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Thursday, December 8, 2022

What’s going on with the trailer market?

These are the best of times for trailer manufacturers. They’re also the most difficult of times. Demand has never been greater, but an inability to meet that demand has strained relations with customers and left trailer makers scrambling to overcome new challenges every day.

David Giesen, vice-president of sales and marketing with Stoughton Trailers, gave attendees at the FTR Transportation Conference some insight into what OEMs have been dealing with.

First there’s the labor issue. When the economy shut down, so too did trailer plants. When it was time to recall workers, many didn’t return. Replacement workers were hard to find, and often didn’t stick around.

“Why are people leaving? We just don’t know. It’s a no show, no call,” Giesen said. “They don’t show up for work and we can’t get a hold of them to do an exit interview so we don’t get good feedback on why that worker isn’t coming back. It remains a struggle and is projected to remain a struggle all through next year.”

Then there are component and raw material shortages that have limited production and driven up costs. Trailer OEMs have been forced to allocate units to customers.

(Photo: Stoughton)

“We are dealing with line shutdowns on a regular basis,” Giesen said. “All the trailer manufacturers have had to allocate their space [on production lines]. It’s a difficult exercise to do, because nobody is getting what they want, including big, loyal customers. If they want 5,000 trailers, we may give them 3,000…Nobody likes to hear the word ‘allocation.’”

But it’s an inescapable reality for manufacturers, said Giesen, noting the manufacturers experience the same from their own suppliers of everything from mudflaps to tires.

When parts shortages arise, trailer manufacturers will produce trailers to a near finished state, then park them until those parts arrive. These are referred to as ‘red tag’ units, which then must be put back through the line for finishing. This is disruptive and inefficient.

“We want to feed our lines first,” Giesen said of when parts arrive. “It’s better than pulling something back in, which creates a problem. When do you ever get incomplete units back in? It becomes a cycle for an OEM you’d love to get out of, but as long as the supply chain is short, we have to deal with it.”

Fortunately, many customers have been receptive to parts substitutions, and will accept an alternative brake chamber, for example, so they can take delivery of their trailer sooner. But prices are in constant flux as OEMs absorb rising costs from their own suppliers. Some fleets have had to accept up to eight cost increases from when they placed their order and when it was delivered, said Giesen.

“We could fill our backlog two to three times over with the demand that’s out there. We don’t see an end to demand.”

David Giesen, Stoughton Trailers

Uncertainties about supply and cost have kept trailer makers from booking orders much into next year.

“We could fill our backlog two to three times over with the demand that’s out there,” Giesen said. “We don’t see an end to demand.”

Demand is rising not only because freight is abundant, but large fleets are also increasing trailer ratios so they can better utilize drivers by increasing drop-and-hook deliveries. Trailer-to-tractor ratios used to be about 2:1; that’s increasing to as much as 4:1.

“Companies 10 years ago were trying to cut that ratio lower,” Giesen explained. “That model has changed now, to ‘How do I keep that driver moving?’ Ratios are going up. As a trailer manufacturer we want to see that ratio keep climbing.”

But the high cost of trailers may put an end to the trend. “You get to the point of diminishing returns,” Giesen said, noting the cost of a dry van has doubled over the past three years. “If the ratio gets too high, you’re just going to have trailers sitting.”

Fleets seeking container chassis are dealing with many of the same issues as those wanting dry vans, exacerbated by anti-dumping tariffs the U.S. slapped on Chinese-made chassis that went into effect in April 2021 – just as demand was recovering.

“The chassis market came back from 0 to 100 mph,” Giesen said. “It’s busting at the seams.”

If there’s good news to be had, it’s that Giesen feels pricing volatility is easing.

“I’d say yes, the pricing that’s in place now I’d predict is going to stay in place for 2023,” he said in response to a question from the audience. But he cautioned that raw material price decreases don’t necessarily translate directly to the cost of the finished trailer. For instance, raw aluminum prices have pulled back, but the conversion fees charged by aluminum mills went up, so the trailer manufacturer is still paying the same high price for frame rails.

Don Ake, vice-president – commercial vehicles with FTR, noted the increase in trailer ratios referred to by Giesen could spell a more drastic downturn for manufacturers if demand softens.

“The next time we have a severe downturn because of a recession, I’m afraid those trailers sitting out there are going to be pulled into the market first,” he said. “So next time there’s a severe downturn, it could be ugly.”

He also commended trailer OEMs for how they’ve managed the supply chain challenges and their order boards. Most are acting in a similar manner, he observed, meaning they’re likely doing it right.

“They have done, in my mind, a tremendous job. Better than other industries,” Ake said. “The trailer manufacturers have worked hard to squeeze as many trailers as they can out of this mess.”

Build rates have climbed 25% from May 2021, when supply chain issues first emerged, to July 2022. That build rate is on pace to total 305,000 units this year, up from 268,000 in 2021.

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