Guest Post: David Broering, Senior Vice President – Integrated Solutions
With the many regulations swirling around the trucking industry as of late, 2017 looks to be a year when several of them could converge with a couple of other market related headwinds to create a much tighter supply of capacity by Q4. In taking a look at the individual factors, one can get a better idea about how and when these individually and collectively could affect the overall supply dynamic of the transportation industry in 2017.
Electronic Logging Devices (ELDs)
Electronic Logging Devices (ELDs) have been the leading fundamental in the continuing speculation of 2017 seeing the “mother of all driver shortages.” All drivers operating a truck with the model year 2000 or later are required to have an ELD active in their truck by the end of 2017. While there has been a great amount of adoption of these devices with the bigger trucking companies, many smaller companies have stayed on the sidelines looking for the right way and the right time to integrate this into their operations. There are several factors keeping the smaller trucking companies out of this endeavor – confusion around what is a compliant device, concern over management and utilization of the drivers with the compliant device, and the overall cost of the device and the ongoing subscription expense. While the implementation of these devices across the estimated 55-60 percent of the trucks that have adopted has not materially affected their overall capacity in a negative way, many feel the remaining 40 percent is where the true capacity crunch will be created1. Expect to see a continued tightening of smaller carrier’s capacity as the year wears on and more of these devices are adopted and installed, and there is less wiggle room in the way carriers manage their driver’s hours of service.
Insurance Coverage and Costs
One of the lesser-known affectations in the market over the past six months has been the material pullback of several major insurance providers in the industry. Both Zurich and AIG (via Lexington Insurance) pulled out of the commercial truck insurance market over these past six months, leaving a large hole to be filled. Much of this pullback is due to the “Nuclear” verdicts that have been coming from major accidents and their resulting wrongful death lawsuits. The result of these providers leaving the market has led to substantially higher rates for the market overall. It is estimated that in 2016 the average cost for insurance will be roughly $.092/mile, which is up 44 percent in two years2. With negative pricing pressure and increased costs across other aspects of the trucking industry, many carriers are being forced to absorb these costs, and it is driving less profitable or smaller carriers out of business or to leave the market overall because they cannot make a profit. These bankruptcies caused a projection of more than 5,000 trucking companies closing operations in 20163.
GDP Growth & E-commerce Effects
Not everything is about taking away from the market, and sometimes the overall heat of the market and an overall change in dynamics can help to move the supply and demand market for transportation around. That said, the recent growth of the economy overall in the U.S. is something that can and will continue to propel some positive momentum in the market. This is especially true when consumers are driving much of that growth. Transportation has traditionally been seen as the “fortuneteller” for the overall market. If supply begins to accelerate that is a good sign for the economy, if the opposite is true, bad things could be ahead. However, the current GDP growth does not seem to be providing as much momentum that a 3+ percent GDP growth number would have indicated 10 years ago4. The continued compression of the overall rates being seen in the current market is an indication of things still being soft. The single biggest difference between today’s economic growth and the growth of past economies is its connection to the consumer as it relates to e-commerce and its changes to our supply chain. With U.S. manufacturing continuing to stagnate and the momentum focused on the North American consumer and their consumption being at the home delivery level, less of the overall growth is trickling into the transportation market as meaningfully as it once did. What does this mean overall? While the economy may be perceived to be cruising right along, it is not materializing in the same sort of demand for trucking capacity (or not in the same way) as it has in previous years where this sort of GDP growth is happening. As more and more of the overall consumption in North America moves to e-commerce related sales, it remains to be seen how this will affect the way in which trucking rates and the overall demand for capacity.
As is often common with the beginning of the year most years, there are certainly some major issues looming for the trucking industry that threaten to disrupt the current dynamics of the market. There has been a lot of speculation over the past few years that a combination of regulations and market factors would create meaningful capacity shortages – and thus higher rates – for the transportation market. There are quite a few questions out there waiting to be answered: Will 2017 finally be the year where this combination of regulations and external factors will come home to roost in a meaningful way for the supply and demand in the market? If that happens, will carriers who have made longer-term commitments to shippers at depressed market rates stick with it or will they turn to the market to gain additional margin? Only time is going to tell us what is really going to happen, but things certainly seem to be more aligned for this to happen than in years past. If it happens, look for the second half of the year to be where that capacity tightening comes home to roost.
Joining NFI in 2012, David is in charge of NFI’s North American brokerage, transportation management, and drayage businesses, as well as, NFI’s intermodal and global logistics operations in Canada. David is leading this rapidly expanding division by offering a more robust suite of services to new and existing NFI clients.