(Bloomberg)—

Volvo Group said strong demand for trucks coupled with a strained supply chain and higher costs for raw materials and freight will continue to drive inflation.

The Swedish manufacturer has been restricting truck order intake because of “already large” order books and long delivery times, Volvo said Friday, reporting fourth-quarter earnings broadly in line with expectations. The company is also battling additional costs to manage the disruptions in the supply chain.

“Supply rather than demand will decide the market for the first half of the year,” Chief Executive Officer Martin Lundstedt said in an interview.

The battle to secure enough semiconductors continues to snarl production lines of manufacturers like Volvo, with deliveries of cars and trucks falling short of demand. The crisis has so far confounded early hopes of improvements this year, with higher raw-material prices and shipping constraints adding to the supply chain woes.

Inflationary Pressures

The pressures on procurement weighed on Volvo’s adjusted return on sales during the fourth quarter, declining to 9.8% from 11.3% a year ago.

The parts shortages, particularly in semiconductors, and an increased workforce to ramp up output “had a bigger impact on margins in trucks than we had expected,” Handelsbanken Capital Markets analysts Hampus Engellau and Max Boustedt wrote in a report. Volvo fell as much as 4.2% in Stockholm trading and was 3.5% lower at 10:43 a.m.

Total net truck orders fell by 16% in the three months through December after Volvo restricted orders for a second consecutive quarter. The company has started to take orders again after the visibility on component shortages improved somewhat, Lundstedt said during a presentation with analysts.

“We expect that the inflationary pressures will continue,” he said.

Electric Orders

While Volvo is battling the procurement crunch, the industry is making moves into electrification following in carmakers’ footsteps to lower emissions. Late last year, shipping and logistics company DFDS A/S ordered 125 heavy-duty Volvo electric trucks, its largest commercial e-truck order so far. Deliveries are expected to start in the fourth quarter, giving Volvo 40% market share for the niche segment in Europe.

“The chip issue is the most important topic that is facing the industry,” RBC Capital analyst Tom Narayan said ahead of the earnings presentation. Truckmakers’ “volumes are at the mercy of the chip shortage, and trucks are very chip heavy.”

(Updates with CEO comment in third; share price, analyst comment in sixth paragraph)

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