f e a t u r e s t o r y
Slower, But Steady
Asia’s problems may hurt U.S. trucking, but the wounds shouldn’t be deep.
Patricia McCullough
Senior EditorFinancial experts called it an “adjustment.” For months, many had been warning that the “Goldilocks” market was due to meet the bears. In August, Russia’s political and economic upheaval added fever to Asia’s economic flu, and the stock market took a dive.
But did it, or will it, affect trucking? “A lot of executives at publicly owned trucking companies just watched their retirement go into the bucket,” observed one industry watcher. Other than that, there was concern but not nail biting.
One reason is that most economists put some distance between Wall Street and Main Street. Most people who play the stock market these days typically aren’t hoping to win a new sofa or refrigerator. We’re there for the long term, looking mainly toward retirement.
Moreover, we believe the investment experts (these days, the ladies in our investment club) who advise us to stay on the roller coaster rather than jump.
Consumer spending, which fuels retailing and manufacturing, is primarily dependent on interest rates and job security. So far anyway, the news on both fronts is good.
The nation’s unemployment rate in August was among the lowest in 28 years. It rose some in early September but that was due mainly to the Northwest Airlines strike. Interest rates were equally encouraging, particularly when Federal Reserve Board Chairman Alan Greenspan indicated the board was ready to tweak them downward, if needed.
As for Asia and Russia, they’ll hurt but few economists expect the wounds to be deep.
Russia’s problems are troublesome from a political standpoint but “inconsequential” to the U.S. economy, said Adrian Dillon, Eaton Corp.’s executive vice president and chief financial planning officer.
At most, it’s a reminder that the worldwide financial system is vulnerable. “If good policies aren’t implemented, economies will unravel,” he explained. “Unfortunately, Russia is in the process of unraveling.”
Asia is more problematic. According to Lawrence Chimerine of the Economic Strategy Institute, U.S. exports in total account for 12% of our gross domestic product. Exports to the entire Asian region, including countries like Australia that aren’t part of the Asian economic crisis, account for about 25% of total exports or 3% of GDP.
His point: Even if all the Asian region stopped buying U.S. goods completely, it would take about 3% off our GDP. That’s about the rate at which we’ve been growing, which means the end of expansion but not a depression. Nobody expects that to happen.
As Dillon points out, certain sectors of our economy — like agriculture and construction machinery — are going to feel the pinch more than others, because a larger chunk of their businesses rely on Asian exports. But overall, Asia’s impact on the U.S. economy “isn’t’ that dramatic,” he said.TRADE IMBALANCE
There is, of course, the growing trade imbalance. Peter Toja, Economic Planning Assoc., sees it as a one-two punch.
First, a drop in exports to Asia cuts into U.S. industrial production. Second, the strong U.S. dollar makes Asian imports particularly attractive to U.S. buyers, which cuts into U.S. producers’ domestic market share.
“Both of these factors affect trucking, because you’re not only losing the movement of a final manufactured product, but materials, componentry and intermediate goods aren’t being moved through our system,” he said.
Moreover, a large percentage of imports enter this country in containers and move across it by rail.
“Trucking doesn’t even get the benefit of saying, ‘What I’m losing in domestic goods movements I can make up for on imports,’” he adds. “It’s not one-to-one.”
Dillon adds more numbers to that equation: A product manufactured domestically requires four to seven moves in the United States; an import requires only one to four moves here.
But truckers shouldn’t throw in the towel. Producers of toys, apparel and low-cost commodity products will be hit hardest by cheap Asian imports. But after years of offshore competition, that’s a relatively small portion of the U.S. industrial sector and the U.S. economy.
Meantime, lower prices for those products means increased buying power or disposable income of U.S. consumers. They buy more, which helps business. They save more, which helps keep interest rates low. Lower interest rates means more demand for housing and durable goods, which means more demand for freight hauling.
“I’m not saying that a trade imbalance is a good thing,” Dillon noted. “But I am saying that, on balance, it’s not nearly as harmful to the U.S. economy as those folks in the affected sectors would believe. It’s a manifestation of the strength of the U.S. economy and a reflection of the weakness of much of the international economies, but it’s got nothing to do with relative competitiveness.
