The man with the plan

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In May of this year, Rainer Schmueckle took the reins of Freightliner LLC following the departure of Jim Hebe, one of the most controversial chief executives in the history of truck manufacturing. Schmueckle spent his first several months devising a turnaround plan aimed at profitability over market share.

The recovery plan reduces to three the platforms for all Freightliner brands. The truck manufacturer also is closing two plants in Canada, cutting 1,600 hourly and 1,100 salaried employees and trimming pay rates. And it’s changing its pricing practices, including renegotiating major buyback deals.

Before taking over at Freightliner, Schmueckle was a senior vice president at DaimlerChrysler AG and has served as chief financial officer and CEO of Adtranz, the former DaimlerChrysler rail systems business. From 1994 to 1997 he served as Freightliner’s CFO.

We met with Schmueckle on Oct. 30, just a couple of weeks after Freightliner announced its recovery plan.

CCJ: What is the state of and near-term outlook for the truck market?
Schmueckle: We believe the market has reached a trough. Demand is not growth anymore; it’s replacement. We think that with this 170,000 [North American] Class 8 market for 2001 and 160,000 in Class 6-7, we have reached what should normally be the ground.

However, Sept. 11 could not have come at a worse time for the economy. We had manufacturing weakness for more than 12 months. The retail and housing industries held up pretty well in 2001, but they are coming down now, aggravated by the terrorist attacks. The name of the game currently is to stay aloft. The market will be coming back fairly soon, but I don’t have a crystal ball to tell you when. It’s all psychology really. Operators are holding back. We think it could go down another 15 to 20 percent for a short period of time.

CCJ: Do you think that sales in 2002 could be worse than 2001?
For the industry in total it could be worse depending on how long this extended period of uncertainty lasts. If it lasts until only the end of 2001, then we could see again a market of 170,000. If it takes longer, then we’ll see less. We also have the transition to 2002 emissions regulations. The price increases and fuel economy for those engines is not known yet. There could be an increase in demand in the second and third quarter, and it could fall off again in the fourth quarter. So I think we have a pretty bumpy road ahead of us over the next 18 months. We think that a structural recovery will only happen in the second half of 2002.

CCJ: What about the used truck situation?
The bulk of the used trucks will be coming back over the next two years. A wave has just rolled over us, but there’s more coming. So the next three years will still be pretty significant. We will try to continue to smooth the way through our arrangements with our large [customers]. We have about 24,000 used trucks in inventory groupwide. We are trying to bring them to the market as diligently as possible and not go through auctions. This will be our strategy going forward.

CCJ: How are you marketing your used truck inventory?
Three weeks ago we rolled out “Meet the Fleet.” Our new and used truck guys are going out together and opening up the small and medium-sized fleet markets for us. It’s a good opportunity to bring good used trucks to buyers that have always bought used trucks. It’s as good a business as our new trucks. We really want to control the lifetime of our trucks much more closely in the future.

CCJ: Will the used truck situation worsen before it gets better?
I wouldn’t say it’s getting worse. But looking at the number of units that were sold in 1998, 1999 and the first half of 2000, it’s easy math. Just add three or four years to it and you will see what’s coming back.

I think what could get worse is used truck sales – they depend as much on the economy as do new truck sales. Our used truck organization, for instance, sold 1,200 units in the first half of September; in the second half of September it sold 200.

CCJ: Are there steps that could help deplete the surplus?
The industry could use a program incentivizing owners to take very old units out of use. We’re going to such tight emissions standards in new trucks that by 2007 the air that comes out will actually be cleaner than the air that goes in. At the same time, we are running very old vehicles. I think there should be some incentives to help take them out.

CCJ: Rethinking business practices is a big part of your turnaround plan. Are you still offering residual value commitments on new sales?
We think that residual values are a fact of the marketplace. You cannot easily do away with them. Operators want to have predictability about depreciation rates. So what we are selling is life insurance. Everybody who has sold insurance knows that you can do something about the portfolio you are handling. The problem is not residuals, it’s not handling the portfolio in the right way.

It can be a win-win situation for the operator and the manufacturer to extend trade cycles and adjust certain specs to make trucks sellable in the secondary markets. We have not been handling that correctly in the past. We will be offering residuals in the future, but we need to have a better framework for handling them. And they need to be done at a reasonable level so that there’s not just downside but there is, once in a while, upside.

CCJ: How successful have you been in renegotiating outstanding residual commitments with major customers?
There are a lot of rumors about the negotiations, but most of our customers are pretty reasonable. They know this is a very difficult environment. We have had good discussions with our large carriers. I’ve discovered a lot of partnership thinking in those negotiations.

CCJ: Are you planning to rationalize the Freightliner, Sterling and Western Star product offerings?
I think we’ve gotten a bit off track from why we bought Sterling and Western Star in the first place. We discovered in the mid-1990s that Freightliner did not stretch very well down to the heavy vocational segments. That was the reason for buying Sterling.
Western Star has a niche in the severe-duty area – oilfield, mining and logging – and is an appreciated truck on the owner-operator side. We will focus Sterling and Western Star much more on the vocational side and Freightliner on the distribution and on-highway segments to achieve, over time, some product rationalization.