DECISIONS 2002: Are you prepared for the challenges ahead?
November 1, 2001
ECONOMIC OUTLOOKToo many questions and no certain answers as carriers head into 2002 Motor carriers have come to rely greatly on transborder freight in recent years to grow their revenues and for good...
November 1, 2001
Julia Kuzeljevich & Lou Smyrlis
Too many questions and no certain answers as carriers head into 2002
Motor carriers have come to rely greatly on transborder freight in recent years to grow their revenues and for good reason. While domestic freight has been growing at a healthy 4.2 percent clip per year since 1989, internationally bound freight has been on a 12.4 percent tear in terms of annual growth. And whereas international freight accounted for 30 percent of total tonne-kilometres in 1989, it has now surpassed the 50 percent mark for carriers earning at least one million in annual revenues.
Unfortunately, this area of strength will likely be where the pain caused by a North American economy on a downward spiral will first be felt.
In September, the latest month for which tabulated results were available from Statistics Canada, merchandise exports fell a further 1.7 percent, hitting their lowest level in 19 months. And imports, key to securing backhaul, declined at almost three times that pace. Canadian companies exported just over $33.1 billion worth of merchandise in September, the lowest level since February 2000. Four of seven principal commodity groupings recorded declines. Imports dropped 4.6 percent to $28.4 billion; with all principal commodity groups reporting declines, except forestry products.
September’s numbers were weakened by a sharp decline in transborder activity shortly after September 11, but traffic patterns did climb to near normal activity by the month’s end. What the September data indicate is a continuation of the decline in transborder business established in previous months. Exports, which had been on a general decline since January’s record peak of $38.3 billion, have now fallen for six straight months to September. Imports, which declined for the third month in a row in September, fell in six of the first nine months of 2001.
Economic activity is not looking good for the last quarter either. Statistics Canada’s October Quarterly Business Conditions Survey, to which almost 4,000 manufacturers responded, showed that more than one-third (34 percent) of manufacturers expected to reduce output during the next three months, more than double the proportion from a year ago. About 58 percent of manufacturers reported their output would be about the same. Only eight percent of manufacturers remained positive about the prospects of increasing production for the coming quarter, the lowest level of positive responses since the survey began in 1981.
Producers in the transportation equipment and primary metals industries were the major contributors to these lowered expectations. Perhaps the best news is that some respondents said they were finding it extremely difficult to assess their economic prospects for the fourth quarter. Many specifically mentioned the uncertainty caused by the September 11 terrorist attacks, as well as the current economic slowdown.
The news is more worrisome on the other side of the border. US manufacturing activity shrank for the 15th straight month in October as the sector continued to bear the brunt of a slowdown in the world’s largest economy.
The National Association of Purchasing Management (NAPM) said its Purchasing Managers Index sank to 39.8 from 47.0 in September. A reading below 50 means activity is shrinking, while a reading above 50 means it’s expanding.
What will this mean in terms of freight volumes? Some carriers we’ve spoken to recently report they’ve seen little decline in their business. But the full impact on trucking may still be a few months off.
“Traditionally freight movements lag behind actual economic downturn by four to six months because orders have been placed and budgets have been committed to. The same lag occurs during an economic recovery. So I am not expecting a major drop for the fourth quarter,” advises George Kuhn, executive director of the Canadian International Freight Forwarders Association. ” But the new year may be a different story. I think we will see an additional decline in freight volumes of five to ten percent in the first two quarters of the new year and then an upswing.”
Up until the end of the second quarter, for-hire carriers were holding up remarkably well. In fact, second-quarter revenues posted by for-hire carriers earning at least one million annually were up 10.2 percent from the second quarter of 2000. And, despite a 9.6 percent increase in their costs compared to the same quarter the previous year, their operating ratio (operating expenses divided by operating revenues) had actually improved one point to 0.92.
Of course, that was before September 11. Expect a variety of carrier costs to rise, some sharply, as a result of September 11 and the obvious focus on increased security.
“To a large extent, the significant cost increases with the border crossing delays were absorbed by the trucking industry. Although delay times are back to normal, in most cases the carriers have to be prepared in the event of future delays. We will be collecting baseline information that will allow carriers to determine increases in border delays if they again occur,” says Dave Sirgey, president of the Freight Carriers Association of Canada.
The issues agenda will, no doubt, be dominated by concerns over border security and trade facilitation and this could constitute the single biggest threat to direct investment in Canada, according to David Bradley, CEO of the Canadian Trucking Alliance and president of the Ontario Trucking Association.
“The industry will need to prepare for less privacy, more data collection, and more electronic monitoring,” Bradley cautions.
HAZMAT transportation in particular will likely get a lot of scrutiny in the coming years, says Yossi Sheffi, professor/director, Massachusetts Institute of Technology and a panelist on a recently held forum of the future of North American transportation. He adds: “I think every truck/rail will see individual registration and tracking, like filing a flight plan.”
