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Automotive The truck industry’s green challenge Headwind or competitive edge?
Automotive
The truck industry’s green challenge
Headwind or competitive edge?
pwcThe truck industry’s green challenge Headwind or competitive edge? Edited by PricewaterhouseCoopers September 2008, 68 pages, 41 figures, softcover All rights reserved. Reproduction, microfilming, as well as recording, storing and/or processing onto electronic media are not permitted without the expressed consent of the editor. Cover photo G. Fischer/Schapowalow Typesetting Nina Irmer, Digitale Gestaltung & Medienproduktion, Frankfurt am Main Printing Druckerei J. F. Niemeyer GmbH & Co. KG, Ostercappeln Printed in Germany © 2008 PricewaterhouseCoopers AG Wirtschaftsprüfungsgesellschaft PricewaterhouseCoopers refers to the German firm PricewaterhouseCoopers AG Wirtschaftsprüfungsgesellschaft and the other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
The truck industry’s green challenge Foreword
Headwind or competitive edge?
Foreword
The key note of the upcoming 2008 International Motor Show (IAA)
Commercial Vehicles in Hanover, Germany, “Commercial vehicles are on
the move for everyone” is indeed a very accurate theme in the light of
increasing globalisation and recent records in global trade and transport
volumes. But what about the industry’s challenges on this ‘move’? Certainly
the globalising world economy is a key growth driver for the truck industry
and it is not incorrect to say that global economic conditions directly affect
the transportation and by association, the truck industry on a macro level.
Aside from these general economic issues, there are some critical
challenges for the truck manufacturing industry.
While public awareness around emissions, fuel consumption, and related
changes in consumer behaviour are key market drivers for car
manufacturers, the truck industry surprisingly has been able to keep out of
the public debate and treat this environmental issue more or less as a
regulatory burden with which they must comply in much the same way as
regulations for road safety, noise reduction, and others. For truck
manufacturers, transport efficiency still is the core factor from a commercial
point of view that drives customer purchasing decisions. Increasing
resource constraints, higher fuel prices, and stricter emission standards will
certainly have a negative effect on transport costs and thus efficiency, which
will in turn drive truck purchasing decisions accordingly.
As a sequel from analyzing “The framework and dynamics of the CO2
(r)evolution” for the car industry that was conducted in 2007, this study aims
to examine impacts of the increasingly important trend for truck
manufacturers to address eco-friendly solutions. Our results build upon
analyses of each major industry stakeholder’s parameters and focuses on
exploring different scenarios and their consequences, concluding in an
assessment of whether the truck industry’s green challenge is a ‘Headwind
or competitive edge’ for its players.
Our automotive experts of the Automotive Advisory practice as well as the
PwC Automotive Institute looked at this complex industry ‘network’ from
multiple angles to shape pathways for the truck industry. We cordially thank
the team namely Dr. Michael Borgmann, Jan Maser, Liang Cheng and
Stephan Huber as well as Nishal Chauhan, Calum MacRae, Emeric
Deramaux and Paul McCarthy for the production of this study as well any
valuable contributions, drawing upon our expertise in both areas – the truck
sector as well as market and technology assessments in the automotive
industry.
September 2008
Harald Kayser Felix Kuhnert Bo Karlsson
Partner Partner Partner
German Automotive German Automotive Commercial Vehicles
Leader Advisory Leader Competence Center
3The truck industry’s green challenge Contents
Headwind or competitive edge?
Contents
Foreword ........................................................................................................ 3
Figures............................................................................................................ 6
Abbreviations.................................................................................................. 8
A Executive summary ................................................................................ 11
B The truck industry and its underlying dynamics ..................................... 15
1 Global truck market: Growth driver emerging markets .......................... 15
2 Road transportation: Increasing demand............................................... 23
3 Key challenge for the industry: Driving efficiency .................................. 24
C The government: Value driver or driver’s worry? ................................... 27
1 On the path to a cleaner environment.................................................... 27
2 Future emission standards ..................................................................... 32
3 Outlook: CO2 as new challenge? ........................................................... 35
D The transportation industry..................................................................... 38
1 Under pressure: Rising costs hit transportation industry ....................... 38
2 Managing rising costs............................................................................. 41
3 Consumers: Barriers or drivers to technological change?..................... 44
E Green strategies for sustainable growth ................................................ 49
1 Driven by resource constraints and rising oil prices .............................. 49
2 Business models: Meet future challenges ............................................. 52
3 Harmonisation of emission standards: Highly appreciated but
hard to realise......................................................................................... 59
Appendix....................................................................................................... 61
4The truck industry’s green challenge Contents
Headwind or competitive edge?
Expert interviews .......................................................................................... 65
Methodology consumer and transport company survey .............................. 66
Contacts ....................................................................................................... 67
5The truck industry’s green challenge Figures
Headwind or competitive edge?
Figures
Fig. 1 Industry stakeholders .................................................................. 11
Fig. 2 Global truck sales by region (2003–2013) .................................. 15
Fig. 3 Medium and heavy duty trucks: World........................................ 17
Fig. 4 Medium and heavy duty trucks: North America.......................... 17
Fig. 5 Medium and heavy duty trucks: China........................................ 17
Fig. 6 Medium and heavy duty trucks: Western Europe....................... 18
Fig. 7 Top 15 – Truck manufacturers.................................................... 19
Fig. 8 Key facts: Top 5 – European truck manufacturers ..................... 21
Fig. 9 Consolidation pressure: Market players by region ..................... 22
Fig. 10 Economic performance and truck market cycles........................ 22
Fig. 11 Transport volume, economic growth and population
growth in the EU-27 .................................................................... 23
Fig. 12 Modal split in the transport sector ............................................... 24
Fig. 13 Net importing regions and oil price ............................................. 25
Fig. 14 Regulations in the truck industry................................................. 28
Fig. 15 CO2 contribution by sector .......................................................... 29
Fig. 16 Reduction of pollutants in the European Union .......................... 30
Fig. 17 Emission standards by region..................................................... 31
Fig. 18 Euro emission standards apply in various countries .................. 32
Fig. 19 Emission standards in comparison ............................................. 33
Fig. 20 Test cycles in Europe, USA and Japan ...................................... 34
Fig. 21 CO2 – Future’s challenge for the transportation
industry?...................................................................................... 35
Fig. 22 Potential instruments to reduce CO2 emissions in road
transportation .............................................................................. 36
Fig. 23 Average cost structure of Germany’s transport
companies ................................................................................... 38
Fig. 24 Costs for a 1000 l diesel in Germany.......................................... 39
6The truck industry’s green challenge Figures
Headwind or competitive edge?
