Here is my annual report on the top stories in surface transportation in the United States and Canada over the past year.
November 13, 2017
by Dan Goodwill
Here is my annual report on the top stories in surface transportation in the United States and Canada over the past year. These stories are not listed in order of importance.
Economic Stability, Political Chaos, and Tightening Freight Capacity
This has been a positive year for the economies of Canada and the United States. Canada’s cumulative GDP growth for the first two quarters of the year was 2 percent, the strongest since 2002 while the comparable increase in the United States was 2.7 percent. The unemployment level in Canada is 6.3 % in October and in the USA 4.1 %, the lowest levels in years. Strong new job growth is being created in both countries on a monthly basis. The US stock market is just slightly below its all-time record levels.
This has been happening against a backdrop of political chaos in Washington. As of today’s date, no significant new legislation has been passed by the US Congress in 2017. Currently the House and Senate are actively trying to pass a tax reform bill (primarily a tax cut for wealthy Americans that will add over $1 trillion to the nation’s debt over the next decade) before Thanksgiving. While some sort of modified bill will likely pass this year, it is questionable how much of an impact it will have on the US middle class or the economy as a whole.
The strength of the North America’s economies indicates that Canada and the United States have been able to tune out the “noise” in Washington, up to now. This has been a positive year for freight transportation. The USDOT’s freight transportation services index was 130.7 in August 2017, the highest level of all time. Truck capacity has tightened; spot and contracted freight rates are on the way up.
America’s “Home Alone” Strategy – The unraveling of Free Trade
Within his first days in office, president Trump withdrew America’s support for the Trans-Pacific Trade Agreement, a free trade initiative that involved the Canada, Mexico, Australia, Japan (the world’s third largest trading nation) and several other countries (excluding China). The TPP11 (the eleven remaining countries excluding the US) reached a preliminary agreement in Asia last week. While there are still some big issues to be negotiated (i.e. exporting of Japanese cars into Canada), it looks like a deal will be reached among these 11 nations. With America’s withdrawal from multilateral trade deals, China has signalled that it wishes to fill the void.
After four fruitless rounds of negotiations on the North American Free Trade Agreement (NAFTA), it appears that president Trump wishes to either bully Mexico and Canada into trade terms more favorable to the US or withdraw from the pact. While millions of jobs in the three countries depend on NAFTA, president Trump seems intent on establishing bilateral (Win/Lose) zero sum game trade deals rather than multilateral (Win/Win) trade agreements.
Trump’s trade strategies need to be seen in the context of the other Home Alone initiatives that are in process. These include the plan to build a wall between Mexico and the United States, restricting the number of immigrants coming into the United States, and the various attempts at a ban on immigrants from selected Muslim countries.
What does this all mean for freight transportation in North America? Business leaders in the United States and Canada are uncertain about their investment strategies. In what country should a Canadian auto parts manufacturer build a new plant? In the absence of bilateral deals between the United States and the other TPP countries and other nations, will this reduce the flow of goods to and from and within America.
Canada’s Comprehensive Economic and Trade Agreement with the European Union and its intent to be part of TPP11 highlight its desire to find other dance partners if America persists in its “Home Alone” strategy. Canada’s trade with the US is currently much larger than its trade with Europe. CETA could potentially be a bigger free trade agreement than NAFTA since the European Union is the largest economy in the world.
Over the past three years, over a billion dollars has been invested in Blockchain projects. Though it was initially intended for financial transactions, businesses of all kinds are getting creative with the so-called Blockchain ledger, to record, track, and verify trades of virtually anything that holds value. From ride-sharing to cloud storage to trucking, companies in all industries are beginning to see blockchain’s potential. Earlier this year, consulting firm Deloitte predicted that by 2025, 10% of global GDP (approximately $12 trillion) would be built on top of Blockchain applications.
According to Adrian Gonzales, president at Adelante SCM, Blockchain could become a new “supply chain operating system” based on its decentralized architecture, which “has the potential to trigger a new wave of innovation in how supply chain applications are developed, deployed and used. Transport companies will be able to use Blockchain technology for freight payments, proof of deliveries, tracking chain of custody and for “smart” contracts.
To advance the process, Blockchain in Trucking Alliance, has been formed to develop market standards. There are 260 companies that have applied (6 of the top 10 3PLs); at least one member touches eighty-five percent of the trucking transactions.
The “Amazon Effect”
The “Amazon Effect” on supply chains is defined as the impact the digital marketplace has on the traditional business model in retail. According to Rosalyn Wilson, Senior Business Analyst at Parsons Corporation, it is causing a revolution of epic proportions across the globe.
To execute fast deliveries, distribution centers must operate on a continuous fulfillment schedule. Orders are no longer processed in batches at the end of the day. They are processed instantaneously and sent to pick in the warehouse immediately. Trucks picking up packages for UPS, the USPO, FedEx and others must be ready to take their filled trucks to nearby sort centers for immediately processing.
