FORCES SHAPING THE FUTURE OF LIGHT AND MEDIUM DUTY VEHICLES
Dr Shereen Nassar, global director of logistics studies and director of M.SC. logistics and supply chain management programmes, Heriot-watt University Dubai
It is no news that COVID-19 has introduced unique business challenges for all industries around the globe, but the transport industry is undoubtedly one of the most impacted due to the shutdown and travel restrictions.
With movement restrictions and precautionary measures still in place, it is already challenging to transport people across cities and countries. While certain cities and countries remain on complete lockdown and some reopen with stringent social distancing measures, people continue to work from home unless travel is essential.
Despite the easing of restrictions, companies continue to expect their employees to work remotely where possible, and the public in general has been voluntarily avoiding places of interest such as malls, beaches, and cinemas as uncertainty around the pandemic persists. Most are still avoiding trips on public transport and ride hailing services to minimise social contact. In a recent report, Mckinsey has already confirmed a dramatic
decline in vehicle miles travelled (VMT), a strong repercussion unique to COVID-19 and its resulting curfews.
The unfortunate outcome is a drastic fall in transportation revenue that is creating a myriad of issues in both the short and long term, from pay reductions and employee redundancies to closures of established businesses that have failed to sustain liquid assets. The appetite for light and medium duty vehicles for transportation of people, is therefore likely to remain low, at least until the pandemic is brought under control.
As one of the sectors most impacted by the pandemic, public transportation in particular will take a long time to recover back to normalcy. Every single facet of travel needs to be adapted to assure passengers of their health and safety, while also offsetting the effect of increased wait times and decreased passenger carrying capacity.
IMPACT OF E-COMMERCE AND LAST MILE DELIVERY
If there is any industry that can boldly claim to have benefitted the most from the pandemic, it must be e-commerce. According to a report by the Dubai Future Foundation, Majid Al Futtaim (MAF) has seen a boom in e-commerce sales with a 59 per cent year-on-year increase in online customers in March 2020. E-commerce giant Amazon has hired more than 1,500 employees in the MENA region, boosting its workforce by 30 per cent since March, to meet the growth in demand due to the outbreak. The e-commerce sector has managed to even attract non-users who have traditionally steered away from online shopping, as they were limited by curfew restrictions from visiting brick-and-mortar stores.
However, with the surging demand, retailers in the online space are feeling stretched to their limit, especially on the delivery side. For instance, Lulu Group, a multinational conglomerate with strong online retail presence is increasingly relying on third-party delivery companies to manage last mile logistics in the UAE and Saudi Arabia, as they endeavour to fulfill orders on time. Union Coop, the largest consumer cooperative in the UAE, is already expanding its fleet to 300 vehicles via contracting companies in order to fulfill orders within two days.
The increased strain on delivery services has, moreover, forced retailers to prompt consumers to opt for preferred delivery time slots as per the availability. Many studies suggest that the delivery process is a key factor in influencing consumers’ future purchase decisions. Slow delivery results in an increase in returned orders and impairs repeat purchases. The pressure of order fulfillment has forced many to come up with ingenious solutions, for instance, RTA taxi fleets teamed up with several online shopping platforms to cover last mile delivery.
According to a report by World Economic Forum (WEF), the number of delivery vehicles in the top 100 cities globally will increase by 36% until 2030, in order to satiate the increasing consumer demand for online shopping. Now with the added factor of the current crisis that has fuelled and multiplied e-commerce growth, one can expect that the demand for delivery vehicles by retailers is likely to increase in the near future. Rising consumer expectations for instant or same day delivery also means that last mile carriers are expected to expand their fleet capacity, in turn heightening the demand for vans, trucks, and other commercial motor vehicles.
In light of COVID-19, Ford and Volkswagen have already responded by announcing a joint project to manufacture commercial vehicles including vans and midsize pickup trucks, demonstrating a coordinated response to meet the changing needs of customers and to tackle transportation challenges in Europe.
LOW OIL PRICES VS GREEN VEHICLES
Although electric vehicles (EVS) might be affected in the short-term due to a pandemicinduced recession and cheaper oil prices, the consensus is mainly in favour of green vehicles as it is said to reach price parity with conventional cars in a decade’s time. Some might debate that consumers would switch to conventional vehicles in markets such as the US due to depressed oil prices in markets. However, the sentiment for electric vehicles and hybrid electric vehicles (HEVS) remain largely positive as proven by increased investment in this segment.
As automakers such as Volkswagen remain committed to the Paris Agreement and their ‘carbon-neutral’ goals, they will continue to introduce new EV and HEV models, especially in matured markets such as Europe, which is further compounded by the growing environmental consciousness among consumers in the region. Moreover, as automakers plan to resume their operations post-lockdown, they are likely to prioritise EV production where the level of automation is higher and requires less workers on the floors to manage assembly lines, making them more compatible with the new health and safety protocols.