“Once the rest of the world begins to get off its back and strengthen — and it will — what we’re going to see is a remarkable improvement in the trade balance. When that happens, trucking will yet again benefit.”CANADA AND LATIN AMERICA
One last shoe to drop in the Asian question is its effect on our two biggest trading areas, Canada and Latin America.
Canada and all major countries of Latin America rely heavily on commodity exports like oil, minerals, wheat. A sharp drop in world prices hurt them but, like here, it didn’t appear fatal. For the United States it would mean slowing trade, but not the end altogether.
“Back in 1994, when Mexicans were staying away from retail establishments in droves because they didn’t have the money, I was getting reports from colleagues there that Mexicans didn’t switch from U.S. to less expensive Mexican-made products, they just bought less of the U.S. products,” said Toja.
It’s heartening to remind ourselves that all these signs of cooling off came when the United States was one month away from the peacetime expansion record (91 months, 1982-90).
And the slowdown comes at a time when U.S. businesses have learned to avoid economic boombusters of the past, like inventory buildups and inflationary pricing.
The popular forecast, therefore, is slower growth, but growth nonetheless.
The sluggishness will last well into 1999, predicts Dillon. Then late next year or early 2000, as the rest of the world comes back, “we’ll regain momentum,” he said. And never mind the peacetime expansion record. Dillon expects us to break the wartime record — 106 months of unbroken growth set in the 1960s.COSTS: ZERO INFLATION
Even as business slows, truck operators should continue to enjoy cost breaks in at least two major areas: fuel and equipment.
In early September diesel prices had crept up some from their 10-year low in August. Some carriers were locking in prices against a possible winter price spike. But high inventories caused most analysts to speculate that only a long, arctic winter would significantly raise prices.
On the equipment side, low interest rates made financing cheap — especially for shoppers with good credit. And despite backlogs stretching into next year, new-truck sellers were willing to deal.
“If it’s somebody off the street who we’ve never seen before, they may not get a break,” confided one dealer. “But we’re struggling to take care of our loyal customers. We’re going back to the factory on almost every sale, and the manufacturer is usually willing to make some price adjustment.”
The high-ticket item, other than driver wages, may prove to be what’s commonly known as the Year 2000, or Y2K, problem.
The question: On 12:01 a.m. Jan. 1, 2000, what’s going to happen to all the computers that don’t recognize the year “00?”
Most large companies started tackling Y2K a few years ago and have made all, or most, of the necessary corrections. The worry now is smaller companies still sitting on old systems.
“From our standpoint we’ll be in 100% compliance for everything we can control,” said John Lanigan, president of Schneider National’s Transportation Sector. “The wild card now is everyone else who has an impact on us, whether it be truckstops, maintenance facilities, repair shops, you name it.”CONSOLIDATION: GROWTH BY ACQUISITION
All signs point to continued mergers and acquisitions for the next year or two.
Acquisition specialists Chapman and Assoc. give several reasons: low interest rates, trucking company owners who are ready for retirement and overnight expansion. Buyers of established motor carriers not only add customers, they get drivers and experienced management.
A slowing economy could make acquisitions even more attractive.
“There’re are a lot of carriers out there on the fence as to whether they’re going to move forward as independents, seek buyers or file bankruptcy,” explained Lanigan. “If we have any change in the cost situation or a slowdown in freight, you’ll see acquisitions and consolidation next year.”
TRUCKLOAD CARRIERS: GO WEST?
If you could choose one economic factor that most affects truckload freight, it’s industrial activity. For the past decade or more, U.S. industrial growth has outpaced overall economic growth; Dillon is confident that will continue for at least the next five years.
“Regardless of how well or ill the overall economy does, the industrial sector will benefit disproportionately,” he said. “And it’s industry that drives trucking.”
For the short term anyway, carriers were equally optimistic.
“All indications are that it’s going to be a very strong Christmas season and people are going to be buying,” said Lanigan.
The biggest rush was to the West Coast, where truck and rail carriers were amassing equipment to handle the flood of Asian imports.
Chemical haulers, like everyone else, were watching industrial production. Bulk haulers were watching the railroads: Last year’s service problems on the West Coast shifted some traditional rail freight to trucks, but, as Union Pacific patches its holes, they’ll likely get most of that business back.
