Subscribe
Share
Share
Embed
From dealing with complex distribution channels to trying to control a distant customer experience, leaders in mobility manufacturing deal with complexity every day. But then, there are the leaders who are, simply, winning.
This is Why You Win, the show hosted by Element Three’s Kyler Mason and John Gough that asks the foremost leaders in the industry to share where they are placing bets and making hard choices that put their businesses in a better position to win.
Steve Tam (00:00):
I think you kind of have to step back from the detail and take in the more macro picture. So if you think about the US and our economy, even if we're only growing at 1% or one and a half percent, we're still growing. So consumption is increasing and as long as consumption's increasing, that's more freight. We need more trucks. We need ultimately more capacity to make more trucks. Population's also growing. Growth rates are slowing on population, but those are the two things that drive economic growth.
John Gough (00:30):
Whether you're going to market for dealers, distributors, or some other partner channel, the mediated sale is complex.
(00:36):
We call it B2B2X. But the leaders in the industry are the ones who are making it look simple. I'm John Gough
Kyler Mason (00:43):
and I'm Kyler Mason, and this is WhyYou Win, presented by Element Three. Our guest today is Steve Tam, Vice President at ACT Research. And
John Gough (00:53):
When I saw Steve on stage at the NTEA Exec Summit a few months ago, I knew that I wanted to have him on this show because not only does he have a ton of industry knowledge and expertise, but he also has this perspective and attitude about the industry that makes him very easy to listen to. Act Research is a trusted advisor to the marketplace about what is happening and what's going to happen. And Steve's been around long enough that he's seen these cyclical trends and he knows which part of history is going to repeat. And he also has these great ideas and really strong guesses about what's going to change this time around. This episode was recorded at the end of December and some of the forecasts and things that he's talking about have already changed. So if you're interested in what's the latest and greatest, go check them out at their website.
(01:37):
I think you're really going to like this one. Steve, we're so glad to have you in the show today. Thanks for jumping on.
Steve Tam (01:42):
John, thanks for having me. I'm looking forward to it.
John Gough (01:46):
So you come at this from a slightly different angle than some of our guests, often we have OEM leaders who are kind of telling us about what they are working on and ACT sits outside of that ecosystem and watches it for maybe lack of a better term. Can you just tell us a little bit more about your role at ACT and what you guys are doing?
Steve Tam (02:04):
Yeah, sure. I'd be happy to. The company has been around for 40 years and we can talk about that maybe some more later, but we play a really unique role. We're, I guess an independent third party data aggregator is one of the roles, and that's something that's directly responsible in my area. Every month we're collecting what we call market indicator data from the OEMs. So they're telling us what their customers ordered, what they built, what they got sold to the customers, what inventory looks like, what the backlog of unbuilt orders is. Data that if they shared amongst themselves, they could probably end up in jail for antitrust violations, at least some of the data. So that's part of the role. But then we use that data to feed more forecasting models, do trend analysis, market share calculations. So there's just a ton of uses for what you can do with all the statistics that we're gathering.
(03:02):
So that's one of the main data flows. We've got quite a few others besides that, but that's how the company got off the ground back in 86.
John Gough (03:09):
So you ingest all of that and then you feed it back to those OEMs that are providing you data and back to the industry. And as data products basically forecast trends, you presented shows, which is where we met you a couple weeks ago. And we're just really, frankly, impressed about the kinds of things that you were able to see over the horizon on and tell the people in the room, leaders in these companies, what is happening, what they should be looking out for. What am I missing about that?
Steve Tam (03:37):
Yeah, no, that's exactly right. So I mean, our sole mission in life is really to just to help the folks that either participate directly in this industry or maybe tangentially to understand, because it's a cyclical business. It's not unlike any other manufacturing business. I'm sure your listeners have heard that story more than once, right?
John Gough (03:55):
Heard and lived.
Steve Tam (03:56):
Exactly. Yeah, exactly. And our claim to fame is being able to kind of take all that data, synthesize it, match it up with other things that are coming down the pike at us, and then try to provide a roadmap, both near term from a tactical perspective as well as long term, a little bit more strategic of what the industry's going to look like or what we see the industry's going to look like. So my role is one of an analyst. I've got my fingers in the data every single day trying to answer questions, working on, as you mentioned, IP, I guess. We're a subscription based business, so you're exactly right. We sell our data, we sell our analysis, so we sell our opinion, right? We sell our forecasts. One of the things I think that differentiates us from others that may play in a similar role is that we're pretty transparent about our thinking.
