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It Starts: First Truck Maker Cuts Production

Summary:
Navistar confirms next phase in Transportation Recession. After orders by trucking companies for Class-8 trucks – the heavy trucks that haul trailers across the country – collapsed by 81% in July compared to July last year to the smallest number of orders since 2010, deepening a trend that has gotten worse all year, it would only be a matter of time before truck manufacturers announce production cuts and ultimately layoffs. These heavy-truck makers – Peterbilt and Kenworth, divisions of Paccar; Navistar International; Freightliner and Western Star, divisions of Daimler; and Mack Trucks and Volvo Trucks, divisions of Volvo Group – have been eating through their historic backlog, accumulated during the record year of 2018, and they’re still delivering these trucks at near record pace,

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Navistar confirms next phase in Transportation Recession.

After orders by trucking companies for Class-8 trucks – the heavy trucks that haul trailers across the country – collapsed by 81% in July compared to July last year to the smallest number of orders since 2010, deepening a trend that has gotten worse all year, it would only be a matter of time before truck manufacturers announce production cuts and ultimately layoffs.

These heavy-truck makers – Peterbilt and Kenworth, divisions of Paccar; Navistar International; Freightliner and Western Star, divisions of Daimler; and Mack Trucks and Volvo Trucks, divisions of Volvo Group – have been eating through their historic backlog, accumulated during the record year of 2018, and they’re still delivering these trucks at near record pace, but that backlog is thinning out, and we’ve been waiting for the inevitable announcements of production cuts.

So now it starts – not with production cuts for Class-8 trucks but with production cuts for Class-5, Class-6, and Class-7 medium-duty trucks.

Navistar International [NAV] confirmed to FreightWaves that it will be cutting production of medium-duty trucks at its Springfield, OH, assembly plant, which builds trucks for Navistar’s brand International and for GM [GM]. The company blamed “the cyclical nature of the business.”

“This cycle is normal for our business, and this is not a shift of production to other locations,” the spokesperson told FreightWaves. But the company declined to disclose if the production cuts involve layoffs.

Navistar also builds medium-duty trucks along with Class-8 trucks at its assembly plant in Escobedo, Mexico, but the spokesperson declined to disclose if production is impacted at that plant.

Inventories of unsold medium-duty trucks have surged 30% to 55,400 units in June, and the current order backlog is still at about 63,500, after the ordering binge last year, according to ACT estimates, cited by FreightWaves. And orders fell 20% in June,

“These medium-duty trucks support a lot of service businesses, and consumer business is doing pretty well,” said ACT president Kenny Vieth, cited by FreightWaves. “This is a trimming of the sails.”

During Navistar’s earnings call on June 4, CEO Troy Clarke acknowledged the “moderating” phase in the freight sector, but gave no indication of production cuts. He was still gung-ho about production and the backlog:

Now the freight market certainly seems to be moderating, but I think the question is, is it shifting to a lower gear or not? It’s really hard to tell because seasonal shipping, which typically happens between July and September time frame, actually has increased, so we’ll have to see how that works its way through the balance of the summer.

But again, I think the economic fundamentals are still there that support not only the backlogs, but I think some opportunities yet to be discovered in 2020.

So these opportunities to be discovered are cuts in production of medium-duty trucks.

In terms of Class-8 trucks, Paccar expressed confidence in its earnings call that the industry backlog would get it through 2019 and into 2020 without production cuts, despite the collapse in orders. Volvo AB and Daimler AG, during their earnings calls in July, indicated that, if necessary, they would be prepared to implement production cuts later this year.

So Navistar became the first truck maker to cut production and kick off that part of the Transportation Recession. During the last Transportation Recession in 2015 and 2016, after the backlog thinned out, truck maker after truck maker announced production cuts and finally layoffs. This ricocheted through the supply chain, hitting engine maker Cummins and others.

And this time around, the U-turn in trucking – given the collapse in orders, the decline in freight shipments, and rising overcapacity among truckers – looks to be harsher than last time.

The order backlog is still feeding truck makers, but time is running out. Read…  Heavy-Truck Orders Collapse Stunning 81%. Lowest Since 2010

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It Starts: First Truck Maker Cuts Production

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Wolf Richter
Founder, Wolf Street Corp. In his cynical, tongue-in-cheek manner, he muses on WOLF STREET about economic, business, and financial issues, Wall Street shenanigans, complex entanglements, and other things, debacles, and opportunities that catch his eye in the US, Europe, Japan, and occasionally China.

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