HIGHWAY INTELLIGENCE - EUROPEAN ROAD FREIGHT FLEET REPORT - March, 2016

HIGHWAY INTELLIGENCE - EUROPEAN ROAD FREIGHT FLEET REPORT - March, 2016 Rementum 2016. All Rights Reserved.

Volume: 2, Issue: 1, Publisher: Rementum Research & Management, AB IT IS ALL IN THE DETAILS Fig. 1: Microscope examining a sample IN THIS REPORT p. 2) A new type of report p. 3) Road Transport Activity p. 4) Risks in the market outlook p. 5) The role of the capacity balance p. 6) Case study - Germany p. 8) European vehicle population p. 11) Risks in the equipment outlook p. 12) Haulage company ownership Freight Fleet Report is consequently an excellent starting point to build this knowledge base for the future. Photo: Kiran Foster, Flickr (creative commons) In this report we will describe: - the evolvment of European road transport work over time. STILL A NEED FOR HIGHLY DETAILED ANALYSIS This is the second, and final, edition of the Rementum Annual European Road Freight Fleet Report. That may sound a little strange; but for next year s edition we are about to make a major overhaul of the report. The reason is that we have seen very clear and growing demand from our clients to analyse the European heavy commercial road transport industry with an even more specific focus; the aftermarket. A heavy commercial vehicle can over its lifetime easily consume spare parts, consumables and services to a value far exceeding the 2 initial investment. This is probably the main commercial difference between the cars market and the heavy commercial vehicles market. In order to describe this significant aftermarket, however, we need to analyse the life of a heavy commercial vehicle in detail; - How old will it become? - How will it be used during its active lifetime? - How will that usage impact aftermarket sales? As you have hopefully become accustomed to; Rementum will walk the extra mile to really provide a detailed understanding of the inner workings of the heavy commercial road transport market. The Rementum Annual European Road - the active European population of heavy commercial vehicles and why it is structured the way it is. - the characteristics - such as age and usage - of this commercial vehicles population and its subsets. Based on this detailed analysis; we will make commercially relevant predictions about how the European population of heavy commercial vehicles will evolve in the coming years. Enjoy!

Fig. 5: Relative importance of industrial sectors, EU28 Source: Rementum Research, EUROSTAT transport in Europe has suffered an exceptional headwind from 2007. Not only did the important construction sector decline significantly; the downturns were most dramatic in some very important road transport markets. In France, Greece, Italy, Portugal and Spain road transport on average made Fig. 6: EU28 transport activity, modal split Source: Rementum Research, EUROSTAT Fig. 7: Housing starts, US up over 90% of the modal split in the year 2007. This compares to 76% for EU28. Austria, Germany and Poland are markets much less affected by a downturn in construction from 2007. Here the road transport modal share at the time was less than 70% (fig. 6). It is obvious that if important markets with almost 20% higher dependency on road freight suffer a steep and prolonged downturn in construction activity; there will be a major negative impact on the overall road transport work in Europe. A complete recovery in total road freight volumes in Europe consequently requires for the Southern European economies to experience significant growth in construction activity. Although we clearly see positive signs in this area, particularly in Spain; the recovery is not yet broad based and history tells us that construction business cycles are relatively long (fig. 7 - US housing starts statistics tracing back to 1959). LONG TERM RISKS TO THE OUTLOOK FOR ROAD TRANSPORT WORK Trucking is clearly a competitive mode of transport; the fleet adjusts relatively fast to shifts in demand and important industrial sectors, such as construction, currently seem to be recovering. All this together points to a period ahead with potentially strong demand for heavy trucks in Europe, but what about the long-term risks for the heavy commercial road transport sector in general? There are of course plenty. First of all, it seems that the importance of physical goods in the economy is generally diminishing. If we study fig. 8; the annual growth rates in European industrial production over the past 30 years, compared to growth rates in road freight volumes (tonnes) over the same time period, it is clear that the pace of road volumes are lagging. We believe there are a number of plausible explanations for this fact: - First; the European economy is generating products of an increasing value to weight, or volume. An economy with higher levels Fig. 8: Growth in industrial production and transport volumes Source: Rementum Research, US Census Source: Rementum Research, EUROSTAT 4

tually returns. This consequently means that a population of heavy trucks can be shrinking d e s p i t e growth in the road transport work. The reason is simply that capacity is becoming t i g h t e r; but it is not yet tight enough to trigger sufficiently higher rates, more earnings and increased investments. In this way the heavy road freight market creates its own business cycles by constantly adjusting capacity to prevailing demand. CASE STUDY OF THE GERMAN MARKET Based on the above reasoning about a constantly evolving capacity balance in the market for road freight; it would be misleading to only focus on the average age of the trucks population to estimate replacement demand. We mention this as it is used as a fairly widespread gauge for heavy trucks investment demand. Let us analyse the German road freight market in the past two decades as an illustration. According to data from the German Federal Statistics agency (Destatis) tracing back to the year 1950 and our own estimations; Fig. 10: German road transport activity and truck population >6t GVW Source: Rementum Research, KBA Fig. 11: German truck population, mix by type Source: Rementum Research, KBA 6 road freight volumes (tonnes) have grown by around 2% annually, compared to 1.2% for other domestic modes of goods transport. More interestingly; this unparallelled activity growth has been accompanied by several important structural market trends that are still ongoing. One striking observation is that the number of German trucks on the roads has not been keeping up with the growth in transport activity (see figure 10.): Total tonne-kilometers driven by German hauliers has grown by 11% in the past 15 years, according to statistics from Kraftfahrt Bundesamt (KBA). In the same period; the number of goods vehicles with Gross Vehicle Weight over 6 tonnes registered in Germany has declined 12%. Analysing this particular observation is relevant to understand where the German commercial road transport market is heading. At the end of the 1990s Germany was still coming off an exceptional period of activity in the construction sector, following the reunification. Between 1994 (peak) and 2005 (trough) activity fell close to 40% (source: Eurostat). Somewhat reminding of the situations in Ireland and Spain at the end of the 2000s; although the declines in construction activity were more dramatic there. Between 2006 (peak) and 2012 (trough) these markets declined close to 80% and 90%, respectively. As we have seen; goods tonnage related to construction and housing markets make up between 30-40% of the total road freight volumes in a developed economy; directly affecting demand for heavy trucks. Consequently; German road hauliers have been working off a significant oversupply of transport capacity throughout much of the past decade. During this adjustment phase the productivity increased

