Mid-Year Report on the Freight Transportation Industry

These are the major developments shaping the freight transportation industry in North America in the second half of 2019.

1. We are entering a period of Economic Uncertainty

Despite a climate of record low unemployment levels, low inflation, a positive ISM manufacturing index and other encouraging economic indicators, the US Federal Reserve cut interest rates on July 31 by a quarter point, the first such rate reduction since 2008. This action is being framed as a precautionary measure to protect the United States from slowing growth in China and Europe, and from uncertainty over President Trump’s trade war. The fact is that this unpredictability is beginning to weigh on business investment in the United States and abroad. Shippers and carriers should closely monitor the key economic indicators to assess whether this and possible other rate cuts will sustain the decade long economic expansion or ease the impact of an approaching downturn or recession.

2. Shippers and Carriers are dealing with the fallout from 2018

The boom times experienced in 2018 came to a crashing thud in the second quarter of this year. According to FTR. the Trucking Conditions Index (TCI) turned in a negative reading for the first time “in several” years.” Carriers are experiencing a “softening freight environment.” This is being attributed to several factors.

To keep up with the strong freight demand in 2018, many carriers purchased additional fleet equipment. Preliminary orders for new trailers fell to the lowest level in a decade in June 2019 as carriers try to determine where demand for freight services is going. Spot market rates have fallen well short of the heights set in 2018. In fact, they've declined steadily since June 2018, as capacity returned to the spot market following the ELD mandate, and as fleets invested in new trucks.

As we enter the month of August, spot rates are in a seasonal retreat. In fact, spot van rates are now price-competitive with domestic rail intermodal when you compare a 53-foot van trailer to a shipping container of the same size.

In a report prepared by the FreightWaves Freight Intel Group they express a concern that we may soon experience an increase in truck failures. As noted above, spot rates are down meaningfully – 20 percent year-over-year and 30 percent off their peak. Second, contract rates are moving lower (and are at risk of downward revisions going forward). Third, trucking companies’ costs are running higher due to driver wage increases and excess capacity entering the market following a robust 2018. Clearly the big story so far this year is that we have too much capacity chasing less robust freight volumes.

3. Global manufacturers are shifting production from China to other low-cost countries

Continued uncertainty surrounding trade, especially with China, has many shippers working to replace key suppliers and customers or to retain them at tariff-inflated prices. The push to move goods in order to beat tariffs has, in some cases, affected production and shipping schedules. China-based manufacturers were already in the process of moving to lower-cost Southeast Asia. Now that trade tariffs have been enacted on billions of dollars-worth of Chinese goods, they are shifting their supply chains.

Some companies are moving production runs from China to India, Bangladesh, Vietnam, Thailand, Malaysia, Philippines, Canada and Mexico. Lower labor costs are available outside of China, for some products. Companies with manufacturing facilities are diversifying their production to multiple countries to further protect their supply chains. Similarly, China is examining opportunities to manufacture more goods, previously sourced from the US, in China.

4. A “Shipper of Choice” strategy is morphing into Lean Freight Management

One of the big takeaways from the last few years was the concept of shippers becoming more “carrier friendly” in order improve their chances of securing trucking capacity. Carriers were encouraging their customers to make their companies easy to work with (i.e. paperwork ready at time of pickup, drop trailers rather than “live load,” increase number of dock doors available) and to make their companies more driver friendly by providing them with vending machines, bathrooms and getting them in and out of their facilities in an expeditious manner.

While the softer freight environment has made more shippers desirable targets for carriers, this should not diminish the importance of becoming a low-cost shipper. Practicing Lean Freight Management allows shippers to keep costs down. This should translate into more capacity at better freight rates. Hopefully the momentum of the “Shipper of Choice” movement the last few years will drive the movement to lean freight management.

5. Shippers are Rethinking their Network of Carrier Partners

It was amazing to hear the arrogance of some carriers last year as the surge in freight volumes encouraged them to reallocate their capacity from long established to higher paying customers. This was an important wake-up call for some shippers. There are boom and bust periods in every economic cycle. Shippers need carriers they can depend on. The softer freight environment should not be the time to conduct a freight bid and allocate freight to the low bidders; rather it should be a time to secure reliable carrier partners who can be counted on to supply consistent capacity, at fair rates, in good times and bad.

