Hino and Isuzu

We combine these two, because one word describes them both rather well: bewildering. Toyota holds a 50.1 per cent stake in Hino Motors Ltd, but Hino itself is the third largest shareholder in Isuzu Motors, ranked behind ITOCHU and Mitsubishi Corporation. The November 2006 acquisition of 5.9 per cent of Isuzu's voting capital led to much speculation of further developments between the two companies, which already share a 50:50 bus joint venture, and are also tied by their joint development of truck cabs.  

   There would be considerable logic to a further merger of operations between Hino and Isuzu. The former shows a distinct bias towards the HD sector, whereas the latter achieves most in the L/MD sector, and the product fit between the two is an excellent one. However, at a global level, Isuzu has made considerable strides within the European market - at a sub 7500 kg level, whereas Hino has tended more towards the North American market as it looks for Triad growth. This pursuit of global revenue (estimates put Hino's reliance on domestic business as being only in the region of 22.4 per cent) would seem to preclude any strengthening of this alliance domestically. Hino has significant issues to address with its negligible European business, whilst Isuzu too has some tough decisions to take. Pre VW, the possibility existed of an extension of the relationship between Hino and Scania - but the prospect of VW and Toyota getting it on through their respective truck operations now seems scant.  Similarly, the mooted acquisition of GM's MD business by Isuzu now seems to have been shelved. Our solution: Hino stays out of Europe, Isuzu eschews North America, both are combined in as close to a state of holy matrimony as the modern automotive business allows, and, as a result, a coherent Japanese-owned truck manufacturer emerges. Put simply, both OEMs can be regarded as being at a strategic tipping point, and both need to decide in what direction they are to move. They each need to shore up their balance sheets too; both are hemorrhaging money with combined losses of a close on ¥20 billion during the last quarter.

Combining the two seems to be an obvious move; we are no fans of truck industry mergers - indeed, we have grave difficulty identifying one that could be said to have worked over the past three decades - but a combined Isuzu Hino would give both company a fighting chance to compete both with Triad-based manufacturers as well as the fast growing Chinese / Indian manufacturer, which, entirely justifiably, regard Asia - a key market for both Hino and Isuzu - as a legitimate target. A merged operation may not be ideal, but it looks to offer a far more sustainable future than the two existing individual operations.

The Emerging Markets.

We bundle together the Emerging Markets for two reasons. Firstly, we're still at the point of cohort shifts here - where each OEM is developing along much the same path - and two, we can't give all of this stuff away foc. Believe it or not, we do occasionally charge for our insights, and, perhaps even more peculiarly, occasionally those same invoices are honoured, so there you go. Surprises us too.

The one absolute here is that the Emerging Markets will emerge. The one obvious question to apply to this assertion is 'When?' We think it will be a lot sooner than the orthodoxy would have us believe.

Time was when trucks were manufactured on a national scale for national markets. There were almost as many brands as trucking companies, and then came the first period of consolidation. Three decades ago, operations such as Iveco - an amalgamation of five European OEMs - began to emerge, whilst the likes of the then Daimler-Benz and Volvo went shopping in North America, acquiring Freightliner and White Motor Company along the way. Consolidation, globalization and the notion of a global truck for a global industry became standard industry small talk.

This should have provided a graceful fadeout to credits, with the then ascendant European truck industry sauntering off into the sunset with its pockets bulging with adoring acolytes. However, there was other stuff going on at the same time.

That other stuff divides into two initial categories - demand and supply - and then into three separate sub-categories for each - money, people and technology.

On the demand side, two trends have been discernable over the past few years. Money - in the form of the margin on the transport task - has fallen dramatically. A traditional Truck operator in the UK, for example, will feel quite happy with a margin of five per cent. More typically, it is around three per cent. This is a function of two things; firstly, the supply chain, in which the physical movement of goods from A to B is but a component, commodity part, places downwards pressure on every cost point within the process. Because we like to eat Avocado Pears in December, but don't want to pay over the odds as we slake our appetites. Secondly, there is way too much excess capacity within the transport marketplace. 'Phone a trucking company and 'phone a plumber, and see which one turns up first. The Emerged Markets are characterized by too many people chasing too little freight at too low a rate to render all but the largest, lowest cost per unit transport operations sustainable in the long run. Unless something very radical happens to the dynamic of the road transport market, this is only going to get more pronounced. As our demand for cheaper avocados grows, so transport margins diminish, and the only way we can maintain any semblance of parity in real terms is reduce the cost per unit of freight transported. At this point, we welcome the suppliers to the plate for their ritual kicking.

What is the difference between a good truck and a bad truck? Given the environment as described above, it's one word; cost. If truck A has a total cost of operation (TCO) of X cents per kilometer, and truck Y comes in at X + 10 per cent, then the rational consumer will have to opt for truck A. And, in the environment above, there is no place for anything other than rational. TCO covers everything from acquisition through operation to disposal and Residual Value, and it is the mantra du jour. Brand is very yesterday. If a truck complies with the prevailing legislation and costs less than its peers, it's going to do well. If it doesn't, it won't. Any other consideration is, today, entirely superfluous. The truck operators of 2009 need a compliant, cost-effective means to work in a market that is getting more, rather than less unforgiving.

