McKinsey Forecasts Global Truck OEM Profits By Region To 2030

In 2030, mature markets like North America and Europe will still be the most profitable regions globally for truckmakers, but nearly half of the growth in original equipment manufacturers' (OEMs) profits will come from aftersales services. In the next decade, volume growth will be decoupled from profit growth—price pressure in emerging markets will make truck sales barely profitable, while mature markets' appetite for expensive services will grow. 

That's what the McKinsey Center for Future Mobility, a specialized practice group of McKinsey & Company, the worldwide management and consulting firm, found in a January 2019 study titled "A regional view of truck industry profit pools." Indeed, even as global OEM profits grow from €11.2 billion in 2017 to €16.1 billion in 2030 (2.9 percent growth per annum), McKinsey projects global aftersales profit to grow from €4.6 billion in 2017 to €7.1 billion in 2030 (3.4 percent growth per annum). 

What are aftersales profits? Simply put, aftersales profit is the money that OEMs make from providing parts, repair, maintenance, and digital services for equipment already sold. Industry trends including battery-electric commercial vehicles, autonomous vehicle technology, and vehicle connectivity are expected to create new opportunities for high-priced aftersales services for truckmaker OEMs. In the other direction, trends like increased emission regulation, electric vehicle cannibalization, and price pressure are projected to be significant headwinds against profits from new truck sales.

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"We believe increased competition, industry consolidation, higher emission standards and the replacement of diesel trucks by battery electric vehicles (BEVs) will reduce the global truck profit pool by EUR 3.9 billion through 2030," McKinsey found. "Combined with the expected positive EUR 3.2 billion profit expansion due to volume increases and structural shifts, the net impact of the two market developments will shrink the global profit pool by EUR 0.6 billion in 2030."

"Consequently, OEMs cannot rely on the market to ‘grow' their way to higher profitability," McKinsey recommended. "Instead, they need to focus on addressable action areas," including operational efficiency and new opportunities like the technology trends mentioned above.

The basic characteristics of regional commercial vehicle markets around the world are driving McKinsey's analysis. Mature markets like NAFTA (the new USMCA) and the EU will experience low structural growth in truck volumes sold—never mind the record number of truck orders in the United States last year, which is a better measure of trucking carrier sentiment than growth in truck production capacity. Yet those same low-growth markets are well-capitalized, relatively high-tech, and heavily regulated, making them ripe for the expansion of pricey aftersales services. For the NAFTA market, McKinsey predicts 1.3 percent growth in new truck sales volume from 2017-2030; for the European Union, that growth rate is just 0.7 percent.

"From a very strong 2015 base, NAFTA experienced an approximate 60,000-unit decline from 2015 to 2017," McKinsey wrote. "This drop affected profitability, which declined from 9.6 percent to 8.6 percent [return on sales]. However, the region, ultimately slated to fall under the new United States-Mexico-Canada Agreement (USMCA) that will supersede NAFTA, remains the most profitable truck market worldwide. We believe overall profitability will bounce back to 9.6 percent by 2030. From a volume perspective, the region should experience limited structural growth through 2030 (about 1.3 percent a year), while revenues grow moderately (2.8 percent annually)."

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Brazil, on the other hand, will experience some of the fastest growth in volume of new trucks sold, expanding its annual market from 55,000 new truck sales in 2017 to 120,000 by 2030, which comes to a 6.2 percent annual growth rate. While McKinsey projects that OEM revenues in Brazil will expand at a 5.9 percent annual rate through 2030, the profit or return-on-sales (RoS) will grow from -1.6 percent to a paltry 2.8 percent (RoS in the NAFTA region was 8.6 percent in 2017 and is projected to grow to 9.6 percent by 2030).

Excluding Brazil, truck maker OEMs' profit opportunities in South America are insignificant: while overall revenue is expected to grow from €3.7 billion to €5.7 billion by 2030, absolute profits should stay flat at €100 million, with profitability declining from 2.1 percent to 1.4 percent.

"China's truck market is expected to expand its profit pool from EUR 1.6 billion in 2017 to EUR 1.8-2.4 billion in 2030, driven by the attractive "upper-budget" segment, while the share of premium imports in the Chinese truck market will largely stagnate," McKinsey predicted. "Global truck makers are expected to localize products in China and compete for the upper-budget market, which includes ‘localized premium' trucks."

McKinsey's base model for the Chinese trucking market sees it contracting from 1.3 million new trucks in 2017 to 902,000 trucks in 2030, while the upside case correlated to optimistic GDP growth would put the market at just 1.21 million trucks in 2030. Profit margins in McKinsey's base case will shrink from 4.7 percent to 4.6 percent by 2030, even as revenue grows 1.1 percent annually.

"The real opportunity in the Chinese market lays within the upper-budget (local premium) segment," McKinsey found. "This segment is especially attractive for localized trucks from global players and high-quality domestic trucks. For foreign players, the key to winning in this attractive market involves a thorough localization effort to reduce costs significantly."

One of the more interesting regional opportunities identified by the McKinsey analysts was Central - Eastern Europe (CEE), where truck OEM profitability should reach 6.4 percent RoS by 2030, while volume growth will likely reach 284,000 units by 2030, a 13-year compound annual growth rate of 3.8 percent.

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