Fig. 25 German road toll dependent on emission class for
trucks (> 12 t) .............................................................................. 40
Fig. 26 Ability to shift costs to consumers............................................... 40
Fig. 27 Expected increase of transport costs.......................................... 41
Fig. 28 Cost-savings measures and their respective feasibility.............. 41
Fig. 29 Top 10 purchasing criteria .......................................................... 42
Fig. 30 Average fuel cost increases in the transportation
industry........................................................................................ 43
Fig. 31 Empty runs in the EU .................................................................. 44
Fig. 32 Consumer perception of trucks ................................................... 45
Fig. 33 Consumer evaluation of environmental friendliness................... 45
Fig. 34 Alternative transport media substituting trucks........................... 46
Fig. 35 Willingness to pay for green products......................................... 46
Fig. 36 Responsibility for reducing truck emissions................................ 47
Fig. 37 Scenario analysis: Driven by transportation need and
crude oil price .............................................................................. 50
Fig. 38 Powertrain technologies and their ability to meet future
transportation needs ................................................................... 54
Fig. 39 Truck manufacturers’ approach towards a green future............. 56
Fig. 40 Development of truck industry’s business model ....................... 58
Fig. 41 Top 15 Global truck manufacturers............................................. 64
7The truck industry’s green challenge Abbreviations
Headwind or competitive edge?
Abbreviations
AG Aktiengesellschaft (public limited company)
ACEA Association des Constructeurs Européens d’Automobiles
(European Automobile Manufacturers Association)
AFS Adaptive Front-lighting System
AMA American Motorcyclist Association
B2B Business to Business
BGL Bundesverband Güterkraftverkehr Logistik und Entsorgung
bn Billion
BTL Biomass to Liquid
CEO Chief Executive Officer
CH4 Methane
CO Carbon Monoxide
CO2 Carbon Dioxide
DSLV Deutscher Speditions- und Logistikverband
EC European Commission
EPA Environment Protection Agency
ESS Emergency Stop Signal
ETC European Transient Cycle
ETS Emission Trading Scheme
EU European Union
FAW First Automobile Works
FTP Federal Test Procedure
g Gram
g/kWh Gram per kilowatt-hour
GDP Gross Domestic Product
GmbH Gemeinschaft mit beschränkter Haftung (limited liability company)
Gpkm Giga passenger kilometre
8The truck industry’s green challenge Abbreviations
Headwind or competitive edge?
GVW Gross Vehicle Weight
HC Hydrocarbon
HDT Heavy Duty Truck
HDV Heavy Duty Vehicle
IAA Internationale Automobil-Ausstellung (International Motorshow)
IPCC Intergovernmental Panel on Climate Change
JP Japan
k Thousand
km Kilometre
kWh Kilowatt-hour
l Litre
LDT Light Duty Truck
LDV Light Duty Vehicle
m Million
MAN Maschinenfabrik Augsburg Nürnberg
MDT Medium Duty Trucks
NAFTA North American Free Trade Agreement
NOx Nitrogen Oxide
NTE Not to Exceed
OECD Organisation for Economic Cooperation and Development
PFC Perfluorocarbons
PM Particulate Matter
R&D Research and Development
RoW Rest of World
SF6 Sulphur Hexafluoride
SET Supplemental Emissions Test
t Tonne
TCO Total Costs of Ownership
9The truck industry’s green challenge Abbreviations
Headwind or competitive edge?
tr Trillion
U.S. United States of America
VDA Verband der Automobilindustrie (German Automotive Industry
Association)
WHDC Worldwide Heavy Duty Certification
WHSC World Harmonised Stationary Cycle
WHTC World Harmonised Transient Cycle
.
10The truck industry’s green challenge Executive summary
Headwind or competitive edge?
A Executive summary
The relationships of the main stakeholders of the commercial vehicle
industry form a complicated triangular network. The economic situation of
truck manufacturers is not only impacted by their customers, transport and
logistics companies, but also by various sets of law and regulations. Not
only do the actual customers challenge the manufacturers’ business models
by their requirements, but the legal framework does too – from safety
regulations to emission restrictions that significantly influence the industry’s
development and truck manufacturer profitability. Emission regulation has
become paramount in this context, which was emphasised by Göran
Simonsson, CEO, of Volvo Trucks Region Central Europe GmbH, in his
press statement for the IAA, 2008: “The development nowadays is primarily
driven by emission legislation which means that stringent emission
standards are competing with the resources to develop other customer
benefits.”
• Which regulatory frame- • Which measures need to
work needs to be set-up to be conducted to regulate
achieve climate targets? transportation more
• How to comply with new efficiently?
regulations on technological • How to create future trans-
level? portation infrastructure?
• How to balance regulations, Regulator • How to balance regulations
economic success and and economic success in
competitive advantage? the area of transportation?
Resource
constraints
and climate
change Trans-
Truck portation
manufacturer company
• What is the right technological roadmap to
meet future regulations?
• Who is bearing the costs for environmental
friendly technology and transportation
concepts?
• Is the consumer willing to pay for ‘green’
transportation products?
