North American truck manufacturers have had their fiscal and engineering noses to the grindstone for much of the past decade. Three successive EPA emissions reductions deadlines in a compressed timeframe sucked a lot of resources out of each organization. Then the recession hit. Now the federal government is calling for significant improvements in heavy truck fuel efficiency.
Volvo Trucks North America says it has weathered the storm, and it's looking forward to new challenges.
The company has a few bruises to show for its struggles over the past few years, but Volvo's new boss, Denny Slagle, says it's a brand new game beyond 2010.
"We have had to walk the line, so to speak, for this entire decade," said Slagle, who was named president and CEO of Volvo's North American Truck Group (which includes Mack) last November. "If you go back to the investment every manufacturer has had to make over 2002, 2004, 2007, and 2010, it's a big number -- probably half a billion dollars invested by Volvo in 2010 alone. It's been very, very difficult from an investment standpoint, but we've done it," he said.
At a recent gathering with the trucking trade press in Roanoke, Va., Slagle and Ron Huibers, Volvo Trucks North America's newly appointed senior vice president of sales and marketing, shared their thoughts and observations on the effort that went into meeting EPA 2010, and the challenges that lay ahead for the truck maker.
"You can see our R&D investment in our financials," Huibers told journalists. "We didn't take any shortcuts. And today, we are way ahead of the curve -- without credits. We have the technology to take us forward. We're in a really good position now to face any challenges that are coming at us."
Market Share
Those challenges include regaining lost market share.
As of March, Ward's Automotive reported Volvo had 8.6 percent of the North American Class 8 market. That's down from a historic high of 15.4 percent in January 2008. For 2009, Volvo Trucks North America had retail sales of 7,066 trucks, representing 7.5 percent of the Class 8 market. Volvo's Class 8 market share has hovered around 10 percent -- give or take a couple of points -- ever since Volvo entered the North American market in 1981 when it bought White Motor Co.
Slagle said Volvo is well-positioned coming off 2010 to regain market share.
"People used to buy an engine and put a truck around it. Now they are buying the truck," he explained. "With all the regulations facing us now and in the future, the more control we have over engineering, design, and manufacturing of the truck, the better we can manage the outcome. Emissions controls, OBD, integration, all these things come a little bit easier if it's your engine and your chassis."
Volvo was the first to certify for EPA 2010, and they've gained millions of miles of experience since then. The company also has economies of scale on its side, and the dealer network came through the recession without a single failure.
Slagle is predicting 20-30 percent growth in Class 8 truck sales over last year, with improvements beyond that in 2011. But as the 2010 product makes its way into the market, a new set of dynamics will come into play, making predictions a little tougher to call.
"Will trucks be kept longer and driven further?" Slagle asked. "Will replacement cycles be stretched? How will long trade cycles affect sales and market share?"
People used to do 450,000- to 500,000-mile trade-ins. Now they're pushing 750,000 to 800,000 miles to stretch the return on investment on the more expensive trucks. Fortunately, 2010, brings some fuel savings, and Slagle says the higher upfront cost will be offset by fuel savings -- but that remains dependent on fuel prices.
"There is now a very good commercial argument for buying newer trucks. That wasn't the case in 2007, and you all know that. But we've done the math on the 2010 models and at worst, the higher costs are offset by the fuel savings and reduced operating costs. There's now a real gain, not just increased cost," he said. "When you do a present value calculation, factoring in the payment stream for the higher-priced truck, the fuel savings wash out the higher payments."
Slagle's post-2010 priority is building market share.
"We've all been schooled that it's really tough to gain a point in market share in a mature industry. For this industry -- under the stresses it has felt from regulatory demand and the new technology required to meet those demands - it's possible to do some really interesting movements in market share, as we've seen over the past three or four years," Slagle said.
Going forward, Huibers says, a broader mix of customer business will be key to growth. "We'll have a broader customer base going forward. Large fleets are important, but we'll have more regional fleets and smaller customers, too. We have to have a deeper penetration across all market segments, and we're well positioned to do that."
But there's still some fence-mending ahead of the company, and a few customers to be brought back into the fold.
"We're not proud of how we executed 2007," Slagle admitted. "We've bounced back okay, and we learned from it. But I can tell you, since 2007, I don't think any other OEM has more trucks on the road, more testimonies than Volvo. We were first to certify at 2010, and we've been getting great reviews on the product ever since. Yes, we have some wounds to heal, but I really like the story from the Volvo Group right now."
Fuel Economy Standards
Our meeting with Volvo execs took place not long after the announcement from the White House that fuel economy standards for heavy trucks are in the works. Slagle was there when President Obama made the announcement. He noted that while it's in favor of reducing greenhouse gases, and supportive of the Obama initiative, Volvo hopes there is some sensitivity in the forthcoming requirement to reasonable commercial standards.
"We won't get far if we're forced into something people can't afford," Slagle said, adding, "We'd all like to move forward on this, provided we start with existing technologies. We think we can get there with what we already have on the drawing board."
At the end of the day, a reduction in GHG emissions is simply another way of saying we have to burn less fuel. To that end, Volvo has, in Slagle's words, "lots of good ideas on the drawing board in terms of aerodynamics and engine efficiency." He doesn't believe that what is currently being discussed will prove insurmountable.
"We're already working hard on fuel efficiency. Some of what they are asking for is within the framework of what we were already striving to do. We're going to have to stretch that, but it's not an unreasonable stretch," he said.
What Slagle fears at this point is unreasonable costs being heaped onto trucks.
"I don't know that it can all be achieved simply by aerodynamics or more efficient engines. I think some of it will require different sorts of equipment that probably would have remained optional if not for this new requirement," he said. "We brought the commercial argument to the table as well as the environmental argument. Still, we think we're better off being part of the process than waking up one morning and finding the tablet has been handed down already, telling us what to do."
We've seen the results of that approach, and while Volvo has come through the EPA 2010 cycle in good stead, it's been a tough decade. With barely a moment to savor that little victory, it's back to the drawing board for Volvo and the others.
"We would have loved to have a bit of a breather, frankly. We're now putting out almost near zero emissions after a decade of very hard work that consumed a lot of resources. It would have been nice to have been able to do a few other things to the trucks, but the times now demand that we focus on CO2," Sla
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