The Long-Term Outlook for Small, Task-Oriented Vehicles and Forklifts, 2008-2012

The Long-Term Outlook for Small, Task-Oriented Vehicles and Forklifts, 2008-2012

by Stephen Metzger PhD,
Managing Director, International Market Solutions
Editorial Advisor, Industrial Utility Vehicle & Mobile Equipment Magazine

Introduction:  Diverse Markets with Related Technologies

The industrial/utility vehicle industry is, despite the wide range of products, centered around the concept and purpose of accomplishing specific jobs or tasks for the end users that buy them.  In so doing, the industry finds that on the level of components and component systems there are significant unifying technologies. 

Thus, Curtis Instruments supplies controllers to golf cars and their derivatives in specific commercial applications, and forklifts, as well as other electric-powered work vehicles.  Other technologies such as batteries, ICEs, braking and steering systems, and safety devices all cut across diverse markets and end user needs.  As component demand and technologies are driven by end use markets, it is important to project market trends in specific application areas.

The forecasts and analyses set forth in this article cover three important product areas, light utility vehicles, off-road utility vehicles, and forklifts.  These can be viewed as three major market segments of what can be called task-specific, mobile utility systems.    The first two segments, because their manufacturers are competing in many of the same markets, are unified under the concept of small, task-oriented vehicles, or STOVs.  Forklifts come in a variety of forms, but are generally categorized into five classes, depending, for the most part, on whether they are ICE or electric-driven.

Economic Trends Underlying the Forecasts

Underlying the forecasts are the following assumptions:

• The U.S. economy will continue to show moderate, real GDP growth in the range of 3%-3.5% over the forecast period;

• Despite on-going increases in oil prices, overall inflation will be less than 2.5% per year, on average;

• Increasing gasoline prices, however, will continue to create an expanding market toward small, alternative fuel vehicles;

• The current credit crunch will be largely overcome in the next two quarters, and, overall, will have little impact on the discretionary income of baby boomers, who will be the major target market for privately-owned vehicles;

• Demographic trends will continue on favorable course relative to demand for golf car-type vehicles and NEVs.

While these projections underlie the forecasts, there is considerable risk associated with them.  In particular, the crisis in the mortgage and associated housing markets have the potential of pitching the economy into recession, and the 2008 general elections could bring new economic and social policies to the fore which could inhibit growth.  More detail with regard to these risks is given in the section on forklifts.

Outlook for Small Task-Oriented Vehicles

Small, task-oriented vehicles, or STOVs, cover a gamut of markets, including golf cars, upgraded privately-owned vehicles (mainly golf car derivatives), NEVs, utility vehicles, and off-road vehicles, or UTVs.  Altogether, at the present time, these various products comprise a market value to the end user at between $3.5-4.0 billion.  By 2012 this figure is likely to be over $6.0 billion.

At the same time these vehicles provide an end-market for parts, components, and accessories that reach close to $2.0 billion for new vehicles and possibly another $350-$450 million that service the stock of outstanding vehicles.

Why bring these disparate products together under the STOV acronym?  Mainly because of the breakdown of traditional market segment boundaries that have historically have been in place, but which now are reforming.  What we see are three historically separate industries beginning to compete on a broader scale.  These industries are comprised of golf car, utility vehicle, and recreational vehicle companies.  Each industry has retained its traditional market, but is now looking for growth elsewhere.

IMS STOV Market Reports:  Outlook for major segments

IMS publishes biannual reports on the STOV market.  The fourth study in this series, dating to 2000 is about to be published.  The principal products involved are: golf cars, golf car-type utility vehicles, and off-road vehicles.  Demand for these classes of products arises from golf courses, a wide variety of utility vehicle purposes, and privately-owned or personal use vehicles (whether for transportation or personal utility tasks).

Given the generally favorable, yet conservative underlying trends that are projected for the economy, the overall STOV market will also show modest gains, but there are, definitely, wide variations among the market subsegments:

• Golfing activities have clearly leveled off, which means only a modicum of new courses opening each year and some courses closing, for a net increase of 15-20 new golf courses per year.

• Thus, new demand for golf fleet vehicles is negligible in the outlook;

• On the other hand, used vehicles coming off golf courses assures a fairly steady replacement demand of around 225,000-250,000 units per year;

• Consumers are increasing their purchases of golf car-type vehicles, much of which are refurbished used vehicles.  Our forecast looks for around 3% growth through 2008 and over 5% per year thereafter through 2012.

