What does it mean when an industry enjoys record growth but continually falls behind investors’ expectations? It means that doing more of the same thing probably isn’t an option—a message that truck manufacturers around the world must confront. Truck sales rose by 41 percent in the United States and by 74 percent in Europe from 1995 to 1999, the industry’s strongest market upturn ever. Yet truck manufacturers, growing by slightly more than one-third the rate of the Morgan Stanley Capital International (MSCI) World Index (Exhibit 1), underperformed most other business sectors in its total returns to shareholders. Given the current economic slowdown, which is hitting the truck market hard, even those inadequate returns are now little more than a fond memory.

To capture more value, truck makers, like companies in many industries before them, must sell solutions.¹ But to do so, these truck makers will have to think of their customers and products in new ways. Traditional small fleets in the United States have been losing ground to consolidated pan-continental companies, and the industry in Europe is expected to follow suit. In both of these markets, four customer segments are dominant: large long haul (such as the US carrier Ryder System), small long haul, city distribution, and municipal services and construction.

Each segment has distinct needs. The larger truck fleets, for instance, want telematics systems² that provide vehicle-tracking tools to manage routes and to service vehicles remotely. Smaller operators, which tend to have less technical support and less systematic maintenance schedules, want onboard tools to diagnose failures, as well as "infotainment" services to attract drivers.

Service requirements also differ. Driver-training facilities, a strong pan-continental service network, and the financing of contracts all have an appeal to large long-haul fleets—a segment that, in the United States, finances 80 percent of its vehicles through leasing agreements and long-term rentals. For these customers, the appropriate sales channel is often key-account management; that is, a manufacturer sells to such fleets directly, not through a dealer, and employs key-account managers who are responsible for sales and for the coordination of service contracts. By contrast, small, usually local or regional fleets buy (rather than lease) almost 80 percent of their vehicles and are more interested in close relations with their dealers than with manufacturers.

To sell solutions effectively, therefore, truck makers must get more control over their sales and service channels through owned dealerships, a strong franchise network, or more direct relationships with large buyers. Tightening the grip on downstream activities makes it possible to fine-tune the service offering, ensures consistency throughout the network, and, above all, captures demand for high-margin goods and services at the source. We estimate that more than 80 percent of the industry’s overall profits could eventually be generated by postequipment sales. The markets for financing, leasing, and rentals—already representing a larger proportion of total industry earnings than do sales of new trucks—look set to enjoy a robust growth in profits (Exhibit 2).

The alternative is for truck manufacturers to adjust to the harsh economic reality of a commodity business. In Europe, for instance, after accounting for nonmanufacturing costs such as R&D, administration, and sales, manufacturers often make a net loss on each truck sold. In fact, sales of replacement parts usually contribute more to the net profits of truck companies than do the trucks themselves. To a lesser extent, this is true in the United States as well.

To make matters worse, price and cost pressures are only starting to be felt. In Europe, the home of two global market leaders—DaimlerChrysler and Volvo Global Trucks—we expect prices to be forced down by 1 to 2 percent a year. After 2002, when the European Union opens the sale of trucks and replacement parts to distributors not currently authorized by the manufacturers, the net margin on spare parts is likely to drop by 2 to 3 percent a year. (In the United States, where distribution has been deregulated for some time, the net margin on replacement parts has already fallen.) On the cost side, rising expenditures for R&D and components, arising largely from stricter standards for engine emissions and noise, could cut net margins by another 2 percent. In all, the net margins of truck manufacturers could therefore drop by as much as 4 to 6 percent within a few years.

Productivity increases alone are unlikely to make up the difference, but solutions strategies might. At least one truck maker, Sweden’s Scania, has experienced the benefits of offering solutions. In 2000, about 30 percent of its new-truck sales in Europe included either a maintenance-and-repair contract or a customer-finance package, and sometimes both. One service contract provides access to 16 regional emergency centers and includes a guarantee that faulty trucks will be back on the road within 24 hours.

The results have been encouraging. Customer-finance profits grew by 77 percent and sales of service-related products by 24 percent in the first nine months of 2001, compared with a 4 percent decrease in revenues from sales of new trucks.