But, howls the emerged markets, what of infrastructure, driver appeal and the like? What indeed. We'll deal with the latter first; having spent some years ourselves behind the wheel, our first concern was the arrival of the pay cheque, the second was the amount inscribed thereupon and the third was whether or not it bounced. Granted, there is still some semblance of the lifestyle-oriented truck driver community, but the majority - we'd opine - are more concerned with making their bills with their pay cheque rather than a statement with their truck. As remarked before, we are all in this for the money, and, for every driver who gets precious about the badge on the front of the truck, there are probably a hundred who are more concerned with the number on the aforementioned cheque.

Infrastructure is a tougher nut to crack, but here the suppliers are confronting the same squalls as their customers. Downwards price pressure within the supply chain has led to marked consolidation within the operator base - vid Schneider, DHL, JBH, Willi Betz and the like - and these people probably have quite enough infrastructure of their own. The OEM dealer networks may be nice, and useful as something to shout at when things go wrong, but necessary? Not nearly as much as before. Take, if you will, the example of Travis Perkins, one of the UK's largest building supply operations. A fleet of over a thousand vehicles delivers bricks and the like from just about every town in the country. TP pays cash, keeps them in the network for as long as the warranty lasts, and then they disappear into the company's own infrastructure, made up, in the main, of independent, non-OEM branded garages. TP could buy just about any type of truck it wanted to using this business model, and in this, it isn't alone. Its customers are more concerned with the timely delivery of construction materials, not with the badge on the front of the vehicle that delivers the same. Same goes for us andour Avocado.

So the playing field is, if not entirely level, certainly far less undulating than a decade ago, and it's flattening out all of the time. How do the Emerging OEMs get in on the action?

But first, what's to hold them back? Technology? No - should you be so minded, you could go out tomorrow and buy the component parts of a Triad-compliant truck. Cummins, Eaton, ZF, Arvin Meritor would be delighted to provide you with the driveline. You could probably ask Renault for a cab, CVG - someone would turn up with something. Seats, electronics - hello Isri, hello Bosch - there is no mystery to the component side of the job. Granted, you'd have to bolt it all together, and then find someone to pay for it at an appropriately remunerative rate, but our point is that technology is no barrier to entry anymore. The very same thing that spawned the idea of the global platform - namely converging emissions legislation - is the very same thing that broadens rather than restricts the marketplace. The notion of joining this technology together and making it all play nicely as being the preserve of the best and the brightest is also something of a fallacy. Take one driveline, one laptop and one operator conversant with both and you're home free.

How about money? Again, welcome to the global marketplace; floating a loan has not been easy of late, but, if a European company can raise funds, then so too can an Indian company. And they do - in some numbers. And, of course, if you happen to be based in country where government policy is to encourage the growth and the development of the auto industry - somewhere like China - things get even better. Today, money is no barrier to entry.

People. Tough one this, and we can only speak from our own experience, but at every trade show that we attend, the number of expats working for the EMOEMs seems to grow exponentially. What they bring to the table is not so much engineering expertise - which, frankly, is hardly lacking from the indigenous ranks - but local market know-how. Want to get into the US market? Best to ask an American. Likewise with Europe. And, on the basis that, once again, we're all in this to make our bills, make them the right offer and you'll get some takers.

In sum, the barriers to entry have gone. But what advantages can the EMOEMs leverage in order to facilitate a successful market entry to the Triad.

Cost is a no-brainer here. The European model seems to have lost its way. Sure, make more rather than less of something, and you'll do it for less on a per unit cost basis. Where this goes awry is when that same volume manufacturing occurs when you're making a lot of anything in a place where it costs a lot to make any amount of something. Volvo sells its AMT transmission in North America, Eaton does likewise. Both do the job, but, whereas one is manufactured in San Luis Potosi in Mexico, the other sees light of day in Linköping, Sweden. It doesn't take much to work out which of these is the more expensive, but, if in doubt, the presence of herrings should tell you you're paying top kroner. If you're going to make a lot of something, and when that something is increasingly viewed as a commodity, a component part of a process in which price is driven downwards, then it helps to make it somewhere that isn't too expensive. The advantage that the EMOEMs are possessed of here is immense, and, just so long as the truck starts, doesn't cost over the odds to operate, and does the job in an efficient and compliant fashion, where it comes from simply is not important. And with the OEMs competing increasingly on finance packages, you can build the bugger in Pyongyang just so long as it will hold its money.

We will see a major market entry by an EMOEM within the next three years, and, quite possibly, rather more quickly than that. The deal structure will be a simple one; one of the logistics leviathans will be made an offer that it cannot refuse, will be offered guarantees on TOC and an underwritten RV, and that will be it - the dam will have burst. Quite how the existing, Triad-based manufactures can cope with this remains to be seen. But we don't envy them their task.