truck industry s green challenge 2008-09-23

8/3/2019 Truck Industry s Green Challenge 2008-09-23

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Automotive

The truck industrys green challengeHeadwind or competitive edge?


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Automotive


pwc


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The truck industrys green challenge

Headwind or competitive edge?

Edited by PricewaterhouseCoopers

September 2008, 68 pages, 41 figures, softcover

All rights reserved. Reproduction, microfilming, as well as recording, storing and/or processing ontoelectronic media are not permitted without the expressed consent of the editor.

Cover photoG. Fischer/Schapowalow

TypesettingNina Irmer, Digitale Gestaltung & Medienproduktion, Frankfurt am Main

PrintingDruckerei J. F. Niemeyer GmbH & Co. KG, Ostercappeln

Printed in Germany

2008 PricewaterhouseCoopers AG WirtschaftsprfungsgesellschaftPricewaterhouseCoopers refers to the German firm PricewaterhouseCoopers AGWirtschaftsprfungsgesellschaft and the other member firms of PricewaterhouseCoopersInternational Limited, each of which is a separate and independent legal entity.


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Foreword

3

Foreword

The key note of the upcoming 2008 International Motor Show (IAA)Commercial Vehicles in Hanover, Germany, Commercial vehicles are onthe move for everyoneis indeed a very accurate theme in the light ofincreasing globalisation and recent records in global trade and transportvolumes. But what about the industrys challenges on this move? Certainlythe globalising world economy is a key growth driver for the truck industryand it is not incorrect to say that global economic conditions directly affectthe transportation and by association, the truck industry on a macro level.Aside from these general economic issues, there are some criticalchallenges for the truck manufacturing industry.

While public awareness around emissions, fuel consumption, and relatedchanges in consumer behaviour are key market drivers for carmanufacturers, the truck industry surprisingly has been able to keep out ofthe public debate and treat this environmental issue more or less as aregulatory burden with which they must comply in much the same way asregulations for road safety, noise reduction, and others. For truckmanufacturers, transport efficiency still is the core factor from a commercialpoint of view that drives customer purchasing decisions. Increasingresource constraints, higher fuel prices, and stricter emission standards willcertainly have a negative effect on transport costs and thus efficiency, whichwill in turn drive truck purchasing decisions accordingly.

As a sequel from analyzing The framework and dynamics of the CO2(r)evolutionfor the car industry that was conducted in 2007, this study aimsto examine impacts of the increasingly important trend for truckmanufacturers to address eco-friendly solutions. Our results build uponanalyses of each major industry stakeholders parameters and focuses onexploring different scenarios and their consequences, concluding in anassessment of whether the truck industrys green challenge is a Headwindor competitive edge for its players.

Our automotive experts of the Automotive Advisory practice as well as thePwC Automotive Institute looked at this complex industry network frommultiple angles to shape pathways for the truck industry. We cordially thank

the team namely Dr. Michael Borgmann, Jan Maser, Liang Cheng andStephan Huber as well as Nishal Chauhan, Calum MacRae, EmericDeramaux and Paul McCarthy for the production of this study as well anyvaluable contributions, drawing upon our expertise in both areas the trucksector as well as market and technology assessments in the automotiveindustry.

September 2008

Harald KayserPartnerGerman AutomotiveLeader

Felix KuhnertPartnerGerman AutomotiveAdvisory Leader

Bo KarlssonPartnerCommercial VehiclesCompetence Center


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Contents

4

Contents

Foreword ........................................................................................................ 3

Figures............................................................................................................6

Abbreviations..................................................................................................8

A Executive summary ................................................................................11

B The truck industry and its underlying dynamics.....................................15

1 Global truck market: Growth driver emerging markets ..........................15

2 Road transportation: Increasing demand...............................................23

3 Key challenge for the industry: Driving efficiency ..................................24

C The government: Value driver or drivers worry?...................................27

1 On the path to a cleaner environment....................................................27

2 Future emission standards .....................................................................32

3 Outlook: CO2 as new challenge? ...........................................................35

D The transportation industry.....................................................................38

1 Under pressure: Rising costs hit transportation industry .......................38

2 Managing rising costs.............................................................................41

3 Consumers: Barriers or drivers to technological change?.....................44

E Green strategies for sustainable growth ................................................49

1 Driven by resource constraints and rising oil prices ..............................49

2 Business models: Meet future challenges .............................................52

3 Harmonisation of emission standards: Highly appreciated buthard to realise.........................................................................................59

Appendix.......................................................................................................61


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Contents

5

Expert interviews.......................................................................................... 65

Methodology consumer and transport company survey..............................66

Contacts .......................................................................................................67


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Figures

6

Figures

Fig. 1 Industry stakeholders..................................................................11

Fig. 2 Global truck sales by region (20032013)..................................15

Fig. 3 Medium and heavy duty trucks: World........................................17

Fig. 4 Medium and heavy duty trucks: North America..........................17

Fig. 5 Medium and heavy duty trucks: China........................................17

Fig. 6 Medium and heavy duty trucks: Western Europe....................... 18

Fig. 7 Top 15 Truck manufacturers....................................................19

Fig. 8 Key facts: Top 5 European truck manufacturers .....................21

Fig. 9 Consolidation pressure: Market players by region .....................22

Fig. 10 Economic performance and truck market cycles........................ 22

Fig. 11 Transport volume, economic growth and populationgrowth in the EU-27 ....................................................................23

Fig. 12 Modal split in the transport sector...............................................24

Fig. 13 Net importing regions and oil price .............................................25

Fig. 14 Regulations in the truck industry.................................................28

Fig. 15 CO2 contribution by sector..........................................................29

Fig. 16 Reduction of pollutants in the European Union ..........................30

Fig. 17 Emission standards by region.....................................................31

Fig. 18

Euro emission standards apply in various countries ..................32

Fig. 19 Emission standards in comparison .............................................33

Fig. 20 Test cycles in Europe, USA and Japan ......................................34

Fig. 21 CO2 Futures challenge for the transportationindustry?......................................................................................35

Fig. 22 Potential instruments to reduce CO2 emissions in roadtransportation ..............................................................................36

Fig. 23 Average cost structure of Germanys transport

companies...................................................................................38

Fig. 24 Costs for a 1000 l diesel in Germany..........................................39


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Figures

7

Fig. 25 German road toll dependent on emission class for

trucks (> 12 t) ..............................................................................40

Fig. 26 Ability to shift costs to consumers...............................................40

Fig. 27 Expected increase of transport costs..........................................41

Fig. 28 Cost-savings measures and their respective feasibility..............41

Fig. 29 Top 10 purchasing criteria ..........................................................42

Fig. 30 Average fuel cost increases in the transportationindustry........................................................................................43

Fig. 31 Empty runs in the EU ..................................................................44

Fig. 32 Consumer perception of trucks...................................................45

Fig. 33 Consumer evaluation of environmental friendliness...................45

Fig. 34 Alternative transport media substituting trucks...........................46

Fig. 35 Willingness to pay for green products.........................................46

Fig. 36 Responsibility for reducing truck emissions................................47

Fig. 37 Scenario analysis: Driven by transportation need andcrude oil price..............................................................................50

Fig. 38 Powertrain technologies and their ability to meet futuretransportation needs ...................................................................54

Fig. 39 Truck manufacturers approach towards a green future.............56

Fig. 40 Development of truck industrys business model .......................58

Fig. 41 Top 15 Global truck manufacturers.............................................64


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Abbreviations

8

Abbreviations

AG Aktiengesellschaft (public limited company)

ACEA Association des Constructeurs Europens dAutomobiles(European Automobile Manufacturers Association)

AFS Adaptive Front-lighting System

AMA American Motorcyclist Association

B2B Business to Business

BGL Bundesverband Gterkraftverkehr Logistik und Entsorgung

bn Billion

BTL Biomass to Liquid

CEO Chief Executive Officer

CH4 Methane

CO Carbon Monoxide

CO2 Carbon Dioxide

DSLV Deutscher Speditions- und Logistikverband

EC European Commission

EPA Environment Protection Agency

ESS Emergency Stop Signal

ETC European Transient Cycle

ETS Emission Trading SchemeEU European Union

FAW First Automobile Works

FTP Federal Test Procedure

g Gram

g/kWh Gram per kilowatt-hour

GDP Gross Domestic Product

GmbH Gemeinschaft mit beschrnkter Haftung (limited liability company)

