U.S. freight industry is ready to take off, but other regional economies still need to catch up.
The size of the third-party logistics market in the United States and around the world continues to grow, but outsourcing is slower than it might be because global economic conditions are sluggish, supply chain experts and economists say.
Better economic performance in the United States, however, has led to a long-feared capacity crunch in the domestic truckload sector and is forcing shippers to engage logistics companies, which have existing relationships with motor carriers and buying power, to secure enough equipment.
U.S. exports reached a record $2.28 trillion last year on modest growth of 3 percent and through the first half of the year exports were up 2.8 percent from the same period in 2013. And exports only increased $265 million in the second quarter.
Exports are not providing the stimulus many had hoped for because the rest of the world, especially Europe, is in worse economic shape than the United States. In the second quarter, Germany’s productivity fell 0.2 percent, France didn’t grow at all and Italy went into recession.
The United States exports about 20 percent of its total overseas sales in goods and services to the European Union.
Europe is plagued by high unemployment, weak wage growth, high debt levels, sluggish business investment, overvalued exchange rates, an aging workforce, and a banking sector still regaining its strength, economists say.
China’s economy is decelerating from more than 10 percent per year over the past decade to 7.7 percent in 2013as the government tries to implement structural reforms aimed at boosting domestic consumption. Chinese manufacturing sector contracted during four months this year.
Declines in commodity prices, interest rates and the Baltic Dry Index (a measure of shipping prices) further suggest that global economic activity is weak, financial analysts say.
Stanley Fischer, the new vice chairman of the Federal Reserve, has argued that it is not time yet to start raising interest rates from historic lows because, even though the U.S. unemployment rate, investment, capacity utilization and other metrics are improving, much of the world economy has stalled.
U.S. Gross Domestic Product grew 4.2 percent in the second quarter, rebounding from 2.1 percent negative growth in the January-March period. And the May Blue Chip Economic Consensus Forecast projects U.S. productivity for 2014 to increase 2.4 percent, 0.5 percent lower than the 2.9 percent growth rate in the February forecast. Participating economists predict 3 percent growth in 2015.
But Lance Roberts, general partner and chief portfolio strategist for STA Wealth Management, wrote in his blog that averaging the two quarters together produces an annualized growth rate of 0.88 percent. For the economy to hit the 2.4 percent consensus estimate, the year’s next two quarters must produce a minimum growth rate of 3.92 percent, which he said is unrealistic.
Freight transportation reflects what is happening in the overall economy because companies don’t purchase transportation if they have nothing to move.
Last year’s slow economy meant most logistics providers, as a whole, experienced minimal growth.
Spending on domestic freight transportation and logistics services grew more slowly last year compared to 2012, reflecting weaker shipment volumes and flat rates associated with a sluggish economy, rather than any gains in business efficiency, according to an annual report on logistics trends.
Logistics costs as a percent of GDP, a key measure of logistics performance relative to overall productivity, fell to 8.2 percent from 8.3 percent, the lowest it’s been since the recession in 2009, when it finished the year at 7.8 percent.
U.S. business costs for logistics increased 2.3 percent, or $31 billion, to $1.39 trillion in 2013. During the prior year, logistics costs grew 3.4 percent to $1.35 trillion, according to the State of Logistics report authored by Rosalyn Wilson for the Council of Supply Chain Management Professionals.
Transportation costs only increased 2 percent, while inventory-carrying costs rose 2.8 percent. Retail inventories grew the most, 6.2 percent, due to weaker-than-expected sales. Wholesale inventory growth was less than half that amount, and manufacturing inventories posted a 2.1 percent gain.
Trucking, the largest component of transportation costs, posted a 1.6-percent rise in 2013, one of the weakest revenue years in recent history.
On average, the 3PL sector grows at three-times GDP, so a stagnant economy will translate into fairly slow growth in the logistics industry, Evan Armstrong, president of research and consulting firm Armstrong & Associates, said at an industry conference in June.
In 2013, the global 3PL market was worth $703.8 billion, according to an annual analysis by his firm. But the European market has contracted 0.6 percent to $158.1 billion since 2006. The compound annual growth rate in North America during the same period is 4 percent. Asia and South America grew more than 10 percent.
The U.S. 3PL market has enjoyed a compound annual growth rate of 9.6 percent since 1996. Last year it was valued at $146.4 billion on growth of 3.2 percent.
Factors driving growth in the U.S. logistics market include near-shoring in Mexico, which is forcing 3PLs to beef up operations to handle traffic such as finished automobiles across the southern land border, and Internet retailing. Many
logistics providers that were focused on business-to-business supply chains are now developing business-to-consumer capabilities to handle parcel shipments for e-commerce clients.