There is also real concern that focus on security will come at the expense of ease of trade.
“I’m kind of concerned about the burdens government is going to put on carriers, shippers and forwarders in terms of licensing agreements. Someone will have to pay for war, and transportation companies are easier targets than citizens are. What type of protectionism are we going to revert back to when we start trading again? Foreign governments love to tax non-local carriers,” says Jeff Kaufman, vice president, Merrill Lynch.
Then there’s insurance. The events of September 11 will cause additional insurance increases for motor carriers, some of who were already being hit with large cost increases, in certain cases as high as 50 percent.
“Insurers have sustained losses and I think they’d like to get them back. It’s kind of discriminatory pricing, like with fuel, and will affect the smaller carriers who may not get the bulk discounts,” says Kaufman.
Meanwhile, on the equipment side, the declining value of the Canadian dollar will cause many carriers to postpone or cancel purchases for the remainder of 2001, says the FCA’s Sirgey.
Should carriers expect help in the form of the ever-elusive rate increase? It depends who you talk to.
“Manufacturers are starting to dig down to figure out where else they can cut costs. That’s not good news for carriers,” is the ominous warning from Lisa MacGillivray, president of the Canadian Industrial Transportation Association, one of the largest shipper lobby groups in the country.
Carriers, of course, have been pushing for meaningful rate increases for years (for example, the Freight Carriers Association of Canada was calling for a freight rate increase of 5.5 percent, reflecting higher costs in labor, equipment and insurance, before September 11) but, according to Transport Canada figures, in real terms, trucking rates have been declining 1.1 percent per year since 1994. The plight of the transportation industry has received wide media coverage since September 11, however, and that may lead to greater willingness among shippers to accept rate i
“Carriers are already operating at historic margin lows. I see a rate increase coming,” says CIFFA’s Kuhn. I think that will be the first step toward sounder financial standing in the trucking industry.”
Rate increases are holding, for now, says Patrick Byrne, vice president, of management consulting firm AT Kearney.
“You’re seeing that rate increases are holding better than they have been in the past, and there has been the ability to pass on fuel surcharges. Companies have also been doing a good job at managing productivity costs, and they are astute about offering unique package services to customers to get higher prices for what they’re providing, which at the end of the day helps the shipper and probably results in overall cost reduction,” says Byrne.
What may help carriers’ cause is a predicted new round of consolidation in the North American trucking industry.
“There has obviously been consolidation on the LTL side, and tonnage is down while yields are up. But this tells a good story: you have fewer players, and a more sophisticated and rational marketplace. Bottom line, the LTLs are pretty well positioned coming out of the recession next year and I think will do quite well. The industry continues to be fragmented on the TL side, with fewer barriers of entry and more irrational pricing,” says Byrne.
“Trucking mergers will continue, some distress-driven, some opportunity-driven. A lot of carriers tell me it’s not getting worse, but again we’re in the peak season. When we get to first quarter 2001 we’ll see a true picture of what shape this economy is in,” says Kaufman from Merrill Lynch.
Effective use of technology will be key for carriers looking to avert or control the impact of the economic crisis.
“To develop differentiation in the marketplace, carriers should be providing an integrated suite of services, and deciding what areas to focus on geographically. Shippers are looking for real-time data, and for carriers who bring ideas to the company,” says Byrne.
What will drive the recovery, though, will be not just software, bus asset-based improvements such as GPS systems, engine and safety improvements. E-markets will also find an important niche, but security, dispute resolution and access issues weigh most heavily now.
Carriers must also consider service improvements and concentrate on niche markets.
“The service provided by carriers has improved over the last 10-15 years. It’s really been a real value. There’s more of a focus on global access when selecting a customer, there’s a trend toward supply chain integration and implementation, and supply chain integration facilitation,” says Byrne.
In a sense, the trucking industry is already in a good position to ride out the current crisis, says Sheffi.
“I see the percentage of traffic moving by truck going up, for several reasons: the level of service will continue to be important, and people will want to be more efficient. In addition, if you take the security point of view, truck transportation is actually a lot more secure because it doesn’t take a lot to shut down rail. By its ubiquitous nature, truck transportation is a lot less vulnerable,” he says.
Industry balance sheets are also healthier than they were during the last downturn, though trucking remains a highly leveraged industry, points out Bradley..
“The slowdown in activity is likely to constrain the long overdue shift to higher freight rates. Nevertheless, the economy will still require trucks. People need to eat. Automobile sales are being kick-started by ultra-low financing rates. While there is likely to be some upward pressure on fuel costs during the cold months, prices appear to have moderated compared to the last couple of years. World crude prices are significantly off their recent highs. Most pundits are forecasting a pick-up in activity in the second half of 2002. I am bullish in that regard as well,” he says.
He also remains optimistic on industry forecasts for 2002.
