Saturday, November 30, 2019
So back to the questions: Where did the freight go and when will it come back?
Where did it go? First of all, 2017-2018 was a perfect storm of goodness for carriers. Demand driven by low interest rates, tax cuts, affordable energy and new purchasing power from millennials who finally started experiencing enough career advancement to move forward with household formation. Take away the freight bubble of this short period and 2019 doesn’t look much different than other dips we’ve experienced. Secondly, e-commerce is driving freight into different channels with different providers, disrupting truckload and LTL carriers. Third, we’ve been in a long-running consumer driven recovery for almost a decade. Fatigue is setting in. People can only buy so much stuff for so long. Fourth, the pain of 2019 was exacerbated by the carrier response to “the boom”. Driver pay was increased dramatically. The driver quality and productivity did not increase. Carriers are stuck with the new higher pay levels. Fifth, a lot of one-way TL freight has shifted to dedicated fleets or private fleets.
When will it come back? First quick answer, not in 2020. It’s not going to get worse, but it’s not going to get better. We may get a bump IF the tariff war gets settled (and I think it will). So when will it come back to last, at least for a year or two? Best case 2021. Regardless of who wins the election. It will get better. Why? First, capacity is going to get very tight. Insurance costs alone will drive a number of carriers out of business. Secondly, we still have a few good years of consumer driven economic activity as the millennials play catch up on household formation. Third, by 2021 we will certainly be past the tariff war issue and goods will be flowing. In addition we’ll see more near-shoring with production moving to Mexico and even some into the States. Fourth, I think we finally start to get some real movement on infrastructure which will create more freight opportunities.
I did say that things will get better regardless of who wins the election. But let’s be clear. If we end up with a Democrat in the White House, especially a far left Democrat; the recovery will not be as robust. And I think it is likely that we will end up with a Democrat. However, even if they run on a far-left agenda, history says they will move toward the middle. So will the freight come back in 2021? Probably. Will it be like 2017-18? Not even close.
Friday, November 29, 2019
"Wealth is the product of man's capacity to think."- Ayn Rand
In Part 1, we looked at the current state of the industry and then asked what will this all look like in five, ten or fifty years. What’s the big picture telling us?
I would suggest that these are some of the most important issues to consider : Technological Advancements, The Environmental Movement, Demographics, Sociopolitical Factors.
The Digital Revolution will lead to more Automation, Optimization and Innovation.
Automation has already transformed distribution inside the four walls. We’ll continue to see advances in this regard which makes large scale order fulfillment extremely affordable. This type of massive distribution capability close to the customer will be THE BIG thing going forward. As more of our population clusters in metro areas it makes this model even more attractive to both companies and consumers. Small package and final mile or last five mile delivery will grow. This will be a business where volume and density are required to achieve required service levels and lowest costs. Fed Ex, UPS, maybe Amazon and one or two others yet to emerge will be the winners. I hold little hope for the USPS.
The optimization of transportation networks has much further to go. You can only optimize what you know and what you can control. As we employ more advanced technology in the tracking of cargo, assets and people; networks will achieve greater efficiency. Empty miles, wasted space and lost time will be steadily reduced over the next half-century.
While I don’t think we’ll see a lot of driver-less trucks on the highway anytime soon, I do see technology continuing to have a huge impact on transportation. Self-driving trucks with an “attending driver” in the seat for over-the-road trips is coming soon. These “attending drivers” could be third-parties who operate in a relay network and are contracted to “drive” for any number of eligible carriers. More experienced drivers, who are employed by the carrier, will handle pick-ups and deliveries as well as travel through certain highly congested areas or under extreme weather conditions.
And the highways will become less congested. Not in the next ten years, perhaps not in the next 20 years. But by 2070, absolutely. More lanes will be constructed, no question. But, the big impact will be fewer vehicles on the highways. The development of mass transit alternatives, expanding ride-share networks, the increase in telecommuting, the evolution of 3D print production and biotech advancements which will allow us to produce more food near highly populated areas will combine to reduce the overall level of transport activity.
Environmental activism is not going away. Regardless of what you think about climate change, this is a movement that has taken hold around the world and is growing in the United States. This has huge implications for transportation companies. As mentioned above, the movement toward food production nearer to consumers is certainly driven by environmental activism and will create new logistics opportunities while putting some companies out of business. It’s a game changer.
Of greater concern is the overall economic impact of the Green Movement. While I do not see the world completely caving into climate change activists, I do think there is already a shift toward more “sustainable” lifestyles and renewable energy alternatives. But it cost money to “save the planet” and to the degree this leads to higher taxes, higher energy costs, fewer cars, smaller homes with smaller closets and an overall reduction in consumption; the demand for transportation and logistics services will decline.
