A Rocky Global Highway
The financial crisis that's putting a new squeeze on freight transportation is also shining harsh light on overseas investment by U.S.-based trucking companies, pushing companies to take a new look at how and where they invest in efforts to bring global business into their networks.
Whether the massive federal bailout keeps the stalling economy from lapsing into a long-term recession, weak demand and unprecedented turmoil in the credit markets could cool what has become an important effort to push more deeply into expanded supply chains.
"When the entire logistics system depends upon performance in overseas production areas, then owning something in those areas adds control to the transportation system," said Donald Ratajczak, emeritus professor at Georgia State University and consulting economist for investment bank Morgan Keegan. "And when the cost of transportation is rising so rapidly because of fuel, greater control of your entire system certainly makes sense."
A global recession, however, would reduce the near-term return on those investments, Ratajczak said, and make it harder for transportation companies to pull the trigger on expansion, especially when it involves hard assets.
"In a world that is trying to avoid risk, acquiring overseas carriers initially may add to risk. Moreover, how are those acquisitions being financed? I realize some transactions continue to be funded, but that is now the major constraint in the world economy."
Major U.S. trucking companies and their subsidiaries that in the last five years have invested in China's explosive growth - YRC Worldwide, Schneider National, Con-way Freight, J.B. Hunt Transport Services, to name a few - may soon be bumping up against another phenomenon: a kind of boomerang effect of offshoring as more manufacturers look at production facilities closer to their end markets in the United States.
Cheap labor and a relatively stable economy pushed the production of technology and electronics goods to Asia over the last decade. But over the last two years, as oil prices have soared, transportation and logistics has become a larger component of the total cost of goods and the wage gap between China and one nearby alternative, Mexico, has narrowed.
"For executives managing global supply networks, the question now is whether or not conditions are moving toward a tipping point," said a recent report by consulting firm McKinsey & Co. "Is this the moment to consider sharply scaling back offshore production plans and bringing manufacturing back or close to the United States?"
FedEx appears to be working on that premise. FedEx recently launched next-day express service in Mexico and the company's comments suggest the ties to international business likely are more important than the dynamics of the domestic market alone. "We're seeing a lot of companies asking us to consolidate their domestic shipping along with their cross-border (Mexican) shipping," said FedEx Express President and CEO David J. Bronczek at a recent earnings meeting.
"We're very optimistic for the Mexican market, bundling our opportunities there into the United States and Canada," he said.
Even China's industrial engine, which helped fuel explosive growth in the trucking sector over the last 10 years, is showing signs of downshifting.
The government recently increased the price of diesel fuel there by approximately 18 percent in response to soaring crude oil prices, according to industry sources there. That could trigger a slowdown in the economy there, and possibly lead to less aggressive investment by the Chinese government in its transportation network. A budget report this year by China called for increasing spending on China's highway network from $68 billion to $276 billion per year.
The changing nature of international manufacturing could put new investment by U.S. trucking under closer scrutiny and raise the stakes for the investments already made.
YRC Worldwide subsidiary YRC Logistics recently closed its purchase of Shanghai Jiayu Logistics, a major Chinese trucking company. YRC is paying $44.7 million for 65 percent of the stock, and up to an additional $39 million in 2010 for the rest.
While YRC calls the acquisition "a key link" to extending and managing its supply chain, it also comes as YRC is trying to trim costs and jump start its long-haul operations in the United States by merging Yellow Transportation and Roadway into a single carrier.
"While providing a strategic opportunity over time in Asia, we believe this acquisition increases a real current cash risk to YRC," said independent transportation analyst Edward M. Wolfe.
Long before becoming $10 billion trucking giant YRC, competitors Yellow and Roadway sought more control of the foreign links in their supply chains to capitalize on growing trade.
