According to an old adage in the automotive industry, passenger cars are bought with the heart, commercial vehicles are bought with the mind.
Since the first truck was built and sold, the OEM focus has always been on the product. Over the past decade in particular, truck manufacturers have competed on factors such as fuel economy, reliability, durability and safety, and more recently total cost of ownership. All along, the truck was the product at the centre of all truck manufacturer improvements and innovations, benefiting a range of customers that included fleet owners, owner operators, drivers and technicians.
However, as competition increased and the areas offering one truck manufacturer an advantage over another shrank, it became evident that this age-long focus on products was about to change.
Moreover, the business of trucking became focused on downtime reduction, higher degree of mobile resource effectiveness and efficiency – with both the truck and the driver being mobile resources – as well as better asset utilisation and ultimately greater value to shippers and consumers. This was further accelerated by the advent of digitisation in trucking, a trend that is omnipresent now in both developed and emerging markets.
The global trucking industry is undergoing a tectonic change, a change that has impacted many other adjacent and unrelated industries in the past
With rising competition, shrinking degrees of separation between trucks (products) offered by the major truck OEMs, and the rapid proliferation of electronics and connectivity related to advanced technologies, the global trucking industry is undergoing a tectonic change, a change that has impacted many other adjacent and unrelated industries in the past. This change is happening at the very core of this industry, one that is changing focus from products to services. Product-based business models are transforming into service-based business models. Those who thought this change was happening only at the OEM level are encouraged to take a wider look. Tier 1 and 2 suppliers, fleets, owner-operators, truck drivers, technicians, and even shippers – all are experiencing this seismic shift.
The global freight movement industry is undergoing a digital transformation that is creating revenue opportunities of approximately US$207bn by 2025, and this is limited to only the section of the industry between manufacturer or shipper and warehouse. Telematics represents roughly US$35bn in revenue opportunities. So far, the proliferation and market adoption of telematics has been a story of service providers and OEM push, and this has delivered handsome growth.
Moreover, telematics subscription renewal rates have also been high, indicating that subscribers who use this technology for mobile resource management derive value from it. In 2015, approximately 17.1 million commercial vehicles globally were connected to telematics services, according to Frost & Sullivan analysis. Of this, 46.4% of vehicles were medium-heavy duty trucks, ensuring a steady growth of the global commercial vehicle telematics subscriber base thus far. By 2022, the subscriber base is expected to more than double, reaching 40 million. At Frost & Sullivan, we expect market pull to outweigh the push from OEMs and suppliers, and that will greatly expedite the proliferation of telematics in global commercial vehicles. This will largely be driven by a confluence of factors; however, the most important factors will be the need for greater supply chain visibility, mobile resource effectiveness and efficiency enhancement, and emergence of new and customisable pricing plans.
While telematics technology is steadily and surely ushering in digitisation in commercial vehicles, this trend is gaining momentum against the backdrop a notable shift in the business of commercial vehicle sales.
The global freight movement industry is undergoing a digital transformation that is creating revenue opportunities of approximately US$207bn by 2025
We are now entering a phase in commercial vehicle sales where an OEM’s relationship with its customer does not end when the truck is sold, but in fact begins at that point. Thereafter, ‘soft’ technologies, for example advanced electronics and connectivity-enabled technologies, will offer OEMs, suppliers and service providers with monthly or annual revenue streams. This will position OEMs in a new territory, where their value proposition will transform from being product manufacturers and sellers to service providers. Look around this industry and follow some of the recent partnerships, acquisitions, stakeholding patterns, and personnel changes emerging from Gothenburg to Tokyo, from Munich to Mumbai, from Stuttgart to Shanghai, and Chicago to Sao Paolo, and the beginnings of a shift in the industry can be seen; product innovations will continue, but service and solution development and positioning will emerge as a higher priority.
This implies a new focus on entire business models, affecting OEMs, suppliers, fleet managers, owner-operators and shippers. Fortunately, technology will come to the rescue that affects powertrain, chassis, safety and telematics. All the talk of connectivity and telematics may easily draw focus towards connectivity technologies, but one needs to understand that looking forward, we should not look at service-based business models in the context of connectivity technologies but just the opposite, for example connectivity technologies in the context of service. That is why it will be crucial to look at technologies and services that harness connectivity as well as offer innovative and attractive value propositions to all stakeholders in freight mobility.
The innovations in the freight brokering market, prognostics, driver monitoring, automated and automatic transmissions, infotainment, truck safety, comfort and convenience technologies, and many other commercial technologies that surround us today show that something exciting is happening in the global commercial vehicle industry. In the past, it was the product (read: truck) that created services, but now we are seeing services creating products. Urban delivery is driving powertrain development and truck design; supply chain visibility is driving telematics adoption; driver health, wellness and wellbeing is driving in-cabin and also powertrain and chassis technology innovations; and more fundamentally, shared economy principles (for example, smartphone-based freight mobility) is driving asset utilisation, while the duty cycles of trucks are forcing a fresh look at a truck’s purpose.
Frost & Sullivan expects global medium-heavy duty truck sales to reach 2.68 million units in 2016, but what is more important is the rise of a new type of truck: the so-called ‘value truck’. For the last decade, global commercial vehicle sales were supported largely by low-cost trucks sold in developing markets, especially the BRIC markets. It is in these very markets that we are seeing the rise of value trucks. These are trucks that are priced higher than low-cost trucks and lower than premium trucks. This represents the rise of a ‘middle class’ in the global truck market.
We are now entering a phase in commercial vehicle sales where an OEM’s relationship with its customer does not end when the truck is sold
What is more remarkable is the fact that these trucks feature a high degree of advanced truck technology proliferation and are being created in response to the businesses for which the trucks are built to cater.
Compared to low-cost trucks, value trucks feature a higher degree of reliability and durability, improved levels of comfort, more connectivity and safety, and more applicability to urban and regional freight mobility. In 2014, value trucks accounted for 17% of total truck sales; this share is expected to touch 19% in 2016. Value trucks are being demanded by truck fleets and owner-operators seeking better products for delivering the better service that shippers are demanding from carriers in developing markets.
As the industry now finds itself on the cusp of transition from a product-based to a service-based business model, it is important to understand that this is just a transition and not the end-game. Look around in adjacent markets and other non-related markets, and enough evidence can be found to suggest that another transition will soon follow, one that transforms the service-based business model into a solutions-based business model. That transition will happen much more quickly than the one from products to services. With such transitions under way, it is time to quickly become accustomed to viewing the truck buyer as a client and not as a customer.
Disclosure: Sandeep Kar serves on the advisory board of Transfix and Vaahika, and on the board of South End Travels
This article appeared in the Q2 2016 issue of Automotive Megatrends Magazine. Follow this link to download the full issue.