Source: PwC
Fig. 1 Industry stakeholders
The triangular network environment is characterised by the following issues:
● Firstly, regulatory requirements have been and will continue to impact
transport companies. Whether directly through fees, or indirectly by
increasing costs for vehicle development, commercial vehicle life cycle
costs are strongly influenced by legal regulations. Costs are the key factor
for the highly competitive transport industry and any increases in costs
create new challenges for this sector.
● Secondly, rising oil prices have a strong impact on this industry sector.
Since fuel costs are the biggest factor contributing to total transportation
costs, rising fuel costs have put transport companies under high pressure.
11The truck industry’s green challenge Executive summary
Headwind or competitive edge?
● Thirdly, the global political agenda and the public’s increasing
environmental awareness demands that greenhouse gases such as CO2
are extensively reduced, with a ‘fair’ share of that reduction to be
delivered by the transport industry.
At the same time, further globalisation and the growth in emerging markets
exacerbate the situation, because growing traffic volume increases fuel
consumption and concurrently global emissions. The main focus of this
study will be the examination of possible impacts for truck manufacturers.
The results are based on interviews with industry executives and experts, a
survey conducted with executives of transport companies as well as
consumers and supported by the analysis of our PwC Automotive Institute.
Generally, the demand for transport services is strongly dependent on
economic growth. Therefore, the industry has shown strong cyclicality in the
past, particularly in the mature markets such as the U.S. or Western
Europe. In addition, significant economic development and growth in the
emerging markets have fuelled transport volume and demand for
commercial vehicles. However, these markets confront transitional truck
manufacturers with different demand patterns caused by different regulatory
regimes and consumer preferences.
Further emission standards are steadily increasingly stringent and require
truck manufactures to provide innovative engine technologies. The
introduction of varying standards in different markets has increased
development efforts of manufacturers significantly. Thus far, existing
emission standards control quantities of substances that are held
responsible for environmental pollution, e.g. CO, NOx, or particulate matter.
Manufacturers have been making great improvements in these areas.
Globally, growing awareness of climate change issues puts the greenhouse
gas CO2 in the limelight of the public discussion.
“Within the next 5–10 years, CO2 regulations will inevitably become part of emission
regulations. The question is, what will it look like and how will it be regulated?”
Jan-Eric Sundgren, Senior Vice President, Environmental and Public Affairs, Volvo Group
Unlike other pollutants, CO2 is the fundamental product of combustion
processes in an engine. Thus, a reduction in CO2 emission can be achieved
whenever fuel efficiency can be increased. Alternatively CO2 emissions can
be reduced by utilising regenerative fuel resources, since no additional CO2
is generated by burning renewable fuels and the CO2 life-cycle stays in
balance.
In the end, total transport costs are the driving factor in the highly
fragmented global transport industry, as B2B businesses – such as the
commercial vehicle market – are cost sensitive to a greater extent. In
contrast to the emotionally driven passenger car market, low life-cycle costs
are the prime motive for purchasing a commercial vehicle. Transportation
costs are, to a large extent, determined by fuel costs, so that life-cycle costs
account for fuel consumption as well. Accordingly, demand for fuel efficient
vehicles rises with increasing fuel costs.
The public discussion about climate change and greenhouse gases has
intensified. This discussion has great influence on the passenger car market
12The truck industry’s green challenge Executive summary
Headwind or competitive edge?
at first, and will soon affect the commercial vehicle industry. As the PwC
survey shows, the majority of consumers see that truck manufacturers
should mainly be responsible for reducing CO2 emissions. Even if the PwC
survey covers only the German market, it is probable that a similar attitude
is prevalent in other markets as well, or can be expected to emerge in the
near future. Thus, many industry experts expect the introduction of CO2
emission standards sooner or later and this creates a strong compulsion to
act quickly for truck makers.
Analysing different scenarios for the development of transport volumes and
oil prices, it becomes obvious that innovative competence in developing
clean and fuel efficient engines has an essential impact on the
competitiveness of truck manufacturers, regardless of the initial scenario or
the underlying market conditions. Thus, in connection with strict emission
standards, innovative engine technologies create entry barriers to
established markets in North America and Europe and they facilitate entry
into emerging markets, as domestic suppliers often have not acquired the
necessary technology. In summary, expertise in clean and fuel efficient
propulsion technology will generate a significant competitive edge.
While improvements for long-distance traffic are generated by advancing
diesel engines and using alternative fuels, enhancements of alternative
propulsion technology like hybrids or natural gas engines are utilised to
increase fuel efficiency for short distance traffic. As long as truly efficient
new technologies have not been developed, manufacturers face great
threats if they invest in the wrong technologies.
“Measures to increase efficiency are determined by the size of a truck. The focus for heavy
trucks, which are used for long-haul transports will lie on alternative fuel, however, diesel will
still be predominate. While for the distributor traffic (light and medium trucks up to 12 t)
alternative drive concepts such as natural gas and hybrid will be pursued as well.”
Dr. Thomas Schlick, Executive Director, VDA
Therefore, communication with the key customers – the transport
companies – will become essential for truck manufacturers to develop
technological innovations that meet customer demands. Moreover, cost-
intensive R&D efforts will trigger increasing consolidation pressure in the
industry, particularly for emerging markets. Finally, developing the right
technologies leads to significant opportunities to create a competitive edge.
The search for basic approaches for further reducing pollutant emissions
and increase fuel efficiency not only considers the powertrain. Lightweight
construction and improved aerodynamic attributes are taken into account for
vehicle design. New telematics and innovative transportation concepts like
the ‘megaliner’ aim at increasing utilisation of infrastructure. This increases
the need to manage the augmented product and to redesign the product
range to meet market requirements.
With an increasing number of different propulsion technologies and
innovative transportation concepts, economies of scale will be eroded. This
effect will additionally be intensified by the requirement of customised
transport solutions when entering emerging markets. Therefore, cost
efficient production and product modularisation will gain in significance.
