Current Trends on the World Commercial Vehicles Market

Lecture by
Professor Bernd Gottschalk
President of the German Association of the Automotive Industry (VDA)
Ladies and gentlemen,
It gives me great pleasure to welcome you on behalf of the commercial vehicles industry
to this international press conference. Today, in the run-up to the 60th IAA Commercial
Vehicles Show, we would like to take a closer look at all the current market trends,
including new products, and the general conditions affecting the industry and its
customers. Leading figures from the European commercial vehicles industry will be
taking the stage to give speeches and answer your questions. I would also like to take
this opportunity to thank all the speakers who are participating and to welcome the
presidents of various trade associations and representatives from the fields of politics
and higher education.

IAA Commercial Vehicles 2004: A Year of Well-Filled Order Books

Ladies and gentlemen,
A mere two years ago, the commercial vehicles sector was still experiencing economic
difficulties. Back then, I responded by emphasizing the trucker's approach to problems,
which can be neatly summed up in the phrase: “Problems are there to be solved!”
Today, I can say that the commercial vehicles industry took the appropriate action.
Thanks to a combination of new products and technologies, improvements in cost
structure, flexible working hours, streamlined processes, customer-oriented services
and an increase in global manufacturing and market presence, the situation has been
radically improved. Appropriately, this year's IAA motto (“Commercial Vehicles – A
Mobile Future”) rightly expresses the sector's newly won confidence.
At the same time, this year's IAA will also benefit from the positive momentum being
generated in the various markets. Today, we can already say with confidence that this
year, the year of the IAA Commercial Vehicles Show, will be characterized by well-filled
order books, full utilization of capacity and secure jobs in the commercial vehicles
industry.

New momentum for commercial vehicles markets around the world

In the first six months of this year, global sales of commercial vehicles rose by 8 percent
compared to the same period last year. What's more, the industry has posted double-
digit growth in the world's most important markets:
Truck sales in the NAFTA region rose by more than 30 percent, with heavy-duty, class-
8 trucks up by almost 40 percent.
– Truck sales in Brazil and Argentina also rose by 40 percent.
– Sales rose by 20 percent in China, which is now a larger market for commercial
vehicles than Western Europe and the U.S. combined.
– In Western Europe sales of medium-duty vehicles rose by 8 percent while sales of
heavy-duty vehicles were up by 5 percent. However, not all the markets of Western
Europe are developing at the same pace, and demand is still particularly sluggish In
France and Italy.
– In the new EU member states, sales increased by 25 percent.
Ladies and gentlemen,

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on the German market, sales of commercial vehicles over 6 tons were up by 15 percent
for the first 6 months of the year, and new vehicle registrations in June even surpassed
the previous year’s figure by 25 percent. As a result, it was possible to boost the
production of commercial vehicles over 6 tons by 21 percent in the first 6 months, thus
achieving a new production record in this weight class of over 76,000 units.
Buoyed by growing demand worldwide and increasing market share for German
manufacturers, exports of commercial vehicles over 6 tons rose by 14 percent in the
first half of the year. In June, this increase was even 30 percent. German trucks are
becoming increasingly popular, particularly in the new EU member states, Turkey and
the OPEC countries. In addition, both domestic and foreign demand remain strong. In
the first half of 2004, domestic orders rose 36 percent, while foreign orders were up
34 percent on the previous year's level.
We therefore hope that our initial sales forecast of 80,000 units for the German market
in 2004 – an increase on the 71,000 vehicles sold last year – will prove to be a
conservative estimate for this, an IAA year.
The vans sector is also looking increasingly healthy. In June, new domestic orders
exceeded the previous year’s volume by 22 percent, while foreign orders actually
increased by 46 percent. For the first 6 months as a whole, domestic orders were up by
12 percent and foreign orders by 26 percent. In June, new registrations of commercial
vehicles up to 6 tons rose by 10 percent, while the corresponding figure for the first half
of the year was an increase of 7 percent. Van production increased in June by
9 percent, bringing total production for the first six months to the same level as in 2003.

