Used Truck Study

A RESEARCH PROGRAM FOCUSED ON RESOLVING THE CURRENT AND CONTINUING USED TRUCK OVERSUPPLY SITUATION

BACKGROUND
Since mid-year 1999, the available pool of used Class 8 trucks and tractors has been rapidly building. From a comfortable position of under-supply for much of the 1990s, the situation is now reversed. There are far more Class 8 pieces of equipment presently available for resale than there are buyers.
Through the end of 1998, based on MacKay & Company research, no more than 200,000 used Class 8 trucks were available (on an annual basis). Of these, no more than 120,000 were being traded or sold by first owners. An additional 80,000 were being made available by the second and third owners.

By the end of 1999, the annual forecast of available used Class 8 trucks for 2000 had increased by approximately 70,000 units, a 35% increase. Of these additional 70,000 trucks, all but 20,000 were trades and sales from the first owner. A minimum of 50,000 more used Class 8 trucks will be available this year than normal demand from second and subsequent owners can absorb.

This oversupply situation has created several problems:

• Inventories of used Class 8 equipment have been rapidly building at every level of distribution; manufacturers, dealers, wholesalers and independent retailers.
• Prices of 3-year to 6-year old Class 8 tractors have fallen sharply; inventories have been re-priced and re-valued at all levels.
• Operators of 3-year old to 6-year old Class 8 tractors are finding that equipment resale values are well below the values at which this equipment is carried.
• Dealers are becoming much more selective in determining what trucks—and what brands—they will accept as trades.
• The current growing glut of relatively new used Class 8 equipment is pulling down the entire new Class 8 market. This glut will not be resolved for at least three years.

It is unlikely that the purchase characteristics and demands of many new Class 8 buyers will change significantly in the short-term. Unless forced by market factors, new truck buyers are not expected to accept longer trade cycles or less customized equipment for long haul applications.

There are indications that this glut will probably spread to both the trailer market and the medium duty truck market over time.

A major key to resolving the current and continuing problem in the used truck market is changing the purchase and use patterns of second and third owners of Class 8 and medium duty trucks and trailers. That is the focus of this research program, understanding:

• Who are the key used heavy and medium truck and trailer purchasers and users?
• How do they make their purchase decisions?
• What are their characteristics of operation?
• How do they evaluate specific components—and component brands?
• How is this equipment used by second and third owners—and for how long?
• Why don't they purchase new equipment?
• How do they evaluate new vs. used equipment purchase options?
• How do they perceive specific types of equipment available to them?
• Where do they shop for and purchase this equipment—and why; will the internet change this?
• How do they determine when to sell equipment?
• How do they measure costs like maintenance, lack of warranty, downtime and other critical operating measures?
• How much "discomfort" are they willing to endure with a used truck purchase (will they buy what they don't want if it doesn't specifically meet their requirements)?
• How much might they be able to change their purchase habits and frequencies?

In summary, how can the used truck and trailer ownership cycle be modified to accommodate the dramatically increased flow of first owner equipment to the second and third owner?

HOW DID THE PROBLEM DEVELOP?

The current used truck crisis did not develop as a result of industry actions and activity over the past several months. The history of this problem can be traced back at least two decades, as the truck-operating industry has restructured and the truck and component suppliers have dramatically improved the performance and longevity of the products being supplied. Even though the United States economy grew dramatically through most of the 1980s, retail sales of new Class 8 trucks did not exceed the levels of the 1970s.

It was only after 1992 that production and sales of new Class 8 trucks began to reflect burgeoning truck activity and demand for Class 8 equipment. For the growth period of 1993-1999, new Class 8 retail sales jumped nearly 53% from the 1980's levels.

Class 8 truck sales increased nearly 50% more than overall truck activity during much of the 1990s. While U.S. Class 8 retail sales were up 53%, truck ton-miles increased only 27% during this same period. Compounding this disparity, intermodal activity increased by 10% alone in 1999.