Gpkm Giga passenger kilometre


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Abbreviations

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GVW Gross Vehicle Weight

HC Hydrocarbon

HDT Heavy Duty Truck

HDV Heavy Duty Vehicle

IAA Internationale Automobil-Ausstellung (International Motorshow)

IPCC Intergovernmental Panel on Climate Change

JP Japan

k Thousand

km Kilometre

kWh Kilowatt-hour

l Litre

LDT Light Duty Truck

LDV Light Duty Vehicle

m Million

MAN Maschinenfabrik Augsburg Nrnberg

MDT Medium Duty Trucks

NAFTA North American Free Trade Agreement

NOx Nitrogen Oxide

NTE Not to Exceed

OECD Organisation for Economic Cooperation and Development

PFC Perfluorocarbons

PM Particulate Matter

R&D Research and Development

RoW Rest of World

SF6 Sulphur Hexafluoride

SET Supplemental Emissions Test

t Tonne

TCO Total Costs of Ownership


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Abbreviations

10

tr Trillion

U.S. United States of America

VDA Verband der Automobilindustrie (German Automotive IndustryAssociation)

WHDC Worldwide Heavy Duty Certification

WHSC World Harmonised Stationary Cycle

WHTC World Harmonised Transient Cycle

.


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Executive summary

11

A Executive summary

The relationships of the main stakeholders of the commercial vehicleindustry form a complicated triangular network. The economic situation oftruck manufacturers is not only impacted by their customers, transport andlogistics companies, but also by various sets of law and regulations. Notonly do the actual customers challenge the manufacturers business modelsby their requirements, but the legal framework does too from safetyregulations to emission restrictions that significantly influence the industrysdevelopment and truck manufacturer profitability. Emission regulation hasbecome paramount in this context, which was emphasised by GranSimonsson, CEO, of Volvo Trucks Region Central Europe GmbH, in hispress statement for the IAA, 2008: The development nowadays is primarilydriven by emission legislation which means that stringent emissionstandards are competing with the resources to develop other customerbenefits.

Regulator

Resourceconstraintsand climate

changeTruck

manufacturer

Trans-portationcompany

Which regulatory frame-work needs to be set-up toachieve climate targets?

How to comply with newregulations on technologicallevel?

How to balance regulations,economic success andcompetitive advantage?

Which measures need tobe conducted to regulatetransportation moreefficiently?

How to create future trans-portation infrastructure?

How to balance regulationsand economic success inthe area of transportation?

What is the right technological roadmap tomeet future regulations?

Who is bearing the costs for environmentalfriendly technology and transportationconcepts?

Is the consumer willing to pay for greentransportation products?

Source: PwC

Fig. 1 Industry stakeholders

The triangular network environment is characterised by the following issues:

Firstly, regulatory requirements have been and will continue to impacttransport companies. Whether directly through fees, or indirectly byincreasing costs for vehicle development, commercial vehicle life cyclecosts are strongly influenced by legal regulations. Costs are the key factorfor the highly competitive transport industry and any increases in costscreate new challenges for this sector.

Secondly, rising oil prices have a strong impact on this industry sector.Since fuel costs are the biggest factor contributing to total transportationcosts, rising fuel costs have put transport companies under high pressure.


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Executive summary

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Thirdly, the global political agenda and the publics increasing

environmental awareness demands that greenhouse gases such as CO2are extensively reduced, with a fair share of that reduction to bedelivered by the transport industry.

At the same time, further globalisation and the growth in emerging marketsexacerbate the situation, because growing traffic volume increases fuelconsumption and concurrently global emissions. The main focus of thisstudy will be the examination of possible impacts for truck manufacturers.The results are based on interviews with industry executives and experts, asurvey conducted with executives of transport companies as well asconsumers and supported by the analysis of our PwC Automotive Institute.

Generally, the demand for transport services is strongly dependent oneconomic growth. Therefore, the industry has shown strong cyclicality in thepast, particularly in the mature markets such as the U.S. or WesternEurope. In addition, significant economic development and growth in theemerging markets have fuelled transport volume and demand forcommercial vehicles. However, these markets confront transitional truckmanufacturers with different demand patterns caused by different regulatoryregimes and consumer preferences.

Further emission standards are steadily increasingly stringent and requiretruck manufactures to provide innovative engine technologies. Theintroduction of varying standards in different markets has increaseddevelopment efforts of manufacturers significantly. Thus far, existing

emission standards control quantities of substances that are heldresponsible for environmental pollution, e.g. CO, NOx, or particulate matter.Manufacturers have been making great improvements in these areas.Globally, growing awareness of climate change issues puts the greenhousegas CO2 in the limelight of the public discussion.

Within the next 510 years, CO2regulations will inevitably become part of emission

regulations. The question is, what will it look like and how will it be regulated?

Jan-Eric Sundgren, Senior Vice President, Environmental and Public Affairs, Volvo Group

Unlike other pollutants, CO2 is the fundamental product of combustionprocesses in an engine. Thus, a reduction in CO2 emission can be achievedwhenever fuel efficiency can be increased. Alternatively CO2 emissions canbe reduced by utilising regenerative fuel resources, since no additional CO2is generated by burning renewable fuels and the CO2 life-cycle stays inbalance.

In the end, total transport costs are the driving factor in the highlyfragmented global transport industry, as B2B businesses such as thecommercial vehicle market are cost sensitive to a greater extent. Incontrast to the emotionally driven passenger car market, low life-cycle costsare the prime motive for purchasing a commercial vehicle. Transportationcosts are, to a large extent, determined by fuel costs, so that life-cycle costsaccount for fuel consumption as well. Accordingly, demand for fuel efficient

vehicles rises with increasing fuel costs.

The public discussion about climate change and greenhouse gases hasintensified. This discussion has great influence on the passenger car market


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Executive summary

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at first, and will soon affect the commercial vehicle industry. As the PwC

survey shows, the majority of consumers see that truck manufacturersshould mainly be responsible for reducing CO2 emissions. Even if the PwCsurvey covers only the German market, it is probable that a similar attitudeis prevalent in other markets as well, or can be expected to emerge in thenear future. Thus, many industry experts expect the introduction of CO2emission standards sooner or later and this creates a strong compulsion toact quickly for truck makers.

Analysing different scenarios for the development of transport volumes andoil prices, it becomes obvious that innovative competence in developingclean and fuel efficient engines has an essential impact on thecompetitiveness of truck manufacturers, regardless of the initial scenario orthe underlying market conditions. Thus, in connection with strict emissionstandards, innovative engine technologies create entry barriers toestablished markets in North America and Europe and they facilitate entryinto emerging markets, as domestic suppliers often have not acquired thenecessary technology. In summary, expertise in clean and fuel efficientpropulsion technology will generate a significant competitive edge.

While improvements for long-distance traffic are generated by advancingdiesel engines and using alternative fuels, enhancements of alternativepropulsion technology like hybrids or natural gas engines are utilised toincrease fuel efficiency for short distance traffic. As long as truly efficientnew technologies have not been developed, manufacturers face greatthreats if they invest in the wrong technologies.

Measures to increase efficiency are determined by the size of a truck. The focus for heavy

trucks, which are used for long-haul transports will lie on alternative fuel, however, diesel will

still be predominate. While for the distributor traffic (light and medium trucks up to 12 t)

alternative drive concepts such as natural gas and hybrid will be pursued as well.

Dr. Thomas Schlick, Executive Director, VDA

Therefore, communication with the key customers the transportcompanies will become essential for truck manufacturers to developtechnological innovations that meet customer demands. Moreover, cost-intensive R&D efforts will trigger increasing consolidation pressure in theindustry, particularly for emerging markets. Finally, developing the right

technologies leads to significant opportunities to create a competitive edge.

