The Impact of Economic Stimulus on the North American Transportation Industry
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:
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.
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.
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.