• In the utility segment, which includes light portage and transport (vehicles mainly built on golf car and golf car modified frames) and off-road vehicles or UTVs, growth should be substantial.  Here there is a major incentive to replace standard sized vehicles (pick-ups) as gasoline prices continue to increase and the cost of operation, plus lower initial sticker price, put the STOV in a constantly improving competitive position;

• The heavy duty, off-road segment of the utility market should see significant growth over the forecast period, even as the ATV market levels off.  This particular segment is focus of strong competition and the entry of many new companies to compete with market leaders, John Deere and Kawasaki.  This segment had estimated shipments of close to 200,000 units in 2006 and is likely to grow in the double-digits through 2012 to as much as 350-375,000 units.

• In the light portage and transport segment, we expect to see growth in the 10%-11% range for new vehicles.

Growing Importance of Electric Power

With the exception of the heavy duty, off-road segment, electric power will continue to make inroads in the market.  The current ratio of electric to gas is approximately 2.5:1, excluding UTVs, and about 1:1 when UTVs are added in.  By 2012 we expect to see these ratios at 4.5:1 and 1.2:1, respectively, assuming that UTVs remain mainly gasoline, but with electric versions in the market, as well.

AC electric motors, in conjunction, perhaps, with higher-priced absorbed glass mat batteries, such as Discover® EV Traction  Dry Cells¹, may have a significant impact on the off-road market.  If that is the case, then even the off-road market may become progressively electrified.

The price of gasoline, which at the time of this publication, is pushing significantly beyond the three dollar threshold, continues to be a wake-up call to many consumers, and, as a result, these consumers will be looking into cheap, alternative solutions to mainstream vehicles.  The inconveniences of current battery-powered vehicles begin to diminish in the glare of high and rising energy prices.

The IMS market report contains considerable detail on the STOV market and is currently available by contacting the author of this article.

Outlook for Forklifts

The market for forklifts tends to follow the general economy.  Unlike some markets which are hurt by the movement of manufacturing offshore or imports, forklifts are used extensively in distribution networks and in construction, and thus demand is diversified across major industrial sectors.

In general, the forklift market is strongly tied to construction spending, but in particular–especially with regard to electric-powered Classes 1, 2, and 3 forklifts–it appears to be significantly affected by warehouse construction.  During the 1990s when distribution systems were expanding nationwide, warehouse construction as an integral part of those systems, was booming.  On the coattails of this boom, forklift end user orders rose from 86,570 units in 1991 to 191,204 units in 2000, decade-long growth rate of 8.2%.  End user orders in 1991 were actually at seven-year low, but even if the orders for 1992, 102,160 units, were taken as the base year, the growth rate would be a respectable 6.5%.

As it turned out, 2000 was a record-setting peak, which was not eclipsed until 2005 when orders were marginally better at 194,475 units.  The next year, 2006, turned out to show substantial gains, rising to just under 208,000 units, a 6.9% gain over 2005.

Outlook for 2007 and 2008

Officials at the Industrial Truck Association (ITA) meeting in September 2007 were understandably conservative in their estimates for end-of-year orders number.  Their consensus of 189,527 orders, if borne out, would represent a significant decline from the past two years and a year-over-year decrease of 8.9%. 

Into the fourth quarter of 2007, the following factors bear heavily on the predisposition to caution, if not some pessimism:

• The subprime mortgage crisis continues to have repercussions in the housing market, the full impact of which is being held in abeyance by the injection of new reserves in the banking system by the U.S. Federal Reserve;

• Although economic growth was good in the third quarter, the housing market’s drag on financial markets and on consumer spending, as well as the increasing price of oil, could well result in considerably less spending on capital equipment–and forklifts specifically;

• Finally, if the Fed slows or ceases its injection of new reserves into the economy, interest rates could rise, further stifling investment and economic growth, on which, indirectly and in many ways, industrial equipment depends.

With these issues in mind and the uncertainty of the near term direction of the economy, the ITA consensus forecast for 2008 calls for a marginal gain in new orders, to 190,490 units.

