Currently many Canadians and Americans are worried about job security and the declining values of their homes and investments. The governments of the United States and Canada are crafting their economic stimulus packages to survive the economic downturn. The rationale for these packages is that only governments have the resources to inject billions of dollars into the economy and create jobs on a large scale. The theory goes that these newly employed or reemployed people will begin purchasing goods and services. In so doing, they will inject some much needed cash and confidence into the economy and encourage the rest of the population to spend money.

For many transportation companies, their survival in 2009 may rely on how well they match their business plans to the opportunities created by the injection of government funds. Here is why.

The Decline in Jobs in Manufacturing

Over the past 10 years, the number of manufacturing jobs in the United States has declined from 17 million in 1997 to 13 million today. Big gains in productivity allow fewer workers to do more with less. In addition, U.S. Imports have risen from 9% of GDP to 19%. One of the big unanswered questions is whether President Elect Obama’s stimulus package will create jobs in the United States or in China, Mexico or India. The answer to this question has huge implications for the economy and for the transportation industry.

The financial crisis was caused, in part, by U.S. consumers borrowing trillions of dollars from the rest of the world to buy imported cars, clothing and gasoline. As long as the United States is running a big trade deficit and borrowing from abroad, a fundamental cause of the crisis remains.

A “Network Shift” has Lengthened Supply Chains

As a result of the movement of manufacturing jobs offshore, this has resulted in a “network shift,” as outlined in a recent article in American Shipper by the Mega Global Forecasting Team. Supply chains have been redesigned to address the global repositioning that has taken in the sourcing of products. Before Network Shift, goods were manufactured, for example, in the U.S. Midwest and moved via truck to warehouses and distributors in the northeast, where they were stored awaiting separate shipment to retail locations. After network shift, the goods were manufactured in China and shipped to a Southern California container port where they were drayed to a deconsolidation facility. There the freight was reconfigured, loaded on a 53 foot intermodal container and shipped to the mid west. From there it was reconfigured and shipped to a retail location. Canada has followed a similar pattern. Some manufacturing work previously performed in Ontario and Quebec is now being done in China. The manufactured products are shipped via the port of Vancouver where they are placed on intermodal units and transported to Central Canada..

These developments have resulted in longer lengths of haul and higher safety stocks to buffer unexpected disruptions. They have also resulted in port issues and concerns about the shrinking pool of long haul drivers. Up unto a few months ago, the high cost of fuel, long lead times and the low American dollar were causing many companies to rethink their supply chains and consider “near-shoring” (manufacturing in North America) as an option.

The Economic Stimulus Package / Keeping Jobs in North America

Now, as unemployment rises and the economy weakens, the U.S. and Canadian governments must carefully consider how to keep jobs in North America to ensure the recovery is sustainable. If the jobs “leak” overseas, this will continue the decline in U.S. and Canadian based manufacturing jobs and maintain the trend of longer supply chains and longer lengths of haul. If President Elect Obama is successful in keeping jobs in America, this will shorten supply chains and encourage more regional transportation.

One of the keys to success for transport companies in North America will be making the right calls on what the Mega Global folks called “spatial strategies,” identifying and concentrating on markets where they have a competitive advantage. Longer lengths of haul make it increasingly difficult for any player to be best in class along the entire supply chain from shipper to consignee. They make it more difficult to be a “one stop shop,” trying to be all things to all people. The successful companies, in their view, will pursue effective “spatial strategies,” that respond to a changing demand picture by selecting the industries, the right geographic markets and the right types of freight so they can achieve scale economics and sustain competitive advantage against existing competitors and new entrants. To be successful, carriers must focus on market segments where they are in the best position to maximize profitability.

The Winners and Losers from Obamanomics

The winners will be those industries where the economic stimulus will create jobs and support the key objectives outlined by the President-elect in his election campaign. They would appear to be:

Energy

The entire U.S. energy system needs an overhaul to reduce America’s dependence on foreign oil and to begin the transition to a low-carbon-emission economy to curb rapidly accelerating climate change. This could include mass-market battery-powered cars (hybrid or plug-in)that achieve at least 100 mpg of gasoline on new fleets by the year 2015, an efficient power grid that can carry renewable energy - - solar from the Mojave Desert and wind from the Great Plains - - to population centres across the United States. There is also the need for investments in the utility industry that can reduce 80% of emissions per kilowatt on newly built power plants by 2016, either through non-carbon sources (wind, solar, nuclear) or by capturing and disposing of the carbon dioxide.