No one really knows what a Green New Deal will end up looking like, but that there will be one of some sort is inevitable. And that its impact on transportation and logistics companies will be unfavorable is almost certain.
News flash: The World is NOT going to become over-crowded. Global population predictions continue to be revised downward. The world's population may well peak within the next 30-50 years and then start to decline. Some regions will be in worse shape than others as populations decline and age out. Consumption is driven by youth and household formation. Investment and production by middle-age wealth-creators. Old people cash out, live off savings and die. If the United States is smart, it will push for more immigration, not less. We are still the number one destination for people seeking a better life. And we need them because we are not reproducing at rates to sustain, much less grow our population.
Population growth is certainly a wild-card factor. But anyone who thinks that the world’s demographic profile will not change dramatically between now and 2070 is just not paying attention. And where people live, how they live and how they work will create the need for totally new and different supply chains.
This gets very complicated because almost everything has a social or political component. But for the sake of simplicity, just consider where the United States is likely headed over the next 50 years with regard to Health, Education and Welfare. Raise your hand if you think “we the people” can avoid increased subsidization of health, education and welfare. Perhaps “investment” is a better word than subsidization. Call it what you will, but a higher percentage of GDP will be spent on goods and services related to these three areas. It’s unavoidable. Unless we find a low cost magic pill that cures most illness and disease, the costs for healthcare will continue to rise, especially with an aging population. We are already at the tipping point when it comes to education and training. There is no choice other than to provide better and more affordable education and job training in order to have a workforce that can just keep the lights on and the water flowing. And, the welfare safety net will only get larger. Whether it’s outright transfer payments or some other form of subsidy or tax credits, we will be faced with an increasing percentage of the population that is unable or unwilling to generate the economic value that would compensate well enough for them to maintain an acceptable standard of living.
This will likely result in higher taxes in the more advanced economies that have some semblance of a social conscience and the flight of capital to those countries that are less concerned about such things or whose poor have lower expectations. Combine this with flat or declining populations in many of the more advanced economies and you have low growth or no growth GDP’s in those places where supply chains are the most developed. Only the best and most efficient service providers can survive under such conditions.
Am I painting a grim picture of the future or simply a reflection of the past into the future? I think more so the latter. This is how civilization has lurched forward for centuries. Two steps forward, one step back. Nations rise, nations fall. Industries are created, flourish, plateau and fade away. Whatever your enterprise or endeavor you must adjust, adapt and overcome….or face extinction.
So you PLAN and work with what you know. That would be the now and the near-term. But you PREPARE for the future...even if you’re not planning to be around.
I'll wrap this up in Part 3 with answers to the questions: Where did the freight go? When will it come back?
Saturday, November 23, 2019
"Amazon.com strives to be the e-commerce destination where consumers can find and discover anything they want to buy online." - Jeff Bezos
As a headhunter working in transportation and logistics, I have the opportunity to talk to a lot of people. I also follow economic and industry reports. Mostly I follow them to confirm what I already know is going on. I am seldom surprised by the direction of things.
I usually get a sense of where things are headed BEFORE the results are reported. We started hearing of softness in certain markets in Q3 2018. This was largely masked by surges as imports were pushed in ahead of the tariffs and carriers were still riding high on the rate increases they had gained earlier in the year. But the cracks were starting to appear and by Q1 of this year, everything had changed. Rates came down and trucks were sitting without freight.
So what happened? Sure Trump's tariff war has had a negative impact. Increased capacity in certain markets is also a factor, although I think it’s been overblown. I’m not sure that we really know how many manned working trucks are actually out there competing for freight. We still have a very low unemployment rate in this country and I just don’t think there have been that many more WORKING drivers added to the system. But, I’ll grant that in certain sectors, incremental capacity has been added and it doesn’t take much to swing the supply/demand balance in some regions. Weather, cold and wet weather, earlier in the year hurt some sectors as well.
The global economy isn’t great and that’s had an impact on freight. Oil and gas activity has slowed down which in effect pushes some of that capacity into other sectors. Chemical demand is a major leading indicator and it started trending down last year and the impact has been felt in the freight markets. Automotive is down and construction has been flat at best.
And then there is e-commerce. The surge in e-commerce has been a major disruption to TL and LTL markets. Products are getting to consumers much differently than they did just a few years ago. Trucks are still involved, but in different ways. Low interest rates have made inventory carrying cost less of a factor. More product is now moved to forward warehouses, often with schedules that are not as service sensitive as they were back in the day when truck networks were created to be an extension of the production line direct to the store shelf or other end user. The value of that sort of highway transportation has diminished as well as the demand for it.
And this really gets to the question of long-term trends vs. short-term trends. We all tend to manage in the now. We compare our results to last quarter or the same quarter last year. When things are good we think it will last longer than it ever does. And when things are bad we react, sometimes sensibly and strategically if we can afford to and sometimes aggressively and tactically if we are forced to. And that may mean cutting costs and people in order to live to fight another day. Painful but inevitable.