A streamlined and more competitive commercial vehicles industry

These figures for the first half of the year show that the commercial vehicles industry is
once again on the rebound following a number of difficult years and radical
restructuring. It is rare that so many of the world's commercial vehicles markets should
all post growth at the same time. As a result, production capacities are now being
almost fully utilized. In fact, for some manufacturers, capacity will be a limiting factor
that could actually lead to a loss of market share. However, with the break-even point in
the various sectors now falling, the earnings situation should improve. What's more, the
commercial vehicles sector is now reaping the benefits of its efforts to streamline its
activities. In fact, it has emerged from the slump stronger than it was before the
downturn.
The industry has also come to realize that incentives wars do not pay off in the long run.
The motto “volume before profit margins” has lost much of its appeal. Despite ongoing
fierce competition, the situation on the price front has calmed down. Manufacturers are
now no longer prepared to chase every order, including those with minimal margins.
Attractive new products and increasing sales opportunities have all played a role here.
So too has the fact that manufacturers do not have to primarily canvass for new
business in order to achieve full capacity utilization.
The level of incoming orders for heavy-duty trucks has always been an early indicator of
a recovery in the economy as a whole. While there are as yet only slight indications of
such a recovery in Germany, the commercial vehicles sector nonetheless offers some
good reasons for optimism – both in terms of an economic upswing and improved
employment prospects. In Germany alone, almost 200,000 people work in the
commercial vehicles industry, not including those engaged in service and trade

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activities. That represents a quarter of the total workforce in the German automotive
industry.

How durable is the recovery?

It should be in everyone’s interest to not only secure the current productivity and
flexibility advantages, but also to build on them. We should certainly pause to consider
just how long the industry will continue to benefit from overdue replacement
requirements, fleet renewals and business expansion in Eastern Europe if the increased
demand for transport capacity is not supplemented by a substantial revival of the
economy as a whole. We should definitely remain cautious, particularly since the
commercial vehicles sector continues to undergo radical restructuring.
In addition, we are also still unsure whether the difficult situation on the steel markets
will have an impact. However, there are increasing signs that the tense situation is now
easing somewhat.

Growth in global markets

Similarly, one of the reasons for the current growth in the U.S. is the weak performance
last year. We anticipate lower growth there over the next few months. Yet, despite the
current account deficit, which continues to remain high, and the possibility of a further
increase in interest rates, there are currently no signs of a decline in demand. On the
other hand, it remains to be seen what direction U.S. economic policy will take after the
presidential election.
In China, there is no reason to fear a radical change in policy with regard to growth,
despite the announcement of measures to achieve a “soft landing” for the economy.
However, following government intervention, the extreme growth rate of recent years
has been slowed down somewhat and is increasingly coming under control. Similarly, I
believe that the danger of overcapacity in the foreseeable future is less serious than is
sometimes suggested.
Sales of commercial vehicles in Eastern Europe have risen rapidly in recent years, not
least as a result of German manufacturers' willingness to relocate to our eastern
neighbors or acquire a stake in companies there. And even though the vehicle fleets
there are already very modern, the potential for growth is real: The new EU member
states are already generating a considerable amount of business activity, which in these
growth markets can only be maintained with the support of commercial vehicles.
Ladies and gentlemen, we have strong markets, and we also have weak ones. In
Western Europe, and in Germany as well, the demand for commercial vehicles has
increased – even though we are still waiting to record a clearly identifiable upward trend
in the economy as a whole. The latest DIW and IMF forecasts give us reason to hope
that buoyant exports and the slight rebound in capital-goods spending in Germany could
boost consumption and eventually usher in a robust upturn.
The key question is therefore: How can the government best generate a new mood of
confidence that will encourage citizens, investors and nervous consumers to become
active again?
The answer is clear: by implementing reforms. After all, the potential for increased
consumer spending is certainly there, as the high savings ratio indicates. The German
people didn't recently vote against reforms or against the laudable approach of Agenda

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2010. Instead, they demanded a clear perspective and, above all, the end to tax
increases – a topic that still remains the subject of discussions.
In last week's “Germany Report,” the OECD expressly emphasized the need for more
deregulation: Germany needs more reforms, not fewer.