(04:44):
And I like to say there's two kinds of forecasters, those that know they're wrong and those that don't. We know we're going to be wrong, but we try to be as right as possible and then we share why we think what we think. And so if you as a customer have some differing views or some different input or a little bit different take on what's going to go on, take our product as a starting point and then modify that for what your circumstances are or what you think your situation is going to be. And here we are 40 years later. So apparently we're doing a pretty good job of it.
Kyler Mason (05:16):
You're less wrong. I want to hear something that you were like spot on about and something you were just so wrong about.
Steve Tam (05:21):
Well, the wrong is the easy one to address. Who saw COVID coming, right? Who knew we were going to have a semiconductor chip shortage? We were at a point in the industry where we were going to be hitting on all cylinders, at least we thought we were, and then the wheels just came off of the thing. The right piece, I sometimes get a pass on this because I tend to focus ... We've got several analysts here. I tend to focus on what we refer to as medium duty trucks. So I think anything basically from a UPS package car up to but not including class eight semi, right? So all the work trucks, dump trucks, that kind of thing, that market, while it's still cyclical, is not nearly as volatile as the class eight market is. And so if I'm off by 5% on a forecast, it's a surprise unless you get an outside shock to the industry.
(06:12):
It's more about kind of the absolute level that you're at right now and then kind of momentum. And it's a pretty stable industry in that regard. I'm forever on my soapbox when I'm presenting to these groups. So many folks in this industry are focused on the heavy side of the industry. And I'm like, "Hey, look, if you want a way to smooth your business out and survive those horrible troughs in this market, think about getting into the medium duty market." It's very, very tangentially related. It's different. It's not the same as the class eight world, but there's a lot to be said for smoothing out the highs and lows.
Kyler Mason (06:49):
Are they taking your advice?
Steve Tam (06:50):
Some of them do. Some of them look at me like I'm from another planet.
John Gough (06:54):
I'm wondering if you get bonused on the amount of truck puns that you put into your presentation because I just heard hitting on all cylinders. Is there just something taped to your monitor?
Steve Tam (07:05):
Exactly. Yeah. Yeah. No, I think it's a factor of just being at this for so long, right? It's just stuck in the lexicon.
Kyler Mason (07:15):
You mentioned earlier that there were tangential participants in the work that you do. Can you give some examples of that?
Steve Tam (07:21):
Yeah, sure. So the vast majority of our customer base are the OEMs themselves as well as the supply base. So the tier one, tier two, tier three folks that make pieces and parts that go on the trucks and trailers, by the way, we do trailers. Folks that aren't in that industry probably, and one of our really good growth segments was the Wall Street set, right? So analysts, banks that are either investing in these companies that are publicly traded, or some of the carriers, some of the trucking companies that use the trucks are actually publicly traded. There's probably, I don't know, not quite two dozen of them. And that group, that Wall Street group has just an insatiable appetite for data and for analysis as they're trying to figure out, should we be recommending this stock? Should I buy as a sell? What are we doing here?
(08:10):
Same thing with private equity and venture capital, folks that are thinking about making an acquisition of a participant in the space. We do a lot of due diligence work with those companies and help them understand the industry and to the degree we can, the role of the companies that they're contemplating and how they're going to fare through that investment cycle. So that's probably one of the best examples. And then trucking companies, this is the thing with us. So the equipment manufacturers, that's a fairly finite universe. And as long as we've been around, it's pretty saturated from a customer perspective. We're always looking for new products, trying to figure out if there's a need that's not being met. And if there is, is there a product that we can develop or tweak or provide to the industry to help them understand? And the answer on that tends to be, yeah, it's kind of topical.
(09:01):
Sometimes there is, sometimes there's not. Alternative fuels are a great example as the industry started to go down that path back in like 2008 with natural gas and more recently with battery electric, we did a lot of work in that space to help the equipment manufacturers, but trying to expand the customer base, right? So we had the Wall Street folks come on and then we really want to find out what the trucking companies need. What kind of a data information analysis can we provide to them? And they want it all, but they want it all for free. So we do some things there. We're continuing to build those relationships and deepen them. But in the process of doing that, we about five years ago got into the freight markets and we're doing a lot of heavy lifting on freight analysis. And so forecasting freight rates and volumes and that sort of thing, which is a perfect fit, right?
(09:49):
And it makes us smarter. It helps us figure out, fine tune those forecasts and be less wrong.
Kyler Mason (09:55):
So as you expand, are you having to strategize different sources of data and partnerships and relationships so that you can continue to provide the analysis that you're providing?