But not all energy sources will be winners. Obama campaigned against “dirty fuels” so this may impact the investment in coal until there is a clean coal technology. The decline in the price of crude oil has made the Alberta tar sands projects less financially viable in the short and medium term and has resulted in some pullback in investment. The tar sands projects are apparently based on crude oil of US$85 to $100 a barrel, not $43 a barrel. All of these developments will have an impact on truck and rail freight flows.

Infrastructure

This is another opportunity for the Obama team to invest in America and create jobs. There appears to be a consensus that the U.S. transportation and infrastructure system, once a marvel of the modern world, has been stretched beyond its capacity and has fallen into disrepair. One-third of the major roads in the U.S. are reported to be in poor or mediocre condition, and a quarter of the bridges are structurally deficient or functionally obsolete. By 2020, every major U.S. container port is projected to at least double the volume of cargo it was designed to handle. Inland waterways and railroads also need capital.

Janet Kovinosky, director of transportation and infrastructure at the U.S. Chamber of Commerce, believes that a multimodal and intermodal vision must increase capacity, reduce congestion and improve the efficient, safe, sustainable movement of goods and people throughout the country and world. Investments in infrastructure also include communication networks and power grids. There are roads and bridges in need of repair in many parts of Canada and the United States. Rebuilding this infrastructure will generate business for the transportation companies that are best positioned to capitalize on these opportunities.

Automotive Industry

Currently this is a hot topic in America with the three large U.S. and Canadian based auto manufacturers, GM, Ford and Chrysler all seeking government assistance. Since this industry employs so many people, directly and indirectly, it is inconceivable that America will let this industry go down. This issue has been magnified by the huge job losses reported on Friday, December 5, 2008. Many of the auto industry jobs are in very politically important states such as Ohio and Michigan that supported the President elect. In Canada, most of the jobs are in Ontario, the largest province in the country.

One would expect to see some sort of compromise worked out such that jobs will be maintained and increased to support the manufacture of fuel efficient, hybrid, electric and small cars. The development of mass transit systems, buses and rail systems would also create jobs and reduce traffic congestion. Some of this manufacturing could be done by firms in the automotive industry. For many years, the movement of auto parts to assembly plants has been a critical component of the revenues of many transport companies. In addition to the movement of assembly parts, there are movements of after-market products. Maintaining and increasing the auto industry jobs are critically important to the transportation industry.

In summary, these are three industries where there will likely be money, jobs and freight in 2009. For transport companies it means following the money trail to the states and provinces awarded economic stimulus funds. The key for transport companies will be to create winning “spatial strategies” in those markets and for those businesses where they can achieve competitive advantage.

1. The Worldwide Economic Recession

This is the biggest story of the year. Many of us in transportation have been talking about the “freight recession” in North America for the past couple of years. The U.S. mortgage crisis and credit crunch transformed the “freight recession” into an economic recession with escalating job losses, home foreclosures and government bailouts. Coming off two soft years in the transportation industry, there was hope that a fall 2008 recovery was at hand. The fact is that just the opposite is happening as tight credit and a lack of confidence are resulting in consumer cut backs on purchases. This is further reducing freight volumes and freight rates. It looks like it is going to get worse before it gets better.

2. The DHL departure from the domestic US Market

For the past several years, Deutsche Post has made a determined effort to penetrate the domestic U.S. small parcel market by expanding its DHL operation in the United States. During this period, DHL played the spoiler role by keeping domestic small parcel rates competitive. After enormous financial losses, the decision was made to maintain DHL’s international service but terminate its domestic U.S. operations, laying off 9500 employees. DHL’s two key competitors, FedEx and UPS, have moved forward with rate increases to take advantage of their market dominance.

