It’s no secret that new product sales have been on the decline. The initial cost of product sales is negligible in relation to the business gained through future service, causing manufacturers to invest more in the service side of their business to correct declining product margins and changing customer demands. And now, with the impending tariffs on raw materials like steel and aluminum, a rise in cost almost always means a dip in net new sales. But, in the face of this downward trend of new product sales, heavy-duty truck orders are treading a different path. In the first quarter alone, trucking companies ordered big rigs at a record pace – nearly double the orders from the first quarter of 2017 – racing to add capacity to meet surging freight demands.
So, what’s happening to cause this tidal wave of truck orders?
The best explanation is an influx of cash in truckers pockets: From the gap between demand and capacity leading truckers to charge higher prices, to a windfall from the new tax law enacted in January, these shifts have given companies more cash to bulk up their fleets. How much exactly? Enough for fleets to order 133,900 heavy-duty trucks in the first three months of the year, according to last week’s report by analyst group FTR. The report also included a preliminary estimate of a 46,300 final number of new orders for March, meaning that this wave isn’t slowing down any time soon. With more cash to spend, owners have both the ability to replace older trucks, as well as the confidence in future demand.
The good news for after-sales service? This persistent growth in orders has stacked truck manufacturers’ backlogs to the highest it’s been in nearly three years, meaning they’re going to have to rely heavily on the service side of their organizations to function like, well – a well oiled machine. According to a study by Bain and Company, service has an average gross margin of 39 percent, which is higher than the 27 percent gross margin on most new products. This means that the more manufacturers focus on optimized after-sales service, while new product sales are also rising, their margins on both sides of the organization have the potential to go through the roof.
New product sales alone will not be enough to enable trucking manufacturers to gain or sustain the competitive differentiation needed to ensure long term financial performance. But, combined with the profit lever available in after-sales service, the manufacturers who invest in service will be the toughest ones to beat.