By almost any measure Corporate America performed well in the first quarter. Revenues of S&P 500 companies grew on average 8.5% over year ago levels, and earnings before taxes advanced 13.2%. But behind these rosy numbers a few concerning items stood out. High freight costs weighed on results of a wide range of companies.
Some of these price pressures are the result of cyclical factors. The U.S. economy is on a roll and that is pushing up prices for fuel and labor – the two key components of any transportation company’s costs. Oil prices averaging over $60/barrel sent fuel costs for many firms up over 20%. Competition for drivers has heated up as well. Transportation research firm FTR estimates that carriers will add 50,000 drivers in 2018 alone. Wage pressures in the trucking sector are unlikely to abate any time soon given that enrollment in commercial driving schools is at a 15-year low at the same time the existing work force is aging.
Secular trends are also at work. Between 1985 and 2007, global trade volumes grew at around twice the rate of global GDP. Growth since 2007 has remained robust with particular strength in mail delivery (see chart above). Escalating trade tensions could well have a short term, negative impact on growth rates. But longer term, the growing success of e-commerce and rising expectations for how and when goods are delivered should underpin steady increases in shipping volumes.
These trends are already forcing logistics firms to rethink and retool how they do business. Until fairly recently, the response to rising trade volumes centered on simply adding more capacity – more trucks, more containers, more ships etc. This capital intensive approach resulted in more costly and time consuming outcomes. The Economist reports, for example, that shipping a 70kg package from Shanghai to London with DHL Express by air takes three times longer and costs four times as much as sending a person of the same weight that distance. Containerized freight, while typically cheaper, is weighed down by a heavy bureaucracy. A wide range of middlemen (freight forwarders, insurers etc.) are involved in the process, and communication systems remain antiquated. Paper trails of every item shipped are the norm and delayed arrivals often last weeks.
Until now, key industry players have had little incentive to change. Heavy fixed costs have limited the threat of new entrants and stifled competition. Freight forwarders, who typically get paid as a percentage of the total cost of a shipment, have also had little incentive to embrace new processes. But new entrants employing new technology are forcing change.
Faster and more accurate transmission of data is having the biggest impact. Greater use of cellular and satellite networks is allowing transportation companies to coordinate deliveries and match spare capacity with cargo demand in real time. New apps like Cargomatic and TruckerPath which pair loads with drivers is threatening to do to traditional trucking firms what Uber has done to the taxi business. The continued adoption of Radio Frequency Identification (RFIN) which uses electromagnetic fields to identify and track tags attached to objects is improving efficiency.
Big e-commerce companies including Amazon in the U.S. and Alibaba in China are behind much of this transformation. Amazon has created its own logistics division which provides freight forwarding services and includes cargo airline Amazon Air. Alibaba, whose business model is similar to eBay’s, already delivers 70% of the ecommerce packages in China. Transportation firms across the industry owe much of their recent success to the growth in package delivery fostered by these firms. But these legacy transportation firms should watch their backs. E-commerce giants like Amazon store and track customer delivery data, and that represents quite a significant competitive advantage in the business of moving goods.