A gathering storm for North American vehicle logistics
The 2011 Finished Vehicle Logistics conference saw more than 200 delegates gather to debate issues around capacity, efficiency and fuel reduction. And in the wake of the Japan crisis and a recovering economy, the market looks set for a capacity challenge later in the year, reports Christopher Ludwig.
The 2011 Finished Vehicle Logistics North America conference in Newport Beach, California revealed an industry moving well along the path of recovery, but which continues to hit multiple speed bumps, including rising fuel prices, restrained production following the Japan crisis and a looming shortage of capacity for trucks and rail wagons.
Continuing a debate that started a year ago at the inaugural event on the West Coast, and mirroring similar debates held on the other side of the Atlantic in Europe at the recent ECG Assembly, carmakers and logistics providers expressed concern that vehicle logistics could become a serious bottleneck for the automotive industry’s recovery.
Carmakers including Ford, Toyota, Honda, Chrysler, Hyundai-Kia and others warned that the shortage of transport assets–compounded in recent months by the withdrawal of service in certain locations by the largest US provider, Allied–could reach critical levels, particularly in the fourth quarter of 2011 as production ramps back up for Japanese carmakers.
An approaching tornado for capacity
Mike Nelson, national manager of highway logistics for Toyota Logistics Services, revealed that the US market had seen its car carrier fleet cut from 13,000 in 2006-2007 to 8,000 at the market’s low point in 2009, with current levels around 9,000. But the industry does not appear to have plans to add significant capacity to the road as sales increase. Ford’s director of North American vehicle logistics, Walter Lowe, said that time was running out to find a solution.
“The industry is looking at a gap of between 1,200-1,500 trucks, which would mean we won’t be ready for the push later in the year when we expect to be at a [production] run rate in the fourth quarter that would equal 14.5m units a year,” he said. “My concern is that there is no real plan to deal with the capacity, and we only have five months to figure it out.”
Mercedes-Benz USA’s manager of vehicle distribution, Markus Gichert, compared the fourth quarter to an approaching tornado. “We know that it is coming but we do not know exactly where it will touch down, whether it will be rail issues, ro-ro shipping or port congestion on the west coast with more Japanese imports, or trucking capacity in the southeast, for example” he said.
But truck providers at the event argued that current rates and the cost structure of the vehicle logistics industry were simply not sustainable for enough new investment to maintain the service levels required by OEMs. Michael Wysocki, chief executive officer of United Road, one of the largest carriers in the US, said that the problem had been building for 15 years.
“Nobody wants to buy trucks. We need support on the capital side, and I’m not talking about rate guarantees or eliminating risk but simply in economic terms that allow us to get returns on our investments and give our drivers a decent life,” he said.
At the same time it would be inaccurate to say that there is currently no investment in the North American vehicle logistics industry. Speaking to several carriers on the sidelines of the event, including Jack Cooper, United Road, and Proficient Auto Transport among others, carriers are once again investing in trucks and trailers (although some appear to be more active on the used truck segment). Dave Floyd, CEO of Professional Auto Transport said that his current investment plan was to grow his fleet 15% per year. The North American railways, meanwhile, have planned massive levels of capital spending, including more than $3 billion for Union Pacific alone.
However, investment in building new equipment is generally muted. Cottrell, one of the two remaining car haul trailer manufacturers in North America (along with Delevan), told Finished Vehicle Logistics that it was operating at about 40% capacity (building about four trailers per day). And according to Keen Doucet, from the Canadian railway CN, the total number of tri-level rail wagons that will be added to the total pool of available wagons would be 341–that is out of a total fleet of 34,845 bi-levels and 14,372 tri-levels, or about 9,000 wagons fewer than the fleet’s peak.
That imbalance between bi-level and tri-level could become a serious issue for the sector. While the American shift to small cars has not been as pronounced as might be expected–according to IHS, the current split for sales is 50.8% cars, 49.2% truck/SUV (with hybrids a surprisingly low 2.4% in 2010)–there is nevertheless increasing production and distribution of small cars. Jon Schwartz, manager of procurement and network design for Chrysler, said that his company would be distributing the Fiat 500 by rail out of Toluca, Mexico on tri-level wagons and would add several new models that move on tri-levels over the next year.