The search for basic approaches for further reducing pollutant emissionsand increase fuel efficiency not only considers the powertrain. Lightweightconstruction and improved aerodynamic attributes are taken into account forvehicle design. New telematics and innovative transportation concepts likethe megaliner aim at increasing utilisation of infrastructure. This increasesthe need to manage the augmented product and to redesign the productrange to meet market requirements.

With an increasing number of different propulsion technologies andinnovative transportation concepts, economies of scale will be eroded. This

effect will additionally be intensified by the requirement of customisedtransport solutions when entering emerging markets. Therefore, costefficient production and product modularisation will gain in significance.


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Executive summary

14

The current market situation, which is identified by high oil prices and

sustained growing transport demand, offers a good starting point forEuropean manufacturers to further generate growth, since they alreadyachieved technological expertise in low-emission and fuel efficientpropulsion technologies and forward-looking transport concepts.

While production excellence and ongoing globalisation have long beenaddressed, managing technological risk and designing the range ofaugmented products are now in the spotlight.

The implementation of globally harmonised standards would be a significantrelief for truck makers, since it would drastically reduce competing R&Defforts. Financial resources could then be allocated for the development ofinnovative propulsion technologies. The implementation of globallyharmonised standards requires intense coordination and the protractednature of ongoing negotiations exemplifies how difficult it is to achieve aconsensus in this matter. A focus on stricter enforcement of emissionstandards and shorter time periods between succeeding regulatory levelscould be a promising approach in this context. An important step towardsharmonised standards could be the World Heavy-Duty Certification(WHDC), a new standardised test cycle, which might be introduced withEURO VI, and gradually be introduced by other countries.

In summary, as a result of the green challenge, the truck manufacturingindustry must intensify their efforts to cope with regulations and staycompetitive with other transport means. Nevertheless, the European

manufacturers are in a promising position, since exhaust emissionregulations and high fuel prices are going to increase their opportunity toexploit their technological competitive edge on a global scale. Theimplementation and enforcement of global emission standards could evenimprove this position. At the end of the day, there seems to be a goodchance for the European truck industry that the regulation-inducedheadwind turns into a tailwind.


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The truck industry and its underlying dynamics

15

B The truck industry and its underlyingdynamics

The global truck industry plays a key role in the transportation of goods fromthe manufacturer to the consumer. Although market conditions vary acrossregions, the global truck industry continues to be a pivotal agent to enableand support economic growth.

1 Global truck market: Growth driver emergingmarkets

Despite the various market conditions and challenges, the global truckindustry is growing. The global demand for medium and heavy duty trucksrose by approximately 5.6% from 2006 to 2007 to reach a sales volume of2.4 m units. Based upon 2007 data, the truck market is dominated by theemerging markets of China, India and Russia, which together account formore than 46% of global demand. China alone accounts for 30% of globaltruck demand, while North America and Western Europe account for 19%and 14% respectively. Global truck demand is predicted to grow by another3.5% per year amounting to 2.9 m units by 2013.

0

250.000

500.000

750.000

1.000.000

1.250.000

1.500.000

2003 2004 2005 2006 2007 2008e 2009e 2010e 2011e 2012e 2013e

Year

China, India, Russia Eastern Europe North America

Western Europe Rest of world

Source: Global Insight, Global Automotive Group

Volume(inunits)

Fig. 2 Global truck sales by region (20032013)

Western and Eastern EuropeThe European market, the headquarters of many of the leading truckmakers, is driven by the individual markets cycles. Western Europeanmarkets grew at a stable rate between 4% to 5% in the past, while the lastyears have been characterised by a slow-down. This slow-down is primarilydriven by inflationary pressure and the subsequent price increases forconsumer goods with the affect of decreasing demand in the transportationindustry. Economic problems in the European market are expected tosubside in the near future. According to the OECDs Economic Outlook,published in June 2008: The economic expansion is likely to moderateduring 2008, with a trough in the second quarter. Output growth is being


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slowed by tighter financial conditions, higher inflation and weaker housing

market activity. Growth is expected to drop below potential this year, beforepicking up slowly through 2009 as financial headwinds dissipate and theexternal environment improves.Thus, marginal growth of 0.3% per annumin the European truck market is expected in the short-term. The regionsoutlook is boosted by much faster growing transportation needs in EasternEurope where current sales were up 15% and growth of 4% is expected inthe upcoming years.

North AmericaNorth America is one of the major markets for the industry, withapproximately 450,000 units sold in 2007. The market grew at a moderatelevel of 4.4% in the last four years. The new American emission standardEPA07 introduced in 2007 led to a pre-buy effect in 2006, increasing salesvolumes for the year which were then followed by a sharp drop in 2007.Looking to the future the North American truck market faces severalchallenges, including the new emissions legislation in 2010 and the marketsuncertain economic prospects could lead to high pressure in this market.

China, India and RussiaThese markets are the key drivers for growth in the truck industry. Theleading market is China with about 700,000 trucks sold in 2007 and anannual growth rate of 15.4% over the past four years. The strong growth isprimarily driven by the booming transportation needs and large investmentsin road infrastructure. The introduction of the new Euro III emission standardin 2007 also had a positive effect on Chinese sales. India and Russia are

following China with average growth rates of 16% per annum. Russia, withits predicted sales volume of approximately 170,000 trucks is a market thatis of growing importance, especially for the European based truckmanufacturers.

Market segmentationThe truck market is broadly segmented by gross vehicle weight (GVW)which indicates the use of the truck. Medium-duty trucks span the grossvehicle weight range 6 to 16 t and the heavy-duty trucks cover those withgross vehicle weight of over 16 t.1

Medium-duty trucks (MDTs) are typically utilised for local and regional

distribution, as they are more flexible and suited to urban roads andinfrastructure than heavy-duty trucks (HDTs), which are mainly used forlong-haul transportation and heavier loads.

HDTs account for 1.45 m units of the global total, with MDTs taking theremaining 0.9 m units. HDTs have also been dominant in terms of recentgrowth between 2003 and 2007 HDTs grew by 12% per year, while MDTsgrew by 6%.

1 Light-duty trucks with a GVW from 3.5-6t are not within the scope of this study. Countries and truckmanufacturers use different categories to define LDT, MDT and HDT.


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0

400

800

1200

1600

2000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Year

Heavy-duty Medium-duty


Volume(inkunits)

Fig. 3 Medium and heavy duty trucks: World

0

100

200

300

400

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Year



Volume(inkunits)

Fig. 4 Medium and heavy duty trucks: North America

0

200

400

600

800

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Year



Volume(inkunits)

Fig. 5 Medium and heavy duty trucks: China


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0

100

200

300

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Year



Volume(inkunits)

Fig. 6 Medium and heavy duty trucks: Western Europe

In the forthcoming years demand for HDTs will continue to overweigh theMDTs as the drivers of topline truck growth China, Russia and India areof considerable geographic scale and are building up their road network andtransportation infrastructure giving conditions suited to HDTs. China ispredicted to increase its HDT sales gradually until 2013 accounting for anannual growth rate of 7.3% amounting to an additional sales volume of250,000 units. Simultaneously, Chinas demand for medium-duty trucks willremain stable across the forecast period. A similar growth pattern ispredicted for India.

Key playersMost of the worlds major truck manufacturers are headquartered inWestern Europe and North America, but truck manufacturers, such as Tata,Dongfeng and First Automotive Works (FAW) from the emerging economiesof India and China are gaining ground, and stand as the 4th, 5th and 6thlargest manufacturers respectively on a global level.


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0 50 100 150 200 250 300 350 400

Hino

Isuzu

Scania

Iveco

Ash. Leyland

MAN

China National HTC

Navistar

FAW (China)

Dongfeng

Tata

Paccar

Volvo

Daimler

Sales volume (in k units)Source: VDA

Fig. 7 Top 15 Truck manufacturers

Of the top 15 manufacturers measured by unit sales volumes, only twomanufacturers Daimler and Volvo can truly be seen as global players.These manufacturers have multiple brands in their portfolio, which originatefrom different regions of the world and backed by local production, whichgives them global player status. However, all European truck manufacturersare playing a key role in development of innovative technologies andsustainable transport solutions.

Besides the technological adoption to meet global emission targets and the global

harmonisation of various emission standards, the localisation of trucks in the different regions

will be a key challenge in the future to cope with. It is crucial to establish ourselves in low-cost

markets with respective trucks.