So we ride this roller-coaster of good times and bad times often missing the bigger picture. What are the next five or ten or fifty years likely to look like? First of all, I remain bullish on America. We have our problems, but we still have the best thing going. Given the level of foreign investment in U.S. assets, I’d say the rest of the world agrees. So we’re going to be ok. But, transportation and logistics are going to change dramatically.
In Part 2, we’ll take a look at the major factors which are driving us toward much different ways of transporting people and products.
Saturday, November 9, 2019
When God kicked Adam and Eve out of The Garden he spoke to Adam saying:
“By the sweat of your brow you will eat your food until you return to the ground, since from it you were taken, for dust you are and to dust you will return.”- Gen 3:19
God also told Adam that the ground was cursed because of his disobedience and his life would be one of painful toil and sorrow.
Whether it all happened exactly as reported in Genesis is debatable, but I am inclined to agree with the message. Life is hard. One is born and has a brief childhood that prepares or scars them for what comes next. Then one works during the best years of their life and sometimes beyond. Then one dies. Gee thanks Adam and Eve.
Somewhere along the way from leaving The Garden to living in gated communities, a few of our ancestors figured out that eating your food by the sweat of someone else’s brow might be a better strategy. If you could find a way to leverage the labor of others you might just sweat less, have plenty to eat and live in a nicer neighborhood.
At first we leveraged the labor of others by violence and the power to rule that it brings. Religion was also used to make others work harder. For most of human history Kings and Queens, divine monarchs chosen by God himself, called the shots. Slowly, beginning most notably in 1215 with the Magna Carta, the divine right of monarchs to rule without regard to human rights was challenged. And life got better for a few more people.
New technology gave us the ability to publish books affordably and in large quantities. More people started to read and to think. Vast wealth brought us the Renaissance Period. And with it came decades of what amounted to public works projects and a redistribution of wealth via job creation. It also created some financial hardships on the Church which led to some creative fund-raising ideas which ultimately triggered the Protestant Reformation. Wars were fought over it and a lot of people were forced to relocate because their side lost. New lands had been discovered and some people went there. And life got better for a few more people.
The Age of Enlightenment shifted our attention from the pursuit of beauty and worship through the arts and architecture to the pursuit of knowledge, freedom and happiness. Revolutions and wars created free republics as well as dictatorships. A lot of blood was shed, but life got better for a few more people.
Then along came the Industrial Revolution. While we hear grim stories regarding the lives of the working poor in the 19th century, for most it was an upgrade to the misery of living “off the land” in places where those who owned the land (the capitalists) leveraged the labor of others to their advantage. And life got better for a few more people.
The Industrial Revolution created more assets that could be used to perform economically useful work. The assets (capital) certainly made labor more productive and prosperous. But those who owned the capital assets benefited the most from the increased production. Marx and Engels realized early on that, in an industrialized free market, labor could not win the battle versus capital. Perhaps guilds and labor unions could balance the scales a bit. But, in the long run they theorized that the capitalist economic model would self-destruct. Some form of communism would evolve where “the people” (or “the state”) would own the assets (capital) and we would all live happily ever after. Now as we look back over the past 100 years, communism has clearly failed and failed on a massive scale killing more people than any other “movement” or ideology in human history.
But, free market capitalism has its own problems. The Industrial Age of mechanical and analog technology has given way to new digital technology and we now live in the Age of Information. This has multiplied the productive capacity of labor and even made some jobs obsolete. Much of the “manual” work that must still be done has migrated to lower cost labor elsewhere in the world. What remains for those left behind rarely pays enough to live without some sort of subsidization. The higher value work that has developed in advanced economies requires skills, education and abilities which are in short supply. Those who can do this work are well compensated. But those who own the assets, the capitalists, do even better. In a world where capital may be employed more productively than ever is it any wonder that the rich are getting richer?
Thus, the gap between those who “have” and those who have been left behind continues to grow. The big question is what happens when too many people have been left behind? For one thing, you have social unrest. We see it now on both the Left and the Right. People who have been left behind and see no way to get ahead.
The second thing that happens, and this is the game-changer, is the erosion of the customer base that was buying the goods and services which made the Capitalists so wealthy in the first place. I am guessing the smartest and the richest people at the top of the pyramid have already figured this out. It’s why the Warren Buffets and the Bill Gates of the world lean to the left. Higher taxes and government transfer payments, investment in training, education and work force development. More affordable healthcare. In effect, redistribution of wealth. How else will those left behind be able to buy the stuff the capitalists have for sell? When it comes down to it…our future is not going to be determined by Republicans or Democrats…left or right. It’s going to be about doing whatever is necessary to keep the doors open for business. And that means having fewer of those left behind.