Four forces to watch in trucking and rail freight

By Sal Arora and Scott Mcconnell

The surface-freight transport sector—truckload, less than truckload (LTL), and rail freight—is fundamental to the North American economy. In 2015, it added $309 billion in economic profit. Companies based in the United States earned nearly three-quarters of those revenues, and the sector accounted for over 1 percent of US GDP, almost 2 percent of Canada’s, and nearly 6 percent of Mexico’s.1These numbers shouldn’t be surprising. From raw materials to finished goods, nearly every product made or sold in North America relies on surface transport at one or several points in its life cycle. Transportation is therefore a substantial (and complex) cost for many North American companies.

The sector is not only large but also growing. Truck and rail growth rates, at both the northern and the southern borders of the United States, have exceeded domestic-freight growth in the past 15 years. And trucking’s productivity is up—the industry sold or decommissioned 20 percent of its fleet during the 2008–10 financial crisis but continues to move as much freight, by tonnage and value alike, as before. Slow and steady economic growth has raised utilization. Other factors also have contributed, including modal shifts as a result of e-commerce, miniaturization of products and packaging, and more efficient use of trucks and trailers. With utilization now high, the trucking industry has little slack to absorb disruptions or more robust economic growth.2

Some segments, however, are running into challenges, and change is on the horizon across the sector. In 2016 we surveyed over 100 shippers, warehousers, and transportation companies and found that near-term challenges, such as rule changes on hours of service and electronic-logging devices, were uppermost on the minds of both shippers and carriers. Trends that have longer-term or more strategic implications—such as automation, the widening of the Panama Canal, and demographic shifts—barely registered as concerns. Since then, of course, a new US administration has brought the North American Free Trade Agreement into question. Understandably, that’s the issue now dominating discussions in the sector. But no matter how that plays out, industry leaders should consider four historical and structural trends and the implications of our 2016 research.3

Nearshoring is real and has been driving trade growth

Over the past few years, many sectors have been nearshoring, but not all sectors are part of this trend (Exhibit 1), and those that are have vastly different reasons. High-tech companies are embracing the move as a way to bring manufacturing and assembly closer to demand, to reduce total landed costs, to minimize supply-chain disruptions, and to reduce intellectual-property risk. These benefits are particularly significant in a sector that evolves as rapidly and as often as high tech, whose imports from Mexico to the United States increased by $142 billion from 2002 to 2015—243 percent. The way companies carry out this strategy is changing, as well. Two years ago, the most commonly nearshored activity was manufacturing (68 percent of respondents). Now, it’s final assembly.

4

Looking forward, several factors, particularly potential US policy changes, will determine how nearshoring evolves. From a labor-cost perspective, although wages are growing in Mexico and flat or growing only slowly in the United States, there’s more to the story.6When nonpay benefits such as healthcare are considered, US labor costs will probably grow at the same rate as Mexico’s—3 percent annually—for the next five years.7Currency fluctuations and the ongoing decline in the peso relative to the dollar will also continue to play a role in these decisions.

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