Truckload’s No. 1 challenge: still drivers. Despite studies that indicate the problem is high turnover and not a shortage, truckload carriers do have a problem keeping enough drivers in the pool.
Longhaul trucking “is the training ground for the rest of the industry,” said SignPost Inc.’s Dave Carlson. “When drivers get tired of being away from home, they go looking for regional or short-haul jobs.”
Yet these days, pay is pretty good for trainees. According to SignPost’s quarterly National Survey of Driver Wages, 87% of van carriers now offer maximum starting pay from 26 to 33 cents a mile; 47% pay between 29 and 33 cents.
Two years ago, virtually no carrier started a driver at 34 cents a mile; now 7% of van carriers do. And two years ago one-fourth of carriers had a maximum starting pay of 25 cents a mile or less; now only 7% pay that low.
Trends for flatbed and refrigerated carriers are similar. Only about 14% of flatbed carriers offer maximum starting pay below 25 cents, vs. 35% two years ago. Some 14% of reefer fleets pay less than 25 cents, vs. 40% two years ago.
At the other end of the scale, 5% of reefer carriers now pay experienced starting drivers 34 cents or more; 16% of flatbed fleets do the same.
Companies that can hang on to good drivers do pay attention to more than just pay. “They don’t try to nickel and dime their drivers,” Carlson said. “Little things like a rider program are a big deal to some drivers.”
But the bottom line for retention still comes to the paycheck. “If you’ve got a good reputation among drivers you might be able to get by with 2 or 3 cents below the market,” he said. “But if you’re way under, you’re going to lose your better driver, no matter how good the rest of your package is.”
It doesn’t appear, however, that carriers have been able to pass along those higher pay costs with higher rates.
Despite robust freight activity over the past year, there is no real evidence of higher rates, said Carlson, publisher of Sign Post’s new North American Rate Index. “Shippers are under pressure to keep costs down, which keeps the cost pressure on carriers.”
LTL: ON TIME, EVERY TIME
It seems that even the threat of a strike can wreak havoc with some businesses. In early 1998, when unionized LTL carriers were getting ready to negotiate with the Teamsters, some customers shifted business to nonunion carriers rather than risk having it marooned by a driver walkout. A new five-year contract stabilizes the labor situation, but the carriers are having a tough tough time getting all of those customers back.
Yet those who are snapping up the business insist it isn’t because they’re union-free.
“Our market share growth is not due to the fact that we’re union-free. It’s due to quality and consistency,” stated Brian Milican, executive vice president, Con-Way Transportation.
Con-Way, which earlier this year began offering nationwide service through its three regional LTL operations, is banking on speed and, most important, reliability.
“If we say ‘next day’ it will be there the next day, not “maybe next day,” he explained. “People can live with ‘fourth day,’ they can’t live with ‘some days three days, some days five.’”
Unlike truckload carriers, the LTL segment has seen some rate increases over the years — including an estimated 5% raise in 1997. A few have announced rate hikes this year in the 5% to 6% range, but many are reportedly waiting for the new year — and a better read on the economy.
Cass Vice President Robert Delaney estimated a 5% to 6% increase in the spot market, 3% for contracts, but only if the economy doesn’t slow.
Those carriers nimble enough to stay one step ahead of customer demands may be able to earn a premium, or at least hold off cost-cutting competitors. “If you give customers a definite schedule, they’ll never leave you,” said Milican. But if shipping declines, any rate increase will likely be bargained away.
INDEPENDENTS: STRONG DEMAND
Continued consolidation may mean that the big will get bigger, but the little guy is still going to be popular.
“Wall Street has been rewarding people who don’t invest in the business,” said Carlson. “They like the financial returns of using somebody else’s assets.”Using more owner-operators may also be a way to hang on to veteran drivers. For many, said Carlson, buying their own truck is kind of a graduation. “They like the independence. They also like the earnings. Particularly now with low fuel prices, low interest rates and low equipment costs, some are netting $58,000 a year.”
The bulk of any “raises” for owner-operators have come with lower costs and carriers that are willing to pick up more fees, like plates and permits. Group rates for insurance helps. So do fleet programs that pass along volume fuel and maintenance discounts.
