Research From Cyclicals Team

• OEM inventories of Class 8 trucks increased during past 90 days for 4 of 6 sources
• Daily build rates decreased qq for 3 of 5 sources, averaging 1,300–1,350 units
• North America Class 8 truck production expected to be 327,000 units in 2023, 289,000 units in 2024

Pent-Up Demand Remains, but Backlogs Coming Down
Heavy-duty truck market conditions remained the same during the past 90 days for four of six sources, while one each said conditions improved and worsened. Sources said build rates have been strong for most of this year with only minor supply chain issues. Pent-up demand was cited most often (by four sources) as helping demand, along with the opening of OEM order slots (mentioned by two sources). However, sources expect demand to slow for new Class 8 trucks next year as pent-up demand finally gets worked through, and some expect builds to slow in 2Q24. Weak freight levels and overall economic conditions were cited by two sources each as weighing on demand the most.

Quotes
“Builds have been increasing since the end of last year. OE inventories are back in place, but we may see production begin to level off. Shipments continue to slip every month and freight volumes have decreased since the beginning of this year. The market is meeting demand, but that demand will begin to wane in 2Q24.”

“In the last 90 days, things have improved with the market’s ability to meet demand. The supply chain continues its recovery and the build rates have been very strong and have plateaued at a run rate to feed the market’s needs. But in the next nine to 15 months, market conditions will start to weaken from a demand perspective. We will start to see a rollover that will soften the market in the back half of next year.”

“The market demand is still there, but we will soon be seeing the finale of two years of pent-up demand.”

“There are decent new equipment orders going into 2024 — replacement demand-type volumes.”

“OEM backlog is coming down with the lead times getting shorter. That can only address the pent-up demand.”

OEM Inventories Higher QQ
Four of six sources reported rising OEM inventories of Class 8 trucks during the past 90 days while two said they remained the same. (This builds on OTR Global’s September note, when three of five sources said inventories had increased during the previous 90 days.) One component supplier said, “Inventories are looking better than they have in a very long time. The OEs are getting caught up with their backlog and are almost there.” Three of five sources also said OEM inventories were in line with desired levels, while one each said they were above and below desired levels.

Additionally, three of six sources said overall supplier capacity in the HD truck component market increased qq, while two said supplier capacity was unchanged and one said it decreased because of a plant shutdown at their company. One said, “For the most part, supplier capacity has increased and stabilized. I think there are a few things out there that are still wobbly, like frame rails. There are a few areas that still exist where OEs are struggling with inefficiencies that could either be capacity or labor related.” Frame rails specifically were cited by three sources as facing supply constraints.

Quotes
“OE inventories have increased and are back to a very healthy level.”

“Inventories have increased in the last four of five months. That means the build rates are strong. The question is why aren’t sales matching the build rate? Currently, it’s only marginal and not out of control.”

“I think the OEs have built back the inventories where they can now feel comfortable. Now there is a fear that they will continue to build inventory as the market softens.”

“Medium-duty inventories have been a bit higher than we want. Heavy-duty inventories are in line with the target range but toward the higher end.”

“There has been an increase in supplier capacity. Last year, we had a supply chain that was still out of balance, but today, other than the occasional components or part, things are nearly back to normal.”

2024 Production Estimates Fall
Class 8 truck daily build rates decreased qq for three of six sources, while two said they remained the same and one said they increased. Sources citing a reduction said it was minor and that some builds are being pushed into 1Q24. On average, current build rates were reported at 1,300–1,350 per day, compared with 1,320–1,380 in September. Looking ahead, three sources expect OEM production to increase during the next three to six months, while the other three expect production to remain the same. The three expecting near-term increases ultimately do expect build rates to taper off sometime during or after 2Q24.

Full-year 2023 production estimates for Class 8 trucks were largely similar to estimates in September, averaging 327,000 (compared with 323,500 in September). Sources also indicated recent strikes at automotive plants had little effect on their 2023 estimates.

U.S. Class 8 Production Outlooks
(weighted average)

However, sources expect total production in 2024 to decline to only 289,000 units on average, a deterioration from the 310,000 units forecast in OTR Global’s September note. Some sources said once the pent-up demand of the past few years is finally worked through, production rates are expected to come down. One said, “We’re assuming 1Q24 will be strong, at least on the truck side; trailers will be soft. 2Q24 is when production will fall off. Orders are slowing, and we’re chewing up that backlog. Demand is not robust enough to maintain the rate we are building at.”