WWL’s Rocky Luna, vice president of inland distribution, which includes responsibility for procuring Nissan North America’s vehicle logistics, said that he was seeing significant shortages related to wagons. “According to the current build plan, even if the industry built a new tri-level railcar everyday until 2013, we would still be short,” he said.
Greg May, president of Jack Cooper Transport, warned that the problems would get worse before they improved. “There is a capacity problem and it will likely get worse in the short term. Carriers are doing everything they can to improve efficiency and make the best use of available capacity, but there is a $1 billion solution out there [to replace 4,000 missing trucks]”, he said.
Looking at the wider US and North American car market presents a complex picture that is also contributing to the conservative expansion of many vehicle logistics providers. Rebecca Lindland, director of strategic review for IHS Automotive, revealed that the company had reduced its forecast for the US light vehicle market by 600,000 units for 2011 from 13.3m to 12.7m, although she admitted that the figure could be pushed up to 12.8m or 12.9m (11.6m units were sold in 2010). The reduction stemmed from two main issues, one of them short term, the Japanese earthquake, and the other more long term with rising oil prices.
The impact of Japan on global production is staggering, even if recent announcements by Japanese manufacturers suggest a quicker return to full production that previously thought. According to Lindland, about 3.6m units will be lopped off of global light vehicle production as a result of the earthquake in 2011. In North America, the impact is a loss of 454,000 units in the second quarter and a further 90,000 units lost in the third quarter.
It is also of concern to ocean forwarders as Gary Hurley, vice president of NYK Line (NA)’s RoRo division, made clear when he highlighted that there were 20-30 vessels from the various providers serving the market currently sitting in Tokyo harbour waiting for work. “That sounds like great capacity but it’s not because a lot of the ships we run services on from the US going to other areas come from Japan. It means tonnage is going to be short in other segments of the market,” he said.
He went on to point out that when volumes return ocean providers are going to be thrown into the other extreme a face a serious capacity crunch.
Until then, however, the impact of the Japanese earthquake appears to have the benefit of causing relief for transport capacity in the US, particularly given backlogs at major rail ramps and Allied’s service withdrawals over pay issues in March. To that end, the capacity debate is framed around a threat in the coming months rather than the current moment. “I am not losing much sleep over capacity,” said Nancy Davies, vice president of Toyota Logistics Services. “I have faith that the market will deliver the necessary capacity when we really need it.”
But many signs point to potential bottlenecks in the fourth quarter and beyond (and Davies admitted that her colleague, Mike Nelson, was considerably more worried about capacity). Lindland predicted that the end of the year would see production levels start to make up for the backlog, with 57,000 extra units predicted for the fourth quarter.
Beyond 2011, IHS predicts reasonably strong recovery in the years to come, with 2012 growing to 14.7m, 2013 at 15.8m and 2014 back to pre-crisis levels at 16.5m units.
But while those numbers are encouraging in comparison to the past three years, Lindland stressed that the figures look higher than they actually are. Sales relative to driving age, housing starts and population growth will be at historic lows, even as the industry recovers closer to 17m units. “We are not gaining back the millions of units that we have lost in this crisis period, which means that is simply growth that is gone and not coming back,” she said.
The reason for this muted growth is the result of general economic weakness–including a poor housing market, high debt levels, and likely tax rises to address the growing American budget deficit– as well as high oil prices. The price at the pump alone will hold back sales by at least 150,000 units per year, said Lindland.
But not everyone at the event agreed with this restrained forecast for the US and North American market. Mike Riggs, who owns Jack Cooper Transport, was bullish on economic indicators including the scrap rate versus new production, the value of used cars as well as the overall improvements in quality of cars on the market. He suggested that a worst-case scenario for the industry right now would be to underestimate the size of the market, thereby restraining further investment in truck and rail wagon equipment. “We are already seeing capacity issues and if 2012 hits 15m units and goes 300,000 units higher than predicted, that could be a serious problem,” he said.
