Strategic Outlook of North American Heavy-Duty Truck

Dealership Focused Revenue Streams and Growth

Opportunities

NCD5-18

March 2014

A BRIEF SUMMARY

2 NCD5-18

Contents

Section Slide Numbers

Executive Summary 4

Research Scope, Objectives, Methodology, and Background 8

Market Overview and Megatrends 14

Market Trends 21

New and Used Truck Forecast 29

Parts, Servicing, and Maintenance Market Trends 35

Dealer Leasing, Financing, and Rental Trends 41

Benefits and Impact of Connectivity Technologies on Dealership Business Model 43

Conclusions and Future Outlook 50

Appendix 53

3 NCD5-18

Research Scope, Objectives, Background, and

Methodology

4 NCD5-18

Research Scope

Dealership Revenue Maximization Study Focus

2014 - 2020 Forecast Period

2013 Study Period

2013 Base Year

North America – Canada and United States of America Geographical Scope

Dealership Revenue Maximization: New Truck and Used Truck Unit Shipment Forecast, North

America, 2013 - 2020

Source: Frost & Sullivan analysis.

Year 2012 2013 2014 2015 2016 2017 2018 2019 2020

Used

Truck

Units

195.6 186.1 211.4 225.6 224.7 228.3 235.4 237.6 235.1

New

Truck

Units

241.2 235.8 258.2 266.4 255.2 251.9 257.6 262.9 260.3

5 NCD5-18

Research Aims and Objectives

Aim

The aim of this study is to research, analyze, and forecast the key market factors and dynamics impacting

the North American commercial vehicle dealership and OEM business model

Objectives

• Provide a market and strategic overview of the North American dealership business model. Includes

analysis on key market trends, revenue streams, organizational structure and pricing models.

• Provide market size and forecasts for new and used class 8 trucks in the market.

• Understand the competitive structure of the dealership channel

• Competitor analysis: Analyze competitive factors, competitor strategies and product portfolio analysis

and capabilities

• Develop an actionable set of recommendations for OEMs and dealerships to use in this market

Source: Frost & Sullivan analysis.

6

Key Questions this Study Will Answer

What are the OEM and dealership strategies for the commercial vehicle market?

How will dealership models change and adapt to a changing consumer market?

Which dealership revenue stream is growing the fastest, and its impact on future dealership

strategies ?

Will the dealership channel become obsolete by the year 2020?

Source: Frost & Sullivan analysis.

How have advanced and connectivity technologies influenced the business model of heavy duty truck

dealerships?

Dealership Revenue Maximization: Key Questions This Study Will Answer, North America, 2013

7 NCD5-18

Research Background

This study is an original work of research that also develops and expanded on content drawn from ongoing

research in the areas of Class 4-8 OE and aftermarket trends:

• N9DD – Strategic Analysis of North American Medium/Heavy-duty Commercial Vehicle Maintenance

and Repair Market – Completed

• NAAF – Strategic Analysis of Engine Downsizing Trends of North American Heavy-duty Truck

Manufacturers – Completed

• N8E4 -- Strategic Analysis of North American Class 4-8 Truck Safety Systems Market - Completed

• N6A8- Strategic Analysis of the North American Heavy-duty (Class 4-8 Truck) Repair Industry –

Completed

• ND7A – 2014 Outlook of the Global Commercial Vehicle Industry – Completed

• NCD8 – Strategic Analysis of the Class 8 Used Truck Market - Completed

• N617 – Strategic Analysis of the Class 4-8 Truck Powertrain Systems Aftermarket- Completed

This study is also supplemented by our ongoing continuous interactions with vehicle

manufacturers, Tier-1 suppliers, dealerships, aftermarket distributors and installers involved in the

braking components value chain.

Source: Frost & Sullivan analysis.

8 NCD5-18

Research Methodology: Frost & Sullivan’s research services are based on secondary and primary

research data.

Secondary Research: Extraction of information from existing reports and project material within the Frost

& Sullivan database, to include data and information gathered form technical papers, specialized

magazines, seminars and internet research.

Primary Research: More than 25 interviews have been conducted over the phone by senior

consultants/industry analysts with original equipment suppliers, regulation authorities and distributors.

Primary research has accounted for 80.0 percent of the total research.

Research Methodology

OEMs

Freightliner

Navistar

Volvo

MACK

Kenworth

Peterbilt

Source: Frost & Sullivan analysis.