Georg Weiberg, Head of Truck Product Engineering, Daimler AG


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Manufacturer Key figures Market strategies

Headquarter: Stuttgart, Germany

Brands: Mercedes-Benz, Freightliner,Mitsubishi Fuso, Sterling, Thomas Built,Western Star

Employees: 80,067

Revenue: EUR 28,466 m(trucks)

Operating profit: EUR 2,121 m (trucks)

Net sales by market

WE NA SA A Other

Daimler Trucks

19% 24% 11% 31% 15%

Global Excellence with theinitiatives management of cycles,operational excellence, growth andmarket penetration and futureproduct generations as importanttool for the business strategy

Capturing down-stream valuethrough vehicle leasing, fleetmanagement, repair andmaintenance

Strategies to enter emergingmarkets dependent upon marketsituation, cooperation, andacquisitions as applicable strategic

options to enter those marketsHeadquarter: Turin, Italy

Brands: Iveco, Astra, Irisbus, Magirus

Employees: 26,461

Revenue: EUR 11,174 m

Operating profit: EUR 813 m

Net sales by market

WE EE Other

IVECO

70% 15% 15%

Aiming at increasing market sharein the Central and EasternEuropean countries by launchingnew products

Emerging markets are in thefocus, the Russian and Indianmarket are entered with localpartners

In terms of alternativetechnologies compressed naturalgas is seen as the most favourablesolution

Headquarter: Munich, Germany

Brands: MAN, ERF, Neoplan, Star

Employees: 36,591

Revenue: EUR 9,023 m (trucks)

Operating profit: EUR 1,023 m (trucks)

Net sales by market

WE EE Other

MAN

49% 15% 36%

Aiming at global growth

Joint Venture with Force MotorsLtd. (India) as key aspect torealise global growth

Assembly plant in Krakow enablesMAN to manufacture within thestrongly growing EasternEuropean markets

Optimising organisation and theprocess of production

Strengthening distribution networkin Eastern Europe and the MiddleEast

Headquarter: Sdertlje, Sweden

Brands: Scania

Employees: 35,096

Revenue: EUR 5,586 m (ScaniaTrucks)1

Operating profit: EUR 1,235 m (vehiclesand service)1

Net sales by market

WE EE SA A Other

Scania

52% 22% 14% 9% 3%

Strong market position in Russia

shall be expanded by largerservice network

Efficiency increase is to bereached by the Scania ProductivitySystem (SPS)

Service products are seen as animportant issue to providemaximum value to the customer

Large investments are done toincrease production capacity


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Manufacturer Key figures Market strategies

Headquarter: Gothenburg, Sweden

Brands: Volvo, Renault, Mack, NissanDiesel

Employees: 63,200

Revenue: EUR 19,955 m (trucks)1

Operating profit: EUR 1,613 m (trucks)1

Net sales by market

WE EE NA SA A Other

Volvo

42% 12% 14% 6% 17% 9%

Market growth is aimed especiallyin Eastern Europe and Asia

Significant investments inincreasing production capacity

Strong focus on the aftermarketand further development of thedealer network

Focus on products with increasedcustomer value

Safety aspects and vehicle andplant emission reductions arestrategic key goals

Productivity and cost-efficiency

improvements1 Exchange Rate 31 Dec 2007

WE = Western Europe, EE = Eastern Europe, NA = North America, SA = South America, A = Asia

Source: Company web sites

Fig. 8 Key facts: Top 5 European truck manufacturers

Market dynamics ConsolidationWhile the light vehicle market those vehicles up to and less than 6 t grossvehicle weight saw almost 69 m units assembled in 2007, the truck marketsaw approximately 2.4 m units of medium and heavy-duty trucks assembledin 2007. Due to the relative low level of market volume and the cyclicaldemand for trucks, economies of scale are more difficult to realise anduncertainties in product planning must be overcome by the truckmanufacturers. This factor has led to strong competition and consolidationin Western Europe and North America and will no doubt lead toconsolidation in the fragmented Asian scene. According to market analysis,Asia has 33 manufacturers, of which most are located in China. Of theseAsian manufacturers, ten truck manufacturers produce 87% of the overallvolume, while the remaining 23 players account for only 13%. This providesa significant contrast to the concentrated West European markets wherejust four manufacturers produce 89% of the volume. Despite the market sizeand growth perspectives, the number of competitors in the Asian marketappears to be unsustainable, since the cumulative number of manufacturersin Western Europe, NAFTA and the Rest of World (RoW) is far lower than inAsia alone.


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0%

20%

40%

60%

80%

100%

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Number of alliance groups

Asia Western Europe NAFTA Rest of worldSource: Automotive World and PwC Analysis

Shareinregionsassemblyvolum

e

Fig. 9 Consolidation pressure: Market players by region

Market dynamics CyclicalityEconomic growth brings greater demand for the transport of goods andservices. As economies are subject to the business cycle, there is acorresponding degree of cyclicality in truck markets. As economies grow,demand for goods transportation increases, either by trucks, trains, ships orplanes. Similarly, when economies face downturns, transportation needsalso decrease. This cyclicality is straightforward in mature markets, such as

in the U.S. and Western Europe. On an annual basis, growth rates of GDPexpansion and truck sales are linked as such that a drop in GDP by 1% isaccompanied by a drop of truck sales of 7%. Hence, the truck market is apro-cyclical market, which highly correlates with the current economicperformance.

-30%

-20%

-10%0%

10%

20%

30%

40%

50%

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Year

-4%

-1%

2%

5%

8%

U.S.-Truck sales growth U.S.-GDP growth

Source: UNStats, PwC

Sa

lesgrowth

GDPgrowth

Fig. 10 Economic performance and truck market cycles


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23

2 Road transportation: Increasing demand

The markets are on the move: Due to advancing globalisation, decliningtrade barriers and an increasingly mobile workforce, the transportationindustry continues to enjoy above average growth. This also holds true formajority regions such as the European Union, with about EUR 250 bn ofrevenue.

Based upon data and forecasts from the European Commission, there willbe ample room for growth in the economic activities, passenger transportactivities and freight transportation by trucks in the European Union.However, the need for road transportation of trucks is forecasted to exceedeconomic growth. A growing European single market and the increasingoutsourcing of manufacturing processes were leading to an increasingdemand for road transportation. However, due to the increasing importanceof the tertiary sector, road transport activities and GDP growth will graduallydecouple after 2025.2

50

100

150

200

250

300

1990 1995 2000 2005 2010 2015 2020 2025 2030

Year

Inde

x(1900=100)

GDP Population Passenger transport activity Transportation by trucks

Source: Eurostat

Fig. 11 Transport volume, economic growth and population growth in the EU-27

While transportation of goods and services can be conducted by several

modes trains, trucks, ships and airplanes it is the greater flexibility oftruck transportation which has seen it increasingly favoured compared toother available modes of transportation. For example, while road transportcarries more than 70% of all inland freight in Europe, railways and inlandnavigation account for less than 30%3 and is set to fall further as freighttransportation on roads is set to increase to 75.4% by 2030. However,industry experts reckon that there is sufficient demand for all transportmeans; the industry needs to work on increasing overall efficiency of thecombined transportation modes.

2 European Commissions Report on European Energy and Transport Trends to 2030, Update 2007.3 ACEA and Eurostat.


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75.4%75.2%74.8%74.4%74.0%72.6%69.3%66.3%58.4%

15.0%15.1%

15.2%15.3%

15.4%16.0%

18.2%20.0%27.9%

9.6%9.7%

10.0%10.2%

10.6%11.4%

12.5%13.7%13.7%

0

1,000

2,000

3,000

4,000

1990 1995 2000 2005 2010 2015 2020 2025 2030

Year

Trucks Rail Inland navigationSource: Eurostat

Transportvolume(inbnkm)

Fig. 12 Modal split in the transport sector

Environmental pressure generated by the growth of road transportation hasforced the European Commission to publish several reports ontransportation with the aim of fostering a modal shift away from roads andtoward railways.4 However, it remains to be seen whether the different railnetworks within the European Union can be harmonised, and whether thelogistical requirements of flexibility and speed to manufacture, process anddeliver intermediate and final goods under just-in-time production conditions

can be met sufficiently by rail transport to challenge road transportsdominance.