3. The Yellow/Roadway Merger

YRC has made a number of acquisitions over the last five years including Roadway, USF and some transportation companies in China. Despite a number of back office rationalizations, several executive changes and closures of poorly performing businesses, YRC finds itself at the point of having to merge Yellow and Roadway, closing and selling off 200 redundant terminals, reducing management salaries, renegotiating union contracts with the Teamsters and restructuring its balance sheet in order to survive. The question is whether these changes going to work? Will YRC be able to retain its revenue base as its competitors target its customers by offering them a “safe haven” for their LTL freight? How much revenue erosion will they suffer as they merge these two large operations? Will they be able to add any new customers during this period of uncertainty? Can the Roadway and Yellow terminal networks be “right sized” and calibrated to correspond with the adjusted revenue base? Can all of this be done with such a shaky balance sheet? Stay tuned in 2009.

4. The Rise and Fall of Crude Oil Prices

The rise and fall of crude oil prices has defied all logic. After hitting a high of US$147 a barrel in July, crude oil prices tumbled all the way down to the $40 range. While this is bad news for those folks involved in the Alberta Tar Sands projects, it is good news for carriers and shippers. At their peak, the surcharges on truckload shipments were equal to fifty percent of the cost of freight, an almost unbelievable number considering where these percentages were a few years ago. Lower fuel costs significantly reduce carrier operating costs and, as a result, shipping costs. This will be very beneficial during these difficult economic times. Nevertheless we must learn the lesson that fuel costs do not correlate directly with the laws of supply and demand. A strong economic turnaround, which now looks to be a few years in the making, could bring back $147 a barrel crude oil costs.

5. The Shrinking Truck Capacity Market

A number of well known carriers left the market in 2008 including Jevic, Alvan and Al’s Cartage. But these relatively small business closures don’t tell the whole story. Many smaller fleets closed their doors while most trucking firms parked some trucks and curtailed purchases. In addition, thousands of used trucks were sold to Russia and other countries. The fact is that an estimated five percent of the available truck capacity exited the market in 2008. We now have many less trucks chasing a lot less freight.

6. The Rise and Fall of the Canadian and U.S. dollars

Currency fluctuations played a large part in the world of transportation in 2008. The Canadian dollar reached a high of $1.10 to the U.S. dollar before sinking back to $0.80. The U.S. dollar, which had declined dramatically in value, is now viewed as the safest haven among world currencies, despite the country’s current economic woes. Recently it has increased in value against many of the world’s currencies. For Canada this is a good news/bad news story. For companies in resource industries, the sharp decline in the Canadian dollar makes Canadian products more cost competitive to export to the United States. The bad news is that over the past few years, many Canadian firms (in such industries as pulp and paper) have closed plants and cut capacity. With the U.S. in recession and with reduced capacity, the currency change may be a case of too little, too late. The currency re-evaluation may not give the Canadian trucking industry much of a lift.

7. Near Shoring

Over the past decade many North America manufacturers shifted their production overseas to China, India and other countries to take advantage of lower costs of production and attractive transportation costs. Then something started to happen. The confluence of production quality problems, rapidly increasing fuel costs, declines in the value of the U.S. dollar, port congestion and long lead times caused logistics executives to question the viability of the off shore movement. A number of companies began to pull back production to the United States, Canada or Mexico. While many of the forces driving near shoring have abated over the past few months, this will not stop companies from revisiting the economics of where to manufacture their products.

8. The Green Movement

A number of factors have brought about this movement, including the cost of crude oil noted above, the issue of climate change and the need for energy conservation. The green movement has resulted in a number of initiatives including hybrid vehicles, bio-fuels, the Smartway program and speed limiters, just to name a few. It has caused carriers to be much more focused on energy conservation and efficiency, reducing idling times, deadhead and out of route miles. This is clearly a movement that will be with us for decades.

9. Shipper / Carrier Collaboration

The realities of the current economic environment have caused many shippers and carriers to rethink their relationships with one another. For shippers, one of the key issues to surface is which carriers are going to make it and which ones are not. Which carriers can I count on to transport my freight, in good times and bad? While there are still many shippers focused primarily on cost savings, many others saw the light in 2008. They realized that when we come “out of the tunnel” and the sun rises again, it will be critical to have strong alliances with quality core carriers. Enlightened shippers are realizing that it is important to surround themselves with dependable business partners. Carriers are also realizing how important it is to partner with shippers that treat them ethically and fairly and pay them in a timely manner. This was an important development in 2008.

