Going to the Mattresses

By John Blodgett, MacKay & Company

That headline, “Going to the Mattresses,” is a great line from a great book and movie (“The Godfather”), which basically means: To enter into or prepare for a lengthy war, battle or conflict; to adopt a combative or warlike position. Like when the Germans bombed Pearl Harbor — another line from a very different movie (“Animal House”).

So, thankfully, we are not in an actual combat war, but we are in what likely will be a long, painful journey until we defeat this virus. Not if — when!

Last month I was on vacation (so glad I went last month) with friends and we got into a discussion about previous generations and, by comparison, we have had it easy (on average). Sure, we had 9/11, related wars, the recession of 2009, but in totality (at least through February 2020), it has been a pretty easy ride.

If I look at my grandfather’s life, the country was in WWI when he was a child, went into a market crash and deep depression soon after he got married then entered WWII. When his kids were young, there were wars in Korea, Vietnam, the oil crises, double digit interest rates … just to name a few things he and his generation had to endure through their lives. It certainly helps explain their drinking and smoking habits.

So, we don’t have a lot of training for this and, as hard as it might be, it’s our turn to “go to the mattresses” and help our country, employees and families survive this temporary huge bump in the road.

The good news is trucking is getting a spotlight like never before and trucking is shining. People are starting to understand the importance of the trucking industry, the truckers, the fleets, the companies that manufacture trucks and support and service to keep the trucks on the road. I have seen several commenters on TV in the last week praise what the trucking industry does and how it is helping mitigate some of the impacts from this pandemic.

During this time, industry associations like the Motor & Equipment Manufacturers Association, American Trucking Associations, Auto Care Association and others are getting the message out to local, state and federal government officials concerning the impacts of implementing rules and regulations on the trucking industry, like keeping rest areas open.

In the coming weeks and months, we at MacKay & Company will be assisting our clients to better understand the actual impacts and forecasted changes for the trucking industry — including new truck sales, aftermarket parts and service demand and issues we probably haven’t even thought about yet.

We know most school buses aren’t running and obviously a lot of trucking activity such as delivery to restaurants and bars and many other industries are near a halt, but demand for trucking to grocery stores, warehouses, hospitals and support of home deliveries appears to be up. Not likely enough to make up for the areas that have dropped off, but it is not all negative.

Refuse will see a drop at most commercial businesses, but I would assume residential pickups might increase (if what is packed in my refrigerator is any indication). The farming market also looks very positive for this year.

It is unfortunate that an event like this is needed to highlight the importance of the trucking industry. As a result of this pandemic, I do think it will be interesting to see what changes, new ideas and processes come from and for the trucking industry. I look forward to writing about that in the future.

A More Competitive Year Ahead

Most vehicle truck and component manufacturers, as well as those in the forecasting business, anticipate U.S. retail sales of Class 8 trucks will be down 30 percent or so in 2020 compared with 2019. Declines also are expected for medium-duty trucks and trailers. That is a significant drop.

The aftermarket for the current year is not impacted much by the vehicles sold in the current year. These vehicles are under warranty and they are a small portion of the operating population. They will, however, impact the aftermarket in future years as fewer trucks sold today means fewer opportunities for parts and service in the future.

Reading this publication and others over the last few weeks makes it apparent this expected downturn in retail sales likely will have an impact on the aftermarket in the form of more attention and competition.

The CEO of one of the major Class 8 truck manufacturers recently stated they are going to expect help with more parts sales profits to offset the decline in new vehicle sales. In another article, a truck dealer stated that his focus this year will be towards parts and service in reaction to the anticipated decline in new vehicle sales.

I do not think most truck dealer parts departments believe they have been slacking off the last several years. Most new truck dealer service departments have had an increase in make ready and warranty work related to the increase in retail sales, so they don’t likely feel they have been slacking off, either. Any good dealer organization strives to have its absorption rate at least above 100 percent where the parts and service departments cover all expenses.