3 Key challenge for the industry: Drivingefficiency

Growing markets and growing transportation needs usually meanfavourable conditions for the truck manufacturing industry. However, thereare some critical issues such as high fuel price, concerns about emissionregulations, and turbulent changes on the demand side, such as rising costsand loading capacity. As the two stakeholders of the industry, the truck

manufacturers and the transport companies depend on each other asdemand of goods and demands of trucks are intertwined. It can be said thatchallenges are affecting both stakeholders to a similar extent. Crude oilprices and emission regulations are having, and will have in the future, asignificant impact on the truck industry.

High crude oil prices has boosted energy costs and commodity prices,creating inflationary pressure. In the past year, the cost of diesel increasedby a staggering 31%. The role of fuel prices within the total cost of owner-ship is critical, as this is the primary attribute that transportation companiesuse for purchasing decisions. This factor is of even greater importance forthose companies running their own truck fleet as many transportationcompanies are at the risk of bankruptcy due to increasing fuel prices. This

4 European Commission: Towards a rail network giving priority to freight (COM(2007)608).


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25

shows that further price hikes will have an enormous impact on all, not just

transportation companies but the truck manufacturers themselves.

Assumptions on future oil price development is difficult. Some marketexperts predict high level prices, others expect more moderate levels.Examining the oil dependency by regions reveals that Asia-Pacific, WesternEurope and North America are net importing regions. Despite the fact thatcrude oil prices have been rising in current years, the overall demand in netimporting regions increased even more, peaking on a level of 1.7 tr t ofcrude oil imports by the year 2007. While Western Europes dependence onoil declined during the prior years, regions like Asia-Pacific, with China inparticular, and North America are demanding more.

0

400

800

1.200

1.600

2.000

2.400

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Year

0

20

40

60

80

100

120

Asia Pacific Western Europe North America Price per barrel

Source: British Petroleum, Statistical Energy Review 2008

Importvolume(inmnt)

Oilprice(USD/barrel)

Fig. 13 Net importing regions and oil price

As observable in recent history, the continuing industrial and economicdevelopment across the globe has brought an inexorable increase in thedemand for oil. For instance, Chinas economic growth and developmentsince the 1980s was accompanied by a 75% increase in oil demand from1980 to 2006.

Reliability and compliance with emission standards are broadly regarded as

another important factor. With the introduction of the Euro IV and the JP05in 2005, the truck industry saw major environmental milestones in Europeand Japan, followed by stricter emission regulations for the U.S. in 2007.Looking forward, the next step to deal with new emission standards iscoming in 2010 for the U.S. and 2012 in Europe. Regulatory rules have asignificant impact on the industry. The truck manufacturers must adopttechnological approaches, and the transportation industry has to deal withsignificant toll fees for emissions.

These market reactions to regulatory frameworks and increasing oil pricesincrease the volatility of an already-cyclical market environment. Thosecircumstances make it difficult to predict the direction of cyclicality in time,

managing the fixed costs, dealing with new technologies and localisingproducts.


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Key facts

Eastern Europe and Asia, with China in particular, are going to be the future growth markets.

The Asian market is fragmented and opportunities for consolidation exist.

Demand for road transportation probably will continue to increase.

Truck market and economic development are intertwined, leading to cyclicality of truck sales.

Rising oil prices are common challenges for truck manufacturers and transportationcompanies.


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The government: Value driver or drivers worry?

27

C The government: Value driver or driversworry?

Emission standards are just one of many regulations that truckmanufacturers have to address. Within the EU, truck makers have to complywith environmental, safety, lighting, and other general rules to achievecompliance before trucks can ply the roads. These regulations have evolvedover time and truck manufacturers have to engineer their vehicles to complywith these requirements. The maze of regulations is further complicated bythe need to comply with laws in other parts of the world. Therefore, truckmanufacturers must make considerable R&D investments to ensure thatproducts are appropriately suited for the respective local markets. Daimler

CEO Dieter Zetsche described the situation this way: Our engineerssometimes feel as if they are forced to play European soccer on anAmerican baseball diamond by Japanese sumo wrestling rules.

The regulations that have been implemented in the past and which aregoing to be implemented in the years to come are extensive. But theseregulations, at times with regulators financial support, together with costpressures, create avenues for technological breakthroughs. This is true forsafety aspects but also relevant on other features around the truck (seefigure 14, on page 28).

1 On the path to a cleaner environment

The industry knows about its high social responsibility. Therefore, safety aspects are especially

stressed as one of the key issues. However, political incentives are necessary to get

developments onto the street. As cost-oriented costumers wouldnt have any inducement to

acquire costly safety measures.

Dr. Thomas Schlick, Executive Director, VDA

CO2 emission, which is currently a relevant topic in the emissionsdiscussion within the passenger car segment, has not been subject of acurrent proposal within the legislative framework for the truck industry.According to the Intergovernmental Panel on Climate Change (IPCC)Assessment Report 4 (2007), 13% of the worlds greenhouse gas emissions

such as CO2 derive from the transport sector and therefore contribute toglobal warming.5 Within this share passenger transport accounts for a largershare than road transportation. While this figure may appear to be low, thepublic image is that trucks, as outlined later, are dirty and increase pollution.Nonetheless, truck makers realise that while they are part of the challenge,they are also part of the solution, and therefore, view emissions reductionsas one of their key priorities.

5 The gases carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs),perfluorocarbons (PFCs) and sulphur hexafluoride (SF6) are the major greenhouse gases (direct greenhousegases). In addition, gases as nitron oxides (NOx) and carbon monoxide (CO) are contributing to ozonedepletion rather than to global warming.


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Emission LDVEuro IV(proposal)

Vehiclecompatibility(proposal)

Diesel emissionHDV Euro VI(proposal)

Cab strength(proposal)

Emission LDVEuro V(proposal)

Biofuels 2nd step

DRL installationrequirements(proposal, new

homologation)

Fuel tanks/rearprotection devices

RecyclabilityBuses & coachesinterior fittingrequirements

Conspicuitymarkings

Identification ofcontrols

Suppression radio(EMC)

Front fog lampinstallation (proposal,optional 06/2007)Speed limiters

Diesel emissionHDV Euro V

2008

Variable intensitysignalisation(proposal, optional06/2007)

Indirect visiondevices (rearmirrors)

Diesel emissionHDV Euro IV(Phase 2)

2007

LightingSafetyEnvironmentalGeneralTime

Fuel quality

Speed limiters

Seat strength

Seat belt & seatbelt anchorages

Frontal protection

AFS Installation(proposal, optional06/2007)

Emergency stopsignal (EES)(proposal, optional06/2007)

Interior fittings

2009

2010

Indirect visiondevices

Front impact

Electronic stabilitycontrol (proposal)

2011

Vehicle typeapproval(proposal)

Emission LDVEuro IV

Front underrunprotection

Door latches &hinges (proposal)

2012

2013

Pedestrianprotection

2014

2015

Source: Iveco

Fig. 14 Regulations in the truck industry


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29

17%

19%

14%

13%

8%

3%

26%

0% 5% 10% 15% 20% 25% 30%

Waste and wastewater

Commercial and residential buildings

Transport

Agriculture

Forestry

IndustryEnergy supply

Source: IPCC

1 Transport including passenger and freight traffic.

1

Fig. 15 CO2 contribution by sector

Nearly all trucks are powered by diesel engines that generate exhaustgases such as Nitrogen Oxide (NOx), Particulate Matter (PM), CarbonMonoxide (CO), Hydrocarbon (HC), and Carbon Dioxide (CO2). Theseexhaust gases, with the exception of CO2, are regulated based upon variousglobal emission standards as they primarily contribute to acid rain, smog,and respiratory diseases. However, these pollutants are caused by anincomplete combustion of fuel, while CO2 would be the only gas if thecombustion were complete. Hence, there is a trade-off between theemission of these exhaust gases, such as NOx and the emission of CO2.

