Some Major Trends in Freight Transportation in 2018
The coming year is full of question marks. Can the strength of the economy and stock markets be sustained? How will the ELD mandate play out? How much will freight rates increase? Will president Trump face legal proceedings or Impeachment? Will the president precipitate a foreign policy crisis? Will supply chains be disrupted by capacity shortages? Will NAFTA be terminated and how will this play out in the three participating countries in 2018 and beyond?
December 8, 2017
by Dan Goodwill
After a tumultuous 2017, the New Year is shaping up to be an eventful and momentous year for Freight Transportation. These are a few of the trends to watch in 2018.
Trump Year 2 – the Sophomore Jinx and Crisis Management
America and the world have lived through year one of an American rookie politician and president. It was painful and disruptive with few solid accomplishments to point to. There is little consensus on the financial impact of the Tax Reform bill that was passed, Trump’s one big legislative achievement.
As the Mueller investigation moves forward, year two does not look any better. As this blog is being published, there are more revelations concerning the Russia Collusion/Obstruction of Justice case on almost a daily basis. The Mueller probe appears to be moving up the chain of command. How and when this case breaks could change the course of history and the financial outlook for 2018. Thankfully the economy is ending the year on a high note; stock markets are at record levels.
President Trump seems intent on generating a crisis or two to prove his loyalty to his base. The decision to move America’s Israeli embassy to Jerusalem will surely enrage the Arab world and stir unrest, certainly not a move to facilitate Mideast peace. Trump’s focus appears to be on undoing everything that president Obama accomplished during his eight years in office.
Another big question is whether the Republicans can maintain control of the House and Senate in next year’s mid-term elections. It is hard to imagine a scenario under which the Trump presidency gains its footing and is a positive force for change in 2018.
The beginning of the end of NAFTA
After five rounds of negotiations, and with only one more round to go, the North American Free Trade Agreement appears to be on the verge of termination. Donald Trump has demonstrated a willingness to ignore the recommendations of his key advisors and party members in order to appeal to his core supporters. These are the people to whom he stated that NAFTA was the worst trade agreement ever negotiated and that he would take America out of the agreement (unless he was able to secure some significant concessions from the two partner countries, Canada and Mexico). He has demonstrated with the withdrawal from the Trans Pacific Partnership and a pullback from the Paris Climate Change Accord that he has no hesitation in ending a longstanding trade agreement.
This is sad since it will trigger a chain of events that, over time, will likely cost jobs in all three countries and drive up the costs of local and imported goods. It will have major impacts on the freight economy. Watch for the first steps in the unraveling of NAFTA in 2018.
ELD Introduction, Capacity Constraints, and Big Freight Rate Increases
Many of you have heard this theme before and have grown to ignore it. Don’t ignore it in 2018. A series of developments that have been in motion for some time are going to make this happen, this year. The economy remains strong and economic predictions are for solid GDP growth in 2018. The driver shortage is real and getting worse. The ELD mandate is going to reduce truck productivity and drive some trucking companies out of business. Truckload rates are projected to increase somewhere between 3 and 10 percent over the next year. Even LTL capacity is tight as many carriers have consolidated their networks to reduce costs.
Given the current trajectories of global supply and demand, one might expect to see oil prices rise above $70 by mid-year, and this upward momentum could continue if the global economy continues to chug along its current path. A Mideast crisis could create an additional spike in energy costs and fuel surcharges.
One big question is how forcefully will the ELD mandate be enforced on a state by state basis? The results from various surveys suggest that many carriers are still not ELD compliant, particularly among smaller fleets. This could have a big bearing on the level of capacity throughout North America.
Railway Renaissance – The Marketing Phase
Over the past two decades, the class 1 railroads in North America have followed similar paths. Railroad freight rates were adjusted up to “market rates.” This resulted in significant margin expansion as many legacy contracts had been priced below market rates. Pricing rose faster than costs and share prices of the public carriers began to generally appreciate at the rate of 20%+ per annum for an extended period. However, this phenomenon came to end as eventually all the legacy contracts had been repriced.
The “Hunter Harrison Precision Railroad Effect” produced a chapter of railroad history that includes a round of efficiency efforts. The result of these efforts has been to de-layer rail organizations, take costs out and run longer, slower, heavier, less frequent trains. Some railways are well along on this cost-cutting process while others have a way to go. But rail networks cannot be downsized indefinitely en route to sustainable prosperity.
