6,500 (+$1,300 tax) to that bill.
In 2013/2014, the industry rolled out GHG-1 (phase 1) Class 8 tractors. On one hand, the trucks cost more: the EPA estimated GHG-1 compliance costs at $6,700. On the other hand, the new trucks delivered better fuel economy (from roughly 6.9 mpg to 7.7 mpg), providing accelerated TCO improvements for new equipment buyers. Starting in 2017, the industry began rolling out vehicles achieving fuel economy north of 8 mpg. Replacing a 6-mpg truck with an 8-mpg truck saves 4,200 gallons of fuel every 100,000 miles. At $3/gallon, that represents $12.6k in fuel savings every 100k miles—a gift that keeps on giving.
At the end of 2020, around 2/3 of the under-15 (U15) tractor fleet was getting better than 7 mpg, with 34% achieving fuel economy at or above 8 mpg. Mandates and spec’ing choices pushing advancements in aerodynamics, parasitic drag, etc. estimate a continued upward trend in fuel economy. New tractor fuel economy will continue to provide an mpg benefit of around 10% compared to the installed U15 population deep into the 2020s, providing a competitive advantage for new vehicle buyers.
Most regulations have little bearing on new vehicle demand when viewed across any given three- to five-year period. Regulations don’t impact the amount of freight in need of hauling. But, on occasion, they impact the trucking industry’s capacity to haul freight. They do this by constraining productivity. Again, not all regulations create negative outcomes in terms of new demand. Some emissions-related regulations have actually improved operating costs by boosting fuel economy relative to nominal top-line costs.
Unfortunately, though, not all regulations are benign. Regulations targeting driver Hours of Service (HOS) tend to constrain productivity. Ironically, this tends to be positive for freight rates by creating capacity shortages in the post-regulatory period. Emissions-related regulations tend to impact TCO by causing new vehicle prices to rise, sometimes substantially.
Regulations we give attention to are sufficiently punitive enough they impact the demand curve. The three best examples are
EPA’07, which had the effect of pulling Class 8 demand forward,
the FMCSA’s change to driver HOS regulations in mid-2013, and
the FMCSA’s December 2017 Electronic Logging Device (ELD) mandate.
In these instances, carrier productivity was impacted. Occurring roughly in conjunction with economic upswings, they drove carrier profits and, by extension, Class 8 demand higher.
With particulate matter (PM) and NOx virtually eliminated thanks to the two-decade-long effort that culminated with advanced OBD (on-board diagnostics) arriving at the start of 2013, the EPA and NHTSA and California’s Air Resources Board (CARB) were still not content.
Starting in 2014, the regulatory focus shifted to greenhouse gasses (GHG). With Phase 1 of the GHG standard nearing completion in 2018 and GHG-2 scheduled to start in 2021, the goal is a 30% cumulative reduction in greenhouse gasses from an EPA’10 benchmark. Much of the industry was ahead of the curve in terms of achieving the 10% GHG reduction in the first phase of the mandate, and the harvesting of low-hanging fruit meant that costs were modest relative to FE payback for truckers.
Low NOx Mandates
CARB plans to implement a very expensive emissions mandate beginning in 2024 that introduces considerable new engine technology. That mandate begins the process of pushing diesel NOx emissions from 0.2g/bhph to 0.0xg/bhph, while at the same time extending warranties on emissions systems that will also boost new vehicle prices.
The EPA has a proposal for a similar-to-CARB mandate that has not yet been converted to regulation status. If enacted, that proposal would start in 2027, likely driving a major prebuy of equipment in 2026, especially if fleets’ ability aligns with willingness. In a regulatory cost assessment project ACT conducted for the Engine Manufacturers’ Association, the conclusion was that this will be a very expensive mandate: Nearly $30,000 will be added to the new purchase price (including taxes), with another ~$5k added to operating costs over the first three years of operation. Those CARB and EPA mandates, hitting in 2024 and 2027, respectively, drive prebuys in ACT’s 2023 and 2026 forecasts.