Steve Tam (10:06):
Absolutely. Yeah. Not so much on the Wall Street side, that piece. It was pretty much just providing them and bringing them up to speed. But the disruptive technologies, one of our favorite MOs is multi-client studies, right? So we went around and met different participants, different stakeholders that were going to be developing those alternative power trains and then a different set of folks at the suppliers and manufacturers who were going to be working on the production and the integration of those products, right? And essentially just kind of used our methodical processes and our forecasting to figure out, okay, what's this thing going to look like? And ultimately what we were trying to do there was forecast adoption rates, right? How is the product going to be accepted and how's it going to be integrated into the fleet as it exists today? So that's one example. The freight piece was a completely different piece, right?
(11:00):
We had no freight data, no volumes, no rates and that sort of thing. And so we did actually go very intentionally out into the space and made those introductions and started to develop those relationships and establish data flows with various providers in the space. So yeah, always a challenge. One of my favorite sayings is the two best times to start a database are 20 years ago and today. So I wish we would have started a freight database 20 years ago because it'd be pretty darn mature and we'd be able to rely on it even more than we do now, but here we are.
John Gough (11:35):
It was one of the insights you shared at that show we were watching you had about great data, the kind of cyclical nature that the long trend downwards that has been happening in that industry, I guess, and in that data and your prediction that we're sort of about to bottom out on that maybe middle of next year, I mean, that was really useful and important for us in marketing context as we're advising our clients to say, when do you start marketing again? The types of cycles that we're looking at and other parts of our business, so outdoor rec, for example, annual cycles. And the question is always, when do I start marketing again? How do I capture the opportunity and stay in front of my competitors in these multi-year cycles like the ones that we're talking about here, I think the question is the same, but even bigger, right?
(12:20):
If I'm going to go and I need to catch the front end of this wave and make sure I take advantage of new demand, new opportunity, become a market leader or a challenge or brand, I have an opportunity to cut a corner on something, knowing that can make a really big difference in your timing and your investment and all those things.
Steve Tam (12:42):
Absolutely. None of the participants in the space want to leave any money on the table, right? So they're like a vacuum cleaner trying to suck it all up. Essentially, that's what we're trying to do. I mentioned the cyclicality of the industry, so the questions are, okay, where are we in the cycle? And let's take where we're at right now. We're in a trough, right? So when's it going to end? When's the market going to turn? How high is it going to go when it goes? How fast is it going to go there? What's the next inflection point? What is the downside or the backside of that curve look like as we wash, runs and repeat? And what are the things that are going to drive that? What are the catalysts that are going to cause these things to happen? And with the benefit of four decades of experience, the cycles, they never necessarily repeat.
(13:28):
They're not the same, but they rhyme. There are common elements and they really go back really kind of to the nature of the business, not wanting to leave that buck on the table. So everybody's putting in capacity until the last minute until they've got too much and it's costing them money and then they go, "Oh, we did it again." And there's also a herd mentality, right? They all do it and they all do it at the same time. And
Kyler Mason (13:55):
So- Human behavior.
Steve Tam (13:56):
It is. It absolutely is. But if you can have some insight into, again, those inflection points and try to be ahead of the curve, so to speak, you either benefit or you don't get hurt as bad, hopefully, is the thinking.
John Gough (14:09):
So you've been doing that for 25 years, Act for 40. Is there something that you watch and you are always surprised that people haven't learned yet? I mean, the thing you just described is I would expect that kind of behavior. I think capitalism is driving some of that, but what should they have already figured out?
Steve Tam (14:27):
Yeah, I can actually point. I remember very vividly, it was at one of the trade shows probably back in about 2008, and it was the president of one of the truck manufacturers. And he implored the industry, "Don't chase the cycle this time." And it's like, that's a really noble sentiment and pursuit, but if you don't get out of the way, you're going to get run over. So we know we shouldn't do it and we just can't help ourselves. And it's not just the manufacturers, it's the buyers, it's the truckers, the trucking companies, they do the same thing. The supply base is a little bit more reactive. The OEMs are telling them what to do, what they need, but yeah, it's crazy. There's a story back in the late 19 ... Well, let's see, it would've been 1998, 1999. The economy was doing really well. Think back to the dot com explosion, right?
(15:20):
The marketplace was just on fire and we were dumping trucks into the fleet left and right. Somebody, I guess everybody in the industry knows who it is. So I'm named names. It was Freightliner, right? They got this brilliant idea. Let's put guaranteed residual values on these trucks. You, Mr. Trucker, buy a truck from us, drive it for two years, we'll give you back half what you paid for it. Sounds like a good deal, right? $1,000 down, that's all you need to get this deal. And if you can fog a mirror, you can qualify for the deal. So of course, Freightliner temporarily bought a whole bunch of market share. The next month, all the other manufacturers offered the same program and market share reverted back to what it's been for decades. But the problem was is that in 2000 and 2001, the US economy went into a recession.
