Freightliner Charts New Course

Buffeted by a slumping truck market and mounting losses tied to guaranteed residuals on trucks sold two to three years ago, Freightliner Corp. launched a plan in October that would “completely” restructure the company, according to Freightliner President and CEO Rainer Schmueckle. The four-pronged plan calls for Freightliner to shutter manufacturing plants, cut overhead costs, reduce truck platforms and dramatically revise its business plan.

“This plan is sweeping and is comprehensive,” Schmueckle said. “It addresses all of our business units: Freightliner Trucks, Sterling, Western Star, American LaFrance, Freightliner Custom Chassis, and Thomas Built Buses. It addresses all of our products: long-haul trucks, heavy-duty vocational trucks, midrange trucks, fire and emergency vehicles, chassis and school and transit buses.”

Schmueckle said the restructuring was ultimately “designed to secure future profitability even in challenging markets.”

The current heavy-truck market certainly qualifies as challenging. Freightliner predicts North American Class 8 truck sales will reach about 172,000 units this year, or down about 36 percent from last year. In 1999, during the boom times, the North American Class 8 market registered 309,000 trucks. “The market has roughly halved in just two years,” Schmueckle said, “with no immediate signs of recovery in the near future.”

The central part of the turnaround plan involves a major change in the way the company sells trucks.

Freightliner vaulted to a position of market leadership in recent years partly on the strength of sales to the major truckload fleets. Many of these deals were sweetened with guaranteed buybacks, which have come back to haunt the company, a subsidiary of DaimlerChrysler. “Our previous business model in our heavy-truck business left us vulnerable to downturns in the marketplace,” Schmueckle said. “Freightliner made residual guarantees on a large number of trucks. These residual guarantees turned out to be unrealistic and with a reduction in new and used truck demand as well as [reduced prices] in the used truck market led to a significant loss at Freightliner in the year 2001.”

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While Freightliner would not comment on the magnitude of those losses, some industry observers have estimated losses as high as $500 million or more for the year. Faced with the mounting losses, the DaimlerChrysler board of directors shook up Freightliner management earlier this year when it removed James Hebe as president and CEO May 24.

Roger Nielsen, Freightliner chief operating officer, said the company is now going back to its customers and trying to renegotiate the residual guarantees. “We are initiating major changes in our heavy-duty truck business model, particularly our approach to large fleet customers. We are currently in discussion with top accounts in an attempt to renegotiate more favorable financial conditions for Freightliner.”

Fleet sources say Freightliner is telling carriers it won’t meet the residual guarantees on trucks it sold two to three years ago. One source estimated such a move would cost his fleet more than $5,000 per truck.

The other three major portions of the plan involve cutting costs in materials, production and overhead. The company said it would cut supply costs by working with fewer suppliers, furthering a trend most truck makers have made in recent years to move away from “cafeteria-style” truck buying in the North American market. “We have no plans to depart the custom truck manufacturing business,” Nielsen said, “but we do plan to consolidate our purchasing volumes on fewer suppliers to remove some complexities from our products and processes.” That would ultimately mean fewer choices for truck buyers in terms of engines, transmissions and other components commonly spec’ed by buyers.

To cut manufacturing costs, the company plans to immediately shut down the Western Star manufacturing plant in Kelowna, British Columbia, and the Thomas Built Buses plant in Woodstock, Ontario. Nielsen said the Portland, Ore., parts plant would be closed next year, following discussions with local union officials in Portland.

“The Kelowna plant is severely under-utilized at the present,” Nielsen said. “It has a capacity of over 11,000 trucks a year but is only producing today at an annualized rate of a little over 2,000 trucks.” Western Star trucks will now be built at the Portland truck plant.

The plant closings will cost 719 jobs in Kelowna and 321 jobs in Woodstock.

The company also plans to close its Sterling Trucks headquarters outside Cleveland. “We will relocate a reduced number of these employees to a leased facility in the Cleveland area.” Nielsen also said the workforce cuts in Cleveland were achieved by “combining duplicate back office functions that we currently maintain to support all three of our brands of heavy trucks.”

From the product standpoint, Nielsen said the company would “sharpen our truck brands. We are now focusing our brands clearly on their target markets and creating a clear identity for each.”

Heavy-truck product offerings will be based on only three platforms instead of the six platforms now used. “Those include the Century Class platform, on which we build our Argosy, Century Class and S/T vehicles. The second platform will include a new medium- and heavy-duty truck platform we will be introducing over the next six to eight months, and the third platform will be the Western Star Constellation,” Nielsen said. Platforms set for retirement include the Freightliner FLD and Business Class and the Sterling HN80. The FLD truck will “migrate to the Century platform.”

The new medium-duty platform will be introduced in early 2002, according to Nielsen, and will be built at the company’s Mt. Holly, N.C., facility.

Nielsen said production of the recently introduced Coronado, Freightliner’s newest owner-operator offering, would depend on the economy. The company has been evaluating ways to cut production costs out of the new truck, and “if market conditions are favorable, we could begin production in 2002.”

Just over 2,700 workers – about 18 percent of the company’s current workforce – lost jobs as a result of the restructuring plan. Freightliner has now slashed its workforce by 9,000 workers since 1999.

“We are absolutely confident that accomplishing these initiatives and sustaining our efforts on these fronts will allow the company a break-even performance by the end of 2002, and in 2003 we expect to deliver a small profit,” Schmueckle said.