AUTOMOTIVE US and Global Commercial Vehicle Outlook 8 September 216 Detroit, Michigan Antti Lindstrӧm, Principal Analyst MHCV NAFTA, +1 33 736 3494, antti.lindstrom@ihsmarkit.com 216 IHS Markit. All Rights Reserved.
Class boundaries GVWR Standard Metric Class 1 6, lbs -2722 kg Class 2 6,1 1, lbs 2722-4536 kg Class 3 1,1 14, lbs 4536 635 kg Class 4 14,1 16, lbs 6351 7257 kg Class 5 16,1 19,5 lbs 7258 8845 kg Class 6 19,51 26, lbs 8846 11793 kg Class 7 26,1 33, lbs 11794 14969 kg Class 8 > 33,1 lbs > 1497 kg 27
Truck market outlook: what a difference a year makes 28
US economic snapshot Improving economy will keep vehicle market generally on a growth path Real GDP growth 4% 3% 2% 1% % -1% -2% -3% 22 24 26 Source: IHS Markit 28 21 212 2.6% 214 1.6% 216 218 22 222 Real GDP: Economic signals mixed; consumer confidence and many sectors improving, but strong dollar hurting trade. Growth weaker in 216: <2%, improving in 217 toward 3% before declining. Monetary policy: US Federal Reserve (Fed) should continue to raise interest rates, weak global conditions causing delays. US labor market key; do rising wages support tightening? Fiscal policy: Spending will rise in 216 thanks to recent budget deal, contributing to growth for first time in years; adds stability. Consumption: Real consumer spending improving; stronger labor markets, falling energy prices, and improved household balance sheets all contributing. Housing: Plenty of recovery left to go; housing starts only at two-thirds of pre-crash averages. Sector will gain momentum as household formation and labor markets improve. Employment: The good times of monthly job gains averaging 2, or better are probably over; the rest of 216 and 217 should be more moderate than the past couple of years. Foreign trade: Strong dollar hurting trade balances, a drag on the US economy through 218. Recent yuan devaluation, coupled with already weak euro and yen, will affect OEM sourcing decisions. Investment Strong profits, stock prices suggest business fixed investment will accelerate; low oil prices are a surprise cost savings, but within the oil sector, there is a major pullback 29
Contracting Expanding Purchasing managers indexes (PMI) Tale of two economies: services relatively strong, manufacturing hit by trade ISM purchasing managers indexes (monthly, 5 = neutral) 65 6 55 5 45 4 35 3 1/1/2 1/1/21 1/1/22 Manufacturing index 1/1/23 1/1/24 1/1/25 1/1/26 1/1/27 1/1/28 1/1/29 1/1/21 Services (nonmanufacturing) much stronger than manufacturing Both starting to gradually recover from recent declines Nonmanufacturing index 1/1/211 1/1/212 1/1/213 1/1/214 1/1/215 1/1/216 Source: IHS Markit, Institute for Supply Management, monthly survey data 3
Automotive Materials Cost Index (AMCI) Falling commodity prices lower production costs, improving profit margins Material costs in a typical 3,5-pound US vehicle: $2,2 $2, $1,8 $1,6 $1,4 $1,2 $1, $8 $6 $4 2 Source: IHS Markit AMCI commodity basket: Steel Aluminum Plastic resins Rubber Glass Iron 22 24 26 28 21 212-51% since 211 214 216 IHS Automotive Materials Cost Index has fallen 51% since 211; like all commodities recently, excess supply and soft industrial demand are driving down prices. Material input costs are near $1,, down from $2,1 five years ago, or a savings of over $1,1 per vehicle - expected to remain low over mid-term, but AMCI will rise as global economy improves. Global economy s recent slow growth is providing manufacturing cost savings expected to continue through 218, rising with emerging markets strengthening. Profit margins for vehicle manufacturers should remain relatively strong in mediumduties especially allowing more pricing flexibility for OEMs and suppliers. Low oil and material prices support a robust global market over the near-term: vehicle sales in general lifted by more money in everyone s pockets both manufacturers and consumers. By the end of the decade, stronger economic conditions will lead to higher commodity prices margins then expected to soften again. 31
Key interest rates Fed monetary policy to tighten further; global softness may delay raises Effective overnight federal funds rate (%) 2 18 16 14 12 1 8 6 4 2 Source: IHS Markit Fed raised rates during 197s inflation, then lowered 198 215 to spur growth; never raised to create growth. Global weakness, US labor wage growth will impact rate increase decisions..41 1955 196 1965 197 1975 198 1985 199 1995 2 25 21 215 22 225 9 8 7 6 5 4 3 2 1 2 22 Interest-rate forecasts (%) 24 26 28 21 Federal funds % 1-year treasury % 3-year mortgage % Cost of borrowing to rise across economy, weakening affordability. Truck sales response? 212 214 216 218 22 32