Inventory control becomes key to managing the flow of inbound goods and assuring the availability of products. To keep the fast-moving inventory in stock at the distribution center, more frequent deliveries must be scheduled and that means yard congestion and perhaps a need for yard management software with delivery scheduling.
To make fast, more frequent deliveries, manufacturers must learn to produce in smaller lots with very fast machine change-overs to accommodate a faster demand schedule. To effect very fast change-overs in manufacturing, machine tool and robotics makers must develop and redesign their products to accommodate fast changes and smaller-run capability. The Amazon Effect is causing a revolution in thinking across the supply chain.
In addition, Amazon’s purchase of Whole Foods threatens to upend the grocery business in Canada and the US. This move may allow Wal-Mart and Amazon to distance themselves from other food and pharma retailers.
The Swift – Knight Merger
The $6 billion deal announced on April 10 will establish Knight-Swift Transportation as the largest truckload operator in the US, giving these top truckload companies tighter control over capacity and core lanes, according to industry analysts. The combined Knight-Swift Transportation has much greater density across common lanes; consolidated business from their largest shippers; access to a broader selection of drivers; and a portfolio that hits all the major sectors, from over-the-road to dedicated and refrigerated to intermodal and brokerage. With 23,000 trucks and 28,000 employees between the two, no other US truckload carrier commands close to the number of resources at Knight-Swift’s disposal.
The Digitization of Freight Transportation
Increased digitization is expected to bring efficiencies to the supply chain, and make booking and other tasks easier through greater transparency. It’s also expected to promote predictability and stability, less time-consuming paperwork, more accuracy, and a reduction in human involvement. The challenge is to integrate the chain of trucking events including planning, dispatching, booking, and brokering that comprise the transportation move, and make the process more efficient.
One facet of digitization of freight transportation is the so-called digital freight matching service, also known as the “uberization of freight.” In essence, this means that drivers can use a mobile app to match their available truck with a pending load. The driver gets an alert for a pick-up and can choose to accept the load if the price and timing are right.
There are two main markets that can be served in this model—long-haul trucking and last-mile deliveries. When you look at long haul, this market can be segmented into two distinct areas—committed and the spot market. However, the last-mile side has more opportunity for growth.
According to Chris Cunnane of the Arc Advisory Group, there are hundreds of millions of dollars pouring into the market, on both the long-haul and last-mile side. Uber and Amazon are both developing apps to become the “leader” of the digital freight matching space, since they have the capital and they have the contacts. Other key players include Fourkites, Cargomatic, Convoy and CargoX, among others. However, this is more on the long-haul side of the market. For last-mile, more than $500 million US of funding has been raised by start-ups, and this looks like the more viable option, with companies like Instacart and Deliv proving their business model.
To date, the impact of digital freight matching has been modest. Most of the players are small to mid-sized freight brokers with app and online interfaces. However, look for this business to grow in the years ahead.
The ELD Mandate
In 2012, the United States Congress enacted the “Moving Ahead for Progress in the 21st Century” bill, or, more commonly referred to as MAP-21. That bill included a provision requiring the FMCSA to develop a rule mandating the use of electronic logging devices (ELDs). An electronic logging device — or ELD — is used to electronically record a driver’s Record of Duty Status (RODS), which replaces the paper logbook some drivers currently use to record their compliance with Hours of Service (HOS) requirements.
Fleets have until December 2017 to implement certified ELDs to record HOS. Truckers already equipped with electronic logging technology will have until December 2019 to ensure compliance with the published specifications.
In today’s truck and fleet applications, ELDs installed in commercial motor vehicles can monitor and record a host of data about the vehicle and its driver that go beyond RODS — from Driver Vehicle Inspection Reports (DVIR) and IFTA automation to driver behavior reporting on speeding, idling, and hard braking. Many systems integrate map and route solutions as well, which can help drivers navigate around construction and avoid high-traffic areas. ELDs are designed to reduce driver paperwork, keep a dispatcher up-to-date on a driver’s status and reduce the hassle of keeping a paper log.
Of course, every new technology results in a set of consequences. One area of concern is drayage. The ELD mandate will compound current problems draymen have when searching for chassis or waiting at terminal gates. As a result, some drayage operators have referred to ELDs as “Extra Long Dray” by predicting worsening container congestion due to the larger-size ships arriving at major ports.
During a recent survey of a representative sample of truck fleets, Fleet Owner Magazine found that 53.5 percent of the fleets surveyed were fully compliant or in the process of implementing ELDs. At the beginning of August, with the mandate due to take effect in just a bit over four months, 46.5 percent of the fleets were not yet underway with implementation. Incredibly, 11 percent of the fleet operators surveyed said they weren’t even investigating how to comply with the mandate. Sixty percent of US-based fleets with under 100 trucks are not compliant. The likelihood is a good chunk of those fleets won’t be ready by Dec. 18 when the mandate takes effect. It’s not clear yet how stringent the enforcement regimen will be.
