In the midst of a booming economy, the demand for medium and heavy-duty trucks continues to surge, pushing prices for both new and used models higher. At the same time, production levels remain constrained due to ongoing supply chain disruptions.

Over the past few months, major players in the medium and heavy-duty truck manufacturing sector have been vocal about the severe supply chain bottlenecks they're facing. Our coverage of the transportation industry's second-quarter 2021 earnings report highlighted these challenges. Every major global truck manufacturer, from Peterbilt and Kenworth to Volvo, Freightliner, Mack, and International, has cited component shortages as a significant issue. As a result, several manufacturers had to shut down operations temporarily due to the lack of necessary parts for assembly.

These supply chain issues are still prevalent as we approach mid-September, and industry experts now predict that component shortages might persist well into 2022. With reduced production numbers, the market will likely see an increase in the prices of both new and used trucks, mirroring trends observed in the automotive sector.

Higher truck prices will inevitably translate into increased freight rates, putting additional upward pressure on general consumer price inflation. As transportation costs rise, businesses across various sectors pass these expenses onto consumers, contributing to broader inflationary pressures.

ACT Research Lowers Its Short-Term Production Outlook

ACT Research, a leading authority on Class 8 truck orders, sales, forecasts, used truck sales, freight rates, and trailer sales, recently revised its production outlook downward in response to continued supply chain challenges faced by truck manufacturers.

"In the current environment of near-record demand for all types of commercial vehicles, the narrative has shifted dramatically from one of abundance to scarcity," said Kenny Vieth, ACT’s president and senior analyst. "While we often refer to semiconductors as the main bottleneck, it’s important to recognize that numerous other parts are also being affected by the pandemic, lingering steel tariffs, and even the February storm that paralyzed Texas and disrupted a significant portion of the U.S. plastics industry for over two quarters."

Class 8 orders are outpacing production rates due to part shortages. Vieth noted that the industry should have manufactured around 30,000 Class 8 trucks in July based on orders but only managed to produce 14,820 units.

"Typically, industry volume forecasting focuses on the demand side," Vieth explained. "For Class 8, we’ve had to lower our 2021 production expectations for the second consecutive month. However, the situation in the medium-duty sector looks more stable, thanks in part to passenger vehicle manufacturers reallocating chips from smaller, less profitable pickup trucks to medium-duty vehicles. Conversely, medium-duty producers are redirecting chips toward Class 8 trucks."

While much attention has been given to semiconductors as a critical supply chain chokepoint, it’s crucial to acknowledge that constraints now extend beyond semiconductors to include other components.

Source: ACT Research
Key Insight: Historically, Class 8 heavy-duty truck production aligns closely with industry net orders. Recently, however, we’ve witnessed the largest deviation on record—orders are high, yet production remains low.

New & Used Truck Prices Expected to Rise Further

Truck prices adhere to the fundamental economic rule of supply and demand—when supply is scarce and demand is high, prices rise. Presently, demand for medium and heavy-duty trucks is robust, driven by a thriving economy and high truckload freight rates. Transportation service costs are escalating rapidly, not just in trucking but also in other industries like container shipping.

Source: Bureau of Labor Statistics
Takeaway: BLS data indicate that long-distance truckload prices are climbing at their fastest pace in over 15 years. Ultimately, these rising transportation costs filter into the prices of consumer goods, driving overall inflation.

Component shortages are affecting a broad spectrum of industries, from aerospace to farm and construction equipment. Used car prices have soared to unprecedented levels due to widely reported semiconductor shortages.

Source: Manheim Used Vehicle Price Index
Takeaway: Used vehicle prices have surged at their steepest rate since 1995. For instance, a friend of Equipment Radar recently sold their used car for $500 more than what they paid three years prior.

Semiconductor Cycles Tend To Be Volatile—This Cycle Won’t Be Any Different

Earlier this year, Intel’s CEO Pat Gelsinger stated that the semiconductor shortage could persist beyond 2022. Building semiconductor factories is costly and takes considerable time to plan, construct, and ramp up production. Demand for semiconductors tends to fluctuate more drastically than the broader economy—when GDP grows by 3%, semiconductor growth is likely to exceed that figure, and vice versa.

“Imagine you’re an automaker and you want more chips, but you’re being told the lead time is a year. How many would you order? Would you source from multiple suppliers? Absolutely,” said Willy Shih, a Harvard Business School professor specializing in technology and manufacturing.

Semiconductor demand alternates between booms and busts, and the current cycle will likely mirror this pattern. Buyers tend to accumulate larger strategic inventories during periods of tight supply and demand, as we’re experiencing now. A company that normally holds two months’ worth of supply might aim for six months or more when concerned about securing supplies. This shift in inventory management amplifies the already strained market conditions.

Eventually, the market will stabilize as supply catches up or demand moderates, often due to broader economic contraction. When normalization occurs, demand can plummet swiftly because many buyers hold excessive strategic inventories. Semiconductor manufacturers are acutely aware of this cyclical nature, which is why they are hesitant to significantly expand production capacity during upswings.

Resources

TruckNews.com
ACT Research: Used truck prices rise as secondary market inventory trickles

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