In response to reducing air pollution, regulators have implemented emissionstandards. These include the EPA standards in the U.S., Euro standards inthe EU, and JP standards in Japan. These governmental regulations limitthe emission of NOx, PM, CO, and HC. These standards vary across theregions, and are determined by government objectives to combat thesepollutants.

European-wide norms for commercial vehicles were introduced for the firsttime with the implementation of Euro 0 in 1988 which became mandatory in1990. The Euro 0 standard sets emission limits for CO, HC and NOxemissions. PM emission was not part of the legislation then, but changedwith the introduction of Euro I in 1992 where PM emission was included. In

the subsequent years the EC gradually tightened the emission limits for thefour pollutants, through a series of directives ranging from Euro 0 throughEuro V.


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30

3%

5%

5%

25%

38%

100%

100%

3%

14%

24%

49%

83%

100%

5%

18%

18%

25%

42%

47%

100%

12%

12%

12%

33%

40%

100%

35%

17%

0% 20% 40% 60% 80% 100%

Euro VI2013

Euro V20082013

Euro IV20052008

Euro III20002005

Euro II19952000

Euro I19921995

Euro 019881992

PM NO HC CO

Source: PwC

1 EU Proposal as of 21 Dec 2007

1

Currentstandard

x

Fig. 16 Reduction of pollutants in the European Union

In recent years, the emission legislation has focused on the reduction of PMand NOx emissions, as these two pollutants have been identified for havingparticularly negative impacts on air quality and health. Based upon thecurrent Euro IV standard, PM and NOx emission limits are at 5% and 24% ofthe original limits set in Euro 0, and further reductions are anticipated withthe implementation of future Euro standards such as Euro V and Euro VI.

As the EU standards were the first to be introduced to combat emissions,the U.S. and Japanese governments followed the European approach to

enable stricter emissions regulations.


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31

EU standards and countries following EU standardsU.S. standards and countries following U.S. standards

Europe/Middle-East/AfricaNorth- and South America Asia/Pacific

Countries accepting EU and U.S. standardsJapan standardNo standard

Source: PwC

Fig. 17 Emission standards by region

Many countries outside of Europe have applied Euro standards, making theEuropean emission standards the most widely adopted worldwide. In termsof sales volumes, regions applying Euro standards account forapproximately 1.6 m units, while countries applying U.S. standards accountfor approximately 450 k units. The residual of 350 k units are sold incountries that apply Japanese standards, accept both European and U.S.standards, or do not have any standards.

In terms of emissions and the regulatory response towards them, emergingeconomies play a key role. This is due to the fact that these markets areexpected to contribute significantly to global emissions caused bytransportation in the future. Within the emerging markets, theimplementation of Euro standards will occur at different time periods acrossvarious countries and metropolitan areas. In China and India, large citieshave introduced or will introduce future standards earlier than on a nationallevel, underlining the necessity of emission standards especially in citieswith a large population for the purposes of clean air.

Securing competence to meet current and future emission regulations is a big challenge.

Jan-Eric Sundgren, Environmental and Public Affairs, Senior Vice President, Volvo Group


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Euro I

Euro I

Euro I

Euro I

Euro I

Euro I

Euro I

II

II

II

II

II

II

II

III

III

III

III

III

III

III

IV

IV

IV

IV

IV

IV

V

V

V

V

V VI

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

China(nationwide)

China(Beijing)

India(nationwide)

India(11 Metros)

Russia

Brazil

EU

Source: VDA, SIAM, CAAM, ANFAVEA, OAR 2008

Fig. 18 Euro emission standards apply in various countries

As the emerging economies implement the Euro standards at various timeframes, the global truck makers have to ensure that they have engines tofulfil the different Euro standards. Thus the lack of a standardised Euroengine in the emerging economies is likely to add cost pressures to thetruck manufacturers predominantly caused by the lack of commonality. Thefact that different regulations apply in the U.S. and Japan lead to even morediverse engines, preventing manufacturers from realising economies of

scale in producing trucks and engines.Together with competitive pressures, harmonising the different regulationsto make economies of scale possible will be a main challenge for the truckindustry.

2 Future emission standards

Although emission regulations have become rigorous since their firstintroduction, regulators continue to make emission standards stricter.

This development will continue for future emission standards; however, the

focus will be on further reductions of PM and NOx emissions. The proposalmade by the EU Commission regarding Euro VI, which will go into effect in2013, targets an additional decrease of NOx emissions by 80% and anadditional PM reduction of 50% compared with the limits of Euro V. TheU.S. standard EPA 10, to be introduced in 2010, will result in PM reductionsof 83% while NOx reductions will be unchanged relative to EPA 07. Besidesthe evolution of Euro and EPA standards, the Japanese standards showsimilar developments and a focus on reduction on NOx and PM.


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33

Euro III (2000)

Japan (2003)

US 04 (2004)

Euro IV (2005)

Japan (2005)

US 07 (2007)

Euro V (2008)Japan(2009)

US 10(2010)

Euro VI(2013)

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18

0.20

0 1 2 3 4 5 6

Nitrogen oxide (in g/kwh)

Particulatematter(ing/kwh)

Source: EPA, AMA, ACEA, MCH

Fig. 19 Emission standards in comparison

To add complexity to this matter, testing procedures vary across regions. Asvehicle testing is very complex for heavy duty vehicles, regionally based testcycle approaches were developed. For instance, in the U.S. testingprocedures are geared towards HDT trucks on motorways, with minimaltraffic congestion. The Japanese testing standards are based upon urbandriving, while European test cycles are weighted more towards a mixture ofthe Japanese and U.S. testing schemes.

In addition to other factors, the issue of not having harmonised testing and emission standards,

does impact our decision to expand into new markets.

Urban Wstljung, Head of Public and Environmental Affairs, Scania


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34

Region Test cycle Description Start conditions

U.S. FTP (FederalTest Procedure)

This transient cycle consists of drivingconditions simulated in three different U.S.conditions. The first simulates light urban trafficwith frequent stops and starts, the secondsimulates crowded urban traffic with few stops,and the third simulates a crowded motorway.

Cold/Warm

U.S. SET(SupplementalEmissions Test)

A steady-state test ensures that emissions arecontrolled during steady-state type driving,such as motorway driving.

Cold/Warm

U.S. NTE (Not toExceed)

This test monitors emissions resulting fromdriving of any type that could occur within thebounds of a pre-defined NTE control area,including operation under steady-state ortransient conditions and under varying ambient

conditions. However, these emission limits aretypically higher than the FTP limits. The NTEcontrol area represents engine speeds andloads expected to be encountered duringnormal operating conditions.

Cold/Warm

Euro ETC (EuropeanTransient Cycle)

This transient cycle test represents drivingconditions in urban, rural and motorway driving.

Warm

Euro ESC (EuropeanStationary Cycle)

The stationary cycle consists of 13 modeswhere the engine is tested in every single modeover a certain period of time.

Warm

Japan JE05 (Japan2005)

The JE05 cycle is a transient test based onTokyo driving conditions, which are involveurban and congested roads.

Warm

Source: EPA, JAMA, European Commission

Fig. 20 Test cycles in Europe, USA and Japan

The lack of a global emission and testing standard forces the truckmanufacturers to create varied powertrains to meet the different standardsthus resulting in increased engineering, testing, and certification costs.Manufacturers are forced to spread their R&D costs across a variety ofengine platforms to comply with all standards, hence being unable tochannel energy and resources into a single global standard that wouldotherwise save costs. Such inefficiencies result in significant costs whichare ultimately borne by the end-user.

Truck manufacturers have been grappling with this issue for many years.The concept of creating a worldwide heavy duty certification (WHDC) is notnew, as such discussions have been occurring over the past couple ofdecades, but disagreement between regulators in the various markets hasresulted in the failure to create a global emission standard. However, it isanticipated by the industry that a harmonisation may probably occur in 10 to15 years.

A world harmonised testing standard such as the world harmonisedtransient cycle (WHTC) as well as a world harmonised stationary cycle(WHSC) have been developed. The creation of these test cycles wasachieved through collecting data about driving behaviour, road classes, and

vehicle use statistics. This information was weighted according to theirworldwide prevalence. Relative to the regional standards, the WHTC resultsindicated that deviations in PM and NOx emissions were small, butvariances for CO and HC were much higher. The variances were attributed


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35

to frequencies in engine speed and load as well as differences in the

average power output between the cycles. However, such differences wouldbe significantly smaller if engine were optimised for a worldwide standard.

