The Business of Supplying The Transportation Business - Tires and Trucks

The Wall Street Journal reported on two major industry suppliers today - Navistar and Michelin.  For Navistar, the story continues to be bleak.  Due a major, almost existential mistake with how they dealt with emissions control. (went against DEF initially) they have been struggling since 2010.  In fact, they essentially pay fines for the trucks they sell because until recently, when they teamed up with Cummins, their trucks violated EPA standards.

The WSJ reports the following statistics for Navistar:

• 34% drop in truck sales
• "higher" warranty costs - an increase of $164M
• Ending the quarter with 15% market share which is down from 25% at the end of 2009 (A direct cause of this is the miss on emissions)
• Loss of $109M in the quarter v. last year a loss of $45M (Truck Business)
• Overall, Navistar lost $374M in the quarter ($4.65 per share) v. $172M ($2.50 per share) last year for this quarter. 

The basic story for Navistar is they went all in on their own emissions system while the rest of the industry went the route of using Diesel Exhaust Fluid (DEF).  It was a "bet the farm" move and it appears they may have lost the farm. 

The second report was on Michelin.  Michelin of course is a French company and they are highly exposed to Europe.  This is causing a problem for them and the numbers in Europe are staggering.  Think of this:

• Demand for truck tires in Europe is down 25% since 2007.  This is a key indicator for how bad the economy is on the Continent.  This decrease is due to lower miles which is due to just less product being moved. 
• Middle East and Africa - down 12% and 18% respectively.
• While South America appears to be booming, sales globally are down 5.6%
• Volvo truck sales are down 7% in April in Europe.

These two companies are not in the same situation.  Michelin is all about being in a bad market - Europe.  Navistar is a self inflicted wound which may not be a foot shot as much as a head shot.  

If the state of transportation is one considered fairly bland - not huge growth and not huge deficit - the work of supplying the transportation industry is downright tough. 

Why I am Not Concerned About The "Driver Shortage"

The myth that has existed in trucking for over 15 years is some year we will get into such an acute driver shortage that freight will be at a standstill and you will be lucky if a truck shows up to pick up anything you have to ship.  In fact, many trucking company executives have parlayed that story into a reason why shippers should pay higher than market prices today for freight for fear that when that day comes only those who over paid in the past will be serviced.

That was 15 years ago and the time has yet to come and if you bought into the story you have "overpaid" for 15 years and the crunch (and your perceived promised reward) has yet to come.   Of course, as always, the story has other aspects to it.  I do not doubt that the driver pool is shrinking and people do not want to drive long haul trucks.  However, the good news is the market is taking care of this problem in 4 ways:

Miniaturization:  This phenomenon is everywhere whether it be in packaging, the product itself or the actual and complete disappearance of the the physical product.  I bought a stereo for a new place I have and it consisted of a Jabra® Soulmate and my iphone.  The entire thing can fit in the palm of my hand and it gives off as much sound as a stereo that came in 3 boxes 10 years ago.  This would not be seen if you looked at GDP numbers or sales numbers of companies because from a revenue and profit standpoint, the company did as well as when they were selling massive boxes.  However, from a freight standpoint, they can fit a months sales into 3 trucks. Or, better yet, it is all sent via UPS.

Of course, we all know this is happening in packaging and other aspects of the freight.  And, the disappearance of freight is becoming very real with iPods, Kindles and now 3D printing.

Focus on Profit v. Revenue Growth of Shippers:   I keep hearing that once the GDP gets to 3% we will have a massive shortage and I am not convinced.  If you look at the financials of the major shippers you will find they are doing very well (as are the transportation companies).  Why are they doing well? It is generally not a growth in product sales / revenue story but more of a growth in profit story. They are managing costs and increasing prices (despite the Government telling us there is no inflation).  This means you cannot equate a great quarter to increased freight.  It is not as connected as it was at one time.

Intermodal:  This, of course, is the grandaddy of them all.  The movement to intermodal continues and seems to be picking up speed.  Shippers who were afraid of it just two years ago have capitulated and even segments of supply chains (i.e. inbound) which historically shunned this mode are now buying into it.  Bottom line:  This is the major counterweight to any type of driver shortage.  This is gone beyond a nice "substitute" for truck freight and has now become the "category killer" for truck freight.  Acceptable length of hauls (LOH) are decreasing (one bid wanted intermodal rates on lanes 400 miles or greater), service is increasing and overall people are moving so much freight over to intermodal that truck is really just catching the local P&D and interplant moves.  P&D and interplant moves are nicely served by local niche players and the need for a nationwide network for a truckload carrier diminishes dramatically.

Economics 101: This is the final reason I am not worried.  If the driver shortage becomes very acute and the demand exists driver wages will increase bringing more drivers into the market.  I am a firm believer in market equilibrium and market clearing prices.  Yes, driving is a hard job.  However, as we have seen in the oil fields in North Dakota, people will do hard jobs if the pay is right.  So, bottom line is, no need to pay "extra" today because if needed, you will absolutely have to pay extra tomorrow.  And any sales person who tells you that because you paid extra now you won't have to pay extra later is either lying to you or just does not understand economics.

My conclusion:  Watch the economy, watch the market, and watch your freight but do not buy into the scare of "pay up now" to be serviced later.  It makes no economic sense and it makes no sense given the current situation of transportation companies.

More Data on Slowing ..

As reported at the Transplace blog, Stifel Nicolaus data supports the idea of a slowing environment.

Is The Trucking Industry Rebounding?

There is anecdotal evidence based on an informal count of trucks on the NJ turnpike showing an increase in truck traffic.   I warn you, this informal study reported on CNBC is about as informal and non scientific as you can get however when you tie it to other evidence (i.e, FEDEX financial results - profit doubles) you see some coalescing evidence that the economy is picking up and trucks are moving.

However, if you take the comments by FEDEX CFO Alan Graf at his word, evidence is the economies of the world are not growing fast enough to offset things such as high unemployment

There is a mixed bag I guess.  I chose to believe the former rather than the later.

Impact of High Diesel prices.. Get Ready

Owner operators will exit the business, the "big 3" will get bigger, everything will cost a lot more. Get ready.

Impact of high Diesel prices.

Government to Buy EOBRs for Mexican Trucks

I saw this a few days ago when it was revealed but had not commented until now.  My first reaction was what a disgrace.  How can our tax dollars be used to fund Electronic On Board Recorders (EOBR) on Mexican trucks when US trucking companies are making the investment themselves?  Further, what is the point of this and how will it be managed?

I just read Brian Straight's article over at Fleet Owner titled Tax Dollars Wasted on Mexican Truck EOBRs and there was a bit of a different spin here.  Could this provision be a "poison pill" placed into the agreement by the US Government knowing it will cause huge outcry?  While that is possible, I do not give them that much credit.   I really believe someone in our Government thought this would help the cause by showing how we will be able to track these trucks.  The enforcement just seems massive and the costs outrageous.

In the end, I do not think we will see many of these trucks coming across the border as it is just too complicated.  But, time will tell and if the American trucking industry gets out of hand in terms of cost and low capacity, I suppose this will become our relief valve.