Dealership Revenue Maximization: Key Industry Participants, North America, 2012

Dealerships

Rush Enterprises

Arrow Truck

Independent dealerships of all leading

class 8 OEMs

9 NCD5-18

Market Overview and Megatrends

10

Commercial Vehicle Market Structure

Dealership/Dealer

Network

Owner

Operator

Leasing

Companies OEM Direct

Sales

OEM Vehicle

Finance

Financial

Institutions

Internet Sales Dealerships Export Market

Used Truck Market

Fleets

Auctions

Truck OEM

Insurance

Source: Frost & Sullivan analysis.

Wholesale

Market

DIY/Private

Sales

Dealership Revenue Maximization: Commercial Vehicle Market Structure, North America, 2013

Represents research parameters

11 NCD5-18

Key Mega Trends Impacting Dealership Business Model Mega trends are transformative, global forces that define the future world with their far reaching impact on

business, societies, economies, cultures and personal lives

Urbanization

Increasing pace of urbanization will lead to integration of core city centre with suburbs and

daughter cities, resulting in expanding city limits and the emergence of several mega

regions in North America. This will have a substantial impact on the future approach of

regional dealership networks to efficiently supply the automotive aftermarket, particularly in

regards to the logistics, warehousing, parts availability and how vehicles are serviced.

Connectivity and Convergence

The increasing penetration of connected devices will expand customer touch points,

compelling commercial vehicle participants to reach out to consumers through multiple

channels. Connectivity will also lead to industry convergence, resulting in telematics,

logistics and IT solutions providers playing a more integrated role in the aftermarket

Evolving Social Trends and Market Dynamics

Demographic trends, particularly the emergence of the technological adverse

generations as key consumers and employees, will compel market participants to rethink

the way they conduct their business and introduce new value propositions to attract the

changing population base

New Business Models

Next-generation business models will redefine future business propositions and influence

future technology and service model development. For the commercial vehicle market,

service aggregation, mobile maintenance, connectivity technologies, digital retailing and

customized fulfillment will expand the current value chain, resulting in new “value for

many” business models

12 NCD5-18

Improved Road Networks

• Higher GVWR Ratings

• High Speed Corridors (Average Speed : 60-100 mph)

• Improved load carrying capability of Roads and Bridges

Stringent Emission Norms

• Efficient/ Downsized Engine

• Subsidies for Electric / Hybrid / CNG / LNG Vehicles

• Weight Reduction

• Automatic Engine Shut-down/Start-up and Anti-idling Technologies

Strict Safety Regulations

• Driver Information & Warning Systems

• Active Chassis Control Systems

• Regulation Compliance Monitoring

Urban Requirements

• Hub & Spoke Logistics

• Infrastructure Projects

• Garbage Collection & Reverse Logistics

• Time and Zone Wise Access

Telematics for Fleet Management

• Prognostics for Preventive Maintenance

• Navigation Support & Driving Assistance

• Driver and Vehicle Performance Monitoring

• Multi-modal (Satellite/Wi-Fi/Cellular) connectivity

• Dynamic Navigation in Urban Areas

Long-haul Requirements

• Inter-modal Freight Transfer

• Trucks capable of bearing Larger Pay Loads

• Low TCO

• Healthy & Comfortable Cabin, Infotainment for Drivers

Urbanization Impact – 2020: HCVs With Urban GDCs Increasing, More Freights Needs to be Transferred at Lesser Cost to Meet the Demand. HCVs will remain

the Most Preferred Inland Logistical Mode for Inter-City and to link Inter-Modal Freights for both Imports and Exports.

By 2020, a new breed of HCVs will emerge in developed economies - with higher GVWR, larger & powerful, but fuel efficient

Diesel / CNG engines, capable of loading wider & longer trailers. These trucks will be branded the ‘Mega Trucks’.

13

Degree of Digitization in Dealership Retailing Full integration of online and physical store strategies developing unprecedented evolution in consumer

experience in the dealership channel

2012 2014 2020

Websites

Online leads

OEM

Rewards

Mobile apps

Digital Kiosks

Digital

Configurations

Tablets

Virtual

Technicians

Augmented

Reality

Digital

store

Virtual

test drives

Electronic

displays

2016

De

gre

e o

f D

igit

iza

tio

n

Hig

h

Lo

w

1st Wave

Focus on increasing

sales leads through

dissemination of

product, service and

sales related

information through

web channels

2nd Wave

Focus on improving

customer experience

and sales conversion

through in-store

digitization

Future Wave

Full integration of online and

physical location strategies.

