“A tremendous amount of change has taken place in our world and it‘s not clear that all of the turmoil is behind us. You have to wonder how long these conditions will last, and what our economy and businesses might look like when the storm clouds finally pass.” – David Wangler, president and CEO, TMW Systems
It’s been a topsy-turvy world of late for truckers large and small; of that, I am sure no one out there has any doubts. The question that needs answering now is: what will trucking’s future from here on out be like? More importantly, can truckers survive in it?
David Wangler, president and CEO of TMW Systems, tried to answer this and other questions about the future of trucking in his keynote address at his company’s 2009 TransForum user conference being held this week down here in Nashville, TN. He drew several interesting conclusions from the current freight environment and what it portends for the future – some of which you may agree with, and some you may reject.
What’s important, though, is that Wangler believes trucking must undergo a major transition – moving away from past practices to develop new ones that emphasize, in part, surviving on limited growth in freight volumes for the foreseeable future. That formed the heart of the “sustainability” theme in his presentation – with “sustainability” focused not so much relating to “green” environmental programs, but more so on how to help trucking businesses survive over the near and long term.
“While environmental issues are obviously important to our long-term health and well-being, I think most of us are also concerned about the sustainability of our businesses in a turbulent domestic and global economy,” Wangler said. “The question is; will we be able to sustain, not only our livelihoods, but our standard of living and our expectations for the future? Will we be able to pass along our vision of endless possibilities to our children and our successors?”
He posits the most popular definition of “sustainability” comes from a 1987 United Nations conference, where the participants defined “sustainable developments” as those that “meet present needs without compromising the ability of future generations to meet their needs.”
Sounds simple enough, but since 1987 a tremendous amount of debate has occurred at the federal, state and local levels as well as across academia on what it means to create a sustainable society, Wangler stressed.
“The direct tie back to the business community is the increasingly popular notion of a ‘triple bottom line’ that concurrently increases profits, improves the planet and improving the lives of people,” he explained. “But what does that definition of ‘sustainability’ really mean for a logistics business, or a trucking company, a ready-mix manufacturer or a maintenance and repair operation? “
When it comes then to the question of business sustainability, Wangler believes three questions need to be asked and answered:
1. Are there really only two choices for our businesses: Grow or Die?
2. Is it true that numbers don‘t lie? Or can we misinterpret them to the same effect?
3. If we continue to do things the same way, are we really crazy to expect different results?
“If we accept that all ecosystems have a ‘carrying capacity’ in terms of population growth, energy consumption, etc., and if we consider industries are also ‘ecosystems,’ then in terms of business sustainability, what does ‘carrying capacity mean?” asked Wangler.
In the case of the freight industry, he said, the business “ecosystem” consists of freight to be shipped, trucks and trailers, fuel, drivers and the roadways that carry them. “It certainly seemed that 2 or 3 years ago we were running out of drivers and space on our highway system,” Wangler noted. “But with the dramatic economic downturn of the past year, we now find ourselves without enough freight to challenge either of those constraints. “
He pointed to the American Trucking Associations (ATA) monthly freight index as a way to track the rise and fall of trucking’s fortunes over the last nine years. ATA‘s index took year 2000 freight volume as a baseline and assigned that year a value of 100 – thus, a value of 115 would indicate a 15% increase in freight volumes.
In the beginning of 2003, the index was around 104. By 2006, just three years later, it was 115, and then it stayed between 112 and 115 until the fall of 2008. A sharp decline then began in October of 2008 and continued into 2009, driving the index all the way back down below 100 in March of this year. “If you were to graph the index, it resembles the same frown that many people have been wearing since last March,” Wangler noted.
He also pointed to a report from analyst Stifel Nicolas last month for potential investors in truckload and intermodal stocks that put the trends we‘ve been seeing over the past few years into a broader context.
Starting with de-regulation in 1980, truckload and intermodal businesses have shown fairly consistent year-over-year growth, fueled by the consumer‘s seemingly boundless appetite to build houses and acquire goods, lots of available credit and the emergence of big-box retailers.
Retail chains like Lowe‘s, Best Buy, Target, and Wal-Mart developed a logistics-based supply chain delivering products primarily manufactured in Asia. This helped to keep prices low, further stretching our buying power, said Wangler.
“And so it seemed as if this increasing consumption might continue indefinitely, immune from economic contraction, even though the industrial sector of our economy went through several slowdowns and continued shrinkage,” he said. Of course, what happened instead is that the bottom fell out of everyone’s house of cards.
So what does our business “carrying capacity” look like today? “Consumer buying, which makes up about two-thirds of the U.S. economy, has slowed dramatically on the heels of higher unemployment. People are saving more. They no longer feel comfortable spending so much of their disposable income,” Wangler said. “Their houses are now more like places to live in, rather than 30 year certificates of deposit with 15% interest rates. Many of us are also concerned about massive increases in government spending and the accompanying deficits which may devalue our currencies. “
In the end, it’s hard to imagine a “V” shaped recovery right back to “the good old days” when credit markets, housing markets, and even the automotive markets were hitting on all cylinders. Instead, manufacturers and retailers are still cutting back on inventories, trying to catch up with lower demand. Shippers continue to re-engineer their supply chains, decreasing lengths of haul and removing complexity and cost.