“It is important to keep some things in mind. The Canadian economy, while slowing, has been stronger than the US economy and has continued to generate freight. The underlying fundamentals in Canada are perhaps as good as they have ever been heading into a downturn – low inflation, small or no fiscal deficits, low interest rates. And, as one of my old economics professors used to say-never count out the US economy,” he says.”While your employees are your first line of defence, they’re also your biggest liability,” warns FMCSA’s Phillips. She advises managers to do thorough background checks keeping a watchful eye out for lengthy employment gaps, suspicious past employers and fake documentation.”(Maintaining) contact with drivers once a day is not sufficient anymore,” she stresses. She says there should be a code word in place that could be used by a driver in distress, should he find himself being hijacked.She suggests if fleets let their guard down, they become susceptible to one of the biggest threats existing today – identity theft. The FMCSA is fearful that terrorists will try to steal a truck and trailer from a well-known, large fleet and then use it to melt into the infrastructure.”They want to take a company name that’s well known, they want the vehicle then ‘BOOM,’ they’re gone,” says Phillips. “You know very well that if it’s your company’s truck and it explodes in a million pieces the only thing that’s going to survive that explosion is (your logo). There will be a little piece of metal with your company name on it on the front page of every newspaper.”With the US in a heightened state of security, HAZMAT drivers are also being asked to take special precautions to make sure they don’t find themselves in hot water. That means avoiding high profile areas (including tunnels and bridges whenever possible), sticking to dangerous goods routes and reporting breakdowns immediately.If fleet owners and managers think the suggestions are over the top, Phillips counters with the story of a trucker who was found to have lied to Customs agents about his citizenship. Upon inspection, they discovered the Jordan native had HAZMAT certifications from Montana and Florida, a pilot’s licence and illegally owned weapons. He was hauling dangerous goods to Miles City, Montana – the home of America’s biggest producer and stockpiler of black powder.”They’re in our backyard folks,” she warns. “Our gates, are open and we don’t have security cameras. They’ll come right up and shake your hand.”Getting a grip on the potential for change in JIT delivery strategiesBy Lou SmyrlisAre we witnessing the beginning of the end of Just-In-Time (JIT) delivery?The supply chain strategy designed to reduce inventory holding costs for the manufacturing sector has proved particularly beneficial for trucking, playing right into its superior on-time performance over competing modes.But since September 11, the effectiveness of a system based on keeping as little supply of material on hand as possible has come into serious question when the threat of future terrorist attacks could shut down supply lines for days or weeks.Many automotive plants and automotive parts suppliers, which generally keep on hand as little as a few hours worth of components, were forced to shut down when those components couldn’t be delivered following the road and border closures sparked by the recent terrorist attacks in the US. Electronics makers found themselves in the same predicament. The resulting losses are likely in the millions and manufacturers are asking themselves if the considerable savings offered by JIT delivery are worth risking the closure of an entire assembly line because a few parts can’t get through.Dennis Gaztman, a US-based market analyst who recently wrote a column about the death of JIT, said that although predicting the death of JIT delivery may have been overzealous, we are perhaps looking at “the good solid maiming of JIT.””No one will argue that we will go back to the inventory levels of the 70s. But the reliance of manufacturers on JIT has changed. The psychology of the game has changed. Any businessman is going t
o be saying I’m not feeling as comfortable as I was a few months ago so I want to have a little more inventory on hand,” Gaztman told fleet managers attending the recent Ontario Trucking Association annual convention in Toronto. Gaztman was part of a panel of experts debating the future of JIT at the convention.Lisa MacGillivray, president of the Canadian Industrial Transportation Association, one of the largest shipper organizations in the country says her members were already looking at JIT and starting to tweak it to avoid some of the obvious delays that were occurring in the system prior to September11.”We have been having trouble for quite some time, not only with the border situation but with such things as (independent trucker) blockades,” MacGillivray said. “The fact of the matter is that the infrastructure Canada has for facilitating trade was already becoming inadequate. What September 11 did was focus everyone’s attention on these inadequacies and the cost of having these inadequacies. The question my members are asking is what exactly do we mean by JIT and how just-in-time do we need to be? They could be looking at expanding somewhat some of their onsite inventory. They could be looking at different modal options, trying to combine trucks with rail a littlemore.””JIT is definitely a concept that is under construction and is being tweaked, with or without September 11,” she added.She didn’t get an argument from Allan Cocksedge, associate consultant with Global Public Affairs. “I don’t think September 11 changed all that much in terms of customs and trade. The delays were bad and getting worse. Business was complaining about costs being too high and trade was already being disrupted by slowdowns,” he told the fleet managers in attendance. To David Bradley, CEO of the Canadian Trucking Alliance and president of the Ontario Trucking Association, the real long term threat of not being able to solve our border delay issues is that US business will start to believe the border is going to impede supply and will turn to domestic suppliers in response.