Carlson thinks we’ll also see more fleet sponsored truck purchase programs, “but they’ll have to have a better reputation,” he adds.
Carriers who don’t play fair with owner-operators are now more likely than ever to find themselves in court.
The Owner-Operator Independent Drivers Assn. has pending lawsuits challenging everything from carrier markups on insurance to overcharges for fuel taxes, kidnapped escrow funds and mystery withholdings.
A key issue is whether or not independent operators can go to court to enforce regulations, explained OOIDA Executive Vice President Todd Spencer.
Prior to the 1995 Interstate Commerce Commission Termination Act, carrier leases with owner-operators were covered by regulation. That meant the ICC was responsible for enforcement, but lack of budget and staff meant few complaints were even investigated.
“For years, when the administrative agencies would not address issues or enforce regulations, the carriers were perfectly content to say ‘if you don’t like it, sue me,’” said Spencer. The ICC Termination Act, contends OOIDA, gives individuals that right.
PRIVATE CARRIERS: RETHINKING OUTSOURCING
Despite all the outsourcing talk, there are still plenty of private fleets on the road.
“Very few companies want to be in the transportation business, and most would like an excuse to get out of it; but there are a couple of things preventing them from doing so,” said Ed Day, a Nashville-based fleet management and logistics consultant.
One is that transportation service providers often can’t show any cost savings. Sales pitches that emphasize fewer headaches are “probably right,” he said. “But until they can demonstrate that the customer can really gain efficiencies in dollars, they will have a tough sell.”The other drawback is the realization that customer service is a bigger issue than anticipated. When outside parties insert themselves between a company and its customers, it can create problems.
“The internal staff has a history with the customer,” Day explained. “They know the customer’s idiosyncrasies ... what’s important, what can slide a little in a pinch. Unless the third-party provider hires the company’s own staff (sometimes just outsourced and usually unhappy), it can be kind of a blind date from the customer’s perspective.”
Day believes that, because of those service concerns, companies that do outsource trucking will most likely choose dedicated vs. common carriage. “It’s a way to eliminate the transportation department, and with today’s competition it’s becoming less expensive,” he said. “A lot more people in the business brings prices down.”
Bill Ford, president of the National Truck Leasing System (NationaLease), believes many companies will choose some form of leasing — full-service or an unbundled finance and maintenance package — over dedicated carriage.
“Companies that are sales-driven are going to find that dedicated does save them money, but it doesn’t give the level of customer service they have under a full-service lease,” he said. “You have to give up something for the savings.”
LEASE/RENTAL: MATURE MARKET
“Wonderful,” said Ford of the lease/rental business. Most of the big, national leasing companies reported record or near record sales. Regional companies and particularly some of the small, local lessors were having a tough time keeping up with demand.
The problem: long waits for new trucks. As Ford explained, the big lessors were able to place big orders up front, thus guaranteeing regular deliveries. Smaller companies, with less capital to spare, order trucks after they get a contract — thus most found themselves, and their customers, at the end of the line for equipment.
Competitionwise, it seems local and regional independent lessors are slugging it out with truck dealers — for full-service packages and contract maintenance. Net effect: low prices and slim margins.
Day sees an even tougher road ahead. “It’s a mature industry, and there aren’t a lot of big scores left out there,” he said, predicting growth for the majors will come with continued acquisitions.Dedicated carriage and third-party logistics services are still viable growth options, though competition and customer demands are making that a tough market.
Many lessors and leasing organizations have turned to Mexico for more business. “There’s lots of potential,” confided one, “but also lots of legal, financial and operational problems to overcome.”
The good news: Leasing’s “mature” market is still a big one (some 40% of all new trucks go into lease/rental service) and the basics still apply.
“People want to put capital into assets that grow in value, not assets that decline in value,” noted Mike Payne, president and CEO, Truck Renting and Leasing Assn. If capital gets tight, then lease/rental should benefit.
Meantime, truck leasing has taken on a big issue: a new wave of “business” taxes on truckers.
In Massachusetts and Illinois, TRALA has challenged corporate income taxes charged to leasing companies simply on the basis of truck travel in the state. They don’t have any employees in the state. They don’t have any facilities in the state. But if one of their trucks comes through, they’re taxed for “doing business” in the state, explained Payne.