The UAE is already at the forefront of clean transportation infrastructure with Dubai sporting one of the highest concentrations of charging stations, in line with Dubai Clean Energy Strategy 2050. It is expected that the adoption of EVS in the MENA region will increase over the next few years due to evolving consumer preferences, falling battery technology costs and government-led environmental initiatives. However, as the EV market of UAE is still in its infancy with very few models sold in the country, one cannot expect to see a significant shift in its demand due to the fall in oil prices.
DEMAND FOR MEDIUM AND HIGH DUTY VEHICLES AMONGST CRUCIAL INDUSTRIES
Light and medium duty vehicles will however see growth in applications across crucial industries such as construction, logistics, and healthcare. Considered ‘essential’ in Dubai, the construction sector was able to function as usual during lockdown restrictions, apart from certain supply chain hiccups. According to projects tracked by Globaldata, the UAE is currently executing more than 600 high-value projects with a contract value of more than $25 million and a combined value of $938.9 billion. Light and medium duty trucks will therefore remain essential in the construction sector, specifically in terms of their usage in hauling small to moderately sized building supplies and construction equipment.
In the healthcare sector, emergency vehicles such as ambulances are undoubtedly critical to manage the current crisis. While we still navigate through COVID-19, the government and healthcare providers will remain committed to upgrading the medical emergency infrastructure, indicating a sustained demand for ambulances.
As for the logistics industry, the boost in e-commerce consumption is already a key driving force, which means that light and medium duty vehicles will continue to play an integral role in the supply chain ecosystem. Refrigerated trucks, for instance, will be crucial to ensure the freshness and safety of food while it covers the distance all the way from logistics hubs through warehouses and retailers to homes. As last mile logistics and fulfilment experiences act as a key differentiator in the highly competitive space of e-commerce and grocery delivery, investments in logistics transportation is going to be key.
Along with the decline in on-demand transport services and a conservative consumer spending behaviour, light duty vehicles such as passenger cars might only see a prepandemic level of performance by the end of 2021. However, opportunities exist even as consumers remain price-sensitive as seen in the positive shift in demand for used cars in the UAE. The organised used car market is less severely hit than businesses selling new cars, and therefore are better placed to tackle the impact of the current crisis.
Global commercial vehicle production (GVW 4-8) volumes in 2020 compared to 2019 are forecast to be down 22% (more than 650,000 units) to 2.6 million units, in the wake of the COVID-19 pandemic, according to the most recent analysis from IHS Markit. Individual regional forecasts are set to a downtrend, and supply chain impacts are being felt, as the consequences of the virus have shuttered manufacturing and supplier facilities around the world. These forecasts are informed by the latest IHS Markit global economic forecast updates, which reflect a 3% decline in global real GDP in 2020.
Most commercial vehicle factories in mainland China have returned to production now. Earlier this year, shutdowns across China resulted in more than 80,000 units of lost production among truck manufacturers in the January-february period; March output appears to have recovered a portion of this volume, despite Hubei province workers returning in the second week of the month, later than plants in other provinces. In fact, the relative strength of the March data compared to February suggests many plants may be online near full capacity again. Looking across the full year,
IHS Markit is expecting a 21% decline over
2019 production volumes due to a combination of factors including COVID-19, but also the natural weakening in truck demand following unusually strong sales in 2018-19.
The policy response to assist the commercial-vehicle industry has been broad, with a variety of direct and indirect supports announced, locally and nationally. By way of example, while the logistics industry has been negatively impacted, one of the measures so far announced includes the exemptions on payments of highway tolls through the end of June, and subsidies on new energy vehicles (NEV’S) have been extended for another two years, from 2020 to 2022. New financing has also been announced to eliminate high emissions vehicles in key regions which should give some support to boost to truck sales, all else equal. More indirect steps for the industry also include bond-financed infrastructure investments; measures to stimulate domestic consumption; and policies to support smalland medium-sized companies, in particular, and companies in Hubei province to stabilize the employment rate.
Regional impacts will vary as the virus runs its course and significant business has been halted. As of now, IHS Markit predicts nearly all regions will see percentage declines in the double digits this year, with sales and production of tractor trucks a.k.a. ‘artics’, generally, leading the way down. The unfolding crisis will cast a shadow over truck demand in the medium term, too, subject to the details of government policy responses and the eventual duration of the crisis. Existing information leads IHS Markit to believe that recovery in 2021 is expected to be substantial, but short of returning to the previous trend.
Andrej Divis, director of commercial vehicle data & forecasts at IHS Markit, explained: “Overall, compared to the downturn experienced in 2009, on a calendar-year basis, we’re seeing the same type of decline with respect to the prior year– a global production decline of about 20%. However, it’s worth pointing out that in today’s environment and given what we expect about the duration of the crisis, we don’t feel the market will fall as far as it did then in units. A number of conditions are different, including the growth of the world economy since then and the fact that the volume of trucks is larger as a result, leading to higher replacement levels. Also, we expect the intense phase of the health crisis to pass by year’s end, opening the window for trucking to resume its business. This means that even though monthly production volumes in the coming quarters may dip below levels we saw during the depths of the last recession in 2009 in some regions, overall, annual figures are still expected to be higher than 2009 totals.”