Commentary
In every super-hype cycle, there is a lot of confusion about what is real and fake. Companies throw out super large numbers, hoping to impress investors with the size of the opportunities. Consultants get in the game using fear tactics to convince large companies to spend money, telling them the end to their business model is imminent.
But most savvy investors and companies in the space know better. They can tell that the entrepreneur or consultant lacks the knowledge of the industry and their role in it.
At FreightWaves, we talk to a large number of freight startups, fleets, 3PLs, and technology vendors in the space. Our insights are gained through decades of experience and knowledge about how the industry actually operates.
We thought we should provide the background on the various industry stats and concepts that startups use in their pitch decks and challenge them to use correct assumptions about their business and the broader market.
First off, let’s discuss the number of trucks in the market. The common thing for startups to brag about is how big the market is. They quote the ATA’s stat of 3.26M commercial truck drivers in the US.
Is this number real? Yes.
Does it have any relevance to your business? Maybe.
If you are selling fuel, ELDs, software, equipment, etc. to the whole Class 8 market, you are good to go. This assumes that your offering does not care whether it is being used in the private construction market, operating in the for-hire trucking spot market, or running dray operations around a container port.
If you are broker or digital platform and hauling general freight (i.e.van, flat, or refrigerated), this number does not apply to you. Sorry, but you are in the one comma club.
According to industry trucking and technology expert, Sandeep Kar, Chief Strategy Officer of Fleet Complete, the number of over-the-road trucks in the for-hire market is around 850,000.
The Bureau of Labor Statistics reports that the number of employees that are classified as heavy-haul and tractor-trailer combination drivers and hauling general freight as 620,340 as of May 2016. The delta between the 620,000 and 850,000 can be explained by single truck operators (i.e. not employees, only owning one truck). The exact number is much harder to get to since a large percent of the market moves in/out of commission and are not consistently driving.
Next, the thing that startups get caught up in is talking about how big their carrier base is. They claim to have hundreds of thousands of carriers and hope these numbers will impress. Of course, a savvy industry person would roll their eyes at this, knowing the number is both meaningless and wrong.
Take CH Robinson, in its 2016 Annual report, they reported having 107,000 contract carriers & suppliers. As the largest freight broker on the planet, they would be the upper-ceiling of what a freight broker would hope to achieve in terms of capacity.
Keep in mind this is taking in all of CH Robinson’s global supplier and carrier base, across all-modes. This includes their intermodal, NVOCC, air, and trucking businesses. CH Robinson is also the number one NVOCC from China to the US and one of the largest produce brokers in the US, so a lot of their reported capacity providers are not in the for-hire-trucking market.
If somehow in the few months of operating a digital brokerage business you have managed to actually sign up hundreds of thousands of carriers and have more carriers to choose from than CH Robinson, you have pulled off a miracle, but also demonstrated a complete nativity to how freight works.
To build a successful freight brokerage, you need density. Without it, you will not achieve any ability to optimize your purchased transportation expenses, nor can you help your carrier base optimize their operations.
The better answer would be that you have a much smaller number of core carriers that get a large percent of their freight from you and you have worked on helping them optimize their operations around your shippers.
Next, you need to properly classify your role in the freight marketplace. If you are a broker (digital or voice) own it. Stop pretending to be a platform business. Going to the market and telling customers, carriers, and investors that you are a platform business when you are a broker is misleading.
As a broker, you are not a marketplace business. Brokers take a principal position in the load, manage payments to carriers, and bill shippers. If a shipper doesn’t pay the broker is out the cash. Brokers also set prices for clients. They arrange for shipments. They have to pay claims when something happens. They have subscriptions to DAT and Truckstop.com for posting loads. If this describes your business, then you are a broker.
There is nothing wrong with being a broker. Brokerages and 3PL investments are super hot right now. Transplace sold for over a billion dollars. This is a company that only a few years ago was being sold in a fire sale by its owner carriers. In fairness, the independence and professional capital gave their executive team a lot more freedom to execute.
Digital brokers are even hotter. Convoy and Transfix have raised almost $200M collectively from some of the savviest investors in technology. Both own their status as a digital broker. Being a broker did not hurt their ability to raise cash.
And last, stop pretending that the large brokers are not digital. It is true that a lot of freight in the spot market is traded by voice brokers. To transact, they use a phone, load board, and email system to buy and sell capacity. But this is not where the vast majority of transactions take place in the truckload market.
Large 3PLs not only have digital strategies, they have been pursuing these technologies for decades. After all, the more efficient they can be manage customer freight, the faster they can grow. Plus, they have to keep on innovating around their business model, because without assets, they are only as good as their relationships and data.
Going back to CH Robinson, their annual report highlights the fact that over 70% of their freight is automated without a human being involved. You would see the same thing at Echo, Coyote, XPO, or Transplace. After all, Transplace’s managed service platform electronically managed over $5B of freight for shippers. If you took CH Robinson and Echo’s engineering teams, you would have more folks in these companies than all of the digital brokers- combined.
We remain bullish on the future of the industry and where it is headed. Our hope is the startup entrepreneurs do a better job of defining their market size and segments going forward and take ownership of their role in the market.
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