Storm Forecasting

As we were going to press, we learned that Freightliner LLC president and CEO Jim Hebe had resigned. Or, as the Wall Street Journal reported in its May 25 online edition, Hebe was “told on Wednesday that he would be leaving the company” on Friday. Rainer Schmueckle, senior vice-president of controlling at DaimlerChrysler, is Hebe’s successor.

A controller, friends, is an accountant, which says something about the immediate priorities of the folks in Stuttgart. DaimlerChrysler said its global commercial truck and bus business would have made money in the first quarter this year were it not for Freightliner, which hauled the division down to a $118.2 million US loss. No doubt, the enduring focus at Freightliner will be on profits, not market share.

Freightliner’s strategy of guaranteeing residual values on the trade-ins of many of its largest customers will rightly be blamed for the company’s current state. Typically, as part of a new-truck order, Freightliner agreed to buy back vehicles at a fixed rate, regardless of their market value. With prices guaranteed, many truckload carriers and lease/rental fleets, the two largest buyers of new class-8 trucks today, shortened their buying cycles from five to three years in order to capitalize on the lower operating costs of running newer equipment. To compete, other truck manufacturers offered similar deals.

Predictably, Freightliner’s market share soared. In 1998, the company surged past Navistar as North America’s class-4 through -8 commercial vehicle sales leader. It surpassed both Ford and General Motors to become the No. 2 producer of class-6 and -7 vehicles in North America. In 1999, when class-8 production peaked at 307,000 trucks, Freightliner’s share was 36%.

All the while, Mercedes Benz Credit Corp. was writing paper like mad. Freightliner’s captive finance company saw its truck portfolio balloon from $1.25 billion US in 1993 to more than $4 billion at the end of October 1998.

Flush with cash, Freightliner’s marketing and R&D efforts were inspired. Hebe brought an infectious enthusiasm-passion, really-about making trucks more productive, safer, more capable, and just plain cool. When senior engineer Michael von Mayenburg challenged his designers to find a way for him to climb up into the driver’s seat of an Argosy cabover tractor while holding a cup of coffee in each hand, they did it.

In April 1998, Hebe warned that “a used-truck crisis lies just around the corner. Manufacturers who are not equipped to handle used trucks and their customers are in for a tough ride.” Freightliner created a raft of programs to rebuild or refurbish and sell its trade-ins, and to finance them to first-time truck buyers.

These initiatives might have been enough, but about a year and a half ago, a perfect storm began to gather over the industry as a whole.

Demand for freight hit a trough as operating costs at trucking companies-notably fuel, insurance, and interest rates-started to swell. Finance companies, saddled with delinquencies and past-due accounts, poured repossessed equipment back into a weak market. Trucks returned to Freightliner were worth half of what was anticipated: indeed, the newer the tractor, the bigger the sleeper, and the smaller the power, the more depressed the price. It’s been predicted that truck manufacturers and dealers will have to write-off about $1 billion US on class-8 residual values between 2000 and 2002.

Worse, the low price of used equipment has made it difficult to raise prices on new vehicles. Freightliner and other manufacturers have been reducing build rates, cutting shifts (and shiftworkers), and increasing shutdown times to help deplete excess inventory. Such measures, however, won’t change the used-truck situation any time soon. Next year-2002-is the peak of the return trade cycle. Some 310,000 used trucks are expected to hit the North American market, about 100,000 more than meets demand.