THE EUROPEAN HEAVY COMMERCIAL VEHICLES POPULATION A European >16 tonnes GVW goods vehicle is currently driven on average approximately 80,000 kms per year. Assuming 300 working days; this would imply an average daily distance between 250-300kms. This observation is relevant from two aspects; first it shows that the local and regional economic conditions are most relevant for the majority of heavy truck owners. However, such an observation still obscures the reality behind the averages; heavy trucks are used in many different applications and consequently the underlying economic drivers are very relevant also here. We need to better understand the numerous applications of heavy trucks. For instance; vehicles generally designed for construction work can operate in different areas, like rock-hauling, road construction, materials recycling, etc. etc. The same goes essentially for over-theroad haulage equipment; will the truck haul goods short distances with frequent stops or over long distances? Is there a special characteristic of the goods that requires a tailored chassis, wheelbase or drive line? The important point here is really that - unlike most passenger cars - a commercial heavy truck is always a specific tool for literally hundreds of different applications. Despite much talk about the globalisation of the heavy truck industry; this market is still to a large extent local - specifications significantly varying with application, economic realities and local regulations. To make an analysis of the European heavy commercial vehicles population even more challenging; a goods vehicle does not roll of the assembly line with its intended application printed on 8 the side. A truck can be defined in numerous ways - Gross Vehicle Weight, frame, number of axles, superstructure, etc. - but very few of them make it certain how the vehicle will actually be used. In fact; the usage often varies with age and location. As stated in the case on the German heavy road freight market above; the population of vehicles will adapt to demands in the market. Therefore, a snapshot of the current vehicle population is never a great indication of what is actually needed in the market - now or in the future. Figs. 13 and 14. chart how a very large sample of used vehicles dealer data segments the current stock of vehicles. To really make a qualified prediction of future demand for vehicle types, however, we need to know more about the characteristics of the entire population. The perfect forecast model would match road transport work with road transport capacity. This is where it gets tricky in reality; because the European vehicle population data we hold on things like age, kilometers driven, etc. does not match neatly with the application (transport work) segmentation. But if we cross-reference this data on equipment usage with historic vehicle registrations statistics and make some simplifying assumptions on normalised application split; we can create two quite interesting data sets: 1. A monthly assessment of the European vehicle population. Fig. 13: European truck population, by main application Source: Rementum Research, used trucks dealer data Fig. 14: European tractor population, by axle configuration Source: Rementum Research, used trucks dealer data

correlation between usage and life expectancy (the percentage of the vehicle population registered in a particular year surviving over time). Fig. 20 shows clearly that life expectancy is longest for vehicles with GVW 6-16 tonnes. Trucks >16 tonnes have a considerably shorter life expectancy and road tractors by far the shortest. Combining this finding with the statistics in fig. 19 and the following chart 21, which shows average mileage by vehicle age and application; the development in life expectancy by vehicle comes as no surprise. Road tractors are used very intensively (it takes approximately 15 years before the usage drops to a level similar to newer construction- and distribution vehicles). Another way to illustrate the difference in life expectancy between road tractors and rigid trucks would be to compare figs. 13/14 above with annual registration data by vehicle type; tractors clearly dominate the registration volumes, despite being in clear minority of the rolling vehicle population. There is also a notable difference between construction and distribution vehicles. For the first 10 years they are operated in a similar way, but after this mileage decreases more for the construction trucks. One can speculate whether the rough conditions often experienced by construction vehicles makes them uneconomical faster. Looking at population data, however, we see no indications that construction vehicles are retired earlier. Quite the opposite; a large share of the construction vehicles in operation are 20 years or older. Finally; we can see that medium-heavy trucks and municipal vehicles tend to have very long physical lives, as usage already from the beginning is low and drops fast. This analysis explains clearly why Fig. 19: Average annual mileage (kms), by vehicle application Source: Rementum Research Fig. 20: Life expectancy by age (%) and general vehicle type Source: Rementum Research Fig. 21: Mileage (kms) by vehicle application and age Source: Rementum Research it is risky to use average reported age of the vehicle population at any given point to estimate replacement demand in the heavy truck market. If there is a large inflow of vehicles with high life expectancy (as was the case during the boom in European construction activity about a decade ago); this will eventually push up the average age of the 10

Fig. 22g: Estimated fleet age - Italy Fig. 22h: Estimated fleet age - Luxemburg Fig. 22i: Estimated fleet age - Netherlands Fig. 22k: Estimated fleet age - Spain Fig. 22m: Estimated fleet age - Switzerlanf Fig. 22j: Estimated fleet age - Norway Fig. 22l: Estimated fleet age - Sweden Fig. 22n: Estimated fleet age - United Kingdom 12