(16:10):
And so we had all this excess capacity. So we had a couple of things happen. One, we came up with a new kind of repossession. It was called a drive-by repossession. The trucker would actually pull into the bank's parking lot and drop the keys through the night deposit slot and walk away, right? Yeah. Freightliner by themselves, I think the number was about $3 billion with a B that they had to write off to write the value of that equipment from book down to market. And I think the rest of the industry had another two billion on top of it. It was insane. Trucks were selling, used trucks were selling two for the price of one, right? And so farmers were buying class eight tractors with sleepers on them. They didn't have any need for the sleeper. A lot of them cut the sleepers off and made them farrowing huts for hogs, right?
(16:59):
A lot of the smart owner operators bought them and they said, "Hey, this is great because I can go be the first guy at the gate at the port. I can spend the night in the truck. I can get a load and I have a shot at getting a second load the same day if I'm first in line." So
(17:14):
I guess necessity is the mother of invention, right?
John Gough (17:19):
Incredible. And a brand new truck, right within-
Steve Tam (17:22):
Essentially, yeah, less than two years old. Yeah. Right.
John Gough (17:25):
So some of the timing question that you are trying to predict has these market inflections that you're talking about COVID, for example, and then some of them are regulatory and these other inflection points. I read somewhere a quote from you about how EPA 2027 was going to be drive the mother of all pre-buys. And as we are looking at regulation shift around that, I think my question to you is like, when you look at OEMs who are making bets that are based on those predictions or even their own gut, what do you think the best ones are doing in light of the fact that the rules change, like the game is changing all the time on them?
Steve Tam (18:07):
Oh, it's interesting that you asked that question. Maybe for a little context, it's been probably about three years, four years ago, we did some work with the Engine Manufacturers Association and tried to understand and quantify the impact of what the 27 compliant trucks were going to look like. And our analysis basically came back and said, "Look, you're going to have about a $30,000 price increase on a Class eight sleeper." About 10,000 of that's going to be for actually meeting the tailpipe emissions. But one of the things that the EPA was also mandating was that the manufacturers extend the useful life of the truck and provide warranty coverage on the emissions components to make sure that they continue to function in accordance with the standards, right? That was going to be the other $20,000. And so if you're going to raise the price of a truck 30,000 bucks, that's the impetus for the pre-buy, right?
(19:01):
That's why truckers would buy early, essentially compress their trade cycle, bring down their average fleet age, and then not be the first ones out of the gate to plunk down an extra 30 grand for a truck. You let the other people who aren't maybe not as cognizant of what's going on be the beta testers or the guinea pigs on the new technology and let the OEMs get all their processes worked out and get all the spare parts and the repair procedures and everything that you're going to need to deal with the new technology and then jump back into the marketplace and resume your normal activity. So that's kind of the backstory behind that. So fast forward to today, well, maybe to a year or 18 months ago, the industry's been on pins and needles because the current administration, of course, isn't as concerned with environmental regulations.
(19:46):
And in fact, the president directed the EPA to reevaluate their standards making process. And so what we've been able to learn from them so far somewhat unofficially is that the tailpipe portion of that mandate is going to stay in effect. So you're still going to get hit with the 10 grand price increase. They're going to start rulemaking, another round of rulemaking in the spring, and the industry expects them to get rid of the requirement for the longer useful life and the warranty coverage. So we won't get the $20,000 hit. You still have a reason to pre-buy. The problem is, in our analysis, if you look at the marketplace right now, there aren't very many trucking companies that are making enough money to be able to buy equipment out of cycle, right? It's an extra or an incremental investment. And so kind of then getting back to your original question, John, right now, most of the OEMs are expecting some kind of pre-buy in 2026.
(20:46):
They're basically saying, "Hey, we think the market's going to be flat from 25 to 26. So class eight sales roughly $250,000." Our forecast is saying down 15%. We think we're going to see something closer to 210, 205, 210, right? So we don't know what they're seeing, what they're thinking, what they're betting, how they're going to incentivize their customers to crunch those trade cycles. It's going to be enlightening as we start to roll into next year to see what those strategies look like. But that's the bet that they're making, that it's going to be a flat market and not a down market. And of course, all that in the context of tariffs, which I'm sure we'll talk about.
John Gough (21:27):
Hope springs eternal when it comes to business planning, right? It's real hard to business plan around contraction, just like emotionally.
Steve Tam (21:35):
It is. Nobody wants to step back. Another phrase we use around here is sprinting head long toward the cliff, right? So you see the downturn coming, but again, God bless capitalism. Nobody wants to be the first one to blink, right? And so it's all hands on deck. It's interesting that you mentioned that too, because another pattern that we see among the OEMs, not just the OEMs, but I guess the industry in general, we're tend to be slow to react on the downside. We see a data point that says, "Hey, something might be up." And we might pay attention to it and we might not. We see a second month or a second data point and it's like, okay, there's something going on here. So we wait for a third month for confirmation that, okay, now we've got a trend. Then you have to start the process of stopping or slowing down, right?