An environmental quantum leap with EU 4 and 5

Ladies and gentlemen,
This workshop will show that the commercial vehicles industry is once again on a firm
footing. Equipped with a convincing product line, new innovations, and an enhanced
range of vehicle-related services, it is now poised to seize the attractive sales
opportunities generated by the strong growth in world and European trade. In addition,
the industry has also used its chance to further increase regional diversification.
With its new technologies for reducing emissions and fuel consumption, the commercial
vehicles industry is about to take a quantum leap with regard to environmental
standards in the road-freight sector. The 60th IAA Commercial Vehicles will mark the
launch of a range of commercial vehicles with radically reduced emissions. In fact,
many products on display at this year's IAA already meet the EURO 4 emissions limits,
which are applicable from 2006 onward. And some of them even fulfill the EURO 5
limits, which only come into effect in 2008/2009.
Once again, commercial vehicle manufacturers and their suppliers have shown that
they are capable of meeting even the most ambitious of targets ahead of schedule. We
mustn’t forget that when the negotiations on these extremely low emissions were being
conducted, nobody knew how, and with which technologies, it would be possible to
achieve such limits. Just imagine what would have happened if we'd been talking about
building regulations!
EURO 4 and EURO 5 will reduce the limits for nitrogen oxides and particulates by
around 80 percent compared to the current levels stipulated by EURO 3. The
permissible level of particulates will fall to less than 3 percent of what it was in 1990.
These developments will accelerate – despite the increasing mileage – the trend toward
a decline in overall emissions from road-freight traffic. The issue of truck exhaust
emissions can no longer be used to justify a call to transfer freight from road to rail.
After all, locomotives don't meet any EURO standards at all!
The aim must now be to market these new vehicles as widely as possible. Rapidly
replacing the current fleet with clean and modern vehicles is the most effective way of
protecting the environment. It's certainly much better than political measures that will
drive up prices.
In order to meet the EURO 4 limits, manufacturers are currently pursuing a two-pronged
strategy: On the one hand, they plan to further develop cooled exhaust-gas recirculation
technology, which further reduces the level of NOx emissions actually produced by the
engine. On the other hand, use will be made of SCR technology in particular, which
relies on exhaust treatment to guarantee the requisite reduction in NOx emissions. The
technically sophisticated and costly SCR technology, which will also enable vehicles to
meet the EURO 5 limits, not only reduces emissions but can also cut fuel consumption
by as much as 6 percent.

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However, vehicles fitted with SCR technology also require AdBlue, an additive in the
form of a carbamide solution. The VDA has therefore brought all the parties involved
together to ensure that a suitable supply infrastructure can be established. And we
shouldn’t forget that such an infrastructure will be required to function throughout
Europe – in other words, from Portugal to the Ural Mountains.

Safety in commercial vehicles is a high priority

Another key area in the commercial vehicles sector, and one that is currently
characterized by a high level of innovation activity, is road safety. Here, too, significant
advances have been made. For example, since 1970 the incidence of truck accidents in
Germany has fallen, in relation to the number of vehicle-kilometers driven, by more than
70 percent. This improvement is primarily the result of the continuous advances made in
vehicle safety systems.
Whereas the emphasis used to be on passive safety – in other words, reducing the
impact of accidents – the focus has shifted to active safety. By active safety, I mean
using electronic systems and driver-assistance technology to avoid accidents.
Electronic traction-control and anti-tilt/stability systems, adaptive distance-control
systems, and lane-monitoring assistants are good examples of such systems.
Similarly, a further reduction in the number of accidents can also be expected from the
voluntary commitment made by truck manufacturers belonging to the VDA – as
submitted to the German Federal Transport Minister on June 16, 2004 – to equip all
trucks over 7.5 tons with advanced mirror systems that don't exhibit any “blind spots” as
standard from September 2004 onward. This will eliminate the blind spot during turning
maneuvers. The changeover is due to be fully implemented by the end of March 2005.
However, even the best safety systems cannot relieve drivers of their responsibility to
drive safely. The industry is therefore cooperating with the associations to provide
training courses aimed at improving safety. The courses are also conceived for drivers
of buses and vans. And we should be taking a much closer look at the needs of van
drivers, given the increase in the volume of van traffic that has taken place with the
advent of e-commerce.
For the last two years, we have finally seen a substantial fall in the number of accidents
involving vans. Once again, manufacturers have introduced a range of measures
designed to improve the safety of this type of vehicle. The most prominent examples I
would like to mention here are not only the increasingly frequent installation of ABS,
ASR and ESP in small vans as standard, but also various systems that help to secure
loads, and a training campaign called “Qualifizierungsoffensive Kleintransporter,” which
was jointly developed for van drivers with other interested parties.
Tackling the causes of accidents is the best way of preventing them, not the introduction
of a speed limit!

