When truckers make money, they buy trucks - extended cycle ahead We hosted a conference call with ACT Research to discuss the truck & freight outlook.

The overall message was that the trucking industry is very strong, and the ongoing cycle should be a relatively long one. Currently, spot rates and carrier profitability are supported by heightened demand for freight, as consumer spending shifted from services to goods due to the pandemic, coupled with undersupply on the trucking side (mainly due to driver shortages). Consequently, demand for trucks should remain high for the time being. However, as consumer behavior reverts to a pre-pandemic mix, and capacity increases, the market will return to balance. Another factor supporting demand for trucks is that carriers want to take advantage of new technology, which allows them to achieve a lower TCO through better fuel efficiency in newer models; some new tech specifications are also now must-haves to operate successfully in the market (e.g. AMT or ADAS). ACT also expects CARB regulations to drive an additional wave of orders before 2024.

Imbalances in trucking market become more impactful each cycle While the cyclical nature of trucking inherently leads to some imbalances, particularly near the inflection points as supply can’t meet surging demand, the imbalances seem to be growing. As a result, spot rate amplitude is intensifying each cycle. ACT expects its freight composite will grow twice as fast as GDP in 2021 before slowing to the overall GDP growth rate in 2022. Undersupply may linger for some time as trucking employment is still down 2.5%-3% compared to early-2020 levels, despite some pay increases (it generally takes 6-8 months before pay increases impact driver population).

ACT expects the driver shortage will last until at least 2028 due to structural & demographics trends; regulatory changes have negatively impacted driver supply as well.

Orders to peak in 2H; 2021 truck production below its potential After five months of strong Cl. 8 orders (40-50k+), ACT expects some moderation in order figures the next three months, given OEMs' 12-month backlogs are almost full and orders only represent orders expected to be built within 12 months. This doesn't represent slowing demand, and based on the historical relation to backlog (as seen in 2018), the orders will likely reaccelerate in Q3 and Q4. While Cl. 8 orders and backlog imply 2021 production in the range of 325k-350k units, production needs to ramp up, and other constraints (chips, steel, labor) will limit production; ACT forecasts 303k units produced in 2021. For 2022, ACT sees CL. 8 production of 359k units, with an upside bias. Cl. 8 truck population should remain ~unchanged in the first half of the year and start to rise in 2H22, but stay below the level of growth seen in 2019. Fleet age is not expected to decrease significantly due to limited production and the volume of trucks produced in 2018-2019.

Electric trucks first to replace diesel Electric trucks are expected to be cost competitive with diesel trucks in most applications (which is in line with our latest Q-Series report). Initially, electric trucks (primarily MD) are expected to be used in local applications, as use for long haul will be limited for the next several years to fleets with predictable routes and for applications for which overnight charging is feasible. ACT doesn't expect fuel cell trucks to be cost competitive with diesel for the foreseeable future.