US and global commercial vehicle Forecast outlook Rising US interest rates to cool future Class 8 buying Historically, normalization of US rates and closure of the short- and long-term interest-rate gap signals a downturn in heavy truck sales 35 3 25 2 15 1 5 Thousands..5 1. 1.5 2. 2.5 3. 3.5 Source: IHS Markit Class 8 sales Interest-rate spread (long-short) 33
Housing starts forecast Lots of recovery remains, but growth rates expected to slow after 217 Housing starts (millions) 2.2 2. 1.8 1.6 1.4 1.2 1..8.6 1.2 million Starts in 216 Growth rate slows significantly by 218; multifamily construction gaining importance Annual growth (total) 4% 3% 2% 1% % -1% -2% -3% -4%.4-5% 1996 1998 2 22 24 26 28 21 212 214 216 218 22 222 224 Source: IHS Markit Single-family Multifamily Growth rate 34
Housing starts vs. medium truck sales Sectors recovering at different speeds; housing still has ways to go Housing starts (thousands,12 million longterm average) 2,3 2,1 1,9 1,7 Housing Bubble Housing starts still growing, while medium-duty trucks showing early signs of saturation Upside potential from housing will support strong job creation, medium truck market Class 4 7 sales (units,182, annual average) 25, 2, 1,5 15, 1,3 1,1 1, 9 7 5, 5 24 26 28 21 212 214 216 Housing starts - L Medium sales - R Source: IHS Markit 35
Trucking increasingly dominant in transports of goods Estimated 215 and 216 tonnage market share of freight transportation 8. 7. 6. 69.2 71.9 Percent 5. 4. 3. IHS Automotive Conference Fall 216 2. 1.. 14.2 11. 1.8 11.6 5.7 5.4.1 Truck Rail Pipeline Water Air.1 Source: IHS Markit 216 IHS 36
US Class 8 truck inventories 6 Tractors over-bought in 215; stocks thinning now 5 4 3 2 1 Class 8 inventory 1-year average Source: IHS Markit 37
Pulse check of US truck market Markets in a wait-and-see mode after very strong buying in 215 Housing sector improving: medium truck demand up Higher efficiencies mean better mileage, more money per truck Product availability from inventory if needed Strong sales through 215; production to continue at full speed into 216 (backlogs!) Housing starts only at 2/3 of pre-crash averages. Sector will gain momentum as labor markets improve and credit standards continue easing. New/refreshed truck models needed to meet new regulations; will boost sales Manufacturing/industrial production stuck in neutral; energy-sector truck buying down Exports sluggish: high dollar Used truck market price-competitive Less interest for natural gas trucks when diesel prices down Retail inventories high, new orders slow Trucking rates soft, no fleet expansion (online shopping!) Regulations GHG Phase 2, ELD, HOS, etc: price increases likely; hurt fleets investment ability 38
NAFTA truck supply adjusting to market conditions 6 5 NAFTA: Class 4 8 production trend NAFTA: Class 4 8 sales trend Thousands 4 3 2 1 Heavy-duty truck production slower since mid-215: slower sales, high inventories Medium duties, trailers have been (mostly) resilient thus far Turnaround cycles also changing Endpoint June 3 Source: IHS Markit NB: Per industry convention, data include select school bus chassis 39
US medium and heavy truck sales combined peaked in 215 6 5 4 3 Endpoint July 31 2 1 Jul-9 Oct-9 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Thousands SAAR Trend Source: IHS Markit 4
US Class 4 7 sales trends Healthy progress until very recently 3, 25, SAAR 194k Trend 192k 2, 15, IHS Automotive Conference Fall 216 1, 5, SAAR Trend Source: IHS Markit Mar-8 Jul-8 Nov-8 Mar-9 Jul-9 Nov-9 Mar-1 Jul-1 Nov-1 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 41
US Class 8 sales Tractor sales, energy sector buying hit slippery spot 3, SAAR 166, Trend 19, 25, 2, 15, 1, IHS Automotive Conference Fall 216 SAAR Trend 5, Mar-8 Jul-8 Class 8 peaked in second-half 215; excess retail inventories, manufacturing/industrial production slowdown, sticky export activity causing fleets to postpone new buying Nov-8 Mar-9 Jul-9 Nov-9 Mar-1 Jul-1 Nov-1 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Source: IHS Markit 42