The FET, or Federal Excise Tax, is a century-old tariff applied to the purchase of new commercial trucks (Classes 7 & 8) and trailers to help the US win WW1. Exclusive of state taxes, the FET adds 12% to new heavy equipment purchases. ACT estimates that the cost of emissions regulations from EPA’04 through GHG-1 added around $30,000 to the purchase of a new Class 8 vehicle. So, in addition to paying more per vehicle to improve the air we breathe, truckers are also being hit with an additional ~$3,600 in FET for the privilege. And that doesn’t include the 7% or 8% required for taxes in most states.
There are occasional efforts to retire or suspend the FET, which does not provide a steady revenue from year to year, and replace it with a more consistent revenue stream. A 10 cent per gallon tax on diesel would provide adequate coverage. Even with groups like the ATA asking Congress for this type of relief for at least the past 20 years, the ATA has not found any politicians willing to propose raising diesel taxes.
An inadvertent side-effect of changes by the FMCSA to Hours of Service (HOS) regulations is the need for more trucks because of reductions in fleet efficiency. With several thousand people killed every year in crashes involving trucks (most not the fault of truckers), safety is an industry imperative. Tightening HOS regulations to rid the nation’s highways of tired and impaired drivers has been positive for carrier profits and new Class 8 demand.
The HOS regulations that went into effect July 1, 2013 are estimated to have impacted trucker productivity by around 4%, at least at the outset. For an industry that struggles with overcapacity, this is not necessarily a bad thing. The capacity takeout that occurred in mid-2013 was a critical component of the 2014-2015 surge in carrier profits and Class 8 demand. At the end of 2014, a Congressional override of the key productivity-constraining provision of the rule gave an estimated 2.5-3.0ppts of productivity back to shippers. This helped hasten the demise of the cycle.
The second major change to HOS in the past decade was the rule requiring electronic logging devices (ELDs) that went into effect at the end of 2017.
As their members already run legally, most large carriers have found ELDs additive to productivity and the bottom line. The largest trucking associations, the ATA, NPTC, and TCA, fully supported the mandate. The rule took effect as planned on December 18, 2017.
ACT estimated the initial productivity impact/effective capacity takeout at around 4% by the end of Q1’18. The one thing about this particular mandate was the “new paradigm” impact at the outset of ELD conversion. Anecdotes from truckers suggested the initial productivity impact was largely improved within 6-9 months. The results being raising governed speeds, better communications with shippers, more stringent routing, and so on.
Adjusting for Seasonality
In some data series, especially those that are trendy in nature like build, retail sales, and inventory, seasonal adjustment helps to smooth away month-to-month variances from things like the number of days in a month, predictable annual events, or the repercussions of end-of-year tax buying. In highly variable data series like net orders, where month-to-month changes can be extreme, seasonal adjustment does not smooth, but it does add depth to the analysis.
A positive seasonal factor indicates a month is typically stronger than average, a negative factor, weaker. Dividing the actual data point by its corresponding seasonal factor generates the seasonally adjusted data point.
As big carriers have gotten bigger, and the owner-operator market has largely become a used truck buyer business (at least for tractors), we have seen a material shift in the seasonal factors for Class 8 net orders through the past decade. Some already important months are becoming even more important. Less important months have become even less so. ACT anticipates order seasonal factors to continue to morph.
High peak and deep trough seasons generate a steady flow of seasonally adjusted order analysis. There are a few months every year when it is critical to understand the pull-forward impact of end-of-year tax related buying on January and February retail sales. There is typically around a nearly 30% swing in retail sales every year from December to January (days per month dependent).
The Classic US Truckload Cycle
The Truckload Cycle explains where we are and what to expect next to strategically prepare for the road ahead. From spot rates to driver capacity, the Truckload Cycle leverages historical insights and market data to guide business decisions.
Trailer Demand & Economic Activity
There is a correlation between the broader economy and trailer demand, not unlike the correlation between consumer demand and trucks, and it can be utilized by industry analysts to understand the historical and future production of trailers.