So what can and what should truck manufacturers do? Truck manufacturershave a key role as regulators are unlikely to push such developmenttowards harmonised standards on their own accord. The global truck marketis dominated by the European truck manufacturers who have forgedalliances with other manufacturers around the world (MAN and DAF havean alliance with Paccar and Navistar, Volvo owns Nissan Diesel in Japanand Mack Trucks in the U.S., Daimler has a controlling stake in MitsubishiFuso and owns Freightliner in the U.S.), and therefore these truckmanufacturers, through their geographic reach, should continue to work withthe regulators to create global emission standards, together with uniformtesting standards.

The way towards worldwide harmonisation could involve a two-step model.Such an approach would entail harmonising the varied testing standardsfirst, and then harmonising emission standards such that one worldwideemission standard with one test cycle, can be achieved.

Emission laws and new emission targets will always play a role. After Euro VI further emission

standards are likely to occur, since new pollutant combinations will be found and regulated.

Gerd Rohrsen, Head of Corporate Communications, Schmitz Cargobull AG

3 Outlook: CO2 as new challenge?Although emission standards are being enhanced, truck makers need to beprepared for the emergence of additional regulations that could target otheremissions.

0

20

40

60

80100

120

140

160

180

200

1995 2000 2005 2010 2011 2012 2013 2014 2015 2020

Year

C H CO CO NO PM

Source: Tremove6 x26

Fig. 21 CO2 Futures challenge for the transportation industry?

Unlike the other pollutants, CO2 is one of the major products of a completecombustion of fuel. If fuel consumption can be reduced, the emission of CO2would decrease as well. Against this background, the cost-sensitive


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transport companies running their own truck fleets have a substantial

interest in the reduction of CO2, and thus of their fleets fuel consumption.

As was the aim of the Euro standards targeting a reduction of emissiongases, the overall emission of the four pollutants declined over time.However, due to the existing trade-off between CO2 and the pollutants, CO2emissions increased and are expected to increase further as the emissionsof the four pollutants are expected to decrease.

CO2 is an issue in the commercial vehicle sector the latest calculations for the development

of CO2emissions for freight transport in Germany showed a constant level of growth by 2020.

This is attributed to ambitious increase of 18% in vehicle technology and logistics. Against this

background, measures to reduce emissions are necessary, especially since they generate not

only ecological, but also economic benefits.

Dr. Uwe Lahl, Head of Department, German Federal Ministry for the Environment

If the target would be to reduce all truck related CO2 emissions in 2020 to90% of the emissions at 2005 level, as required by the EU, it would requirea reduction of approximately 20 m t compared to 2005. There are multiplepossibilities, but unlike in the car industry, the truck industry has variedproducts based upon size, weight, length, and truck application. Whateverthe solution, such truck variances will have to be an important consideration.Three possible instruments could be considered as illustrated below.

120

160

200

240

280

1995 2000 2005 2010 2015 2020

Year

CO emission (est.) CO reduction simulation

(inmt

)

Logistics companies As recently introduced for the aviationindustry, CO2 emissions could bereduced by restricting the amount ofemissions and allow the stakeholdersto trade within this trading system.

EmissionTradingScheme(ETS)

Immediate cost bearer could beeither the truck manufacturersbased on the developmentcosts and logistic companies,which would have an incentiveto buy low CO2 emissionvehicles.

Similar to the passenger car industry,a limit on CO2 emissions might beintroduced.

Penalties could be conducted on eachunit of CO2 emissions exceeding amaximum threshold depending ondistance or tonnage per distance.

CO2 limits

Logistics companies Implementation of a CO2 emission taxbased upon the level of CO2 emission

The CO2 emissions tax could be paidat road tolls as such tolls exist in mostof the EU member states.

Tax on CO2emissions

Immediate cost-bearerMeasureOption

Source: Tremove, PwC

2 2

Fig. 22 Potential instruments to reduce CO2 emissions in road transportation


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First, governments could introduce tolls based upon a vehicles CO2

emission levels. While this matter is currently under discussion in variousparts of Europe, it is likely to face opposition as freight companies as theyare already inundated with paying high fuel prices. A current suggestion isthe concept of a Eurovignette, which reflects taxing CO2 emissions as a tollon EU member states that have a national toll system.

According to ongoing discussions in Germany and the EU, we expect a regulation on CO 2 to

come. Eurovignette and ETS (Emission Trading Scheme) are reasonable solutions to

incorporate CO2emissions.

Michael Lohmeier, Senior Expert Corporate Development, Deutsche Post World Net

Second, regulators could issue rules relating to fuel efficiency standards. If a

vehicle is not fuel efficient, more CO2 would be emitted. This approach istaken by the car industry where limits on CO2 emissions per kilometre areexpected to be introduced and could be expanded to the truck industry.

In Japan, for instance, the Top Runner Program has been introduced fortrucks with a gross vehicle weight of more than 3.5 t. The programspecifically targets the improvement of fuel efficiency and thus CO2emissions. It is intended to increase fuel efficiency from a level of 6.32 km/lin 2002 to 7.09 km/l in average in 2015. In terms of CO2 emission this fuelefficiency improvement leads to a decrease from 415 g CO2/km in 2002 to370 g CO2/km in 2015 resulting in a decrease of 12.2%. The target valuesfor the different vehicle classes are set by gross vehicle weight.

Finally, an emission trading scheme could be introduced that requires trucksof a specific weight to be included. Under this cap and trade scheme, theoverall emission limits cannot exceed a certain level, and if it does,participants in this scheme are allowed to buy and sell allowances as theyrequire. However, for fleet operators to reduce such costs, the truckmanufacturers will face even further pressure to enhance fuel efficiencylevels.

Key facts

Within the combustion process CO2 is generated as the main emission gas. Hence, reducingfuel consumption within an engine would lead to less emission of CO2.

CO2 which is an unregulated greenhouse gas is expected to become part of future emissionlegislations. The nature of what this law may look like however is unclear.

Significant reduction of the pollutants was made; further emission standards (Euro VI, EPA10, JP 09) are going to be implemented in the years to come.

Emission standards and testing procedures are not globally harmonised yet, leading to thenecessity of different engines for different regions.


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The transportation industry

38

D The transportation industry

Transport companies have been encountering growing cost pressure fromvarious sides including fuel prices, road charges and price premiums onmodern technology to comply with emission standards. Fuel prices ofcourse have manifold effects; on the one hand a negative effect on theeconomy, which affects the demand for transportation negatively, and onthe other it increases the costs for transportation.

1 Under pressure: Rising costs hittransportation industry

Costs are the dominant issue for transport companies. The need for efficientuse of fuel, the avoidance of empty runs and the compliance with emissionregulations are critical success factors for transport and logistic companies.Labour inputs, such as personnel costs, driver costs, and so on, are theprimary element within the overall cost structure of transport companiesrunning a truck fleet.6 Nonetheless, in line with rising fuel prices, the sharecomprised by rising fuel costs in the overall cost structure of transportcompanies is increasing.

Crucial cost factors for logistic providers are fuel costs, labour expenditures, which are

determined by social regulations, security measures and toll fees. It is especially profound that

these hurdles will get higher.

Frank Huster & Markus Olligschlger, Deutscher Speditions- und Logistikverband (DSLV)

Labour costs28.6%

Source: Bundesverband Gterverkehr, Logistik und Entsorgung (BGL)

Overheadcosts10.6%

Fuel costs25.9%

Fixed costs12.7%

Road toll6.8%

Other distancerelated costs

15.4%

Cost structure is referring to national long haulage transportation.

Fig. 23 Average cost structure of Germanys transport companies

In 2007, the share of fuel prices in the total costs within the long-distance

haulage accounted for approximately 26%. While overall costs have

6 It should be noted that the decreasing fixed costs is partially due to the fact that a time-based toll (tax) wassubstituted by the distance-based road toll in Germany.