13The truck industry’s green challenge Executive summary
Headwind or competitive edge?
The current market situation, which is identified by high oil prices and
sustained growing transport demand, offers a good starting point for
European manufacturers to further generate growth, since they already
achieved technological expertise in low-emission and fuel efficient
propulsion technologies and forward-looking transport concepts.
While production excellence and ongoing globalisation have long been
addressed, managing technological risk and designing the range of
augmented products are now in the spotlight.
The implementation of globally harmonised standards would be a significant
relief for truck makers, since it would drastically reduce competing R&D
efforts. Financial resources could then be allocated for the development of
innovative propulsion technologies. The implementation of globally
harmonised standards requires intense coordination and the protracted
nature of ongoing negotiations exemplifies how difficult it is to achieve a
consensus in this matter. A focus on stricter enforcement of emission
standards and shorter time periods between succeeding regulatory levels
could be a promising approach in this context. An important step towards
harmonised standards could be the World Heavy-Duty Certification
(WHDC), a new standardised test cycle, which might be introduced with
EURO VI, and gradually be introduced by other countries.
In summary, as a result of the green challenge, the truck manufacturing
industry must intensify their efforts to cope with regulations and stay
competitive with other transport means. Nevertheless, the European
manufacturers are in a promising position, since exhaust emission
regulations and high fuel prices are going to increase their opportunity to
exploit their technological competitive edge on a global scale. The
implementation and enforcement of global emission standards could even
improve this position. At the end of the day, there seems to be a good
chance for the European truck industry that the regulation-induced
headwind turns into a tailwind.
14The truck industry’s green challenge The truck industry and its underlying dynamics
Headwind or competitive edge?
B The truck industry and its underlying
dynamics
The global truck industry plays a key role in the transportation of goods from
the manufacturer to the consumer. Although market conditions vary across
regions, the global truck industry continues to be a pivotal agent to enable
and support economic growth.
1 Global truck market: Growth driver emerging
markets
Despite the various market conditions and challenges, the global truck
industry is growing. The global demand for medium and heavy duty trucks
rose by approximately 5.6% from 2006 to 2007 to reach a sales volume of
2.4 m units. Based upon 2007 data, the truck market is dominated by the
emerging markets of China, India and Russia, which together account for
more than 46% of global demand. China alone accounts for 30% of global
truck demand, while North America and Western Europe account for 19%
and 14% respectively. Global truck demand is predicted to grow by another
3.5% per year amounting to 2.9 m units by 2013.
1.500.000
1.250.000
Volume (in units)
1.000.000
750.000
500.000
250.000
0
2003 2004 2005 2006 2007 2008e 2009e 2010e 2011e 2012e 2013e
Year
China, India, Russia Eastern Europe North America
Western Europe Rest of world
Source: Global Insight, Global Automotive Group
Fig. 2 Global truck sales by region (2003–2013)
Western and Eastern Europe
The European market, the headquarters of many of the leading truck
makers, is driven by the individual markets’ cycles. Western European
markets grew at a stable rate between 4% to 5% in the past, while the last
years have been characterised by a slow-down. This slow-down is primarily
driven by inflationary pressure and the subsequent price increases for
consumer goods with the affect of decreasing demand in the transportation
industry. Economic problems in the European market are expected to
subside in the near future. According to the OECD’s Economic Outlook,
published in June 2008: “The economic expansion is likely to moderate
during 2008, with a trough in the second quarter. Output growth is being
15The truck industry’s green challenge The truck industry and its underlying dynamics
Headwind or competitive edge?
slowed by tighter financial conditions, higher inflation and weaker housing
market activity. Growth is expected to drop below potential this year, before
picking up slowly through 2009 as financial headwinds dissipate and the
external environment improves.” Thus, marginal growth of 0.3% per annum
in the European truck market is expected in the short-term. The region’s
outlook is boosted by much faster growing transportation needs in Eastern
Europe where current sales were up 15% and growth of 4% is expected in
the upcoming years.
North America
North America is one of the major markets for the industry, with
approximately 450,000 units sold in 2007. The market grew at a moderate
level of 4.4% in the last four years. The new American emission standard
EPA07 introduced in 2007 led to a pre-buy effect in 2006, increasing sales
volumes for the year which were then followed by a sharp drop in 2007.
Looking to the future the North American truck market faces several
challenges, including the new emissions legislation in 2010 and the markets’
uncertain economic prospects could lead to high pressure in this market.
China, India and Russia
These markets are the key drivers for growth in the truck industry. The
leading market is China with about 700,000 trucks sold in 2007 and an
annual growth rate of 15.4% over the past four years. The strong growth is
primarily driven by the booming transportation needs and large investments
in road infrastructure. The introduction of the new Euro III emission standard
in 2007 also had a positive effect on Chinese sales. India and Russia are
following China with average growth rates of 16% per annum. Russia, with
its predicted sales volume of approximately 170,000 trucks is a market that
is of growing importance, especially for the European based truck
manufacturers.
Market segmentation
The truck market is broadly segmented by gross vehicle weight (GVW)
which indicates the use of the truck. Medium-duty trucks span the gross
vehicle weight range 6 to 16 t and the heavy-duty trucks cover those with
gross vehicle weight of over 16 t.1
Medium-duty trucks (MDTs) are typically utilised for local and regional
distribution, as they are more flexible and suited to urban roads and
infrastructure than heavy-duty trucks (HDTs), which are mainly used for
long-haul transportation and heavier loads.
HDTs account for 1.45 m units of the global total, with MDTs taking the
remaining 0.9 m units. HDTs have also been dominant in terms of recent
growth – between 2003 and 2007 HDTs grew by 12% per year, while MDTs
grew by 6%.
1
Light-duty trucks with a GVW from 3.5-6t are not within the scope of this study. Countries and truck
manufacturers use different categories to define LDT, MDT and HDT.