Short Term Outlook Will Show Declines

IMS differs from the ITA prognosis in that the negatives are likely to weigh more heavily on investment spending and spending on warehouses and warehouse equipment.  Most consumer retail chains are showing a slowdown in domestic sales, lessening the need for expanded distribution, whether with vertically integrated or independent facilities.  Thus, a drop off in such spending will negatively impact forklift orders and shipments, as it has in the past.

The bottom line will be a decline in orders in 2008 in the range of 5%-7%.  This would bring 2008 orders to a range of 176,000-180,000 units.  IMS picks the mid-point of this range, 178,000 units, as its forecast.

Longer Term Forecast Affected by Structural Changes in the Market

The next four years in the forecast horizon, 2009-2012, are particularly hard to predict in light of the general elections in 2008, and the possibility of an administration which promises higher taxes, more spending on social programs, and a less appreciative view of the private sector’s contribution to economic growth and prosperity.

While economic policy is virtually impossible to predict at this point, certain changes and trends in product technology and warehouse management are on-going and will have a significant effect on the market.  In the first instance, forklifts are likely to become more and more powered by electric motors.  The recent IUV Technology Conference in Louisville highlighted the impact of AC electric motors and controllers, with most experts acknowledging the strong likelihood that these motors will drive a new generation of more powerful, more efficient forklifts.

Operations within warehouses will benefit from radio frequency identification devices (RFID) systems, vision systems, real time information systems, and better safety equipment.  Vastly improved charging systems are also in the offing, which will facilitate the transition to electric power.  These improvements in forklift products will provide a positive incentive for growth in demand, even in the face of a slowing economy.

On the other hand, warehouse usage has become more efficient, even aside from what might be the contribution, now or in the future, of higher performance forklifts. Warehouse users have found ways to use less space by increasing inventory turns or skipping warehousing altogether, according to Mike Levans, editor of Logistics Management magazine.  Statistics indicate that U.S. businesses keep 3.1% less inventory now per dollar of monthly sales than a year ago.  Of course, diminished demand for warehouse space will negatively impact the market for forklifts.

How will these structural issues play out?  On the whole, it is likely that the strong pace of product innovation, accompanied by aggressive sales efforts, will offset by a slight margin, the inherent negative effects of more efficient warehouse usage and the general overall improvements in logistical systems which diminish the need for warehouse-held inventories.

Given the dynamics of the structural changes just discussed and the uncertainty of the long term course of the economy, IMS projects a conservative growth over the 2009-2012 period.

Risks in the Forecast:  Planning for Unprecedented Events

All forecasts contain risks.  These are usually in the nature of incremental differences in performance in the economy; e.g., GDP is a percentage point up or down; inflation is greater than expected; imports take more of the nation’s markets, and so on.  These kinds of considerations are, of course, important and certainly could have an impact on the two growth segments of the STOV market, privately-owned and utility.  Growth in the forklift market could also be affected.

The next decade, however, has the potential for events or trends which could have vastly greater impact than what is usually contemplated in an otherwise relatively stable economic environment.  This is where “Plan B” risk aversion comes in.  Those are the risks of events which you know could happen, but you have little ability to measure their probability.  Yet, if the event or trend occurs, the survival of your business is likely to be at stake.

What would some of these “hyper”-risks be:

1. Clearly, the most significant and potentially possible would be a dramatic cutoff of oil supplies.  It is one thing to adjust to $7.00 per gallon gasoline over a six year period.  It is another to try to do so in 6 months to a year.  When you consider that the vast majority of foreign oil is in the hands of regimes that are antagonistic to the United States or exist in areas of high conflict, the potential for such a cutoff is certainly a realistic consideration.

2. Some say we are in a war.  Some have a contrary opinion.  There does not seem to be much dispute, however, that a terrorist attack on the scale of 9/11 or greater is a possibility.  If it occurs, the economy will certainly suffer.

3.  Mention has already been made of the current credit crunch caused by the collapse of the subprime mortgage market.  At the moment the crisis in financial markets seems to have been contained.  The impact on the economy has yet to work its way out, however, and this should be closely monitored.

4.  A greater threat may lie in burgeoning entitlements programs, which neither Republican nor Democrat seems willing to contain.  Indeed, both parties have pursued an expansion of such programs, particularly as related to health care.  The danger here is that the increase in federal budgets will be such as to greatly increase the federal debt.  This, in turn, could lead to higher interest rates, greater deficits, a weakening of the dollar, a dramatic slowdown in consumer spending as import prices increase.  The bottom line is much lower economic growth.