Climate Change brings Major Natural Disasters
This year three natural disasters hit mainland America and some of its territories (including Puerto Rico) in the Caribbean. The damage from Hurricanes Irma and Harvey alone are estimated in the range of $290 billion. Waves of disruption in rail and truck capacity extending outward from Texas, the Louisiana Gulf Coast and Florida are still having after effects in freight capacity and pricing.
The two storms on the mainland had multiple impacts. One thing that distinguishes Hurricane Harvey from Irma is the significance of Houston to the American economy. Houston is home to several industries including energy exploration and refineries. It’s a major hub for rail and marine freight. In trucking, it’s the No. 1 source of flatbed loads and one of the top five or six markets for van and refrigerated freight. Distribution centers near Houston serve at least six states.
After Harvey, some shippers began to supply markets ordinarily served by Houston from regional hubs in the Southeast, including Atlanta, Charlotte, and Memphis. Warehouses in the Midwest were called on to supply the Northeast in order to compensate for freight that otherwise would have come from Atlanta. Many of those warehouses had to supply Colorado and other out-of-the-way markets served by Houston.
It is interesting to note that on Aug. 30, the worst truck shortage was in Grand Rapids, Michigan. Trucks were diverted to deliver emergency relief to staging areas in markets like San Antonio and Dallas, leaving shippers in the Midwest scrambling to move seasonal freight, including apples and potatoes, as well as the usual consumer goods. The Chicago-to-Buffalo spot dry van rate increased by 82 cents to $3.30 per mile in the week after Hurricane Irma. Freight was diverted into atypical lanes and regions by the storms.
One of the key takeaways is that shippers must take truck capacity very seriously. Hurricanes and other natural disasters can strike at almost any time. With Syria signing the Climate Change pact created in Paris in 2016, America remains the only nation that is not a signatory to this landmark agreement designed to reduce carbon emissions.
Brick and Mortar Retailers Shrink as Ecommerce and Last Mile Delivery Come of Age
As e-commerce grows exponentially, taking larger and larger shares of markets — like household goods, cosmetics and personal care items, groceries, and furniture — it’s re-shaping how goods are packaged, shipped, and stored, forcing fleets to adapt quickly. Industry analyst Thom Albrecht predicted that traditional retail stores would continue to take a hit, with another 20% shuttering their doors in the next five to seven years. The lack of physical locations will only increase the number of goods being shipped directly to consumers. That increase in online shopping will also mean an increase in the cost of shipping, and consumers’ expectations.
TMW President David Wangler says he sees companies moving to regional warehousing models, instead of large centralized warehouses. In a hub-like model, Class 8 trucks would still haul goods to smaller, dispersed locations, storing the goods closer to consumers for ease of delivery in smaller timeframes. “You’re not delivering to a big box store or a grocery store. You’re delivering to the point of consumption. It doesn’t mean you get rid of the warehouse. It means that they’re configured differently and located in different places each time,” he said.
Of course, last mile delivery to residential customers is inefficient and more expensive than delivering to companies. Carriers are bringing single packages to low density areas, and often the resident isn’t home. Yet customers are demanding faster and cheaper deliveries. Last mile delivery is one of the most dynamic areas of freight transportation.
On the road to Autonomous Vehicles
There are approximately 3.5 million professional truck drivers in the United States, according to the American Trucking Association; there are an estimated 350,000 professional truck drivers in Canada (source: Toronto Globe & Mail). There are a host of initiatives taking place in North America and Europe to partially or fully replace truck drivers with a set of technologies that have come to be known as autonomous vehicles.
“Automated vehicles have the potential to save thousands of lives, driving the single biggest leap in road safety that our country has ever taken,” stated former U.S. Transportation Secretary Anthony Foxx. The cost of automated vehicle technology, which currently represents between $5,000 and $10,000 per vehicle, would be a sound investment for a new truck, which can cost $125,000-$150,000.
There is an emerging set of technologies and companies that are shaping this big change in trucking. They include:
• Retrofit Kits for Existing Fleets
• Autonomous Trucks
• Automated Last Mile Delivery Services
• Platooning and Guided Highways
Safety concerns, infrastructure and regulatory changes are among a range of hurdles to overcome but the technology is taking shape quickly.
The year ends with a series of questions. Will Canada, the United States and Mexico find a way to conclude a new NAFTA pact? With the ELD mandate date looming, what will the US regulators do with the non-ELD compliant trucking companies? Will ELD compliance drive carriers out of the market? Will shippers utilize the services of a non-complaint company? What impact will the restrictions on immigration have on manufacturing and business volumes? With the setbacks suffered by Republicans in the recent elections, will president Trump adjust some of his policies to maintain and grow his base of supporters? Will the House and Senate put a tax bill on the desk of president Trump before the end of the year? Will the strong economy continue or will US trade policies stunt its growth?
Happy Holidays and Best Wishes for 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. All posts by Dan Goodwill