Thousands Medium-duty sales still expected to move along; heavyduty market is in major correction 35 3 25 2 15 1 Forecast 1% 8% 6% 4% 2% % Thousands 3 25 2 15 1 Forecast 1% 8% 6% 4% 2% 5-2% 5 % -4% -2% Class 8 retail sales % change Class 4 7 retail sales % change Source: IHS Markit 43
NAFTA member countries economies move in tandem Real GDP, year on year change 6 4 Percent change 2-2 -4-6 2 22 24 26 28 21 212 214 216 218 22 United States Canada Mexico Source: IHS Markit 44
Canada s housing trends different from US trends United States Forecast Canada 2.5 2. 1.5 3. 25. 2. 15. 1. 1..5 5... Jan-6 Jun-6 Nov-6 Apr-7 Sep-7 Feb-8 Jul-8 Dec-8 May-9 Oct-9 Mar-1 Aug-1 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Millions Thousands Canada housing starts (SAAR) US housing starts (SAAR) 45
Canadian truck market snapshot The market continues to be something of a mixed bag, displaying the trend already seen in the last two years. The traditional medium-duty market has been showing signs of strength. Class 8 truck sales were soft in 215 but ended up virtually even with 214; in 216, they are expected to be off almost 9%. Housing prices and construction are surging in Vancouver and Toronto, but declining in the Calgary area. The Bank of Canada will likely keep its policy rate at.5% through the summer of 217 to support economic growth. The weak Canadian dollar is boosting exports. Looking further out, the economic climate is expected to push truck-buying end markets to expand in the next few years, also assuming the resource sector finds its traction again. 46
Canada economic outlook Real GDP growth (%) 4 3 2 1 Consumer price inflation (%) 3 2 1 21 212 214 216 218 22 21 212 214 216 218 22 Source: IHS Markit 216 IHS Source: IHS Markit 216 IHS Exchange rate per US dollar* Current-account balance** 1.4 1.3-15 1.2-3 1.1-45 1. -6.9-75 21 212 214 216 218 22 *Annual average, **Billions of US dollars 21 212 214 216 218 22 Source: IHS Markit 216 IHS Source: IHS Markit 216 IHS 47
Canada Class 8 sales trends Soft energy, mining, materials eroding heavy truck sales Thousands 5 45 4 35 SAAR 2, Trend 21, 3 25 2 15 1 5 Resources-sector malaise now hitting heavy truck sales in full force Class 8 SAAR Class 8 trend Source: IHS Markit 48
In Canada, heavy duties peaked with oil in 214 5, 45, 4, 35, 3, 25, 2, 15, 1, 4 5 6 7 8 9 1 11 12 13 14 15 16 Annual SAAR Annual Trend Source: IHS Markit 214 IHS 49
Canada: Medium truck sales holding on Thousands 4 35 3 Medium-duties doing better, with Classes 6 7 showing a bit more vigor than 4 5. In aggregate, the medium segment remains remarkably resilient. SAAR 13,5 Trend 13,3 25 2 IHS Automotive Conference Fall 216 15 1 5 Class 4 7 SAAR Class 4 7 trend Source: IHS Markit 5
Mexican economy mirrors US movements Choppy but consistently modest growth overall (Percent change y/y) 8. 6. 4. IHS Automotive Conference Fall 216 2.. -2. 1-Q3 11-Q1 11-Q3 12-Q1 12-Q3 13-Q1 13-Q3 14-Q1 14-Q3 15-Q1 15-Q3 16-Q1 16-Q3 17-Q1 17-Q3 U.S. Ind. Prod. Mex. GDP 51
Codependence of economies Mexico s production follows US industrial production, imports 2. (Percent change y/y) 15. 1. 5.. -5. -1. -15. -2. 99-Q3 -Q3 1-Q3 2-Q3 3-Q3 4-Q3 5-Q3 6-Q3 7-Q3 8-Q3 9-Q3 1-Q3 11-Q3 12-Q3 13-Q3 14-Q3 15-Q3 16-Q3 17-Q3 U.S. Ind. Prod. Mex. GDP US Real imports 52
Investment constraints growth in Mexico; low oil prices preclude government spending on infrastructure 15. Fixed investment (seasonally adjusted) 14. 13. 12. 11. 1. 9. 8. 7. 6. Total Machinery and equipment Construction 53
Mexico s economy is pushing gradually forward Mexico will benefit in 217 from faster growth in the US economy through trade, capital inflows, and remittances. The drop in oil prices has prompted the government to execute budget cuts, especially in public investment. Constitutional changes opened Mexico s oil and gas industries to foreign investment and will eventually reverse the decline in oil production. Fiscal spending cuts will constrain growth; cuts to public infrastructure in particular will drag on economy in general. Global automotive and petrochemical companies continue to invest in new capacity in Mexico; the country is a major production base for market entry into the north, and production continues to be solid. Mexico s automotive industry continues expanding as vehicles built there gain market share in the United States. Several new plants are coming online 217. 54
...but low oil prices are a threat (Millions of barrels per day) Mexico oil output 3.5 3.4 3.3 3.2 3.1 3. 2.9 2.8 2.7 2.6 2.5 2.4 2.3 2.2 2.1 2. Jan-1 May-2 Oct-3 Feb-5 Jul-6 Nov-7 Apr-9 Aug-1 Jan-12 May-13 Oct-14 Feb-16 55