Manufacturers that have seen their production and sales hit hardest by the current crisis are also anticipating that the capacity scenario could get ugly if the industry does not prepare. Toyota’s Mike Nelson and American Honda’s Scott Crail pointed out that allocation rates were already very high, with most cars sold off the assembly line or on the ship by the time it reaches port. “Toyota has got 50% production right now and that is at a time when our dealers probably need 110%, so we are going to face a lot of challenges in getting cars to market once we come back to full speed later in the year,” he said.
Besides concern for truck and rail wagon capacity shortages, the industry is also facing potential driver shortages. Toyota’s Mike Nelson, quoting figures from the Automobile Carriers Conference, an association representing car hauliers, said that more than 60% of drivers were aged 55 years or older. The industry has generally lost drivers in recent years as pay failed to keep pace with other freight trucking sectors. The industry also saw a large exodus or drivers during the 2008-2009 crash.
But at least one newcomer challenged the industry view that companies could not recruit drivers. Steffon Perfect, president of Car-Haul Co-Op, held up a list of about 600 owner-operator drivers that he had signed up over the past four months. Perfect, a native New Zealander and former driver and owner-operator, said he had gathered excitement from drivers based on his plan to create the first cooperative in the car haul sector. Perfect plans to give away nearly 50% of the company after two years, and eventually to move to a 100% employee-owned model. He believed that his focus on treating drivers well would create a more sustainable and service-minded company. “Our people will come first, not the OEMs. We believe that if you put your employees first, the customers and the money will follow,” he said.
The company is only four months old and as yet unproven, although Ford’s Lowe expressed hope that Perfect would be able to achieve what he said he was going to do. Others expressed worry that the driver base Perfect had recruited would be pulled from other companies and that it did not address the general shortage still facing the industry.
One area that both carmakers and providers agreed could help to alleviate the capacity shortages would be through better communication and education with dealers. American Honda’s Crail and Toyota’s Nelson were joined by carriers in calling for dealers to be more flexible in their receiving hours. Kirk Williams, president and CEO of Proficient Auto Transport, a carrier operating primarily in the southeast, said that inflexible dealers were hurting the efficiency of carriers. “Manufacturers’ switch from a push to a pull production and sales model has put a lot pressures on carriers, and yet many dealers won’t take cars on weekends or during night hours,” Williams said. “We would ask dealers to make themselves more available to carriers.”
Mike Monell, service director for a major dealer group, Norman Reeves Honda Superstore, said that he worked specifically with his employees and his schedules to help accommodate out-of-hour deliveries. In some instances, the store had switched schedules to Tuesday to Saturday to be able to take Saturday deliveries (and since few deliveries were arriving on Mondays). “I tell my employees to treat the drivers [arriving with the cars] as their customer, and to go out there and help them,” Monell said.
But Monell admitted that most dealers, particularly smaller ones, were completely ignorant to the logistics process. For that reason, he emphasised that better communication between the OEMs, logistics providers and dealers would help to better set expectations and estimated arrival times for final customers.
The extent to which OEMs maintain this communication still appears to be inconsistent, with some carmakers providing considerably more visibility and information than others during the delivery process. Steve Seher, from vehicle processor Auto Warehousing Company, said that one specific customer was excellent at communicating and adhering to its forecasts, and to keeping its processing steady in volume and flow, allowing carriers to build the most efficient loads and to help them meet estimated delivery times.
On the other hand, other carmakers appear to communicate much less. Proficient Auto Transport’s Williams said that some of its customers do not even communicate which vehicles are stock and which are sold. “That means that sometimes we build our loads as efficiently as we can only to arrive at the dealer and discover that we delivered stock units to it when it was desperate for a specific sold unit,” he said.
According to Tom Swennes, vice president of ICL Systems, while most OEMs have good internal visibility they lack awareness outside their own supply chains because of a lack of common standards, entrenched business processes and attitudes, and inflexible legacy IT infrastructure.