Most of the growth a year ago occurred in the non-asset-based, domestic transportation management sector that includes high-flyers such as XPO Logistics, Echo Global Logistics, Transplace and C.H. Robinson. Armstrong predicts net revenue in this sector will increase 7.5 percent to $7.6 billion, with growth fed by an expanding base of new customers.
“It is common now for customers with as little as $3 million in transportation spend to use at least one 3PL,” the report said.
But the after-tax net income margin for domestic transportation brokerage fell from 20.3 percent in 2012 to 12.2 percent last year because there was so much competition from new, technologically advanced entrants such as Coyote Logistics, XPO and Echo, Armstrong said. Freight brokers seem more willing than in the past to reduce prices to secure a truck, even if they can’t earn a decent margin, out of fear the customer will look somewhere else, he explained.
Stoughton, Wis.-based Armstrong & Associates estimates overall U.S. 3PL spending will grow 5.2 percent this year and reach $154 billion.
International transportation management is expected to grow 4.5 percent to $18.8 billion after only growing 0.6 percent in 2013 due to muted growth in the U.S.-Asia trade.
Value-added warehousing and distribution has had a slow recovery since the great recession, in part because it is a mature sector and most mid-to-large 3PLs have built out national warehousing footprints. Armstrong anticipates a net revenue increase of 3.5 percent this year following a lackluster 0.3 percent increase for 2013. Positive signs for the sector include shrinking capacity and new warehouse construction in areas such as Southern California, and growth in inventories.
Dedicated contract carriage is expected to grow a modest 4 percent this year. Activity continues to be hindered by soft retail sales as consumers remain cautious with their spending, Armstrong said. New federal limits on the hours commercial truck drivers can put in behind the wheel and when they restart their weekly duty cycles has pushed many shippers to lock in truck capacity through dedicated contracts, according to trucking industry operators and customers.
A spike in the economy and consumer spending could lead to dramatic increases in dedicated carriage— essentially leasing part of a motor carrier’s fleet for exclusive use— as shippers learn that truckload equipment is difficult to procure through standard booking methods.
Wilson predicted the shortage of drivers due to demographics, bankruptcies and new safety regulations, combined with a quickening economy, could push truck rates up 5 percent to 8 percent this year. Logistics industry executives and shippers have stated in recent months that they are paying more to secure long-haul trucks.
Wilson cited work by Donald Broughton of Avondale Partners showing that motor carrier bankruptcies were at a three-year high in 2013, as small firms found it increasingly difficult to pay more to attract drivers, while also experiencing significant inflation in equipment, insurance and other costs. Trucking industry officials say new safety regulations reduce productivity, and, therefore, the earning potential of drivers, and winnow out the pool of available drivers that don’t meet new standards.
Younger drivers are not entering the industry to replace older ones in the same numbers as the past. Motor carriers are also competing with construction and other industries for skilled labor, analysts and trucking executives say.
The shortage of available drivers is further pushing shippers to truck-rail services, so drivers can be kept on short-haul routes.
Mast Global Logistics, a subsidiary of Limited Brands (Victoria Secret, Pink, Bath and Body Works, La Senza, and Henri Bendel), has seen its rates for trucking rise during the past 12 to 18 months while service and reliability have deteriorated, Executive Vice President Rick Jackson said in Washington during a panel discussion about the State of Logistics report.
Penske Logistics, which operates its own fleet, is experiencing strong demand for its services and trucking capability
“Right now, if we could find 1,000 to 1,500 drivers we could put them to work very easily” because of the high demand, President Marc Althen said. The company hopes to retain and attract drivers by offering the newest, safest possible equipment, good pay packages and benefits, and getting most of them home at night with shorter hauls.
Some trucking companies have resorted to advertising heavily on radio, offering $3,000 to $7,000 signing bonuses and wages in the $65,000 to $75,000 range, he added.
Penske has seen productivity reduced about 3 percent since the new hours-of-service rules went into effect more than a year ago, Althen said. The decline is similar to what other motor carriers say they are experiencing.
And in certain verticals, such as food and beverages, delivery productivity is probably off by 8 to 10 percent, he added.
Mast is adjusting to the capacity and driver shortage by moving to more dedicated carriage, exploring intermodal transport, and positioning more inventory in warehouses close to stores so that retail locations can be replenished the same day or within 24 hours, Jackson said.
The use of regional distribution centers, as opposed to giant centralized ones, has become a strong trend for inventory and other reasons, Wilson concurred. It also allows motor carriers to make round-trip runs within driver work limits and improve driver satisfaction by getting them home each night.
This article was published in the October 2014 issue of American Shipper.