Outlook for Utility Vehicles and Forklifts, 2008-2012:
Economy and Industry Face Major Hurdles
By Stephen Metzger, Ph.D., Managing Director, International Market Solutions
The past year, 2008, has in many ways been pretty dreadful. The severe impact of the credit crisis, which initially came on during the latter half of 2006, but struck home with the collapse of Lehman Brothers in September, 2008, the bailout of AIG (a continuing saga), and a decline in stocks of over 35% (Dow Blue Chips). The financial crisis is now translating into the real side of the economy:
- Unemployment reached 6.5% of the workforce in October with higher numbers of unemployed a strong prospect;
- Corporate earnings continue to decline, a trend which began in the second quarter of 2007;
- The automotive industry (i.e., Ford, GM, and Chrysler) is in dire straits;
- Housing prices continue a downward trend amidst declining sales;
- Residential and commercial construction are now both declining;
- Real GDP declined in the third quarter and most analysts see this continuing into the fourth quarter.
Are there any bright spots in the darkening skies? Faint though they may be, it is worth noting that oil prices have plummeted, which means that gasoline, diesel, and home heating oil prices have all followed suit. Those who like to see a strong dollar are getting their wish, as global recessionary fears are weakening foreign currencies relative to the greenback. The various initiatives undertaken by the Federal Reserve and the U.S. Department of the Treasury appear to be stemming the tide of financial market collapse, although it is clear we are not out of the woods yet.
The lack of credit remains troubling, because despite attempts by the Fed to add liquidity to the financial system, the retrenchment among financial institutions, the so-called “deleveraging” process, continues. Thus, interest rates, especially in the government bond market are at historic lows as investors seek safety rather than returns. This is, of course, negatively impacting the stock market and a wide range of corporate bond markets.
Moreover, consumer credit, as well as business loans, are more difficult to come by. Banks are adding to their cash and liquid assets (e.g., short term Treasuries) and are not in a lending mood. An early November survey by the Fed determined that U.S. banks continued to tighten their standards on loans to households and businesses in the third quarter. This adds up to weaker consumer and business demand.
Recent Trends in the Economy
The marginal third quarter downturn in real GDP is certainly destined to become a more definitive negative trend in the fourth quarter (initial results of fourth quarter activity should be forthcoming about the time of the publication of this forecast). And, despite a new stimulus package, which is in the works at this present writing, negative growth is highly likely for the first and second quarters of 2009.
The table below shows recent quarter-to-quarter trends in the economy over the 2007-2008 period. Real GDP held up fairly well in 2007, although by the fourth quarter it could be seen that trouble lay ahead. The small downward trend in the fourth quarter was followed by anemic growth in the first and second quarters of 2008, and finally, a downturn in the third quarter.
Personal consumption expenditures took a severe hit in the third quarter of 2008, as the much relied upon consumer began to seriously retrench. Gross private domestic investment turned negative much earlier, in the fourth quarter of 2007 and has gone south since. Government expenditures have taken up the slack, especially in the first three quarters of 2008, with an almost 14% gain in the third quarter.
Outlook for the Economy, 2009-2012
Turning to the outlook for end-of-2008 and 2009-2012, there is a high probability that the early going will be rough, beginning with an almost two-percentage point drop in real GDP in the fourth quarter of 2008 and negative growth flowing into the first half of 2009. This year (2009) and beyond, aside from the uncertainties brought on by pure economic trends, is beset with new uncertainties pertaining to the new administration and in particular, its tax polices, which, if implemented, will surely hinder the chances of recovery. The details of the forecast may be seen in the table below.
Consumer expenditures may not recover until well into 2009 with a slight overall negative result for the full year. This forecast is predicated on continuing issues in the housing market, where declining asset values will have a negative impact on spending, and this will be coupled with considerably less access to consumer credit.
Gross private domestic investment is certainly headed for negative territory as the profit outlook turns even less inviting, resulting in a significant downgrading of business expectations. Investment is far more volatile than consumer spending, as reflected in the trend data, as well as the outlook. The forecast is for an 8.8% drop in investment, year-over-year in 2009, but with moderate recoveries thereafter.
Recovery in business outlays for plant and capital equipment after 2009 will significantly depend on new administration tax policies. If, as loudly advertised during the presidential campaign, tax increases on dividends, capital gains, and corporate profits (not to speak of higher taxes on the “rich” who do most of the saving in the economy) are implemented, then it is unlikely that even the moderate gains in the range of 6% per year will be attainable. The forecast for gross private domestic investment is predicated on far more moderate tax increases, if any, that have been suggested up to this point.
Government expenditures will, of course, be pumped up in the coming months and quarters, and will have a moderating effect on recessionary pressures. The forecast is for a large increase in government spending in 2009 and with further increases in the 6-8% range for 2010 to 2012.
The net impact on GDP of these major components is likely to be low real growth in 2009 of less than 1%, followed by a recovery beyond, averaging about 3% per year.
Outlook for Utility Vehicles and Forklifts
The outlook for utility vehicles focuses on three main segments, a number of which reflect categories used in IMS reports on the small, task-oriented vehicle (STOV) industry: These include light portage and transport vehicles (the LPT segment), most of which are built on golf car or modified golf car frames, and heavy duty utility vehicles. The latter category includes off-road utility vehicles with side-by-side seating and turf and grounds maintenance vehicles.
In addition to STOVs, the outlook includes a forecast of the forklift sales, which comprise a significant market segment in the general materials handling industry and are actively covered by Industrial/Utility Vehicle Magazine.