(22:22):
And it's not a one-month process. All the manufacturers, all the truck manufacturers have union labor in their shops and so they've got to give warn notices before they do any layoffs or cutbacks or whatever. Again, another 90-day process. Now you can take down days or slow down line rates or whatever, but yeah, exactly. You're literally two quarters in before you get to where you should have been six months ago. So if you were more nimble, more agile. So yeah. I was going to say it's a challenge too when the industry ramps, right? Because if we've cut those people, they went somewhere else and got jobs. They weren't going to sit around and wait. They needed a paycheck and back in competition for labor. You've got to bring the supply base back up. So you got to get the flow of materials going again. That's one of the reasons if we could just draw a line through the middle of those peaks and valleys and keep a steady pulse, we'd be so much better off.
John Gough (23:13):
You all are advising people on billion dollar decisions ultimately. These are huge choices that these organizations are having to make. And I think you did a great job kind of pointing out early, you start with the data. The data can only tell you so much. So you start with good data, good observation, good forecasting. And then you have to have good decision making on top of that. There's got to be good instinct and there's got to be strategic bets that go around that. When you think about the people who are doing that right, or if you were to give advice to somebody like, how do you make great bets on top of good data, where would you tell them to start?
Steve Tam (23:52):
I think you kind of have to step back from the detail and take in the more macro picture. So if you think about the US and our economy, even if we're only growing at 1% or one and a half percent, whatever it is these days, we're still growing, right? So consumption is increasing. And as long as consumption's increasing, that's more freight. We need more trucks, we need ultimately more capacity to make more trucks, right? Population's also growing. Growth rates are slowing on population, but those are the two things that drive economic growth, our productivity and population growth. So we as consumers are not buying less, we're buying more. We spend everything we make and then some. And so big picture, they know what the answer is. The question really ultimately comes down to timing, I think. When do you make that investment? How much pain do you have to feel in terms of being capacity constrained before you start, well, stick the shovel in the dirt and start digging, right?
(24:54):
And then in the context of the world that we're in today, where is that activity going to take place? We're being penalized for decisions that we made decades ago that were made. We sent manufacturing offshore because labor was so expensive in the US market. Consumers, not just consumers, I think businesses too in the US have a hard time understanding the concepts of price and value. We want the best quality at the lowest price that doesn't exist in a high wage market, right? It just doesn't. So we shipped everything offshore and then we said to ourselves, "Okay, what have we done?" And now we try to bring it back and it's good luck with that, especially within the context of a four-year presidential term. Getting things like steel mills or energy plants up in a short period of time like that, not for the faint of heart.
John Gough (25:44):
I mean, let alone setting up a manufacturing line north of the border, right? It's not a thing. It is a thing. It's just an incredibly challenging and expensive thing. Yeah, not a four-year cycle.
Steve Tam (25:56):
Yeah. So these players that are in the space today, they've all been in for the long run. They've all been around for just eons, decades. And there has been some consolidation or acquisition more on a global basis as the global economy has kind of ... Well, as the globe has shrunk, the economy hasn't shrunk, but all of the four major manufacturers on the class eight side now have European heritage. And so I think that the key there really is different regions of the globe perform differently at different times. And as long as the entire globe's not in a down cycle at one time, North America can subsidize Europe or Europe can subsidize Asia or whatever the case may be. You spread the pain, I guess.
John Gough (26:40):
Which is fine if you're thinking globally.
Steve Tam (26:43):
Yeah, sure. Yeah, it is. Yeah. Yeah. I don't know how this is going to play out. It's going to be very different than what we've seen previously.
John Gough (26:52):
Well, and you mentioned tariffs a few minutes ago. Most of our guests on this podcast have been very careful to not say that word. Here you are. And you said it first
Steve Tam (27:00):
First. Yeah. I mean, it's a reality. So we have a couple of different things going on in the tariff front. There's something called IEPA tariffs. Those are the ones that were kind of retaliatory at the very beginning, kind of back at Liberation Day in April, if you will. Of course, the legality of those tariffs has been called into question. The cases at the Supreme Court, nobody knows for 100% sure which way they're going to go. And if they agree that they're illegal, what does it look like after that? Do we have to give back the money? What's the mechanism for that? So that's one challenge. And that one has been, from our industry perspective, I think more difficult on the indirect front. What it's done to consumption, right? It's slowed consumption down. It's slowed freight down or kept freight growth slow. So from a demand perspective, it's really challenged our industry.