Ford’s Walter Lowe said that sometimes the problem lies in dealers setting false expectations as well. He related an anecdote in which a dealer had promised its customer a Ford F150 model before Christmas that was not even going to be launched until January. After a delay launch, and several other logistics problems, the customer did not receive his vehicle until March. “There were a lot of failures in that process but the first failure was the dealer giving the end customer false information. We have to work together to make sure we set realistic expectations,” he said.
There was some suggestion about how innovative new equipment might help to change the capacity situation. One company, CTM, presented a convertible trailer that can be adjusted to carry vehicles as well as collapse to a flatbed truck that could haul general freight. Likewise, Union Pacific will start production this year of its Autoflex rail wagon that can be converted from a bi-level to a tri-level in 20 man-hours. Linda Brandl, vice president and general manager of UP said that the railway would build 75 wagons to enter the reload fleet by the end of the year and another 25 early in 2012.
But by and large the solution for the capacity issue seemed down to simple investment–the “$1 billion solution” as Greg May said–and carmakers indicated that if the market did not rise up to meet the demand then they would seek other solutions, including making their own investment in transport assets. One carmaker indicated privately that the company was very close to going that route and would likely start its own trucking company.
Lowe said that Ford didn’t want to invest in trucking, but that “we will not fail our customers”. He said that Ford would step in if necessary to delivery cars itself, but he was clear that he would much prefer that the open market provided the capacity.
Other carmakers made similar comments. Toyota, which already has an in-house carrier with 105 trucks delivering primarily on the west coast, did not rule out expanding that fleet. “We would be remiss if we didn’t explore the potential to expand Toyota Transport,” said Nelson. “We can certainly do that if necessary. Do we want to? Not really, but we can.”
Glovis, the logistics arm of Hyundai and Kia, has also recently said that it was exploring the idea of developing its own truck fleet.
Such comments echoed similar sentiments expressed recently in Europe, notably by Daimler’s head of worldwide vehicle logistics, Egon Christ, who said that Daimler could resort to building up a distribution company if the market did not step up. But for Christ such a move would also be a reluctant solution.
Lowe also indicated that perhaps a railway might be willing to expand and offer a “turnkey” solution where it might take responsibility for road transport to or from a rail ramp. “A railroad is already a transportation company and has the necessary expertise, whereas as Ford should be investing in product development rather than car carriers,” he said. “Vehicle logistics is a necessary evil for us.”
The railways were relatively quiet on such a proposal, although Norfolk Southern’s Richard Kiley indicated that he was not sure that a railway should look to get involved in the trucking industry. “If a guy as smart as Greg May [president of Jack Cooper] is struggling with truck capacity, then why would I be any better at it?” he said.
At the ports, meanwhile, where capacity is likely to become a serious issue when the surge in volumes that is expected by 2012 comes, forward planning and faster throughput involving collaboration between processor, carmaker and ocean forwarder were seen as crucial.
“Dwell is the enemy,” said Richard Frick, senior vice president and general manager at Pasha Automotive Services. He admitted that storage was a necessary evil sometimes but it was not ideal. “What is ideal is throughput,” he went on, and provided an example of how the company increased turnover and removed four days of dwell time by communicating with the ocean forwarder, the rail provider and the trucking company to get a preferred picture of the load build required.
“It drives process change and we can find efficiency and savings,” he said. “A car in the pipeline is costing someone money in storage charges and risk of damage, it needs to get to the customer.”
Of further relevance to ports would be the impact of the strong yen as it spikes to 79 against the dollar, prompting a change in balance from imports from Japan to exports by Japanese manufacturers from the US.
“With the strength of the yen it is almost impossible at 80 yen to the dollar for Japanese manufacturers to be profitable on a small imported vehicle,” said Steve Rand, president and CEO of port processor Amports. “Unless the yen weakens I wouldn’t be a surprised if there was a shift in production of small cars from Japan to the US.”