5. There are some upside opportunities.  One of these is the strong possibility of a breakthrough in large format lithium ion batteries, in terms of safety and cost.  General Motors has seemingly made a definitive commitment to develop and commercialize the Chevrolet Volt with an on-board, rechargeable lithium ion battery, and driving range of over 600 miles.  The potential for high volume manufacture of large format lithium ion batteries will lead to substantially reduced unit costs, thus allowing this technology to spread into other markets, and the STOV and forklift markets in particular.  (We do not need to rely solely on General Motors insofar as lithium ion development is concerned.  There are numerous other efforts underway to develop this power source.)

The introduction of vehicular lithium ion batteries, assuming sufficient sources of lithium, would lead to a monumental transformation of the energy economy.  It would not happen overnight, but its effects would be felt profoundly in the arena of small, task-oriented vehicles.

Plan B Risk Averting Strategies

Looking at the above risks as outlined, the first two are of an emergency nature, requiring the capability to immediately respond.  The three following are longer term influences, which involve strategic planning and implementation throughout the forecast period. 

Building a Response Capability:  The Key is Self-Sufficiency

Being able to respond to a fuel crisis or a terrorist attack basically means having backup systems in place:  A secure supply chain, adequate inventories of key materials and components, and a backup power supply.  The issue here is not one of growing sales and profits in the face of difficulties.  The issue is one of survival until help arrives.  For that period, six months or a year or more, self-sufficiency is the key.

Adjusting to a Long Term Deteriorating Economy:  The Key is Diversification

The key to avoiding the pitfalls of recession and long term difficulties in the economy is to diversify.  What to diversify?  Markets, production capacity, and technology:

• In the face of a weakening dollar, it is an opportunity to expand exports, thereby increasing revenues denominated in stronger currencies, such as the Euro.  That means developing international markets and expanding international sales.

• Production capacity abroad is a means both of serving local or regional international markets and keeping open another supply line to the home market.

• Perfecting current technology and moving toward applications of new technology—combined with engineering design and prototype development is the key to maintaining global competitiveness and remaining strong in the U.S. market in particular.

Just a further comment concerning investment in production capacity abroad.  This does not mean a rush to China, leaving U.S. capacity languishing.  While not mentioned as one the specific risks listed above, China continues to have designs on Taiwan.  A visit to the official Chinese government website is pretty frightening in that regard.  Therefore, place 70-80% of your productive assets in China is not a good idea.  A strategy of diversifying would preclude this sort of move.

Outlines of a Win-Win Strategy for Globalizing

Every company undertakes the process of globalizing in a different way, depending on prior international experience and history.  In broad outline, however, the process can be win-win for both local or national operations and foreign stakeholders.  The formula should be to farm out established manufacturing, but keep new product generation in the U.S.

Thus, companies can buy into a competitive advantage involving low labor rates, but at the same time retain the competitive advantage of product R&D, product development, design expertise, and—at a minimum—prototype and low volume, specialized manufacturing.  This will keep the company at the cutting edge of new products and markets, and at the same time retain a core capability in manufacturing.  Given the frenetic search for alternative fuels

Hopefully, this formula is not too simplistic.  If carried out with all the attendant details, it accomplishes two purposes:  1) Diversifies the company’s asset and sales base; and 2) Maintains a critical presence in product development that assures a dynamic base of operations in the United States.

---

Notes:

1 - Discover® is a registered trademark of BDII and is used herein with permission

---

About the Author:

Stephen Metzger is Managing Director of International Market Solutions (IMS), a management consulting firm, whose prime focus is putting companies into the international market arena on a cost-efficient basis. Mr. Metzger is also Principal of International Competitive Assessments (ICA), the market research arm of IMS, which he founded in 1980. ICA has undertaken extensive market research and consulting assignments covering a broad range of products and markets over the firm’s 25-year history. Mr. Metzger and his staff and associates have produced three ground-breaking studies of small, task-oriented vehicle market in the United States since 2000 and devote most of their efforts to this rapidly emerging area. Mr. Metzger, an economist by background, is, in addition to his full time consulting work, adjunct professor of business and economics at Iona College and Mercy College, both located in Westchester County, New York.