For most of the 1990s, truck sales chased backlogged demand for Class 8 trucks; in 1999, truck sales caught and passed truck demand, creating the glut of used Class 8 equipment we have today.

Not only did the sales and demand picture change, so did the structure of the primary Class 8 truck buyer.

In the 1970s and much of the 1980s, LTL carriers and private fleets represented nearly half the demand for Class 8 equipment. Truckload carriers generated only 10% of demand, lease/rental companies only 12%. LTL carriers and private fleets typically held this equipment for six to ten years, generating relatively steady and nominal flows of used equipment for the second buyer.

By the early 1990s, the Class 8 buyer situation had changed dramatically. Truckload carriers alone generated approximately 27% of new Class 8 demand, lease/rental companies an additional 24%. These two classes of Class 8 customers typically traded equipment about twice as fast as did LTL carriers and private fleets, the former major customers these new entities replaced.

As a result of the structural changes in truck buying, the universe of Class 8 trucks in operation has changed significantly in just seven years.

Since 1993, the universe of Class 8 vehicles in operation has increased by 34%. More significantly:

• The truckload carrier universe has increased 65%.
• The lease/rental universe has increased nearly 50%.
• The LTL carrier universe has shrunk by 13%.
• The universe of construction and similar vocational vehicles has increased 21%.

Since the mid-1980s, new Class 8 configurations have also changed markedly:

• Prior to the mid-1980s, the standard line haul tractor for both LTL and truckload carriers was either a cabover day-cab or short sleeper or a medium-length conventional with a day-cab or short, easily removable sleeper.
• With truckload carriage replacing long distance LTL, and with the challenge of attracting and retaining drivers, the standard line-haul power became medium and long conventionals with increasingly larger sleeper cabs, many of which are integral with the driver compartment.
• Not only has the velocity with which first owner trucks move into the used availability pool changed—so has the configuration of those trucks. Many can be adapted only with difficulty to traditional second and third owner applications.

If there is to be any easing of the growing used truck supply crisis, it must be keyed to the characteristics and use of used trucks by second and subsequent owners. In the opinion of MacKay & Company, only by understanding a great deal more about used truck operators and the opportunities for altering his used truck purchase and use patterns can some or all of the used truck crisis be eased.

RELATED USED TRUCK RESEARCH ACTIVITIES

MacKay & Company has been actively involved in researching and tracking the used truck market since 1991. Since 1995, we have been tracking used Class 8 activity with several dozen new truck dealers and with many independent marketers. Over the past several months, we have seen:

• Trade ratios on new truck sales increasing from below 20% to approaching 30% Purchases of used trucks drop from more than 30% of dealer used truck supply to slightly less than 20%
• Dealer used truck sales, as a percent of new truck sales, drop from more than 80% in 1997 to less than 60% at year end 1999
• Margins on used trucks in late 1999 decline to the lowest levels in several years Dealer used truck inventory levels increase nearly 50% from two months' supply to nearly three months.
• The current used truck problem cuts across all levels of the industry; truck manufacturer, new truck dealer, independent dealer, auction and fleet direct sales. Understanding the used truck buyer and the potential opportunities to change his behavior and purchase patterns is a fundamental need for all of these used truck distribution entities.

RESEARCH PROGRAM METHODOLOGY

The used truck research program will kick off with a meeting of all participants in Chicago to review the objectives and each detail of the research. In addition, this initial meeting will review all past used truck research and discuss the implications of this existing research on the current program. Each participant is invited to send as many interested individuals as they desire to this launch meeting.

The second major element in the research program is a series of focus groups with non-owner/operator used truck buyers and operators in at least three locations across the United States. In addition, focus groups with owner/operators will be separately held in a minimum of three truck stop locations in the same general metropolitan area. The non-owner/operator focus group sessions will include used truck operators in each location from a variety of key vocations buying and using used trucks:

• Earlier used truck research has indicated that construction-related truck operators may purchase as much as 40% of all Class 8 trucks.
• For-hire carriers are probably the second largest purchasers, with 20% - 25% of used truck purchases.
• Owner/operators appear to be the third largest purchasers of Class 8 vehicles, representing 12% - 15% of these purchases.
• Used truck owners will be identified in and selected from MacKay & Company's truck operator database of some 200,000 individuals and companies. In addition, we will acquire additional used truck purchaser information from R.L. Polk and similar sources.