This was picked up by Toyota’s Nancy Davies who agreed that the company needed to do something in terms of production with its smaller vehicles. She said that plants would continue production in Japan but she said there was a fine balance in deciding which vehicles to build there and which to build in the North America, including Mexico. “The yen crisis is long term as opposed to the tsunami, which is going to be a short-term situation,” she said
In another sign of the industry’s recovery and shifting business model, the conference revealed that the used car market is booming. The lack of inventory for new cars has driven up demand for used cars as well, and according to both Dave Carp, director of fleet and remarketing at Kia Motor America, and Richard Okida, remarketing manager at Toyota Financial Services, used car prices are at all time highs.
This demand is creating opportunities for vehicle transport, according to Carp, as Kia and other brands look to quickly move cars to auction. Okida said that there has been an increase in online traffic, and for demand of single unit moves across the country.
United Road chief Michael Wysocki, whose business is split about 50% between new and used car business, said that the high price of used cars was also increasing the demand for car swaps between dealers.
Wysocki said that United Road’s diversification in the used car market had enabled it to grow during the recession, but that is also enhanced the carrier’s efficiency in the new car market. “Plugging used cars into our network allows us both to fill trucks and better use our assets, but it also gives us opportunities to reposition our trucks for backhaul moves,” he said.
But Wysocki added that transport capacity for the used car market would be subject to the same pressure as the new car market, particularly later in the year. While he said that there was no specific priority for a retail car, manufacturer or used car within the delivery network, he did stress that dealers were often the most concerned about service and delivery time because they needed the cars for their sales. “The cost pressure is the same or greater for a used car or retail car as it is for a manufacturer’s car, but dealers often expect a higher service level and are willing to pay for it,” he said.
The high cost of fuel brought into sharper focus the debate on fuel efficiency and ‘green logistics’. John Felitto, executive vice president of WWL Americas, reminded delegates of the impending legislation of sulphur emissions for bunker in Emission Control Areas (ECA) in both Europe and along the east coast of the US and Canada that will come into effect in 2012, with even stricter limits slated for 2015. “When these ECAs come into effect we will have to switch from bunker fuel that currently costs $650 per tonne to $950 per tonne,” said Felitto.
Felitto revealed that WWL was already burning low-sulphur fuel that exceeded current requirements at an expense of about $20m more per year, an added cost that it has not passed onto to customers. “We have absorbed that cost and taken a smaller margin because we believe it has a positive long term impact,” he said. “But with the new regulations coming it will not be sustainable for WWL or the shipping industry to absorb all of these costs.”
Felitto pointed to numerous ways that the shipping industry could mitigate cost, including newer, more efficient vessels, as well as by slowing down vessel speed. “A reduction in speed of two nautical knots–or 10%–results in a 25% reduction in fuel consumption,” he said. “That would mean adding two extra days to the transit time between Europe and North America, but the total savings in fuel would be 14,000 tonnes per year.”
Felitto admitted that if the market picked up as expected, and particularly as Japanese exports ramped up, that ships may need to run at full speed to help free up capacity. But the industry needed to have a wider debate on speed in the supply chain and the balance between fuel consumption and delivery times.
Such expectations were a point picked up by other modes too in the face of capacity shortages. Pat Donohue from IT provider ICL pointed out that if dealers could live with two days extra lead time, a lot of pressure would be taken off of capacity. Mercedes-Benz’s Gichert said he was open to the idea, but admitted that it would be an uphill battle in educating dealers and changing their expectations since most expect vehicles to turn up as soon as they are sold. “It will be very difficult to change the dealer’s awareness. Logistics companies get no credit from dealers for doing things right, but they complain a lot about any delay,” he said.
In terms of the wider environmental debate, Ford’s Lowe as well as Toyota’s Davies agreed that the ‘green’ aspect was simply a label for reducing fuel consumption and cost. “A greener logistics provider would rise to the top, but it would still come down to cheaper rates and better service,” Davies said.
But both said that could change as buyers–particularly the younger generation–become more environmentally conscious. “Maybe as consumers look more carefully at the environmental impact of the supply chain we too will change our focus,” said Lowe.