Throughout the late '90s, W. Marvin Rush simply couldn't get enough heavy-duty trucks from his supplier, Paccar Inc. With sales at Rush Enterprises Inc.'s Sun Belt dealerships doubling from 1996 to 1999, Rush sold the Peterbilt trucks as soon as they hit the sales lots. But early this year, amid a runup in fuel prices and interest rates, truckers suddenly slammed on the brakes. Even with eight more truck lots in his San Antonio-based chain, Rush says he'll be lucky to match last year's total sales. "The market has gone to pot," he says.
For anyone who may have forgotten what a recession feels like, just ask the folks who make 18-wheelers. A battle for market share left a glut of cheap, low-mileage used trucks that's crowding out new ones. U.S. sales of heavy-duty rigs are expected to fall 12% this year, to 231,500. Paccar, the No. 2 truckmaker in the U.S. behind DaimlerChrysler, has announced three rounds of layoffs this year at the plants that build its Peterbilt and Kenworth models. And Wall Street has knocked Paccar's stock price down by 24%, to about 41, from a year ago.
Still, no one expects this latest downturn to break one of the country's more remarkable financial streaks: Every year since 1939, in good economic times and bad, Bellevue (Wash.)-based Paccar has turned a profit. Thanks to a family-dominated corporate culture that emphasizes lean operations and constant reinvention, Paccar should weather the current dip better than most in the trucking industry, say analysts. "They're probably one of the best-run truck companies in North America, if not the world," says Gary F. McManus, an analyst at J.P. Morgan Securities.
QUALITY COUNTS. Paccar is surely better positioned than it was during the industry's last rough stretch, in 1996. Then, Paccar banked almost entirely on sales of custom-built, heavy-duty trucks in the U.S. Today, following three recent acquisitions in Europe, Paccar generates nearly a third of its revenue outside North America. And Paccar, with 21% of the heavy-duty truck market, is pushing hard into the still growing market for midsize, short-haul trucks. It's even dabbling in high-tech investments, pumping $40 million into wireless telecom and computer technologies with transportation applications. Chairman and CEO Mark C. Pigott boasts that within 25 to 30 years, perhaps half of Paccar's profits will come from businesses other than trucks. "We're not in a Rust Belt here. We're a high-tech growth company," says Pigott, 46.
The growth part, at least, is undeniable. In March, Paccar made Business Week's list of 50 top-performing companies, with industry-leading 24% average annual sales growth and 40% profit growth over the previous three years. Amid this year's downturn, it's expected to churn out net income of $488 million, down 16%, on sales of $8.3 billion, down 8.5%, says Peter Jacobs, an analyst with Ragen MacKenzie Inc. in Seattle. And its stock hasn't suffered as much as the competition's--Navistar International Corp., for instance, was punished with a 37% drop in the past year.
Still, calling Paccar high tech seems a reach. Whereas a typical automobile factory teems with robots and automated equipment, Paccar's plants are populated with living, breathing assembly workers. Its Peterbilt and Kenworth units build none of their own engines or transmissions. Paccar focuses on assembly, marketing, and design. At its seven North American factories, it's not unusual to see a worker swing an old-fashioned sledgehammer to drive an axle into place.
FOURTH GENERATION. A reputation for quality among truckers enables Paccar to cover its higher labor costs with premium prices--its custom-built rigs go for up to $120,000 apiece. And by shunning many capital investments, it keeps asset costs low. When orders slacken, Paccar can cut costs by furloughing employees at its union and nonunion plants, rather than idling expensive equipment. "We don't size up for the peaks," says President David J. Hovind. "We can take care of it with extra shifts and some selective contracting."
Pigott joined Paccar 23 years ago as a newly minted industrial engineer from Stanford University and is now the fourth generation of his family to run the company. Business was flush when he took over as CEO in 1997 from his father, Charles M. Pigott. And by 1999, Paccar produced a record 108,000 trucks.
Today, that core business has down-shifted dramatically. Despite an overall economy that is still booming, industry-wide orders for new heavy-duty trucks have fallen by half from last July, to 10,000 a month. Since March, Paccar chopped output by as much as 30% at three big plants and laid off more than 750 employees to shrink its payroll to 20,000. Higher fuel costs and interest rates are keeping many buyers out of showrooms. And now there are widening worries of an economic slowdown in the not-too-distant future, which could depress shipping volumes. But Paccar's biggest woe is the generous trade-in terms that manufacturers offered in their grab for market share. Now, dealer lots are clogged with used trucks, and prices are tanking.
Because of his family's dominance--along with insiders, the Pigotts hold 40% of Paccar's shares--Pigott is under no outside pressure to do something risky. Like his elders, however, he has no qualms about remaking the company. Paccar started as a maker of railroad and logging equipment in 1905 and didn't build a highway truck until 1945, when it bought Kenworth. It was later in the steel business for a while. Now, after selling an auto-parts business last year, Paccar is almost exclusively in trucks.
So far, Pigott has kept his diversification moves narrowly focused. Last year, Paccar jumped into the medium-duty truck business, opening a plant in Ste.-Therse, Quebec. Demand is strong for the just-in-time local deliveries handled by single-unit medium trucks, thanks in part to e-commerce. But Paccar's Peterbilt and Kenworth medium trucks so far have only 4% of the North American market.
It may take a while for Pigott's other big expansion move to pay off. Wall Street applauded Paccar's bottom-fishing acquisitions in Europe, where its DAF, Foden, and Leyland nameplates now claim more than 10% of the Continent's truck market. This year, heavy-duty truck sales in Europe are projected to hit a record 250,000. But because of the weakened euro, those sales won't count as much when translated into dollars. As a result, some competitors are unimpressed with Pigott's diversification attempts. "Paccar is basically a Class 8 [heavy-duty] truckmaker; they have nothing to offset it," says Steven Keate, president of Navistar's truck group.
BEACHHEAD. Moreover, European truckmakers are muscling into the U.S. market. The leader, DaimlerChrysler, has 37% of U.S. heavy-duty truck sales through its Freightliner and Sterling subsidiaries. Renault, which bought Mack Trucks Inc. in 1990, plans to combine its truck business with AB Volvo's. That would give it 24% of the U.S. market, to pass Paccar. The Europeans produce their own components and operate with global economies of scale. "Scale does matter," Pigott concedes. So far, many truckers are willing to pay more to get a vehicle built to their engine and transmission specifications. But if they grow more price-conscious, Paccar and Navistar, which holds 16% of the market, could get squeezed.
Pigott is hardly standing idly by. Analysts expect him to broaden the company's beachhead in overseas markets. And he clearly believes Paccar can maintain premium pricing by boosting the technology in truck cabins. Among its recent trucking-related tech investments is the $10 million it sunk into PNV, a Coral Springs (Fla.) company that sells truck-stop access to the Internet. Paccar also has prototype technology that scans a driver's index finger before letting the engine start--a guard against unauthorized truck drivers.
There's no guarantee that Paccar will even be assembling trucks when he retires, Pigott says. Or that a family member, such as one of his two school-age daughters, will be running the show. The only requirement, in fact, is to keep making a profit.