New retailing models from

adjacent industries and

interactive technology will be

key focus in the forecasted

period

Dealership Revenue Maximization: Degree of Digitization in Dealership Retailing, North America, 2012 - 2020

Social Media

Source: Frost & Sullivan analysis.

Remote

Diagnostics

14

CSA 2010 CSA has put the spotlight on the entire maintenance process as fleets continually look for solutions to improve

their scores in order to meet the strict standards

CSA INTERVENTION

• Early Contact

• Investigation

• Follow-up

SAFETY EVALUATION

Vehicle

Maintenance

Crash

Indicator

Controlled

substances/alcohol

Driver

fitness Fatigued

driving

Unsafe

driving

Cargo-

related

Data Collection

Crashes Inspection

Unfit

Marginal

Continue to Operate

Unfit

Marginal

Continue to Operate

• Carriers with unacceptable safety levels will receive some intervening

action from FMCSA.

• Carriers whose stats are low enough in one of the standalone

measurements or two or more other criteria, will have to make

immediate corrections or cease operations.

• Carriers with acceptable safety levels are left alone.

CSA Scores Effect on Equipment

• Bad equipment inspection includes

tire pressure monitoring, braking

safety, emissions, trailer weight after

loading, roll over stability, and

overall health and safety of the

equipment, which is a part of CSA

calculations and is a source of

violation

• Dealership expertise will be leaned

on to handle the advancement in

technology and in meeting the strict

guidelines CSA

Suspend

operation

15 NCD5-18

Mobile Resource Management Driver and Vehicle Connectivity Over Cellular

and Wi-Fi Networks, Two-way

Communication, V2I+V2V Communications,

EOBR, HOS, Electronic Vehicle Inspection,

Handheld Device Connectivity

Security/Safety Management Track and Trace, HAZMAT,

Geofencing, Stolen Vehicle

Tracking, Critical Event Alerts,

Smart Navigation Dynamic Navigation,

Geofencing, Telematics Based

Fuel Consumption Optimization,

Green Routing, Electronic Toll

Collection, Real-time Parking

Fuel Optimization Fuel POI Tracking, Charging

Station/Battery Swap Facility

Location, Fuel-Tax Filing

Operations Management Back Office Automation,

Scheduling, Dispatching,

Delivery Confirmation, Billing,

Insurance Risk Management

Vehicle Uptime Maximization Remote Diagnostics, Prognostics

Smart Connected Trucks and Dealerships Integration of connectivity technologies to increase consumer touch points with dealership locations helping

dealerships serve customer needs more effectively

16 NCD5-18

Executive Summary

17 NCD5-18

Summary of Key Findings

Source: Frost & Sullivan analysis.

The dealership channel will remain a main staple in the class 8 truck market, where 95% of new

truck sales and 75% of used truck sales will flow from. Internet channels are expected to gain

traction, garnering close to 5% market share in 2012.

The approaching equipment replacement cycle is expected in 2014 and 2015 with total class 8

unit shipments estimated at 469,600 and 492,000 respectively. However, this replacement cycle

does not signify fleet size expansion as fleets are only looking to replace old equipment.

Customized fulfillment solutions and flexible service options such as contract maintenance and

mobile maintenance will take the place of previous norms as the key dealership value

propositions for consumers through the forecast period.

4

5

1

2

3

Parts, servicing, and maintenance has remained the pillar of successful dealership revenue

maximization with profit contributions around 45% - 50%. It is expected to experience an

additional 5%-10% growth by the year 2020.

Connectivity technologies such as telematics, prognostics, and remote diagnostics will emerge

as a key new monthly revenue stream with expected contribution of 10%-15% profits by the

year 2020. These technologies will provide downstream benefits of improved customer

communication, service efficiency, parts allocation, and customer loyalty.

Dealership Revenue Maximization: Summary of Key Findings, North America,

2013

18 NCD5-18

Dealership Value Chain and Profit Margin Analysis Connectivity technologies can provide a new revenue stream for dealerships in the long-term as well as

downstream benefits from increased parts & servicing sales and customer loyalty

Source: Frost & Sullivan analysis.