In a recent survey, we ask parts distributors by channel who is their primary competitor. This includes truck dealers, independent parts distributors, engine distributors, automotive WDs and independent garages. They all say truck dealers are the primary competitor (except engine distributors — but truck dealers are second). This makes sense; we estimate truck dealers control 49 percent of parts sales in the parts aftermarket.

The challenge for those who compete against truck dealers (everybody) is there is now going to be more focus on the parts aftermarket by truck manufacturers and dealers. So, while dealer parts departments have not been slacking, it is likely they will have more programs and/or resources to address the aftermarket, which they may have wanted for years and now the market conditions justify the focus. Service sales, in particular, also will get more attention as more service sales equal more parts sales.

In addition, everybody who has ever worked for a truck dealership knows that no one at a dealership is immune to cutbacks or layoffs caused by new truck sales declines. The hits don’t just stay in the truck sales department so there is extra motivation to go the extra mile.

The flipside to this discussion would be that the independent aftermarket has had it easy for the last several years as truck dealers have not focused on the aftermarket.

I don’t think anyone on the independent side would agree with that statement.

What I have learned over the past 25-plus years is that all channels of the aftermarket have some very dedicated, hardworking and creative people and companies. The aftermarket offers opportunities for those on the OE side and the independent side.

The aftermarket is not a right, it’s an opportunity for those who want to fight the battles every day and come up with customer service and solutions that beat the competition. This year, the battles might just be a little more competitive.

John Blodgett has worked for MacKay & Company for more than 20 years and is currently vice president of sales and marketing, responsible for client contact for single- and multi-client projects. He can be reached at john.blodgett@mackayco.com.

Truckable Economic Activity Steady Despite Minor Concerns

Despite a few significant quarterly shifts within individual shares, Truckable Economic Activity (TEA) was steady overall in the third quarter of 2019, MacKay & Company announced Thursday during a new TEA quarterly webinar.

After posting 2.3 percent growth in Q2, TEA slipped only fractionally to 2.2 percent in Q3, buoyed by consistent strength in consumption and government spending and an increase of exports to offset a similar slip in imports. The strong quarter also extended the longest continuous economic growth period in American history to 126 months — six months longer than the March 1991 to March 2001 expansion.

Yet despite strong overall numbers, Bob Dieli, founder and president, RDLB Inc., and MacKay & Company in-house economist, says granular data within TEA does show a few economic weak spots.

Dieli says imports and exports represented 14 percent of TEA in 1985 but are now 25 percent. Though TEA is different from GDP in how it calculates imports (GDP deducts imports entirely; TEA includes 50 percent of them, because they “spend time on a truck,” Dieli says) the expanded overall influence of trade on the economy has increased its vulnerability.

Another data point that Dieli says causes concern is how the previous six quarters compare to the six quarters that immediately preceded them when evaluated against 2012 chained dollars. Dieli says total TEA was $743.2 billion from 2017 Q1 to 2018 Q2, but just $398.9 billion from 2018 Q2 to 2019 Q3, with Truckable Investment, Exports and Imports all falling precipitously over the last six quarters.

Dieli also references his Enhanced Aggregate Spread (EAS), which serves as his most detailed indicator for potential economic contraction. Dieli says every recession over the last three decades has followed a drop in EAS, and the index’s last reported total of 88 in July 2019 is well within its danger zone less than 200 basis points.

In forecasting out from today, Dieli summarizes the weakest element of TEA entering 2020 is exports, with imports and investments also somewhat lagging. Regarding exports in particular, Dieli’s TEA report notes “weaker overseas activity has already taken a toll on exports. Prospects for improvement are slim.”

Thursday’s webinar also closed with a Q&A segment. Most of the questions touched on the trade dispute and upcoming election. Regarding both, Dieli says it’s important to keep the news in perspective.

“Often people have what we call ‘current-itis,’” he says. “They hear something happen and expect something else to happen in reaction the next day.”

Dieli says TEA and the greater economy doesn’t work like that. Economic changes, even those generated by a presidential election, occur gradually over a number of months and years.

“Don’t let the last headline be what makes the basis of your next decision,” Dieli says.