“This is going to lead to a whole new theory of taxation that we believe is totally unacceptable,” he said, “not just for leasing but for our customers and anyone else using the highways.”
CONSTRUCTION: HIGHWAYS & HOUSES
The Transportation Equity Act for the 21st Century, signed into law last summer, authorizes some $36 billion a year for highway and transit spending through 2003. That should boost business for companies and carriers involved in highway construction.
Commercial building had slacked off by midyear. New-home sales may be cooling after June and July records, but mortgage rates, which hit a 30-year low in September, should keep buyers interested.
And people who don’t build may instead remodel, which means continued strong demand for building materials and appliances.
AGRICULTURE: SHIFTING TRADE
Since Congress did away with government subsidies and supply controls, production volumes and crop mixes have changed. Examples: Arkansas is growing less cotton but more corn; wheat has dropped to less than half of Kansas’ crop acreage, edged out by corn, sorghum and oilseed. That means different harvesting (and shipping) periods, also different shipping destinations.
And in the last few years, exports have grown significantly — including higher overseas demand for processed and high-value products that typically move domestically by truck. According to the U.S. Agriculture Department, U.S. meat and poultry exports have gone from 1% to 2% of production in the 1980s to 6% to 8% now.
Asia is a key market for farm exports and, obviously, will be down significantly this year. But surging agricultural trade with Latin America is expected to make up some of the loss — and see more agricultural shipments headed south.
HOUSEHOLD GOODS: MOVES WITH THE ECONOMY
The household goods moving business pretty much follows the economic ups and downs, and for the last couple of summers, business has been very good, said Joe Harrison, president of the American Movers Conference.
If the real estate and job markets remain strong, people should continue to move.
One concern: Instead of working directly with movers, some companies are contracting with third-party relocation specialists who then farm out the work to movers. That means another layer of service providers to share already slim profits.
Another: finding and keeping owner-operators. With more freight carriers courting independents, movers are finding it harder to lure good truckers — especially the kind who can be trusted with Grandma’s china.
“We ask a lot more of owner-operators than freight haulers,” Harrison points out. “Their drivers just have to get the load from point A to point B. Ours have to know how to pack it and load it. And they have to be goodwill ambassadors for their companies and their industry.”
INTERMODAL: BACK ON TRACK
Since a year ago, when Union Pacific’s West Coast service problems snarled much of the Christmas freight, shippers have been wary of intermodal but are not staying away.
Data through August showed only a scant 0.8% increase in intermodal traffic — still better than some of the negative numbers reported early in the year.
But the numbers were deceiving, said Economic Planning Associates, Toja. “When you take UP out of the numbers, intermodal traffic among other Class I railroads is up about 7% this year.”
Data compiled by the Intermodal Assn. of North America continues to show that intermodal marketers are booking more highway truckload freight. That may just be a function of the economy — more freight overall, which means more calls for trucks. But as one confided, some customers were somewhat reluctant to trust their merchandise to the trains.
Yet trucking companies that use intermodal didn’t seem the least bit nervous. Schneider, said Lanigan, is pulling out all stops to make sure it can adequately serve customers bringing goods through the West Coast, and that means putting some shipments on trains.
“We have no qualms about moving additional freight intermodal,” he said.
THIRD PARTY LOGISTICS: THE BLOOM OFF THE ROSE
It’s apparently tough to make a buck in the 3PL business these days. Many early deals reportedly were made at bargain rates by 3PL providers eager to get high-profile business. Those customers aren’t now receptive to price hikes.
At the same time, customers want more. Large U.S. manufacturers want international service. Sophisticated information systems are necessary just to stay in the game.
That pretty much leaves the big accounts for big logistics providers, but consultant Day thinks there’s still room for the little guys.
Smaller manufacturers “are often hard-pressed and would love to squeeze out some transportation overhead,” he said. “Additionally, their current costs are often high because they don’t have the size [and can’t afford the expertise] needed to be demanding.”
The downside is that customer service may even be more critical than for large manufacturers. “They often have a handful of very important customers that they take extremely good care of,” he said. n