Mexico s high-quality public policy framework helps boost resilience to external shocks Credible inflation targeting regime A flexible exchange-rate regime External sector is Mexico s bright side Financial system: well-capitalized with relatively good asset quality and no bubbles; room for improvement in risk management Public finances still manageable, but more action is required Public debt relatively low and manageable in the short and medium term Domestic market moving slowly, but still up; labor market tepid, however 56
Mexico economic outlook Real GDP growth (%) 6 3-3 Consumer price inflation (%) 6 5 4 3-6 28 21 212 214 216 218 2 28 21 212 214 216 218 Source: IHS Markit 215 IHS Source: IHS Markit 215 IHS Exchange rate per US dollar* 19 17 15 13 Current-account balance** -1-2 -3 11 28 21 212 214 216 218 *Annual average, **Billions of US dollars -4 28 21 212 214 216 218 Source: IHS Markit 215 IHS Source: IHS Markit 215 IHS 57
Takeaways The linked business cycle with US economy will continue to dominate Mexico s dynamics, with good contagion ahead. Unless energy reform materializes rapidly, the oil-sector outlook is gloomy; lower oil production will also hurt oil-export revenues and government fiscal accounts. A solid external position and favorable debt metrics provide support; exchangerate volatility is not endogenous. Inflation is not a long-term threat. Operational and security risks remain high; corruption scandals may hurt investment. Lower oil prices will hurt the Mexican economy; public finances are adjusting, but public investment will continue to suffer. 58
Mexico: Recent demand trends in Class 8 (annualized) Thousands 4 35 3 25 Monthly SAAR and annualized trend, through July 2 15 1 5 Demand for both tractors and straight trucks has turned a bit softer after a rather good 215 Class 8 SAAR Class 8 trend SAAR 22.9k Trend 23.7k Source: IHS Markit 59
Mexico: Recent demand trends in Class 4 7 (annualized) Thousands 4 35 3 Class 4 7 SAAR Class 4 7 trend 25 2 15 1 5 The 215 result was encouraging, but lately, we are seeing signs of a leveling off again SAAR 6, Trend 6,5 Source: IHS Markit 6
North America: Production outlook Forecast Forecast Thousands 35 3 25 1% 8% 6% Thousands 3 25 2 1% 8% 6% 2 15 4% 2% 15 4% 1 % 1 2% 5-2% 5 % -4% 21 211 212 213 214 215 216 217 218 219 22-2% 21 211 212 213 214 215 216 217 218 219 22 Class 8 production % change Class 4 7 production % change 61
NAFTA: Class 8 production by country IHS Automotive Conference Fall 216 Thousands 2 18 16 14 12 1 8 6 4 2 27 28 29 21 211 212 213 214 215 216 United States Canada Mexico Forecast Source: IHS Markit 62
Manufacturing remains generally muted, demand soft in export markets World industrial production 15 Percent, 213-16 1 5-5 March 216-1 -15 China India Japan Russia United States Source: IHS Markit, three-month average, in percent, historical actuals and current estimate Brazil Eurozone 63
Strong dollar easing off lately, except versus pound, euro Currency versus US dollar (indexed to January 213) 2.6 2.4 2.2 2. 1.8 July 216 1.6 1.4 1.2 January 213 1..8 China India Japan Russia Brazil Euro United Kingdom Source: IHS Markit, monthly, indexed to January 213 exchange rate 216 IHS 64
Major US Class 8 destinations: Little support to exports 25 Sales of Class 4 8 trucks (excluding buses) Thousands 2 15 1 213 214 215 216F 5 Peru Colombia Chile Ecuador Source: IHS Markit 65
NAFTA truck market conclusions Sales of small commercial trucks continue at a healthy pace, supported by the emerging recovery in housing and construction and right-sizing trends. The medium-duty market has been gaining ground, albeit at a slower pace than the small commercial market. Heavy-duty truck demand peaked in 215 and is now adjusting to changing market conditions. Growth in the NAFTA market will accelerate again after the current slump. Such growth will support steady freight flow expansion, increased vocational market and resource sector activity, and public sector spending good news for trucking and for truck makers. Replacement remains the primary motivation for truck buyers, with capacity expansion put on hold for now (owing to skittishness about the economy and freight volumes). Look for more strength in the medium truck market. 66
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