Saturday, November 23, 2019

Where Did the Freight Go & When Will It Come Back? Part 1

" 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.

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