Value Chain Current Status (2013) Profit

Split Future Status (2020)

Profit

Split

New and Used

Truck Sales

Class 8 truck sales are expected to peak in 2014 and 2015 due to the equipment replacement cycle

Used truck demand and sales have reached historic highs in previous years due to economic influences and TCO awareness

30% - 35%

Truck sales are expected to remain stable with relatively flat overall equipment growth and unchanged profit margins

Dealerships are developing new business models to take full advantage of the revenue potential in the used truck market

25% - 30%

Aftermarket

Service, Parts,

and Maintenance

Aftermarket servicing, parts and

maintenance provide the leading revenue

generating capabilities as they produce

the largest profit margin

45% - 50%

Dealerships posses advanced technological

knowledge and are able to provide

unparalleled servicing capabilities and

accessibility to quality OE parts

50% - 55%

Leasing and

Rental

The moderate economic recovery

combined with the increasing credit

availability has helped regain lost value

1% - 3% Leasing and rental revenue streams are

expected to increase slightly as leasing

provides a more affordable monthly payment

3% - 5%

Financing and

Insurance This is the most traditional method of

purchasing a truck through the dealership 5% - 10%

Financing and insurance revenue streams

are expected to remain stable owing to the

nature of the trucking industry

5% - 10%

Connectivity

Technologies

(Telematics,

Remote

Diagnostics,

Prognostics)

Emerging high potential revenue stream

for the dealership business model

Currently there are too many different

telematics providers in the market

0% - 3%

Dealerships will be fully equipped to offer

customizable telematics and prognostic

services to their customers

Telematics and prognostics will provide a new

revenue stream for dealerships where

customers can easily locate dealers, part

availability and schedule service times

10% - 15%

Dealership Revenue Maximization: Dealership Value Chain and Profit Margin Analysis, North America, 2013 and 2020

Potential Emerging Dealership Revenue Stream

19 NCD5-18

Dealership Strategic Approach—Key Dealership Goals Dealers need to be dedicated to developing a strong revenue mix by focusing on the many details from each of

their departments

Long

Term

Staff and Technician

Management

Short

Term

• Short-terms goals for dealerships should center around

understanding and analyzing current performance measures

• Analyzing in-shop performance on a monthly basis is

inadequate as hourly, daily, and weekly focus is needed to

determine any potential cost pitfalls

• Properly trained and utilize staff can effectively lead to

improvements in customer service and customer value

enhancement

• Inventory optimization is key to managing daily costs and

serving customers in a timely manner

• Long-term dealership goals should aim to optimize

performance for sustainable growth

• Developing principal organizational values and vision

will help keep the dealer focused on successful long-

term goals

• Dealers must continually account for the cost of doing

business and prepare for the volatility of market factors

• Most importantly dealers need develop support

programs to cater to its customer base steadily building

customer loyalty

Improve Service Quality and

Delivery

Implement in-shop

performance measures

Inventory Optimization

Leaner Cost

Structure

Develop Fleet

Relationships

and Customer

Touch-points

Strategic

Approach to

Cracking

Dealership

Profitability

Source: Frost & Sullivan

Dealership Revenue Maximization: Dealership Strategic Approach, North America, 2013

Define

Financial

Goals

Develop

Organization

Values and

Vision

20

The Last Word—3 Big Predictions

2

The convergence of telematics, diagnostics and prognostics in commercial

vehicles will lower the total cost of ownership to customers by as much as

10% while creating a new business segment for dealerships through data

collection in the form of training hubs for drivers and technicians

3

OEMs and dealerships will be fully integrated together with one core

synergistic strategic goal for both business segments to reach consumers

collectively by 2020. Communication and marketing strategies will be used

to set brands apart from the competition similar to the auto industry

1

By 2020, electronic platform integration with commercial vehicles and fleet

managers combined with overall industry digitization will create new

revenue streams for the dealers and OEMs. Dealerships truck sales and

services will be highly dependent on soft technologies while 75% of sale

and part leads will be generated through internet sources

Source: Frost & Sullivan

Dealership Revenue Maximization: 3 Big Predictions, North America, 2013

21 NCD5-18

Market Engineering Methodology

One of Frost & Sullivan’s core deliverables

is its Market Engineering studies. They

are based on our proprietary Market

Engineering Methodology. This approach,

developed across the 50 years of

experience assessing global markets,

applies engineering rigor to the often

nebulous art of market forecasting and

interpretation.

A detailed description of the methodology

can be found here.

Source: Frost & Sullivan research