10. The Declining Domestic U.S. Big 3 Auto Sector

When I first came into the trucking industry, hauling automotive freight was the backbone of the company I worked for. Performing LTL consolidations for Ford and GM and moving full loads to assembly plants on a JIT basis, was the foundation of the company. It helped me realize how important the automotive business is to the economy of Ontario, Canada (and to various regions of the United States). There is no doubt the original big 3 have lost their way over the past quarter century. Nevertheless, this industry and the jobs that go with it, both in the automotive and trucking industries, are crucial to the economies of the United States and Canada.

While it is true that if cars are not made by the big 3 in North America, there will likely always be some car manufacturing in North America (for Asian or European manufacturers). That is not the point. The issue is that for much of the past century, car and truck manufacturing by the big 3 has been a key component of our economies, even if the three companies in question have not been particularly well run. As the year 2008 comes to a close, there seems to be a growing recognition that in this time of rapid job loss, we need to find a way to make these companies relevant and productive again. This business is very important to the transportation industry in North America.

There were a host of other developments that had an impact on transportation in 2008. While truck capacity was a challenge much of the year, this was a good year for many freight brokers. Many shippers turned to them to find the scarce capacity that was available. Freight bids became the norm as shippers sought to leverage their freight volumes to reduce freight rates and solidify capacity. The third party logistics movement continued to grow as shippers continued to outsource their non-core logistics and transportation functions to companies that provide these services as their core competence. Purchases of transportation management software remained strong as some industry consolidation took place.

On a personal note, I have been in the freight business for almost 27 years. I have been through recessions and economic recoveries several times. Nevertheless, there has never been a year quite like 2008. It was year when carriers had to look at every truck, every driver and every customer and challenge their economic viability. It was a year when shippers had to be just as knowledgeable about a carrier’s on-time service report as its balance sheet. For the companies that survive this tough time, they will be stronger and more financially focused than ever before. 2008 was a very challenging year. In next week’s blog, we will look ahead at some of the trends shaping freight transportation in 2009.

As 2008 draws to a close, it is time to look ahead to the trends that are likely to shape the world of freight transportation in 2009. Here are some events to watch.

1. Investing in Infrastructure to create Jobs, Jobs, Jobs

President-Elect Obama and Prime Minister Harper are currently preparing their economic stimulus programs to give their respective economies a lift. While there has been lots of talk about investing in infrastructure in recent years, we will finally see a significant injection of funds into road and bridge construction and repair in 2009. This development will create as a by product, over time, much needed jobs in the transportation industry as supplies are transported to jobsites across North America.

2. Cash will be King and Queen

Tight credit means that companies with strong balance sheets are in the best (defensive) position to weather the economic storm. They will also allow these companies to go on the offensive and be more opportunistic than others by taking business from weaker foes or making “tuck in” or strategic acquisitions.

3. Back to Basics

Shippers and carriers will be focused on what they do best. Non-core assets will be divested. Non-core functions should be outsourced to those that can perform them more cost effectively. It will be all about taking costs out of the supply chain or transportation company in 2009. To save money on freight, the best approach is to use the lowest cost modes, truckload instead of LTL or intermodal instead of truckload whenever possible.

4. Crisis Management Teams will take Center Stage in Many Companies

Many shippers will be forming crisis management teams, composed of logistics, sales, manufacturing and customer service to identify vulnerable lanes where the loss of a core carrier could mean service disruptions and failures to key clients.

5. “The Paradox of Thrift”

Many consumers across North America are feeling the pinch brought on by job losses, job loss anxieties, declining home values, declining stock/bond portfolios, declining 401K’s and RRSP’s. They are feeling poorer because of the significant declines in their net worth. This fear is having a profound effect on holiday shopping. Fearful consumers save more and spend less. Less money flows into the economy, contributing to the slide into recession. This causes further reductions in incomes and less spending, providing momentum to the severity of the recession. The current consumer negativity will continue into 2009.