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39

increased by approximately 9% within the last year, fuel prices have

contributed some 8% to that increase.7

The second largest contributor to theincreasing costs was road tolls.

0

200

400

600

800

1,000

1,200

1,400

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: MWV

Dieselcosts(EUR/1000l)

Data for 2008 include prices for diesel up from January to June 2008.

Fig. 24 Costs for a 1000 l diesel in Germany

Fuel prices have skyrocketed to a record high. In Germany, filling-up a1,000 l tank in the first half of 2008 was nearly EUR 1,400, EUR 200 morethan the average cost in 2007.

Road tolls, the second largest component of a transport companys variablecosts, are also increasing. Germany, one of the main transit countries in theEU, will increase its road tolls by 40% to 85% beginning in January 2009.8

The road toll increases for January 2009 will be imposed on a variable basisdepending on the Euro emission standards of the truck. Costs for eachkilometre are increasing by 85% for trucks fulfilling only Euro I or Euro IIstandards, while Euro III trucks have to face an increase of 72% and Euro

IV and V compliant trucks will encounter increases of 40%.

7 The comparison is based on data from July 2007 to July 2008, obtained by the Bundesverband Gterkraft-verkehr Logistik und Entsorgung (BGL).

8 Values are referring to trucks above 12 t and 4-axles. However, 3-axles trucks larger 12 t are facing similarincreases in road toll.


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0,00

0,05

0,10

0,15

0,20

0,250,30

Euro I & II Euro III Euro IV Euro V

Emission standards

EUR/km

Current road toll Future road toll (1 Jan 2009)

Source: BMVBS, PwC

85%

72%40%

40%

Fig. 25 German road toll dependent on emission class for trucks (> 12 t)

In a situation of rising costs, most companies attempt to pass on costincreases to consumer, if at all possible. According to a PwC surveyconducted for this report, 53% of the increasing transport costs can beshifted in this way.

48%

53%

59%

0% 10% 20% 30% 40% 50% 60%

Truck fleet< 50 trucks

Truck fleet> 50 trucks

Total

Source: PwC survey (n = 103)

Fig. 26 Ability to shift costs to consumers

However, the ability to shift costs to consumer is dependent on the size ofthe fleet of the company in question. Smaller and medium-sized companiesreported that they could move 48% of increased costs to the consumer,compared to 59% for larger companies.

Looking forward, it does not appear that these cost pressures will ease, astransport companies are expecting further increases in transport costs; thevast majority believing that a significant increase of 10 to 30% will occur inthe next four to five years. Even higher increases are seen by 17% of thecompanies. Only 13% of the companies think that transport costs areincreasing on a rather modest level of less than 10%.


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41

3%

5%

12%

67%

13%

0% 10% 20% 30% 40% 50% 60% 70%

No statement

Increase of more than 50%

Increase between 30% and 50%

Increase between 10% and 30%

Increase lower than 10%

Source: PwC survey

Fig. 27 Expected increase of transport costs

Whether companies will be able to shift increasing transport costs to theconsumer will be crucial for the business of the transport industry. Sinceconsumers are cost-sensitive, managing rising costs will be important fortransport companies and fleet operators.

2 Managing rising costs

Reducing fuel consumption can enable transportation companies to becomemore profitable providing the benefit of improved fuel consumption is notwiped out by increased fuel costs. According to the PwC survey for this

study, the three most desired means to reduce costs were the purchase offuel-saving trucks, increasing utilisation of trucks, and driver training.

26%

43%

45%

68%

79%

85%

92%

93%

94%

56%

55%

63%

80%

86%

88%

57%

78%

67%

0% 20% 40% 60% 80% 100%

Terminating trucksafter shorter time

Increasing deals withforeign contractors

Reducing truck pool, out-sourcing to contractors

Boosting new vehicle sales

Sorting out older trucks

Charging diesel surplus

Improving fuel-saving drivingmanners through driver training

Increasing utilisationof trucks

Purchasingfuel-saving trucks

Appropriate measure to decrease costs Feasible measure

Source: PwC survey

Fig. 28 Cost-savings measures and their respective feasibility


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A significant factor for a trucks fuel consumption is the driver whose driving attitudes affects

about 20% 30% of the overall fuel consumption. Regarding driving behaviour I assume anadditional savings potential by up to 10% in the future. Furthermore, the improvement of

aerodynamics still offers opportunities to reduce fuel consumption.

Hans-Georg Scholz, Fleet-Manager, Schnellecke Group

Nonetheless, purchasing new trucks and increasing utilisation of truck fleetsare considered to be rather unfeasible, making the most appropriate cost-saving measures rather inaccessible. Since new trucks are anotheracquisition cost, and utilisation is dependent on the contracted business onthe one side and optimisation of fleet-management and route planning onthe other side, realising these measures appears to be a complex task fortransport companies.

Driving behaviours are very difficult to control, as they depend on the skillsand experience of the individual driver. Hence, companies consider drivertraining as a feasible measure to cut costs. Charging a diesel surplus wouldbe a surplus dependent on the fuel (diesel) price, which is passed to theconsumer when prices increase. However, as discussed above how muchof the costs can be shifted is rather different across companies of differentsize. Other cost-saving measures are considered as relatively feasible, butare not considered as significant for reducing costs.

In terms of cost reduction and individual competitive advantage, measures to reduce fuel costs,

such as driver training, fleet management, and route planning are the most favourable ones.

Frank Huster & Markus Olligschlger, Deutscher Speditions- und Logistikverband (DSLV)

According to the PwC survey, the total costs of purchasing and owningtrucks are mostly driven by fuel economy, reliability of trucks and emissionstandards.

Rank Top 10 purchasing criteria Category

1 Fuel economy (fuel efficient trucks technology) Total cost of ownership

2 Reliability (high technological reliability of trucks, serviceinterval)

Quality

3 Emission standards (technology complying with new emissionstandards)

Environment

4 Life cycle costs (low operational cost over the life cycle) Total cost of ownership

5 Service (service network, service availability, qualified staff) Service

6 Handling system (e.g. tie-down system, anti-slide mat, angleschooner, belt system)

Functionality & flexibility

7 Purchasing Price (low purchasing prices, finance service) Total cost of ownership

8 Low weight (low weight of truck and trailier) Functionality & flexibility

9 Multifunctionality (flexibility and multifunctionality of truck) Functionality & flexibility

10 Ergonomic (comfort and functionality of the driver cabin) Functionality & flexibility

Source: PwC survey

Fig. 29 Top 10 purchasing criteria

The fuel efficiency of trucks is crucial for cost management. Reliability iscrucial for transport companies to ensure their trucks quality and thereforethe supply chain involving trucks. Moreover, reliable trucks guarantee longerservice intervals, while shorter intervals increase the total cost of ownership.


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The third most important purchasing criterion is compliance with emission

standards, as non-compliance would lead to higher road tolls and highertaxes. In total, most of the criteria reveal that total costs of ownership andfunctionality of trucks are the most important aspects when purchasingtrucks.

Hence, it is straightforward that each reduction in the average fuelconsumption bears high potentials for cost savings.

500,000

750,000

1,000,000

1,250,000

1,500,000

1,750,000

2,000,000

2,250,000

0 -1 -2 -3 -4 -5 -6 -7 -8 -9 -10

Reduction of average fuel consumption (in l)

Fuelcosts(inEUR)

1998 2003 2008

Source: Tremove, PwC

Average distance of truck fleet: 150,000 Average fuel consumption: 32.5 l/100 km

Fleet volume (no. of trucks): 30

Assumptions Diesel price (1998) (in EUR/l): 0.587 Diesel price (2003) (in EUR/l): 0.888

Diesel price (2008) (in EUR/l): 1.360

Fig. 30 Average fuel cost increases in the transportation industry

For instance, fuel costs for a medium size transport company running anown fleet with 30 trucks, driving a distance of 150,000 km per truck onaverage has been risen by 39% between 1998 and 2003 and by another53% in the years between 2003 and 2008. Reducing one litre per 100 km inaverage fuel consumption would cut 3.2% of the total fuel costs of thisrespective company. In order to save 10% in total fue

truck industry s green challenge 2008-09-23

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