“In basic terms, the amount of freight moving across North America‘s roadways is much less than it was just 12 months ago,” Wangler said. “The ‘carrying capacity’ of our economy for profitable freight movement has fallen dramatically, and as an industry, we have no power to reverse it – we can only seek to adapt.”
This is where the “transition” for truckers needs to occur, he explained. “In order to sustain our businesses in this new environment, we‘ll have to become more cost-effective, more nimble, and more competitive to make a profit moving the freight that is available. Growth may no longer mean doing more of the same things that we did before, it‘s more likely to mean reconfiguring our businesses to do new things in new ways.”
Wangler believes the term “right-sizing” may have new relevance for the strategic thinking of truckers these days – and for one, he does not believe that if you can‘t make companies bigger, they‘re on a path to extinction.
He pointed to the revitalization of Youngstown, Ohio, as an example – an American steel town that with a population of 168,000 in the 1950s that seemed destined to grow forever, with city leaders back then envisioning the city being home to a quarter of a million people by the end of the century. Instead, by the 1980s, the steel industry had gone into a tailspin. Today, only a single, large steel mill is left and the city's population is half of what it was in 1950.
[You can watch this part of Wangler's speech below -- I apologize for the poor audio quality; CNN I am not!]
While most of the mills have been torn down, the city has thousands of empty buildings and it still has 535 miles of roads that need to be maintained and kept free of snow and ice all winter. Like other Midwestern cities in similar straits, Youngstown tried to find some big employers to replace steel, such as prisons (both private and public), while also re-developing some of the former steel-mill sites into industrial parks. Yet none of those efforts ended up replacing jobs that vanished along with the steel industry.
Then in 2005, Youngstown elected Jay Williams, a former city planner, to be their mayor. He addressed the city’s problems with a radically simple concept –if the city removed its unused buildings and large chunks of un-needed infrastructure, it could then focus on improving its services and better align its expenses with tax revenues.
By reducing its obsolete infrastructure, the city could position itself for a much more sustainable future, one that might include a new era of growth, but not one that desperately needed growth to ensure its survival.
“Youngstown‘s approach to a future without foreseeable population growth is controversial,” said Wangler. “Accepting that a city is going to shrink, and even planning to help it shrink seems like a rejection of the American idea of progress, where a bigger city means more jobs, more tax revenues, better education, and better services.”
Yet he stressed that the “carrying capacity” of a city, or its ability to sustain its residents, is ultimately determined by its tax base, with the infrastructure needs of businesses and residents have to be balanced against available tax revenues.
“For decades, professors of urban planning have taught that the inability to grow a city‘s population is a terminal condition; all city planning strategies must revolve around growth, and city leadership should focus on stimulating that growth,” Wangler explained. “So is Youngstown just preparing for its extinction, or is it emphasizing quality over quantity? Well it‘s early in the new ballgame, but … it’s choosing an improved quality of life for its citizens by seeking creative alternatives to conventional growth.”
This idea of shrinking instead of growing in order to be more profitable is something that must wend its way into trucking, Wangler believes. “Typically, [trucking] companies thrived for years by putting as many trucks on the road as possible and working to keep every truck on the road every day,” he said. “Unfortunately, declining freight volumes meant that more and more of those road miles were empty and unpaid miles.”
In recent work with several carriers, Wangler said TMW found that by eliminating just 3% of the least profitable loads from their freight network, the re-assigning the right resources to the remaining freight movements, they increased revenue per mile and overall margins, moving less freight and running fewer trucks. Most importantly, the total profit increased by 5% in real dollars.
“Doing less work could actually make more money,” he said. “They focused on the more profitable loads out of current business and parked trucks that became idle when they dropped their least profitable freight. Though they were generating less revenue, they began making more profit – a crucial step in helping them re-structure their business operations for a more sustainable future.”
Freight, by its very nature, exists in a codependent environment, Wangler said, with the delivery of one load creating open capacity to accept another. “Good trucking operations try to minimize the empty miles and the time between these subsequent loads, but geography and freight density conspire against this,” he said. “So the true picture of profitability has to consider truck movements before and after any individual load.”
And Wangler pointed out that there are still quite a few motor carriers whose strategy in the face of falling rates and increased competition seems to be “wait and hope” … “wait” for a capacity correction to let them increase rates and start making money again, and “hope” that they can keep the doors open and the lights on until then.
“But passively waiting for the up portion of an economic cycle is truly not a way to sustain your business,” he said. “As a wise man once said, ‘hope is not a strategy.’”
