New and used medium and heavy-duty truck prices are expected to climb higher as demand remains robust amidst a thriving economy and production levels dip due to supply chain disruptions. Over the past few months, nearly all major medium and heavy-duty truck manufacturers have been vocal about the severe challenges they face in their supply chains, a topic we explored in our transportation industry Q2 2021 earnings summary.
Every major global truck manufacturer—Peterbilt, Kenworth, Volvo, Freightliner, Mack, International, and others—has cited component shortages. Several truck manufacturers were compelled to take unplanned downtime because they lacked the necessary parts for assembly. These supply chain issues have persisted through mid-September, and industry experts now anticipate that component shortages could stretch into 2022. Reduced truck production will inevitably push both new and used medium and heavy-duty truck prices higher, echoing trends we’ve observed in the automotive industry.
Higher prices for new and used trucks will translate into elevated freight rates, placing upward pressure on general consumer price inflation.
ACT Research, a leading authority on Class 8 truck orders, sales, forecasting, used truck sales, freight rates, and trailer sales, has revised its truck production outlook downward in its latest monthly forecast due to continued supply chain constraints affecting truck manufacturers.
"In this current period of near-record demand for all types of commercial vehicles, the narrative over the past few months has transitioned from one of abundance to one of constraint," said Kenny Vieth, ACT’s president and senior analyst. "While we often refer to semiconductors as a shorthand for supply chain issues, in reality, numerous parts continue to be impacted by the pandemic, lingering steel tariffs, and even the February storm that paralyzed Texas and disrupted large segments of the U.S. plastics industry for more than two quarters."
Class 8 orders are no longer aligned with build rates due to part shortages. Vieth noted that the industry should have produced around 30,000 Class 8 trucks in July based on orders but only managed to build 14,820 units.
"Typically, industry volume forecasting is a demand-driven exercise," Vieth said. "For Class 8, we’ve had to reduce our 2021 build expectations for a second consecutive month, but the situation is quite different in the medium-duty sector. The smoother outcomes in Classes 5-7 can be attributed to the fact that major passenger vehicle manufacturers can divert chips from smaller, lower-margin pickup trucks to medium-duty vehicles. Conversely, medium-duty market producers are also reallocating chips toward Class 8."
While much of the media has emphasized semiconductors as a key supply chain bottleneck, it’s important to recognize that ACT Research has stated supply constraints now extend beyond semiconductors to other components.
Source: ACT Research
Truck prices follow the basic economic principle of supply and demand—if supply is tight and demand is high, prices go up. Right now, demand for medium and heavy-duty trucks is strong due to a robust economy and high truckload freight rates. Rapidly escalating transportation service prices aren’t confined to trucking alone; other transportation sectors, such as container shipping, are witnessing significant price hikes as well.
Source: Bureau of Labor Statistics
Source: Manheim Used Vehicle Price Index
Intel CEO Pat Gelsinger noted earlier this year that the semiconductor shortage could last beyond 2022. Semiconductor fabs are costly and take a long time to plan, construct, and ramp up production. Semiconductor demand typically fluctuates at a greater magnitude than the broader economy—when GDP grows by 3%, semiconductor growth is likely to exceed that, 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 chips will you order? Will you source from multiple suppliers? Absolutely," said Willy Shih, a Harvard Business School professor specializing in technology and manufacturing.
Semiconductor demand oscillates between booms and busts, and this cycle will likely follow the same pattern. During tight supply and demand environments, semiconductor buyers tend to increase their strategic inventory stockpiles, similar to what we’re seeing now. If a buyer usually held two months of supply in normal times, they might aim for six months or more when worried about securing supply. This shift in buying behavior amplifies an already tight market.
Eventually, the semiconductor supply and demand balance will normalize as supply catches up or demand moderates (demand typically moderates due to broader economic contraction at some point, while supply increases take a long time to come online). Once market forces stabilize, demand will drop sharply because many semiconductor buyers have larger-than-normal strategic inventories. Semiconductor manufacturers are well aware of this cyclical pattern, which is why they are cautious about adding significant production capacity during upswings.
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ACT Research Downgrades Near-Term 2021-2022 Production Outlook
Takeaway: Historically, Class 8 heavy-duty truck production has followed industry net orders. Recently, the industry has experienced the largest divergence on record—orders are high, but production is low.
New & Used Truck Prices Are Likely to Keep Rising
Takeaway: BLS data shows that long-distance truckload prices are rising at their fastest pace in over 15 years. Ultimately, these increased transportation costs filter into broader consumer goods prices, driving general cost inflation.
Component shortages are impacting a wide range of industries—from aerospace to farm and construction equipment. Used car prices have surged to the highest level on record due to widely reported semiconductor shortages.
Takeaway: Used vehicle prices have climbed at the steepest rate on record, dating back to 1995. For example, a friend of Equipment Radar recently sold his used car for $500 more than he paid three years ago.
Semiconductor Cycles Tend To Be Volatile—This Cycle Won’t Be Any Different
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ACT Research: Used truck prices rise as secondary market inventory trickles
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