6. Companies are developing their own Climate Change Strategies

While there is little most shippers can do to reduce the impacts of climate change, there is much shippers and carriers can do to prepare for the possible impacts on their companies. Every shipper should be aware of the potential threats in their respective geographic locations. Hurricanes, floods, forest fires, droughts and extraordinarily high temperatures are just some of the potential and actual dangers. Severe weather can destroy warehouses and freight terminals, block roads, damage bridges, cut telecommunications lines and injure essential infrastructure. Every company needs to assess the major risks in their markets and plan accordingly.

7. New Carrier Sourcing Strategies are taking hold

For many years, shippers relied on RFPs to secure capacity and negotiate freight rates. Some shippers relied on freight brokers for spot market or difficult to serve lanes. Medium and large-sized shippers, with limited supply chain expertise, partnered with logistics service providers.

Digital freight matching is changing the carrier procurement model. These companies provide “real time” quotes with designated carriers on specific lane pairs. The increasing growth and reliability of this new category of freight service provider is changing the carrier procurement dynamic. Increasing numbers of shippers (and carriers) are learning how to incorporate this new middleman into their procurement exercises. Manufacturers are adopting a multi-tiered Carrier Procurement and Pricing strategy – FRPs for contract rates, dynamic pricing or real time freight pricing and booking for spot market rates. This allows shippers to find capacity when the market turns as it did last year

8. Amazon is changing consumer expectations with respect to eCommerce related transportation services

Free one-day Prime delivery is now available on more than 10 million products from Amazon, and many of them were on sale on Prime Day. What's notable here is that Amazon captured a wide swath of people on the one-day shipping bandwagon in July and made delivery speed an expectation for Black Friday and the holiday season. Add it up, and Amazon's competitive advantage is its logistics vs. other retailers.

Prime Day is a massive sale that's designed primarily to entice folks who aren't Prime subscribers to take the plunge. The Amazon mission is at the forefront on every Prime Day until its Prime household penetration approaches 100%. Amazon values its Prime subscribers since they buy more products, consume more content, provide more data, and have more lifetime value. Cowen & Co. estimates that Amazon had 63 million Prime subscribers and 44% of them planned to buy something on Prime Day with another 42% undecided. Cowen & Co. estimates that about 10% of non-Prime households signed up on Prime Day.

Amazon Prime’s free one-day and two-day shipping has rapidly become the default expectation for many shoppers. Of all shipping promises, 77% of consumers surveyed in the report ranked free shipping as the most important option for online purchasing decisions. Still, most consumers show a preference for reliable delivery, with high expectations that retailers will deliver products when they promise to.

To counter or address the Amazon business model, companies are redesigning their footprint, and adding more, smaller DCs to their networks, to get closer to their customers, reduce lead times and improve customer service. To reduce risk and cost and increase agility, they are looking at a shared real estate model for their DCs, sharing platforms and services with other companies.

9. The Freight Transportation Sector is undergoing a Technological Revolution

For many years, the transportation sector was a somewhat unprogressive industry from a technological perspective. That is changing rapidly. Drones, ELDs, artificial intelligence, electric trucks, driverless trucks, robotics, and platooning are just some of the technologies being tested and/or used by multiple companies throughout the freight transportation industry. Everyone making a career in this industry must closely monitor these developments, so they don’t get left behind.

10. Foreign countries are revising their America strategies

For many years, America was the world’s most desirable economic partner. Whether it was buying American produce and other goods or supplying goods to US consumers, the USA was a very large and desirable business partner. As a result of president Trump’s erratic leadership, America’s international vendors and customers are reassessing their relationship with the US. America’s withdrawal from treaties signed by previous administrations, the failure to sign the TPP treaty, and the imposition of tariffs on certain imports, is very disruptive to many foreign countries. While many foreigners don’t wish to antagonize this large and important market, they must look at alternative vendors and markets. Depending on how the upcoming US and British elections proceed, America’s relationships with various countries could undergo some change.  With 5 more years of the Trump presidency a distinct possibility, countries and companies are evaluating their risk management strategies.

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