(27:49):
It's made it very difficult to plan. If we know the rules, we can figure out what the playing field looks like and we can conceive a strategy where we can be successful, but the rules just seem to be changing at the drop of a tweet, at least they were. Now things have calmed down a lot, relatively speaking, and I think some of that increased clarity or decreased ambiguity has been beneficial for the industry since that happened. The other set of tariffs though is the Section 232 tariffs. And so going after essentially the rest of the globe and putting a tax on anything that we import into the United States, several of the manufacturers have significant exposure that they manufacture a lot of trucks in Mexico. And it was a 25% tariff on heavy commercial vehicles. And the worst case scenario was that's on the price tag, right?
(28:42):
So on the sticker price. So I talked about a $30,000 price increase for the EPA 2027 emissions. Well, a 25% price increase is more than $30,000. So we were very nervous for a good period of time. Now, it seems that as though things have calmed down a little bit, we still don't have 100% clarity on what's going on here and there's a lot of negotiations still taking place. But for those things that were already USMCA compliant, the 25% tariff is not going to apply to those. So we get some relief in that regard. And again, that's been beneficial to the industry, at least for now. Now, if we change our minds about that, it could get pretty ugly. And by our back of the envelope calculation, based on kind of the mix of what's either made outside of the US or shipped into the US, it's probably close to a 10% price increase, again, on a class A truck.
(29:42):
So the manufacturers like the rest of the economy have been absorbing some portion of that, some portion of that tax, and that's a short-term solution, right? They can't continue to do that, especially with lower volumes. Their profit margins are getting squeezed just like a Everybody else. And there's a lot of work going on right now to try to figure out, okay, what does the playing field look like and what do we need to do next? So it's a developing story.
Kyler Mason (30:10):
So in the work you do, how do you account for this in your analysis and forecasting with so much uncertainty?
Steve Tam (30:17):
It's really hard. Truly it is. And that's kind of the comment that I made earlier on the podcast about transparency. We're again, very forthcoming about what our assumptions are because the manufacturers are living this day to day. We don't know, for example, what the parts content, non-US parts content of any manufacturer's truck is. Each manufacturer knows, I hope, what their non-US content is. And so they know what the hit is going to be for their particular product. They don't know from an industry perspective, I don't think. We don't have that kind of visibility into that kind of detail in the commercial vehicle space. I know on the automotive side, there's actually a sticker on the vehicle that says where the content came from. So they're a lot more advanced in that regard. And that's one of my laments about the commercial vehicle industry in the first place.
(31:09):
There's just so much data on the passcar side and not nearly as much on our side, but we're also classes four through eight, we're a half a million units a year in an average year as opposed to 16 million or 15 and a half, whatever the car market's going to be this year. So we're almost a rounding year.
John Gough (31:26):
One of the things that we think about and talk about a lot are the dealer channel. So not only the OEMs, but also how are they actually delivering these things to customers through their channels? And I know you gather data from them and you talk to dealer groups and kind of give advice and guidance to them. I'm wondering as you look at those successful relationships between the OEM and the dealer, are there patterns that emerge for you? What makes that really work or not work?
Steve Tam (31:56):
That's an interesting question. Successful relationships between the OEMs and the dealers. Well, no, the reason I say that is because they tend to be love, hate relationships. Obviously as a dealer, you're obliged to the OEM and somewhat beholden to them, but that then of course also makes you bitter somewhat about the relationship. I think there's actually one publicly traded new truck dealer in the space, Rush Enterprises. They're a Peterbilt and international dealer. And that's kind of gone the other direction. The OEM is the one who might hold that resentment. In fact, I think Rush has been told that they are not allowed to buy any more dealerships because they're too big. They're actually competing, I won't say head on, but competing very directly with the corporate mothership in both cases. So yeah, I don't know. It's a complicated dance. It really is. Obviously, the dealers don't have products, don't have service tools, don't have the support that they need without that mothership.
(33:02):
But I think they oftentimes feel constrained by the manufacturers and what they're allowed to do or what they're not allowed to do. I think they'd like more freedom, more autonomy to be able to make some decisions on their own. But they're also looking at their universe in a vacuum. They're in their own silo. They don't necessarily see the bigger picture. And that's why it's probably necessary to have that bigger oversight and why corporations or why the manufacturers, the OEMs make some of the decisions that they make. So yeah, it's an interesting model. Like on the Pascar side, we can sell direct to the customer from the OEM. We don't necessarily need the dealership. Tesla has kind of broken that mold and some of the others. And I don't know that we'll ever see that on the commercial vehicle side. Partly because of the size, I think.