6. Shipper Consolidation

Recent press reports have focused on the closure of certain shifts and the extension of holiday shutdowns at various automotive plants, the closure of specific (e.g. Office Depot) retail outlets and the chapter 11 filings of various large companies (e.g. Circuit City). It is clear that a number of retailers have gone to deep discounting (e.g. 25%, 50%, 70%) across some or all of their product lines to stimulate sales during the latter months of 2008. Business volume declines in the first quarter of 2009 will hasten the closure of more poor performing retail outlets and manufacturing plants. Watch for some big name shippers to exit the market during the course of the first quarter of 2009.

7. Transport Company Consolidation

Freight capacity contracted by a reported five percent in 2008. The major casualties were DHL’s exit from the U.S. domestic small parcel market and the closure of a number of small trucking companies and a few mid sized firms (e.g. Jevic, Alvan). Watch for the speed of consolidation activity to hasten in 2009 as companies find it too difficult to adjust their costs to the declining freight volumes. Watch for some big name players to falter. Look for some companies to withdraw from certain markets and/or restructure to focus their efforts in those areas where they are best able to compete. The LTL sector is particularly vulnerable with their extensive (and expensive) terminal networks as volumes and shipping weights decline.

8. Expect the Unexpected

With some publicly traded truck stocks down 50 to 90 percent in value, watch for some companies to make bold acquisition moves.

9. Finding a Treatment for “Affluenza”

The Canadian Broadcasting Corporation (CBC) recently coined this term to refer to the many consumers who are trying to make do with less, trying to place limits on their spending during this holiday season. In other words, they are trying to treat the “affluenza” that has swept across North America over the past few decades. The result is a movement to more discount shopping and more controlled spending. As consumers try to stretch their purchasing dollars, watch for shippers to try to stretch their freight dollars. This will make for a difficult freight rate negotiation environment in 2009.

10. “Capacitization” will prevent service disruptions

As carriers falter or cut back on service to weather the financial storm, shippers will be faced with the critical task of maintaining the viability of their supply chains. To offset these vulnerabilities, shippers will be “over-capacitizing” their freight networks. They will be seeking redundant carriers on specific lanes to ensure their supply chains operate in an uninterrupted mode. They will also seeking to diversify their carrier portfolios to reduce risks across all modes and lanes. Logistics managers will need to focus on monitoring their carrier scorecards for unusual delays, changes in lead times, requests for quicker payment intervals or other telltale signs that a carrier in distress.

11. Paying a Premium for Capacity

Smart shippers are realizing that as the recession comes to an end, there will be much less truck and rail capacity. To lock up capacity in the future, forward thinking shippers will be paying a premium for truck and rail capacity. While this may not coincide with current market conditions, the departure of some name brand carriers in the first quarter will cause a rethinking of freight rate negotiating strategies.

12. Shipper – Shipper, Shipper - Customer and Shipper – Carrier Collaboration

This is a trend that has been evolving over the past decade. In 2009 it will progress to a new level. To reduce vulnerability, secure capacity and control freight costs, shippers will more actively seek partners with whom to pool their freight. This may precipitate the development of more industry associations and closer working relationships with carriers and freight management companies that can help pool freight in specific geographic areas or create round trips that shippers cannot create on their own. It may also result in more vertical integration or at least closer financial arrangements between the various supply chain partners. Carrier partners will likely be evaluated on the basis of the shipper collaboration proposals they can bring to the table.

13. Logistics and Finance Team Up

Despite the efforts of the Federal Reserve to inject liquidity into the U.S. financial system, credit remains tight. Funds for new warehouses, new factories, new product launches and new personnel will come under increased scrutiny in 2009. The credit crisis is causing every company that uses borrowed funds for project financing, bridge loans or working capital to revisit their plans and processes to determine if alternate arrangements can be made. This will result in changes to supply chains and staff cuts. It will place more pressure on supply chain professionals to cost justify every initiative and drive any unnecessary costs out of the system. This will bring the financial and logistics folks closer together than ever before.

