The US financial system is in crisis; there is no doubt about that. The world is watching and hoping that the hotly-contested government rescue package will help stabilize things, but the job of getti...
The US financial system is in crisis; there is no doubt about that. The world is watching and hoping that the hotly-contested government rescue package will help stabilize things, but the job of getting things back on track will be a long and painful process.
While the rescue package might fend off a credit freeze, credit will remain tight in the US; recovery in the US housing sector is a long way off; the risk of stagflation has reared its ugly head; US consumers remain over-extended; and the US government’s fiscal situation is a mess with the national debt growing into the stratosphere.
The financial crisis is not just a US problem. Just look at the bail-outs of major financial institutions that have taken place in Europe. As for Canada, the governor of the Bank of Canada recently stressed that Canadian financial institutions “are in considerably better shape than their international peers,” which has allowed credit growth to remain relatively strong in Canada.
He’s right about that, and that should be of some comfort to Canadian carriers and shippers. Canada’s fiscal situation has also been very positive up until now.
But clearly, Canada will not be immune. No country on the planet is as vulnerable to the economic situation of one trading partner as Canada is to the United States. So, a slowdown
in US economic activity and therefore US demand for Canadian exports, will have implications for Canada’s exporters and the people who move that trade.
Motor carriers realize that the same economic forces that are impacting them are being visited upon their customers. Trucking is a derived demand industry, so as the economy goes, so goes trucking. More than ever in these difficult times, cash is king – for everyone.
Unfortunately, one strategy that some shippers have chosen to use in response to this is to drag out the amount of time before they will pay their freight bills. That sort of short-term thinking could back-fire on shippers.
The trucking industry is already in a cash crunch and credit has been shrinking. Most carriers’ fuel bills now have to be paid within seven days; employees need to be paid on time; and they need to be able to make payments on their equipment. Trucking capacity has already started to adjust to conditions in the freight market. By not paying carriers within reasonable timeframes, shippers are creating the conditions for a long-term capacity shortage.
Cash-strapped motor carriers, who have already seen margins squeezed and their creditors tighten the screws, could be in for a rough ride. Carriers whose balance sheets are already in need of repair will be particularly vulnerable.
Bankruptcies in the trucking industry have already been increasing significantly. Between 2006 and 2007, trucking bankruptcies in Canada increased 7.3%. Over the same period, bankruptcies in the Ontario trucking industry skyrocketed by almost 19%. In the first-half of 2008, total Canadian trucking bankruptcies already surpassed the total for all of 2007.
Many carriers have delayed investment in new equipment for the last year or more. But, ultimately, to provide the best possible service at the best price, carriers need to buy trucks and trailers. Where will the capital come from? Credit might be more available in Canada than in the US, but at what cost? Trucking is already under-capitalized.
The next 12 months or more promise to be as challenging as ever for Canadian businesses from all economic sectors. And, all economic sectors will need to work together to weather this storm. Carriers understand the challenges that their customers are confronting and want to build long-term relationships. They are only asking for the same understanding from their customers. Shippers should be looking to lock-in capacity for the long-term.
-David Bradley is president of the OTA and CEO of the Canadian Trucking Alliance.