(33:51):
I don't know that the dealers themselves could survive without that relationship and the support that comes along with it. I think they strive for it, but yeah, I don't think we'll ever see it. It's also a lot more complicated product. Think about the specing process on a truck. In the class eight world, those trucks are highly specced. Probably, I'm going to say probably 85% or more are, you have to sit down and go line item by line item through the specs and choosing options and that sort of thing to get the truck configured the way you want it to do the work that you want it to do. And there's a lot of expertise that at the corporate level that the dealers rely on to make those choices. I'm sure there are a lot of dealers out there who probably could do it on their own, but then you've got to stay current, right?
(34:39):
Nothing's static. We're constantly developing, changing, adding technology, especially in this day and age. And yeah, it's just a relationship for good, better, and different is going to have to exist, I think.
John Gough (34:52):
I was talking to a sales leader at a class eight dealer a couple weeks ago and I was asking him, "What's the secret to selling enterprise fleets? What do you need?" And his perspective on that was in the room, you have to bring the fleet leader and the service leader and the parts leader from the dealer side. And if you don't show up with all three of those things into that enterprise environment, then it's just like, you can't make ground. Often you can't even get in the door. And I think for some of that, I think for mid-size trucks, that is often true, especially in these larger fleets. You need the dealer because you need the parts and service arm and you need the local help. And you don't want, as a fleet manager, you don't want to own all of the problems that come with owning a fleet and only being able to go back to the manufacturer, this distant, sometimes multinationational corporation and be like, "Hey, my thing broke down.
(35:47):
Can you help?" No. Okay. Now what?
Steve Tam (35:50):
So yeah, the customers are just amazingly sophisticated and the dealers I think certainly recognize that. And thinking about successful dealers, they're really starting to parlay that sophistication into an advantage for themselves. There's just a lot of different things that they're doing to try to connect at a much different level. I joke that it's not rocket science, it's truck science. There's really only four things you have to do. You have to have the right truck in the right place, at the right time, at the right price. That's all you got to do.
John Gough (36:20):
How hard could it be?
Steve Tam (36:21):
Sounds like it's really easy, doesn't it? Yeah, that word right.
John Gough (36:25):
Doing a lot of work in that sentence.
Steve Tam (36:26):
It takes a lot of explanation. It absolutely does. Yeah. Yeah.
John Gough (36:32):
As we're getting close to wrapping up, I have maybe two more questions for you. The first one's about changes in the industry and things that inside, I would say inside the business we talk about a lot. Things like electrification and autonomy and like the tech that is changing the industry. And you go to a show and everybody's real excited to talk about that. I say everybody, not everybody. Many people are really excited. I'm wondering, as a longtime observer of the industry, what of those trends are you looking at and saying, "Yeah, that actually doesn't really have a ton of impact versus the ones that you're like, actually that's making a big difference."
Steve Tam (37:12):
The two that we've talked about already, alternative fuels and technology, or specifically autonomy, are the ones that we're the most focused on. Clean air is important. Has the EPA oversold the importance of clean air and have they done it with a blind eye toward what things really cost? I will tell you, historically, they're terrible at estimating the cost of compliance by a factor of 10 they typically miss. And so if that analysis had been correct, perhaps we would've made a different decision sooner. I don't know. But the technology to me is the part that's a lot more fascinating. If you think about trucking operation, the two most expensive items on the income and expense statement are fuel and labor. And so if you want to control the cost of logistics, essentially, that's what you've got to go after. Fuel, we thought we were doing that with the alternatives.
(38:04):
We hit the pause button, we'll wait. So now it's the driver piece, right? If you could take the driver out of the truck, you're going to save 25% of the cost of your operating expenses, something like that. But that technology is proving slower, I guess, in terms of development and adoption than many in the industry or even in the broader sense would like to see. In fact, I just saw one of the taxi services, one of the robo taxi services just got grounded, I guess for a better word, because they were passing school buses.
Kyler Mason (38:38):
I saw Waymo driving to a police standoff. It was a video.
Steve Tam (38:42):
Yeah. So we've got, especially at the lower levels of autonomy, we're really doing a good job I think of developing the building blocks and for sure making trucking operations safer. And that's a huge win. That's a huge gain because there's costs associated with all those accidents. Even if they're only fender benders, just bang a bumper or whatever, but hit the dock. All those things that you don't have to repair, don't have to fix, that's all good. And so if we can ... There's so many things that have to happen to see broad adoption. We are commercially delivering freight with driver out trucks today on a very limited basis, but we actually are doing it. So it does work. It doesn't work everywhere. The snowstorm that we had today, it'd probably be a game changer, a game ender, at least temporarily until the pavement clears up.