Main Market Driver is Capital Expenditures
In both the STOV and forklift markets, the main market driver is end user capital expenditures. Company plans for new vehicle investment and for replacement of older vehicles are strongly influenced by what they see developing for their own markets. STOVs and forklifts are an input into the production and distribution of end products, and when those markets are lagging, so will the demand for inputs.
Thus, in the context of the pessimistic, albeit realistic, forecast for the economy, as detailed above, do not expect to see banner years for STOVs and forklifts. Nevertheless, in some market segments there are offsetting factors, as noted below.
Light portage and transport (LPT) benefits from environmental regulations
Most LPT utility vehicles are golf car derivatives. The three major golf car manufacturers, Club Car, E-Z-GO, and Yamaha, dominate this market, although there are significant other, if smaller competitors, such as Columbia Par Car and Taylor Dunn. Cushman, a well-known brand and part of E-Z-GO, is another important factor in this market.
In looking forward over the next few years, the LPT segment will be affected by the cyclical downturn in the economy, but will be benefiting from four offsetting factors:
- Replacement of on-road utility vehicles as a economizing measure;
- Companies “going green”;
- Tightening environmental regulations;
- Breaking new ground in fleet markets.
Despite recent decreases in gas prices, LPT vehicles offer cost cutting features and cheaper prices as an attractive alternative to larger, on-road vehicles—mainly pickups and vans—as these vehicles reach replacement age. In addition, many companies are focused on going green, and electric-powered LPTs provide a solution. Whether a voluntary initiative or an economical measure, many companies will opt for LPT vehicles in the face of tightening state and federal environmental regulations.
Deputy Assistant Secretary of the Army Paul Bollinger, Jr. recently announced that the Army was ordering 800 street legal neighborhood electric vehicles for various bases by the end of the fiscal year 2009, to be followed by additional orders totaling a contemplated 4,000 units over the next three years, and ultimately numbering 10,000 vehicles. If the Navy and Air Force piggy back on these plans, the military thrust toward a large NEV fleet could well set a precedent for other major federal, state, and local governmental agencies.
These factors, plus cyclical influences, should result in measured increases in the market from 2010 on, after a moderate decline in 2009. Figures for the three utility segments are summarized in the chart below.
Grounds maintenance utility vehicles likely to see declines
Turf and grounds maintenance utility vehicles, which include the products of major factors, John Deere, Toro, Kubota, and Jacobsen, are likely to see stagnating, possibly declining markets over the next four years. Key market segments, such as industrial/research and college campuses, as well as golf courses, will be going through a belt-tightening period.
At the same time, as most of these vehicles are driven by internal combustion engines, there will be a premium on meeting pollution standards. While possible with biofuels and CNG, these product lines will be more open to electric utility vehicle competition from the LPT products than in the past.
Crossover UTVs should see moderate gains
UTVs (Utility Terrain Vehicles) continue to make headway in the market for rugged off-road vehicles in both commercial and consumer markets. (The term, “crossover”, describes the play in both the commercial and consumer segments that these products enjoy.) Basically, derived from ATVs in the recreational market, the UTV’s success has come in large part as a displacement of the ATV.
UTVs, because of their diverse uses, are likely to maintain some positive momentum in the face of an otherwise poor market environment. The outlook for 2009 remains positive with relatively low growth of 3.0% for what has been much higher growth trajectory in the recent past. Beyond 2009, gains of between 5%-6% are likely.
One inhibiting factor for these vehicles is that they are mainly ICE-driven and will be up against more stringent environmental regulations. Adapting to biofuels may result in higher price points. The mainline companies in this industry segment, including Polaris, Yamaha, and Kawasaki have been quite reluctant to develop electric-driven models. At the same time smaller, entrepreneurial companies, such as Bad Boy Buggies, Imaginative Manufacturing, and HuntVe are breaking new ground with their electric-powered UTVs.
Forklifts closely track investment spending
In the material handling segment of the utility/industrial market, forklifts are the key product type. Of all industrial vehicles, forklifts show one of the clearest patterns of adherence to cyclical investment spending. The chart below shows the movement of gross domestic private investment from 1987 through 2007, a period which encompasses two recessions and the slowing period of 2007. Superimposed on the graph of investment are shipments of forklifts.
Comparing the changes in forklift shipments with changes in investment spending also reveals a close tracking pattern. Forklift shipments, while generally moving in the same direction as investment spending, display wider fluctuations.
Given this compelling correlation, as well as the results for 2007, the near term outlook for the forklift industry indicates that a significant drop off in shipments is highly likely. The table below indicates a forecasted decline of 15.0% for 2009, following an estimated 8% decrease in full year 2008.
Forklift shipments should, however, ride the coattails of a recovery in investment spending in 2010-2012.
Summary of the Forecast
Having fallen into a deep crater at the time of this industry forecast, the economy presents little to be optimistic about. As an industry heavily dependent on capital investment outlays, the picture, realistically, cannot be any more inviting.
Moreover, the incoming administration has up to the time of this analysis presented a problematic economic policy of higher taxation, which this forecast has discounted as unfeasible in a recessionary period. Nonetheless, the potential for such a policy, not to speak of other policy areas (e.g., trade, foreign policy, defense), which could have serious economic repercussions, leaves the outlook one of extraordinary risk.
Finally, the rate of financial and corporate bailouts appears to be mounting. Counting on the tax payer to stem the likely deficits this process will produce is dubious, and, at the same time, deficit financing for the bailout and the forthcoming stimulus programs may put unacceptable pressures on the financial markets to the point of placing the unimpeachable credit of the United States government in question. Oh well, as long we are talking risk, why not think the unthinkable!
A noted economist once remarked that, “The secret of good forecasting is to forecast often.” If would be hard to find a time in which such an admonition applied more fittingly.
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