16The truck industry’s green challenge The truck industry and its underlying dynamics
Headwind or competitive edge?
2000
1600
Volume (in k units)
1200
800
400
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Year
Heavy-duty Medium-duty
Source: Global Insight, Global Automotive Group
Fig. 3 Medium and heavy duty trucks: World
400
Volume (in k units)
300
200
100
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Year
Heavy-duty Medium-duty
Source: Global Insight, Global Automotive Group
Fig. 4 Medium and heavy duty trucks: North America
800
Volume (in k units)
600
400
200
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Year
Heavy-duty Medium-duty
Source: Global Insight, Global Automotive Group
Fig. 5 Medium and heavy duty trucks: China
17The truck industry’s green challenge The truck industry and its underlying dynamics
Headwind or competitive edge?
300
Volume (in k units)
200
100
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Year
Heavy-duty Medium-duty
Source: Global Insight, Global Automotive Group
Fig. 6 Medium and heavy duty trucks: Western Europe
In the forthcoming years demand for HDTs will continue to overweigh the
MDTs as the drivers of topline truck growth – China, Russia and India – are
of considerable geographic scale and are building up their road network and
transportation infrastructure – giving conditions suited to HDTs. China is
predicted to increase its HDT sales gradually until 2013 accounting for an
annual growth rate of 7.3% amounting to an additional sales volume of
250,000 units. Simultaneously, China’s demand for medium-duty trucks will
remain stable across the forecast period. A similar growth pattern is
predicted for India.
Key players
Most of the world’s major truck manufacturers are headquartered in
Western Europe and North America, but truck manufacturers, such as Tata,
Dongfeng and First Automotive Works (FAW) from the emerging economies
of India and China are gaining ground, and stand as the 4th, 5th and 6th
largest manufacturers respectively on a global level.
18The truck industry’s green challenge The truck industry and its underlying dynamics
Headwind or competitive edge?
Daimler
Volvo
Paccar
Tata
Dongfeng
FAW (China)
Navistar
China National HTC
MAN
Ash. Leyland
Iveco
Scania
Isuzu
Hino
0 50 100 150 200 250 300 350 400
Sales volume (in k units)
Source: VDA
Fig. 7 Top 15 – Truck manufacturers
Of the top 15 manufacturers measured by unit sales volumes, only two
manufacturers – Daimler and Volvo – can truly be seen as global players.
These manufacturers have multiple brands in their portfolio, which originate
from different regions of the world and backed by local production, which
gives them global player status. However, all European truck manufacturers
are playing a key role in development of innovative technologies and
sustainable transport solutions.
“Besides the technological adoption to meet global emission targets and the global
harmonisation of various emission standards, the localisation of trucks in the different regions
will be a key challenge in the future to cope with. It is crucial to establish ourselves in low-cost
markets with respective trucks.”
Georg Weiberg, Head of Truck Product Engineering, Daimler AG
19The truck industry’s green challenge The truck industry and its underlying dynamics
Headwind or competitive edge?
Manufacturer Key figures Market strategies
Daimler Trucks Headquarter: Stuttgart, Germany ● ‘Global Excellence’ with the
initiatives management of cycles,
Brands: Mercedes-Benz, Freightliner,
operational excellence, growth and
Mitsubishi Fuso, Sterling, Thomas Built,
market penetration and future
Western Star
product generations as important
Employees: 80,067 tool for the business strategy
Revenue: EUR 28,466 m ● Capturing down-stream value
(trucks) through vehicle leasing, fleet
management, repair and
Operating profit: EUR 2,121 m (trucks) maintenance
Net sales by market ● Strategies to enter emerging
WE NA SA A Other markets dependent upon market
situation, cooperation, and
19% 24% 11% 31% 15% acquisitions as applicable strategic
options to enter those markets
IVECO Headquarter: Turin, Italy ● Aiming at increasing market share
in the Central and Eastern
Brands: Iveco, Astra, Irisbus, Magirus
European countries by launching
Employees: 26,461 new products
Revenue: EUR 11,174 m ● Emerging markets are in the
focus, the Russian and Indian
Operating profit: EUR 813 m market are entered with local
Net sales by market partners
WE EE Other ● In terms of alternative
technologies compressed natural
70% 15% 15% gas is seen as the most favourable
solution
MAN Headquarter: Munich, Germany ● Aiming at global growth
Brands: MAN, ERF, Neoplan, Star ● Joint Venture with Force Motors
Ltd. (India) as key aspect to
Employees: 36,591 realise global growth
Revenue: EUR 9,023 m (trucks) ● Assembly plant in Krakow enables
Operating profit: EUR 1,023 m (trucks) MAN to manufacture within the
strongly growing Eastern
Net sales by market European markets
WE EE Other ● Optimising organisation and the
process of production
49% 15% 36%
● Strengthening distribution network
in Eastern Europe and the Middle
East
Scania Headquarter: Södertälje, Sweden ● Strong market position in Russia
shall be expanded by larger
Brands: Scania
service network
Employees: 35,096 ● Efficiency increase is to be
Revenue: EUR 5,586 m (Scania reached by the Scania Productivity
Trucks)1 System (SPS)
Operating profit: EUR 1,235 m (vehicles ● Service products are seen as an
and service)1 important issue to provide
maximum value to the customer
Net sales by market
● Large investments are done to
WE EE SA A Other increase production capacity
52% 22% 14% 9% 3%
20The truck industry’s green challenge The truck industry and its underlying dynamics
Headwind or competitive edge?