(39:34):
You've got legislative issues, you have insurance issues and public opinion, right? People already hate trucks. It's sad but true. The public just doesn't like them. It's like they don't realize the importance that they play in the economy. They're afraid of them and the driver out. I'm not sure whether they're going to be more afraid or less afraid. I assume so, at least initially. Yeah.
Kyler Mason (39:56):
Yeah. You haven't researched that yet?
Steve Tam (39:58):
I have some thoughts about that. I think it's a marketing issue actually. We can't market them as being 100% safe. We have to market them as being 90% safer or 95%. You pick a number. We're going to have accidents, we're going to have mistakes, we're going to have failures, we're going to have problems, but hopefully we're going to have fewer of them than if we didn't have the technology to help us keep it between the lines, so to speak.
John Gough (40:21):
But not just hopefully, right? I mean, I think the data really backs that up, especially in passenger vehicle, it's like way safer.
Steve Tam (40:28):
Yeah. It's happening. There's no question. There's nothing idiot proof to a sufficiently trained idiot, right? So we as humans behind the wheel, we just find innumerable ways to screw something up. And so just the reliability alone of being able to repeat the same action over and over and not make a mistake is priceless. So I think one of the things that has the potential to be a structural change within the industry if we can do that. I know there are still companies that are looking at platooning. So you have a driver in the lead vehicle and then you have three or four or however many trailing vehicles. Operationally, that's a challenge, right? When do you see five of any brand of a trucking company in a row going down the road? And if you've got five different companies, there are fuel savings to tailgating or platooning, I mean, I'm sorry.
(41:21):
And so how do you share this-
John Gough (41:23):
Drafting. It's all drafting.
Steve Tam (41:24):
Drafting, yes. Yeah. I'm not tailgating. I'm drafting. Yeah. Yeah. How do you share in those cost savings? Because lead guy certainly isn't saving anything. And so do you have the rolling- It's
John Gough (41:34):
Indian run.
Steve Tam (41:35):
Yeah, exactly. Yeah. And take turns. What are the logistics in that look like? So there are, like I said, a lot of operational considerations to challenge that, but I don't know. It's fun times to be in the industry. That's part of the reason I'm still here 25 years later is because it's just something different every single time. You just never know what you're going to be up against next. And it's always fascinating. There's a lot of creative and a lot of energetic people in the industry looking for ways to improve, solve the problems, be more effective, more efficient, more productive. Yeah, it's amazing.
John Gough (42:07):
That's a great place to get a wrap. My last question to you, Steve, if you woke up tomorrow and you were the chief strategy officer for one of these big OEMs, what's the bet you'd make first?
Steve Tam (42:19):
Well, myself, I really love battery electric, but the technology's just not there. So you didn't say how far in the future the bet had to be.
John Gough (42:29):
That's right. That's right. I said wake up tomorrow.
Steve Tam (42:31):
Yeah. Well, wake up tomorrow, but when do I actually have to place the money and realize the return? No
Kyler Mason (42:36):
Rules yet.
Steve Tam (42:38):
Yeah. So that's one of the beautiful things that as we've looked at the developments over the last, let's say five or 10 years, is the level of interest has garnered so much investment that we are making technological leaps and bounds. You look in China today and they're already at solid state batteries, right? Battery density or energy density is one of the big hurdles for adoption of battery electric in the class eight world. And so we didn't know five years ago we were going to be able to get there in five years and what's next? Really, a perfect fuel would be hydrogen. And it would be really cool if we could manufacture the hydrogen on board because then you don't have to store fuel, you don't have the distribution costs, just fascinating. There are actually, there's a study that I read about hydrogen powered airplane, right?
(43:29):
Sucking the moisture out of the sky as it's flying, making its own hydrogen to keep it airborne. Now, I don't want to ride in that plane today, but you get some hours on it and I'd be the first one to get in there. So I like the technology.
Kyler Mason (43:43):
How many hours do you need?
Steve Tam (43:44):
I don't know. I'll let you know.
John Gough (43:47):
He needs to receive the study first. Oh man.
Kyler Mason (43:49):
Steve, this is great.
John Gough (43:50):
Yeah, man. We so appreciate you coming on and sharing this with us.
Steve Tam (43:54):
John, Kyler, it's good to talk to you guys. I'm happy to do it.
John Gough (43:57):
Let's talk a lot more. Thanks, Steve.
Steve Tam (43:58):
Sounds good. Yep. Take care.
John Gough (44:01):
You win is presented by Element three, a marketing firm focused on modernizing go- to-market strategies for manufacturers that sell through complex distribution channels. We help leaders solve problems across demand generation,
Kyler Mason (44:13):
Sales channel support, and brand development.
John Gough (44:17):
If you'd like more from myself or John, connect with us on LinkedIn. And for more from Element Three, visit elementhree.com. That's elementthree.com.