Participants in the study are encouraged to attend at least one of the non-owner/operator focus group sessions. Because the owner/operator focus groups will be held in truck stops without traditional focus group facilities, these sessions will be videotaped (as will all focus groups) and copies provided to all research program participants.

The focus groups will concentrate on those issues MacKay & Company believes are critical to understanding how and why participants purchase and employ used trucks. The overall objective is to better understand the purchase and use behavior and the opportunities to modify this behavior to accelerate used truck flow to the second and third owners.

Once the focus group sessions have been completed and the input evaluated, a second review session with study participants will be held in the Chicago area. The objective of this second session is to review and discuss the initial input in detail and encourage participant questions on priority issues to help shape the remainder of the research.

The second review session feedback will shape, to some degree, how the balance of the research program will proceed. However, we anticipate that the key elements in this subsequent research will be:

• A series of on-site interviews with some of the larger fleets identified as purchasers of used trucks
• A parallel series of surveys, combining mail and telephone research techniques, to generate characteristics of used truck purchase and use from a much wider audience of used truck buyers
• On-site and telephone interviews with used truck marketers to better understand how sales and marketing appeals to used truck buyers are presently being developed and the audience to which these appeals are being directed.
  

In the opinion of MacKay & Company, part of the current problem and part of the future solution may rest with how used trucks are marketed:

• New truck marketing is quite selective and vocationally focused, both in terms of sales organization structure and advertising.
• Used truck marketing is quite general and non-selective, using the approach of "here's what we have" rather than focusing on the needs and requirements of individual types of used truck buyers.
• Once each of the preceding research activities has been completed, the research input will be summarized, tabulated and analyzed by MacKay & Company staff members. A final report will then be prepared for each participant, focusing on the key issues outlined earlier and others which surface through research.

Perhaps most important to the program participants is the "bottom line" deliverable of the report: what do used truck marketers, financers, lessors, component suppliers, etc. do to change the behavior of used truck buyers to help alleviate the current and continuing glut in the used equipment market?

Once the final report has been completed and submitted to participants, a final on-site presentation will be scheduled. We would encourage participants to involve as many staff members in the final presentation as possible to broaden the understanding of the second and third owner market. One final review session for all participants is included in the participation budget. Others can be arranged for an additional charge.

(Study completed December 2000)

WHY MACKAY & COMPANY?

Since the early 1990's, MacKay & Company has devoted a significant portion of its resources to developing and improving its understanding of and information on the used truck market. For much of the 1990's, however, there was only nominal need for this information:

• Truck activity was growing at a rate more than adequate to absorb the first owner trucks being sold and traded.
• Owner-operator growth helped absorb a meaningful portion of tractors specifically equipped for long distance transport.
• LTL carriers, while consolidating and shrinking in terms of market importance, were shedding equipment that could be readily absorbed by a variety of non-carrier applications.
• Private fleets, also shrinking in terms of market importance, were also spinning off equipment that was generally applicable to many secondary applications.
• The market situation has changed dramatically in recent months; the information and understanding MacKay & Company developed now has new importance and value.

Since 1995, MacKay & Company has been surveying truck dealers and independent used truck marketers monthly, tracking key indicators such as volume, new/used volume relationships, used inventory purchase practices, margins and other relevant indices. Concurrent with this, we have also been tracking overall used truck activity, integrating this into both proprietary and client-specific research.

We believe that MacKay & Company's experience in and understanding of the used truck market positions it well to assist study participants in understanding what must be done to relieve the current and continuing oversupply situation in the used truck market.