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

PMV Middle East - - COMMENT -

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.”

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