Customized services
Ladies and gentlemen,
In addition to commercial vehicle “hardware,” services are now becoming an
increasingly important. Not only does this apply to vehicle maintenance, but also to
vehicle financing. The leasing, financing and rental business is of course nothing new to
the commercial vehicles industry, which has been engaged in these activities for more

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than a decade. However, the services sector is now becoming much more dynamic, as
shown by the recent headlines about some of our member companies active in this
market. The focus is now not only on service packages, but increasingly also on flexible
individualized solutions. These are not only important for large companies and the
management of their fleets; even well-established medium-size businesses are now
increasingly looking for customized financing deals – particularly when it comes to
leasing solutions, an area that is currently experiencing a veritable boom.
The sharp rise in leasing and rental contracts over the past several months is in part a
response to the stipulations of Basel II. That's not surprising, given that credit ratings
have a big influence on shipping companies’ vehicle financing practices.
The financing structure is changing as well, and the durations and deadlines of leasing
and rental contracts are becoming more and more differentiated. One of the reasons for
this development is that many freight forwarding companies now bind themselves to
logistics providers for shorter periods of time than in the past. In addition, shipping
companies have to be able to order vehicles more flexibly than before. This is because
orders from construction and trading firms, for example, are often received
unexpectedly and at short notice. But uncertainties such as those associated with the
delayed introduction of the toll system also play an important role.

Increased internationalization
In addition to product innovations and services, the industry’s increased
competitiveness is also being strongly driven by changes in production locations and by
the strategic steps taken toward globalization. With regard to engine production, the
focus is now on achieving a global scope with greater economies of scale and exploiting
the benefits of globally sourced procurement. The “World Engine” is a good example of
such a development. However, achieving this goal also requires a reorganization of
production facilities and value chains. The increased presence of German
manufacturers in foreign markets – whether in Eastern Europe or in Asia – is not just a
process of relocation. Instead, the main aim is to expand the production network so that
it acquires a global scale and to secure a presence in markets with above-average
growth potential.
As a rule of thumb, for every three new jobs created abroad, a job is also secured in the
German auto industry. Because of this, ladies and gentlemen, jobs are actually being
secured at the main German plants and not destroyed, as is frequently claimed.
German commercial vehicle manufacturers have become much more international in
scope over the past few years. Since 1990, their share of the commercial vehicles
produced abroad has more than doubled and now accounts for 54 percent of total
output.
The big supplier companies in particular followed the manufacturers abroad at an early
date, which is why our supplier industry is now global in scope as well. However, the
value chains are not as tightly networked when compared to the passenger car sector.
This is because of the smaller degree of vertical integration and the small batch
numbers, especially for heavy-duty vehicles.
On the other hand, the suppliers are closely integrated into technological projects aimed
at optimizing lifecycle costs. The efficiency of our suppliers has a big impact on the
competitiveness of our manufacturers.

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Asia – a strategic objective
Ladies and gentlemen,
With regard to structural changes in the global landscape, this industry has always been
a step ahead of others, such as the passenger car sector. More than 25 percent of the
commercial vehicles in the world are now already manufactured in China. And other
emerging markets in Asia, such as India, are becoming increasingly important as both
production locations and sales markets.
Today, Chinese commercial vehicle manufacturers already occupy second and third
place among the world’s producers of heavy-duty trucks. China now manufactures more
commercial vehicles than Western Europe or Japan. What’s more, China is now also
one of the world’s leading markets, with sales of 2.4 million vehicles last year.
Almost all established manufacturers now have a foothold in Asia, even though access
to this market is often difficult. DaimlerChrysler, for example, has created a strong
strategic position for itself by teaming up with Fuso. In addition, it has initiated a joint
venture for vans with the Chinese Fujian Motor Industry Group. Volkswagen has
meanwhile had a strong position in China for many years. In April, MAN established a
new subsidiary called MAN Truck & Bus China, thus underscoring its ambitions in the
rapidly growing Chinese market. However, the competitors of these two companies
have similar ambitions in China.
Motivated in part by the need to ensure their competitiveness, Germany’s commercial
vehicle manufacturers have become globally operating companies that have greatly
expanded their international production network over the years.
In the bus sector, they are now more strongly involved in countries such as the Czech
Republic and Turkey. Poland and Turkey have also seen increased activities with
regard to light trucks. In view of the opening of the Eastern European markets and their
growth potential, it will be interesting to see whether German companies will also
expand their manufacturing activities for heavy-duty vehicles in this region.

Consolidation now far advanced

The consolidation of the commercial vehicles industry has made considerable progress.
Irisbus, formerly a joint venture operated by Iveco, Renault, Ikarus and Karosa, is now a
wholly-owned subsidiary of Iveco. Neoplan has meanwhile been integrated into the
MAN Group, and Volvo no longer owns shares of Scania.