Manufacturer Key figures Market strategies
Volvo Headquarter: Gothenburg, Sweden ● Market growth is aimed especially
in Eastern Europe and Asia
Brands: Volvo, Renault, Mack, Nissan
Diesel ● Significant investments in
increasing production capacity
Employees: 63,200
● Strong focus on the aftermarket
Revenue: EUR 19,955 m (trucks)1 and further development of the
Operating profit: EUR 1,613 m (trucks)1 dealer network
● Focus on products with increased
Net sales by market
customer value
WE EE NA SA A Other ● Safety aspects and vehicle and
42% 12% 14% 6% 17% 9% plant emission reductions are
strategic key goals
● Productivity and cost-efficiency
improvements
1
Exchange Rate 31 Dec 2007
WE = Western Europe, EE = Eastern Europe, NA = North America, SA = South America, A = Asia
Source: Company web sites
Fig. 8 Key facts: Top 5 – European truck manufacturers
Market dynamics – Consolidation
While the light vehicle market – those vehicles up to and less than 6 t gross
vehicle weight – saw almost 69 m units assembled in 2007, the truck market
saw approximately 2.4 m units of medium and heavy-duty trucks assembled
in 2007. Due to the relative low level of market volume and the cyclical
demand for trucks, economies of scale are more difficult to realise and
uncertainties in product planning must be overcome by the truck
manufacturers. This factor has led to strong competition and consolidation
in Western Europe and North America and will no doubt lead to
consolidation in the fragmented Asian scene. According to market analysis,
Asia has 33 manufacturers, of which most are located in China. Of these
Asian manufacturers, ten truck manufacturers produce 87% of the overall
volume, while the remaining 23 players account for only 13%. This provides
a significant contrast to the concentrated West European markets where
just four manufacturers produce 89% of the volume. Despite the market size
and growth perspectives, the number of competitors in the Asian market
appears to be unsustainable, since the cumulative number of manufacturers
in Western Europe, NAFTA and the Rest of World (RoW) is far lower than in
Asia alone.
21The truck industry’s green challenge The truck industry and its underlying dynamics
Headwind or competitive edge?
100%
Share in region’s assembly volume
80%
60%
40%
20%
0%
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35
Number of alliance groups
Asia Western Europe NAFTA Rest of world
Source: Automotive World and PwC Analysis
Fig. 9 Consolidation pressure: Market players by region
Market dynamics – Cyclicality
Economic growth brings greater demand for the transport of goods and
services. As economies are subject to the business cycle, there is a
corresponding degree of cyclicality in truck markets. As economies grow,
demand for goods transportation increases, either by trucks, trains, ships or
planes. Similarly, when economies face downturns, transportation needs
also decrease. This cyclicality is straightforward in mature markets, such as
in the U.S. and Western Europe. On an annual basis, growth rates of GDP
expansion and truck sales are linked as such that a drop in GDP by 1% is
accompanied by a drop of truck sales of 7%. Hence, the truck market is a
pro-cyclical market, which highly correlates with the current economic
performance.
50% 8%
40%
30% 5%
Sales growth
GDP growth
20%
10% 2%
0%
-10% -1%
-20%
-30% -4%
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Year
U.S.-Truck sales growth U.S.-GDP growth
Source: UNStats, PwC
Fig. 10 Economic performance and truck market cycles
22The truck industry’s green challenge The truck industry and its underlying dynamics
Headwind or competitive edge?
2 Road transportation: Increasing demand
The markets are on the move: Due to advancing globalisation, declining
trade barriers and an increasingly mobile workforce, the transportation
industry continues to enjoy above average growth. This also holds true for
majority regions such as the European Union, with about EUR 250 bn of
revenue.
Based upon data and forecasts from the European Commission, there will
be ample room for growth in the economic activities, passenger transport
activities and freight transportation by trucks in the European Union.
However, the need for road transportation of trucks is forecasted to exceed
economic growth. A growing European single market and the increasing
outsourcing of manufacturing processes were leading to an increasing
demand for road transportation. However, due to the increasing importance
of the tertiary sector, road transport activities and GDP growth will gradually
decouple after 2025.2
300
250
Index (1900 = 100)
200
150
100
50
1990 1995 2000 2005 2010 2015 2020 2025 2030
Year
GDP Population Passenger transport activity Transportation by trucks
Source: Eurostat
Fig. 11 Transport volume, economic growth and population growth in the EU-27
While transportation of goods and services can be conducted by several
modes – trains, trucks, ships and airplanes – it is the greater flexibility of
truck transportation which has seen it increasingly favoured compared to
other available modes of transportation. For example, while road transport
carries more than 70% of all inland freight in Europe, railways and inland
navigation account for less than 30%3 and is set to fall further as freight
transportation on roads is set to increase to 75.4% by 2030. However,
industry experts reckon that there is sufficient demand for all transport
means; the industry needs to work on increasing overall efficiency of the
combined transportation modes.
2
European Commissions Report on ‘European Energy and Transport – Trends to 2030, Update 2007’.
3
ACEA and Eurostat.
23The truck industry’s green challenge The truck industry and its underlying dynamics
Headwind or competitive edge?
4,000
9.6%
Transport volume (in bn km)
9.7%
10.0% 15.0%
3,000 10.2% 15.1%
10.6% 15.2%
15.3%
11.4% 15.4%
2,000 12.5% 16.0%
13.7% 13.7% 18.2%
27.9% 20.0% 75.4%
74.8% 75.2%
74.0% 74.4%
1,000 72.6%
66.3% 69.3%
58.4%
0
1990 1995 2000 2005 2010 2015 2020 2025 2030
Year
Source: Eurostat Trucks Rail Inland navigation
Fig. 12 Modal split in the transport sector
Environmental pressure generated by the growth of road transportation has
forced the European Commission to publish several reports on
transportation with the aim of fostering a modal shift away from roads and
toward railways.4 However, it remains to be seen whether the different rail
networks within the European Union can be harmonised, and whether the
logistical requirements of flexibility and speed to manufacture, process and
deliver intermediate and final goods under just-in-time production conditions
can be met sufficiently by rail transport to challenge road transport’s
dominance.