On a going forward basis, the rails now need to enter a new era that would involve the concept of targeting those parts of the network that have surplus capacity, the lowest market share, good revenue growth prospects, and a strong competitive position, with a newly enhanced Marketing effort. This would start with the low hanging fruit similar to what the railroads did on the cost side. Watch for this to start in 2018.
Ecommerce will change Supply Chains
The U.S. and Canada import the bulk of their consumer goods. This freight has historically come via truck or intermodal to a consolidating point or distribution centre (DC), where goods are stored in pallets (bulk) awaiting a request from a brick-and-mortar store for replenishment. Today the “Amazon Effect” has attracted consumers who are lazy or don’t have the time to go to the store and who prefer to interact with their mobile device rather than people. These consumers can now expect rapid home delivery of their goods, or the option to go to a locker, close to home, to pick up their goods.
This has produced a significant amount of fulfillment centers (similar to a DC, but items are inventoried on an individual basis rather than a bulk basis) to service the e-tail customer. Therefore, we should expect to see significant growth in parcel/small package last-mile volume leaving FCs to go to residences and parcel lockers and less of a need for consistent TL (often dedicated) replenishment out of DCs to the local store.
Rising Demand for Data-Driven Logistics
In the ever-changing logistics business, companies will continue to adopt big-data algorithms, data-visualization techniques and smarter analytics to boost process efficiency and shorten the delivery times. Look out for the following changes in 2018.
The digital revolution is pushing manufacturers to make drastic changes to their business models. Companies are expected to use geography-specific data to anticipate demand of certain products in a region and ship in advance.
All operational and administrative processes including Procurement are being impacted by these innovative digital products and services. In adopting the new normal, procurement is shifting from the traditional approach of enabling cost savings to delivering strategic value to the enterprise.
As procurement metamorphoses into a profit driver, we will see a shift in its priorities, which will call for leveraging big data analytics for better decision making, increasing enterprise value by enabling co-innovation with suppliers and harnessing technologies like Artificial Intelligence, Cognition and Robotic Process Automation.
Emerging Technologies in Freight Transportation
Electric and self-driving vehicles have been hot topics for the past several years. They are part of ongoing effort to increase the capacity per truck or group of trucks and reduce the requirement for drivers. There are a host of enabling technologies and initiatives that are driving the efficiency movement. A number of companies have already committed to Tesla’s new electric vehicle. Successful tests will lead to increasing orders from carriers throughout the trucking industry.
The industry may be a long way off from seeing the commercialization of autonomous vehicle technology as there are many regulatory and safety hurdles still to be overcome. What may not be so far away, is the use of platooning technology, in which a group of typically three trucks travel together – with drivers – but the trailing two trucks automatically move in tandem with the truck in front of them. This allows those trailing trucks to travel at much closer distances to the trailer ahead, improving mileage through reduced wind resistance. It can also have the effect of reducing trucks on the highways. There are other initiatives in play that facilitate remote drivers, dedicated truck lanes and optimized first driver trucks (that maximize miles per gallon).
More Mergers and Acquisitions
The M & A movement should continue in certain sectors of the trucking industry. There are thousands of truckload carriers throughout North America. No truckload carrier controls more than five percent of the total market. With interest rates low and the supply of drivers tight, this is a good time to gain market share and drivers via acquisition. In addition, for companies trying to gain an entry into the last-mile delivery business, a purchase is a good way to learn the business and gain expertise. Even for companies in the last mile business, an acquisition can stretch geographical coverage.
The coming year is full of question marks. Each of these issues could have an impact on the freight business. Can the strength of the economy and stock markets be sustained? How will the ELD mandate play out? How much will freight rates increase? Will president Trump face legal proceedings or Impeachment? Will the president precipitate a foreign policy crisis? Will Republicans maintain control of the three branches of government? Will supply chains be disrupted by capacity shortages? Will NAFTA be terminated and how will this play out in the three participating countries in 2018 and beyond? We will soon find out. Happy Holidays and best wishes for a successful 2018.
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Dan Goodwill, President, Dan Goodwill & Associates Inc. has over 30 years of experience in the logistics and transportation industries in both Canada and the United States. Dan has held executive level positions in the industry including President of Yellow Transportation’s Canada division, President of Clarke Logistics (Canada’s largest Intermodal Marketing Company), General Manager of the Railfast division of TNT and Vice President, Sales & Marketing, TNT Overland Express.
Goodwill is currently a consultant to manufacturers and distributors, helping them improve their transportation processes and save millions of dollars in freight spend. Mr. Goodwill also provides consulting services to investors, vendors to the trucking industry, transportation and logistics organizations.