Structural changes within the vehicle segments

Major changes are also taking place within the individual vehicle segments. In the vans
segment, small and full-size vans are becoming increasingly important. This is because
courier, express and parcel services have achieved a high degree of specialization. The
trend toward using semitrailer trucks is continuing unabated, and this vehicle type now
accounts for 40 percent of the total new registrations of trucks over 6 tons in Germany,
compared to only 32 percent five years ago. This trend has also benefited semitrailer
manufacturers, who saw their sales in Germany increase by 30 percent in the first five
months of the year.
Construction vehicles have, on the other hand, declined in importance in recent years.
Because the home construction market is experiencing a probably short-lived upswing
before the elimination of tax breaks for home buyers goes into effect, new registrations
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of tipper trucks increased by 24 percent in the first few months of the year. However, it
would be wrong to think that this result indicated a long-term recovery of the German
construction industry which could, in turn, boost the demand for construction-site
vehicles. The German economy is still not strong enough to support such a
development.
The upcoming introduction of a toll for trucks has also changed the demand structure in
Germany. Whereas the demand for vehicles weighing between 12 and 14 tons has
declined this year by 10 percent, it grew by a comparable amount for trucks weighing
between 10 and 12 tons.

Expansion of logistics in Germany

Ladies and gentlemen,
World trade is expected to increase by 43 percent between now and 2010. Trade with
China will double, while that with Asia will increase by 67 percent. Even the value of
Germany’s trade with other Western European countries is also expected to increase by
33 percent. However, one thing will definitely remain the same: Commercial vehicles will
be helping drive things forward at the beginning and end of every transport chain.
But there is a further development which not everyone in Germany seems to be aware
of. Because of EU expansion, the outlook is very promising, particularly for Germany’s
logistics sector, which can expect annual growth rates of 6 percent. These growth
prospects reflect the tremendous opportunities shipping and logistics companies can
exploit as a result of EU expansion. After all, trade with the accession countries is
growing at a rapid pace.
And there is another factor that we should bear in mind: Germany is turning into a
logistics hub and could, in the coming years, develop into one of the most important
regions for European distribution centers. Although Germany is better equipped to
handle this task than its neighbors, it must still ensure that it is well prepared. As part of
the German chancellor’s mobility offensive, we have therefore launched a marketing
offensive for Germany as a logistics hub for all modes of transport. To achieve this aim,
it is essential that our road, rail, port and air traffic infrastructure be appropriately
equipped to take on this new role.

Modernization of infrastructure absolutely essential

However, Germany is doing too little when it comes to modernizing its infrastructure.
Despite EU expansion this year, the budget for traffic infrastructure investments is in
danger of being cut by €500 million. Investments by the federal government could
account for less than 9 percent of the total budget in 2005 – an all-time low. And this
development has taken place despite the fact that Transportation Minister Stolpe
succeeded in convincing the Finance Minister to increase his department’s budget by
one billion euros in relation to the sum originally planned. These cuts in infrastructure
investments have aroused the anger of 45 business and transport associations, which
publicly proclaimed that “Germany needs mobility, not standstill.”
And it would be totally unacceptable if more than €600 million in infrastructure funds
were transferred back to the federal treasury because the German Rail company cannot
use them. These funds should instead be used for improving the highway network, as
stipulated by the transport ministers of the various states – and without any increase in
the road toll. This is an area where this money is desperately needed.
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The results of the latest toll system tests are encouraging. However, it's little consolation
that we are now hearing about technical defects in Austria.
Meanwhile, we are still waiting for a clear statement on how the situation should be
harmonized in order to help out the disadvantaged German shipping industry. We don't
need a debate about whether this harmonization should take place; what we need is a
statement about how it will be implemented. And we need an answer before January 1,
2005. Should the European Commission be incapable of approving at least a temporary
toll refund, the German government will have to offer an alternative, such as an
innovation support program for EURO 4 and EURO 5 vehicles.
Under no circumstances should we allow this harmonization to be postponed
indefinitely.

A boost from the commercial vehicles industry

Ladies and gentlemen,
The commercial vehicles industry is well prepared for the 60th IAA, which will be held in
Hanover from September 23 – 30. The markets are in good shape and the prospects
are good.
The important thing now is to ensure that the momentum being provided by the
commercial vehicles sector helps trigger a corresponding increase in private
consumption and boosts the economy as a whole. In particular, we need new initiatives
that will help us to modernize the country. And we believe all this is possible. We share
the optimism expressed by Germany’s new president, Horst Köhler, who recently
summed up the situation perfectly by claiming: “We will succeed.”

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