Oh where, oh where goes Class 8 used truck valuations?

The Class 8 used truck market has experienced tremendous success over the past few years. Many factors have positively contributed to this, including poor economic conditions, strengthening government emissions regulations and rising operational costs.

During this period, new truck production struggled as fleets were continually extending the life cycle of their trucks, as well as holding back expansion of their fleet size. However, the trucking industry is a cyclical market that experiences many peaks and valleys resulting in changes to the dynamics of all Class 8 truck sales.

Market Dynamics

The economic downturn from 2007 to 2009 significantly impacted new truck production. Plus, as consumer spending declined and housing demand wavered, the supply of quality vocational trucks was greatly reduced.

Moreover, prior to the downturn, the strengthening of U.S. Environmental Protection Agency regulations also have helped boost used truck sales, as truck users were hesitant to switch over to new untested EPA mandated emission technology. Truck users have shown a greater propensity in purchasing preceding EPA model year trucks and may once again be the case when EPA 2014 goes in effect.

Improving education toward truck users about maintenance mechanics is key for them to understand and accept new-mandated emission technologies offered.

Current Market Environment

The current economic environment has shown positive signs of improvement and growth over the past year, thus restoring business confidence in all market segments impacted by the trucking industry.

Today, on average, used trucks are older and have higher mileages than ever before due to fleets and owner-operators alike holding their equipment longer than the typical four-year trade-in cycle. Today’s Class 8 used trucks have a historically higher range of mileages, from 600,000 to 700,000 miles – a significant increase from the previously normal 450,000 to 550,000 miles.

This, however, has not affected the average pricing of used trucks, as demand remains strong and supplies tight.

Nonetheless, there has been a supply shortage of later model year trucks that are high quality with low mileage, resulting in prices comparable to a new truck purchase. In addition, dealer lots have many available high-mileage trucks (700,000 plus miles) that are unappealing to buyers in the market.

This has resulted in a change in buyer behavior, as total cost of ownership becomes increasingly important and may lead to an increase in new truck sales over the short term.

Distribution Channels

The major influence from the accessibility of the Internet and efficiency of shipping routes has diversified the number of quality distribution channels available. Traditionally, the dealership route has been the first option for potential buyers to visit. Dealerships consistently offer strong sales support, physical lots and numerous truck models to its customers.

However, alternative channels, such as Internet sales and private/do-it-yourself (DIY) sales are expected to be on the rise over the next few years.

Internet sales provide sellers with incredible visibility to showcase their trucks across North America. Private/DIY sales provide the seller with the most return, as it cuts out the middleman.

Both these channels are expected to gain some market share. However, dealerships are likely to remain the definitive market leader.

Conclusion

The used truck market is expected to face some significant challenges over the next few years as fleets enter into the equipment replacement cycle.

The period beginning from 2014 to the end of 2015 is projected to be peak years in new truck production. This is likely to result in an oversupply of used trucks entering into the market at one time.

Moreover, used truck valuations are expected to decline moderately due to the oversupply of low-quality, high-mileage used trucks and a declining demand on the back of the growth in new truck sales.

Wallace Lau is an industry analyst within Frost & Sullivan’s Automotive & Transportation business’ commercial vehicle research department. Frost & Sullivan, the Growth Partnership Company, works in collaboration with clients to leverage visionary innovation that addresses the global challenges and related growth opportunities that will make or break today’s market participants. www.frost.com.

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