Peterbilt Trucks through the years.

Hold the High Ground Trumps all Other Pricing Rules

Daimler’s Freightliner and Western Star brands held 40% of the US heavy truck business in 2014, followed by Paccar at 26% with its Peterbilt and Kenworth marques and Navistar and Volvo each come in at 12.5%. This is a low growth, mature and highly competitive industry. Paccar, the subject of this study, has not lost money since 1939 and, not withstanding the economic turmoil of 2008-2009, its return on equity has averaged 16% over the past thirty years.

Fleet Operator’s Viewpoint

Synonymous with quality, Paccar has two brands in its stable: Kenworth and Peterbilt which are widely regarded as the highest quality trucks made in North America and the company does not fail to receive JD Power awards for its trucks as well as for its service. Paccar maintains its high standing despite charging premium prices.

What is Paccar’s secret to being able to sell at a premium? There is none. It is able to show that its trucks run better, run longer and its cost to operate is lower than its competition. This is vitally important to the fleet operator who looks at a fraction of a cent per mile in making procurement decisions.

As an example, a 2015 Kenworth W900L Sleeper lists at around USD165 000 and if it is driven 125 000 miles a year, the operator has to budget around $125 000 every year in operating expenses for fuel, repairs and insurance and all of these expenses are in addition to wages and benefits. It was for this very reason that Kenworth designed low drag, streamlined trucks 4 decades ago, well before its competition.

Quality leadership is a tenuous place

Quality leadership of Paccar’s kind is difficult to hold and there are three reasons for this: one cannot say one has a long-lasting product unless one has a product that has lasted a long time. This reputation take a while to establish but can evaporate in an instant. The second is the complexity in building a very involved, large, high-quality machine. The store-house of knowledge is passed on from engineer to engineer only when the company provides a stable, collegial workplace and thirdly, owing to purchasers’ myopic vision, they tend to be steered by the selling price rather than by future savings.

Custom interior of long-haul truck

Owner-Driver’s Viewpoint

Paccar addresses the obstacles by its strategy of being the quality leader. It looks at quality not through the eyes of the fleet operator but through the viewpoint of the owner-driver. Owner-drivers increase their pay by driving themselves and their rigs for longer, harder, sometimes driving 16 Hrs a day. They look at efficiency but also have a broader view since their truck is their office, home, lounge and TV room on the road. Also, with the Paccar brand comes a kind of Harley-Davidson aura. The dealers are highly trained and experienced and their configurator tools allow the purchaser to custom design their rigs. Since Paccar builds each truck to order, inventories are low, both of production items and finished goods.

Paccar’s strategy is to do something well and consistently over the long haul.

Paccar’s make to order model means its variable costs are higher. The higher margins endears it to its dealership base which is more dedicated and loyal. Paccar does not make small trucks, only large ones and in the large truck sector it does not make cheap products.

In the design studio, on the shop floor, in the executive suites all the talk and focus is about truckers and the truck industry. They have no need for consultants to come in and tell them where their core competency lies or who their main customer is.

This is Paccar’s strategy. Good strategy is about design and design is about fitting various pieces together so they work harmoniously together.

A senior judge in the Imperial Court

Part II – The Judiciary

In the first part of this set of papers, corruption in China was addressed. A case to counter this blight was made and, in the current paper, the ground is laid on a small, but not insignificant, step that can be taken to at least start the journey to clean up corruption.

Why is it necessary to address corruption? As consultants to industry, our clients, who, in the main, are successful business people, tell us two things that are high on their wish list:

• I wish to invest in a country where I don’t have to bribe everybody, and
• I want to invest in a country where the judges are not corrupt, where, if I have a legal case, I can expect justice in the courts.

The connection between corruption and the judiciary is undeniable.

One of the most central facts about China’s judicial system is it is intimately and inexorably intertwined with the party bureaucracy. In another way that is emblematic of the problem discussed is the courts are financed from local government sources rather than from provincial or central funds. It goes without saying, therefore, courts lean towards local pressures.

Judges lack life-long tenure and are hired only with the approval of the courts’ communist party’s political department and are subject to the discipline of the party organization.

Except for the most trivial of cases, judges normally operate in panels of three and there is a two-tier adjudication system. Once received by the filing court, the case is heard before a professional judge sitting with two people’s assessors. The assessors are chosen from a roster of approved laymen so as to give the proceedings a patina of democracy. As to be expected, the assessors take their cues from the judge in charge. A collegiate panel of three professional judges deals with decision-making on appeals to the second instance tribunal.

A case that can be received by the receiving clerk of the court can only be inscribed upon the authority of the local party. Hence, many cases can be refused to be received with no reasons offered. For a business seeking judicial remedies for their economic or social redress this is most frustrating.

A point that was raised above related to local interests. The protection of local interests may be crucial to the business dispute between a local company or individual and those from elsewhere.

In all of this, guanxi, the network of personal relations that judges find more compelling to satisfy than legal norms has to be acknowledged even if not eradicated. Hence, judges are ever heedful of maintaining social stability, i.e., take into account public opinion even if that requires the misapplication of substantive or procedural law.

GuanXi

In cases involving the author’s clients, during proceedings, blandishments of an influential or aggressive litigant, who threatens to take the matter to ‘people in Beijing’, have scuppered their plans. The presiding judge does not take kindly to having the case heard elsewhere, especially if it is a local individual who chooses to go to Beijing.

The pressures on judges come from many sides:

• Local government or party officials;
• Members of the local people’s congress;
• Members of the local people’s consultative conference {a.k.a. prominent residents};
• Judges from a higher court and
• Individual provincial or central party or government leaders.

Hence, the legal framework does not support the independence of the individual judge.

Quoting Sen. Marco Rubio, Chairman of the Congressional Executive Commission on China, ‘Local governments are the most significant source of external interference in judicial decision making’,

A possible two-pronged remedy for this would be to give judges life-long tenure, after a period of probation, and for the judge to have more real-life experience rather than academic achievements prior to being appointed to the bar. In this manner, the judge is more mature and less malleable.

The current system if far too entrenched to make radical changes in a short period of time without substantial resistance. The independence of the individual judge should be paramount and by making that person have tenure should alleviate the dependency of the judge on the local party machinery.