1Q EU & S.Am truck orders rise, March EU CV registrations.

We spoke with the CEO of a North American heavy truck parts supplier about production trends heading into 2Q. Since the optimistic Mid-America Truck Show, this supplier has seen only neutral to negative news, including weak March Cl8 orders and modestly disappointing guidance from Daimler to suppliers. After OEM guidance earlier in the year that 2Q build rates would ramp up considerably from 1Q, this supplier is not seeing April sales rise as expected and daily build rates seem roughly flat from March. Our contact is also seeing price pressure from PCAR on parts for its new Kenworth T680 and Peterbilt 579 trucks, the so-called next gen platform or NGP, as sales have not lived up to expectations, but this supplier has been successful pushing back and maintaining pricing. This CEO believes the slow launch is fairly typical for new trucks because truckers tend to stick with what they know and unlike with a light vehicle launch, truck OEMs typically don’t discontinue old product lines. [With the March Cl8 data released and detailed below, PCAR looks even more likely to top low 1Q estimates. However, we see growing risk to 2H expectations as our below-cons Cl8 forecast is increasingly in line with OEM build plans, also detailed below, but translates to 205K U.S. and Canada retail sales, versus PCAR’s 210K-240K market guidance. – Wolfe Trahan comment].

After hearing nagging concerns about China at the Mid-America Truck Show, we spoke with the CEOs of three suppliers to Chinese truck OEMs about the NS IV diesel engine emissions standards, production trends and natural gas. All confirmed China is going forward in July with NS IV implementation in major cities, with the rest of the country following over 18 months as oil companies expand their limited low sulfur diesel capacity and nitrogen companies ramp up urea distribution. Only Beijing, Shanghai and Guangzhou are on track to have the diesel and urea availability by July, so initial implementation is likely to be limited to as much as 20% of production, according to one supplier. At a conference in March, regulators and OEMs laid out modest initial enforcement, which toughens next July. The general sense from these suppliers is there is embarrassment in China that they’ve had to delay the NS IV standards so many times already, and public pressure to curb pollution makes another delay unacceptable to the new government. While uncertainty was the consistent message on the production outlook and our contacts are generally concerned about Chinese OEMs ability to control inventory, truck production came back strong after Chinese New Year in Feb. The suppliers we spoke with generally don’t expect much NS IV pre-buying and believe the government could limit pre-buying to show seriousness about air quality, but our contacts also couldn’t rule it out. Another big China truck theme is natural gas engines, which are already being certified at NS V emissions, and production is running at 55K-60K units this year, ~6% of truck & bus production. This has been growing ~20% per year even as Chinese truck and bus production is down 30% in the past two years, and far ahead of the 4K-5K NA Class 8 natural gas build rate, or ~2%.

We estimate global auto production dropped 1% y/y in 1Q, more than explained by Europe, but we also estimate the global production SAAR improved 1% from 4Q with modest upside to our expectations in China, Korea and Thailand.

We spoke with the manager of a mid-sized private fleet about fleet growth, truck replacement and upcoming changes to drivers’ Hours of Service (HOS) regulations. Our contact doubled his capex this year to grow his fleet 10% as the company added a new division, and he took delivery of these growth trucks in 1Q. Going forward, he is going back to replacing about 15% of his fleet per year and expects his capex to drop by about 50% in 2014. This fleet manager typically trades trucks after they hit 700K miles, but has tried selling 2007-2009 models as early as 400K-500K miles because of reliability problems. However, the used market values for these trucks were well below his book values, so his management opted not to take the losses to replace them early. The new HOS regulations set to take effect in July, which require more driver downtime, will impact this fleet’s ability to deliver. Our contact is studying whether he will need more trucks to maintain normal operations, but expects to be able to make do with the same number of trucks by hiring additional drivers instead.

In this note: CMI gains more Cl8 share in Feb; EU CV registrations remain weak, German freight volumes robust, Feb tire sales weaken, PCAR recall & more.