14. Freight Rate Benchmarking will rise to Prominence

In an era of challenging financial conditions, it is critical for shippers to be paying at or below market freight rates unless there is a demonstrable value in delivering a premium service at a premium price. Freight rate benchmarking is a service that is widely available but in limited use in the United States, and is in minimal use in Canada. It is a service that is right for the times. It allows a shipper to obtain market rates 24/7 on any lane in North America, thereby ensuring that they keep their costs to a minimum.

15. Six Key Indicators to Watch

Here are six key indicators to watch. These KPI’s will tell us if we are moving out of the recession. They are:
The stock market indices - These forward leading indicators told us we were heading into a severe recession and they will tell us when we are coming out of it.
The jobless percent - When the jobless numbers start to decline, this will tell us that there are more people with money to spend.
Consumer confidence - Fearful consumers do not spend money. An upturn in consumer confidence will signal an upturn in spending. Confident consumers will start buying homes and cars.
Auto sales growth – This industry is very important to the economies of Canada and the United States. We need to see evidence that consumers are buying cars again.
New home construction - The sub prime mortgage mess led us into this recession. This KPI will signal that consumers are again buying homes and suggest that the economy is on the upswing.
GDP - This indicator tells us that business is expanding.

16. Slow and Unsteady

The first quarter of 2009 will be brutal. As the economy continues to contract, job losses will continue to mount. The economic stimulus combined with low interest rates will begin to spur some activity upswing in business activity. However, the increase in freight activity over the balance of 2009 will be modest at best. It will get worse before it gets better but it will get better.

17. Expedited Freight Takes a Hit

Expedited freight will take a hit in 2009 as knowledgeable shippers realize that there are big cost savings in moving freight via standard ground or intermodal services.

18. An upswing in “Off shoring”

Many companies began to rethink their supply chains as the U.S. dollar declined and fuel prices skyrocketed. We now face an ocean shipping capacity surplus with declining fuel costs, falling commodity prices, sinking freight costs and a rising American dollar. While economic activity has moderated, the economics of off shoring have greatly improved in recent months.

19. Non-asset based logistics companies are in a strong position

Non-asset based companies have the most flexibility. They can mix and match modes and carriers to provide capacity and competitive costs. This should be another good year for well managed non-asset based 3PL’s and transportation management companies.

20. Green is Good and getting Better

The Green movement will continue to evolve as companies search for ways to become more environmentally friendly while improving their bottom lines. The ocean carriers use the term “slow-steaming” when they reduce vessel speeds to lower fuel consumption. Shippers should take advantage of these reduced fuel costs in their freight rate negotiations.

Dan’s forecast for 2009

I am not an economist. Most economists are predicting a turnaround beginning anywhere from the third quarter of 2009 to somewhere in 2012. Nobody knows for sure. This is how I see the world.

Some serious errors and misjudgements were made that led us into the current financial crisis. We are all in a negative “funk.” Everywhere you go, people are walking around with downcast faces and worried looks. There is a huge lack of confidence in the world today.

There will be a new administration coming to power in America in January of 2009. President-elect Obama has surrounded himself with some of the best economic minds around. The arrival of Mr. Obama in the White House will be viewed as a positive development around the world. He was elected on a mandate of change and his administration will take action. The large financial stimulus package coupled with the monetary policies of the Federal Reserve will move the U.S. economy in a positive direction. Everyone is looking for good news, for signs of encouragement.

Many retailers will start 2009 with unsustainably low inventories. They will need to restock their inventories. Unemployment will be at about 7 percent, not 25 percent as it was in the Great Depression.

Canada and the United States are strong, stable countries. We have some very talented and determined people who will lead us out of the current mess. Just as we are all feeding on the daily dose of negative news from the various media sources, we will feed on the positive news as these financial initiatives take hold. I look for the North American economy to begin to trend upward in the third quarter of 2009. This may be a bit of wishful thinking but I am optimistic that the beginnings of a turnaround will manifest themselves during the latter part of next year.

To the many readers of this blog a sincere thank you for your feedback and suggestions in 2008. They are all much appreciated. Please keep them coming. I wish all of you happy holidays and a healthy and prosperous 2009. Keep on trucking!

Dan Goodwill
President
Dan Goodwill & Associates Inc.