3 Key challenge for the industry: Driving
efficiency
Growing markets and growing transportation needs usually mean
favourable conditions for the truck manufacturing industry. However, there
are some critical issues such as high fuel price, concerns about emission
regulations, and turbulent changes on the demand side, such as rising costs
and loading capacity. As the two stakeholders of the industry, the truck
manufacturers and the transport companies depend on each other as
demand of goods and demands of trucks are intertwined. It can be said that
challenges are affecting both stakeholders to a similar extent. Crude oil
prices and emission regulations are having, and will have in the future, a
significant impact on the truck industry.
High crude oil prices has boosted energy costs and commodity prices,
creating inflationary pressure. In the past year, the cost of diesel increased
by a staggering 31%. The role of fuel prices within the total cost of owner-
ship is critical, as this is the primary attribute that transportation companies
use for purchasing decisions. This factor is of even greater importance for
those companies running their own truck fleet as many transportation
companies are at the risk of bankruptcy due to increasing fuel prices. This
4
European Commission: ‘Towards a rail network giving priority to freight’ (COM(2007)608).
24The truck industry’s green challenge The truck industry and its underlying dynamics
Headwind or competitive edge?
shows that further price hikes will have an enormous impact on all, not just
transportation companies but the truck manufacturers themselves.
Assumptions on future oil price development is difficult. Some market
experts predict high level prices, others expect more moderate levels.
Examining the oil dependency by regions reveals that Asia-Pacific, Western
Europe and North America are net importing regions. Despite the fact that
crude oil prices have been rising in current years, the overall demand in net
importing regions increased even more, peaking on a level of 1.7 tr t of
crude oil imports by the year 2007. While Western Europe’s dependence on
oil declined during the prior years, regions like Asia-Pacific, with China in
particular, and North America are demanding more.
2.400 120
Import volume (in mn t)
2.000 100
Oil price (USD/barrel)
1.600 80
1.200 60
800 40
400 20
0 0
1977
1979
1981
1983
1999
2001
2003
2005
2007
1965
1967
1969
1971
1973
1975
1985
1987
1989
1991
1993
1995
1997
Year
Asia Pacific Western Europe North America Price per barrel
Source: British Petroleum, Statistical Energy Review 2008
Fig. 13 Net importing regions and oil price
As observable in recent history, the continuing industrial and economic
development across the globe has brought an inexorable increase in the
demand for oil. For instance, China’s economic growth and development
since the 1980s was accompanied by a 75% increase in oil demand from
1980 to 2006.
Reliability and compliance with emission standards are broadly regarded as
another important factor. With the introduction of the Euro IV and the JP05
in 2005, the truck industry saw major environmental milestones in Europe
and Japan, followed by stricter emission regulations for the U.S. in 2007.
Looking forward, the next step to deal with new emission standards is
coming in 2010 for the U.S. and 2012 in Europe. Regulatory rules have a
significant impact on the industry. The truck manufacturers must adopt
technological approaches, and the transportation industry has to deal with
significant toll fees for emissions.
These market reactions to regulatory frameworks and increasing oil prices
increase the volatility of an already-cyclical market environment. Those
circumstances make it difficult to predict the direction of cyclicality in time,
managing the fixed costs, dealing with new technologies and localising
products.
25The truck industry’s green challenge The truck industry and its underlying dynamics
Headwind or competitive edge?
Key facts
● Eastern Europe and Asia, with China in particular, are going to be the future growth markets.
● The Asian market is fragmented and opportunities for consolidation exist.
● Demand for road transportation probably will continue to increase.
● Truck market and economic development are intertwined, leading to cyclicality of truck sales.
● Rising oil prices are common challenges for truck manufacturers and transportation
companies.
26The truck industry’s green challenge The government: Value driver or driver’s worry?
Headwind or competitive edge?
C The government: Value driver or driver’s
worry?
Emission standards are just one of many regulations that truck
manufacturers have to address. Within the EU, truck makers have to comply
with environmental, safety, lighting, and other general rules to achieve
compliance before trucks can ply the roads. These regulations have evolved
over time and truck manufacturers have to engineer their vehicles to comply
with these requirements. The maze of regulations is further complicated by
the need to comply with laws in other parts of the world. Therefore, truck
manufacturers must make considerable R&D investments to ensure that
products are appropriately suited for the respective local markets. Daimler
CEO Dieter Zetsche described the situation this way: “Our engineers
sometimes feel as if they are forced to play European soccer on an
American baseball diamond by Japanese sumo wrestling rules.”
The regulations that have been implemented in the past and which are
going to be implemented in the years to come are extensive. But these
regulations, at times with regulator’s financial support, together with cost
pressures, create avenues for technological breakthroughs. This is true for
safety aspects but also relevant on other features around the truck (see
figure 14, on page 28).
1 On the path to a cleaner environment
“The industry knows about its high social responsibility. Therefore, safety aspects are especially
stressed as one of the key issues. However, political incentives are necessary to get
developments onto the street. As cost-oriented costumers wouldn’t have any inducement to
acquire costly safety measures.”
Dr. Thomas Schlick, Executive Director, VDA
CO2 emission, which is currently a relevant topic in the emissions
discussion within the passenger car segment, has not been subject of a
current proposal within the legislative framework for the truck industry.
According to the Intergovernmental Panel on Climate Change (IPCC)
Assessment Report 4 (2007), 13% of the world’s greenhouse gas emissions
such as CO2 derive from the transport sector and therefore contribute to
global warming.5 Within this share passenger transport accounts for a larger
share than road transportation. While this figure may appear to be low, the
public image is that trucks, as outlined later, are dirty and increase pollution.
Nonetheless, truck makers realise that while they are part of the challenge,
they are also part of the solution, and therefore, view emissions reductions
as one of their key priorities.
5
The gases carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs),
perfluorocarbons (PFCs) and sulphur hexafluoride (SF6) are the major greenhouse gases (‘direct’ greenhouse
gases). In addition, gases as nitron oxides (NOx) and carbon monoxide (CO) are contributing to ozone
depletion rather than to global warming.