Quotes
“The OEMs’ build rates are plateauing given the market demand.”

“I think the OEs will reach 1,380 [per day] in the next four months, but by Q2 of 2024, we might begin to see those numbers falling.”

“They are forecasting flat build rates for November, and then a slight increase for December and Q1. They are trying to make up for some lost builds. We’re expecting around a 1,345 daily build rate for Q1, in line with 3Q23. Then, in Q2, things will slow down.”

“At this point in the year, I’m confident with a final production number between 315,000 and 335,000. And, no, the past strike really does not figure into my prediction. If it had lasted longer, I might have predicted a different number.”

“We are expecting around 330,000 for 2023. We are still on track to hit that; the strikes shouldn’t affect that.”

“2024 will start off strong in the new truck build markets and then slow down in the second half of the year. [2024 will be] about 10% lower than 2023.”

ADDITIONAL QUOTES
On Demand
“Economic uncertainty and declining freight levels will cause large carriers to hold off on major purchases. The retail industry is plagued with high inventory levels and inflation. With less inventory getting moved and less demand for trucks, drivers can struggle to make a profit.”

“The trucking market is experiencing very weak freight levels that will last into next year. That will eventually collide with market demand fizzling out.”

“The trailer order backlog is softening. There is not enough demand to keep building more new trailers like we have been.”

“We are still operating in a market that demand has yet to be satisfied. I think it will cool next year.”

On Inventories, Supplier Capacity
“Inventories are at a healthy level. If I look out into the future when the market rolls over next year, the inventory number is still 15,000–18,000 lower than its peak at 80,000 a couple of years back, which was way too much and everybody was nervous about it. We are now in the mid-60,000s, and that’s a good level, equating to about two and a half months of sales. I would be nervous if the market softens and the OEs continue to increase build rates to increase inventory.”

“There really are no supplier capacity problems at this time. The OEs are sending surveys asking what we can do to increase our capacity an additional 10%.”

“I still hear about issues with frame rails, but otherwise it has been stable.”

“Not everybody is comfortable yet. We are feeding the market enough, but I think we are not completely efficient yet. Most suppliers are finding a comfort zone knowing that the build rates have plateaued, and they are only going to come down. Many are feeling that the softening of demand will make suppliers a little more comfortable.”

On Supply Issues
“A few months ago, it was wiring harness, and now it’s frame rails. In time, it’ll be something else. But these shortages are not bringing the industry to its knees; [they are] just an obstacle that the OEs can work around.”

“There’s still always one or two components that keep the supply chain from being as efficient as we all would like.”

“Any shortage has the ability to affect every OEM. Unlike semiconductors, most don’t seriously affect production.”

“Frame rail issues are effecting everyone evenly. Some OEMs are more forthcoming with info about shutdowns than others. [Mercedes-Benz Group AG’s] Daimler doesn’t tell us as much.”

On OEM Component Purchases
“PACCAR [Inc.] is increasing their build rate indicated by the feelers being sent out to find more capacity from suppliers.”

“[Volvo AB’s] Mack has been on strike. They haven’t been producing for a few weeks. Volvo is trying to make up some of those volumes as best they can.”

“I am not aware of anyone increasing purchases.”

“There are just feelers out there looking for information before the OEMs make decisions.”

On Build Rates and Production
“Volvo’s build rate is 400 per day during the quarter, but last year, they were looking at 330 per day.”

“Q3 as a whole was at 1,367 [class 8 truck] builds per day. The October build rate was at 1,273, so we are a bit lower qq. For class 5–7 trucks, [2Q23] ended with a daily build rate of 1,089, which was lower than Q2. October was even lower than that, at 981.”

“The OEs are hitting their stride with a production level that matches market demand.”

“Through the first two quarters of 2024, production will remain the same and then taper off as the year closes.”

“The supply chain issues are diminishing, and that will help increase the build rates through the first half of 2024; then, it will slow down.”

“I think the Q3 and Q4 production numbers will be a high point as we go into 2024.”

“2024 could bring some upside as volumes get pushed into 1Q24. But if strikes continue, people may hesitate to place orders. We’re still expecting around 265,000 units for the year, though. The strikes are impacting us for sure, Volvo is trying to make up volumes because Mack has been on strike for a month. I heard they could start hiring replacement workers if this next deal is not ratified.”

“I think the slowdown will put production in the high 200,000s for next year.”

“The total production number for next year will decline as the market softens, but will not go below 250,000.”