27The truck industry’s green challenge The government: Value driver or driver’s worry?
Headwind or competitive edge?
Time General Environmental Safety Lighting
2007
Diesel emission Indirect vision Variable intensity
HDV – Euro IV devices (rear signalisation
(Phase 2) mirrors) (proposal, optional
06/2007)
Emission LDV Speed limiters
Euro IV AFS Installation
Seat strength (proposal, optional
06/2007)
Frontal protection
Emergency stop
Seat belt & seat signal (EES)
belt anchorages
(proposal, optional
06/2007)
2008
Diesel emission Interior fittings Front fog lamp
HDV – Euro V installation (proposal,
Speed limiters optional 06/2007)
2009
Fuel quality Identification of Conspicuity
controls markings
Suppression radio
(EMC)
2010
Buses & coaches Recyclability Fuel tanks/rear DRL installation
interior fitting protection devices requirements
requirements (proposal, new
Front impact homologation)
2011 Indirect vision
Biofuels 2nd step Emission LDV devices
Euro V
Vehicle type Electronic stability
(proposal)
approval control (proposal)
(proposal)
2012
Front underrun
protection
Cab strength
(proposal)
Door latches &
hinges (proposal)
2013
Diesel emission Pedestrian
HDV – Euro VI protection
2014 (proposal)
Vehicle
compatibility
2015 (proposal)
Emission LDV
Euro IV
Source: Iveco (proposal)
Fig. 14 Regulations in the truck industry
28The truck industry’s green challenge The government: Value driver or driver’s worry?
Headwind or competitive edge?
Energy supply 26%
Industry 19%
Forestry 17%
Agriculture 14%
1
Transport 13%
Commercial and residential buildings 8%
Waste and wastewater 3%
0% 5% 10% 15% 20% 25% 30%
1 Transport including passenger and freight traffic.
Source: IPCC
Fig. 15 CO2 contribution by sector
Nearly all trucks are powered by diesel engines that generate exhaust
gases such as Nitrogen Oxide (NOx), Particulate Matter (PM), Carbon
Monoxide (CO), Hydrocarbon (HC), and Carbon Dioxide (CO2). These
exhaust gases, with the exception of CO2, are regulated based upon various
global emission standards as they primarily contribute to acid rain, smog,
and respiratory diseases. However, these pollutants are caused by an
incomplete combustion of fuel, while CO2 would be the only gas if the
combustion were complete. Hence, there is a trade-off between the
emission of these exhaust gases, such as NOx and the emission of CO2.
In response to reducing air pollution, regulators have implemented emission
standards. These include the EPA standards in the U.S., Euro standards in
the EU, and JP standards in Japan. These governmental regulations limit
the emission of NOx, PM, CO, and HC. These standards vary across the
regions, and are determined by government objectives to combat these
pollutants.
European-wide norms for commercial vehicles were introduced for the first
time with the implementation of Euro 0 in 1988 which became mandatory in
1990. The Euro 0 standard sets emission limits for CO, HC and NOx
emissions. PM emission was not part of the legislation then, but changed
with the introduction of Euro I in 1992 where PM emission was included. In
the subsequent years the EC gradually tightened the emission limits for the
four pollutants, through a series of directives ranging from Euro 0 through
Euro V.
29The truck industry’s green challenge The government: Value driver or driver’s worry?
Headwind or competitive edge?
100%
Euro 0 100%
1988–1992 100%
100%
40%
Euro I 47%
1992–1995 83%
100%
33%
Euro II 42%
1995–2000 49%
38%
17%
Euro III 25%
2000–2005 35%
25%
12%
Euro IV 18% Current
2005–2008 24% standard
5%
12%
Euro V 18%
2008–2013 14%
5%
1 12%
Euro VI 5%
2013– 3%
3%
0% 20% 40% 60% 80% 100%
PM NOx HC CO
1 EU Proposal as of 21 Dec 2007
Source: PwC
Fig. 16 Reduction of pollutants in the European Union
In recent years, the emission legislation has focused on the reduction of PM
and NOx emissions, as these two pollutants have been identified for having
particularly negative impacts on air quality and health. Based upon the
current Euro IV standard, PM and NOx emission limits are at 5% and 24% of
the original limits set in Euro 0, and further reductions are anticipated with
the implementation of future Euro standards such as Euro V and Euro VI.
As the EU standards were the first to be introduced to combat emissions,
the U.S. and Japanese governments followed the European approach to
enable stricter emissions regulations.
30The truck industry’s green challenge The government: Value driver or driver’s worry?
Headwind or competitive edge?
North- and South America Europe/Middle-East/Africa Asia/Pacific
EU standards and countries following EU standards
U.S. standards and countries following U.S. standards
Countries accepting EU and U.S. standards
Japan standard
No standard
Source: PwC
Fig. 17 Emission standards by region
Many countries outside of Europe have applied Euro standards, making the
European emission standards the most widely adopted worldwide. In terms
of sales volumes, regions applying Euro standards account for
approximately 1.6 m units, while countries applying U.S. standards account
for approximately 450 k units. The residual of 350 k units are sold in
countries that apply Japanese standards, accept both European and U.S.
standards, or do not have any standards.
In terms of emissions and the regulatory response towards them, emerging
economies play a key role. This is due to the fact that these markets are
expected to contribute significantly to global emissions caused by
transportation in the future. Within the emerging markets, the
implementation of Euro standards will occur at different time periods across
various countries and metropolitan areas. In China and India, large cities
have introduced or will introduce future standards earlier than on a national
level, underlining the necessity of emission standards especially in cities
with a large population for the purposes of clean air.
“Securing competence to meet current and future emission regulations is a big challenge.”
Jan-Eric Sundgren, Environmental and Public Affairs, Senior Vice President, Volvo Group
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