Yellow began an alliance with Dutch trucking company Frans Maas in 1992 to tap into the European market. The same year, Roadway and rival ABF Freight System announced overseas alliances of their own. Roadway started a weekly service to the Pacific Rim as a non-vessel operating common carrier, and ABF hooked up with Dutch NVOCC Votainer, allowing ABF to ship cargo to 45 countries.
Yellow ended its relationship with Frans Maas in 2002 because "it wasn't bringing with it what we had expected in revenue and growth," said Jim Ritchie, who oversaw the alliance for Yellow. But it hasn't stopped YRC from expanding its borders. Instead of cultivating alliances in Europe, it's placing bets that owning a trucking company in Shanghai will reap rewards in Asia.
Ritchie, now president of YRC Logistics, said although it took over a year to finalize the deal, it's already paying off.
"We've been approached by our U.S.-based clients to provide service to them on the ground in China, and it's been successful in bringing in business," Ritchie said. "Those that have come to us said they need to get more visibility into the intra-China movement of goods."
The Jiayu purchase gives YRC Logistics 250 local offices, 400 trucks, and another 3,000 under contract as owner-operators. Of Jiayu's 30,000 customers, 90 percent are based in China. Multinational companies make up the 10 percent based elsewhere.
"But we see a shift occurring in China," Ritchie says. "Multinationals are really starting to look for companies that can provide the service they're more accustomed to receiving in the U.S. We've built up a trust in the U.S. with these manufacturers over a long time, and they're interested in figuring out how to bring service to a new level."
YRC Logistics' domestic Chinese customers have become used to dealing with the service flaws inherent in what is still a very fragmented trucking market: no pricing discipline, slack safety standards and low visibility into their supply chains.
"It's like the Wild, Wild East," Ritchie says. "Because the market is mostly owner-operators, they lack the ability to find a balanced lane they can operate in. It's very inefficient to drive 500 miles and come back empty."
He's finding those customers are getting more comfortable dealing with a big name in trucking like YRC. "They're a little more price sensitive - the mindset there is still to see how inexpensive they can get their freight moved," he said. "But this gives us opportunity for solid client loyalty as service improves over time."
Similar experience drove truckload carrier Schneider National to obtain a license last year to provide domestic trucking services in China. The company set up Schneider Logistics (Tianjin) to provide asset- and nonasset-based trucking and logistics services in China and even began offering scholarships this year to logistics students at China's Tsinghua University.
Menlo Worldwide Logistics, a subsidiary of Con-way, took the nonasset based approach to increasing its presence in China.
The company completed its purchase of Shanghai-based Chic Holdings in October 2007 for $60 million, adding 1,500 employees working at 130 sites in 78 cities. It will provide domestic third-party warehousing, logistics and transportation management services throughout the country.
As with YRC, it's been a challenging year for Menlo. "There were a bunch of natural disasters - earthquakes, snowstorms, two highways shut down," said Gary Kowalski, Menlo's chief operating officer. "But our retention rates are at 100 percent. We've renewed all our current customers, and had a 50 percent win rate on new customers."
For Menlo, which has been in China for 10 years, adding Chic Logistics, which generated $55 million in revenue in 2006, boosts its capacity to serve customers by adding 1.5 million square feet of warehousing space. "It gives us a more stable platform for growth," Kowalski said.
It's unclear whether other nonasset-based attempts by trucking companies to expand their international presence - such as Schneider National's 2005 purchase of American Port Services, or J.B. Hunt Transport Service's 2006 partnership with steamship company Matson Navigation - will prove less risky than owning assets overseas in a slowing economy.
Whether the massive federal bailout keeps the stalling economy from lapsing into a long-term recession, weak demand and unprecedented turmoil in the credit markets could cool what has become an important effort to push more deeply into expanded supply chains.
"When the entire logistics system depends upon performance in overseas production areas, then owning something in those areas adds control to the transportation system," said Donald Ratajczak, emeritus professor at Georgia State University and consulting economist for investment bank Morgan Keegan. "And when the cost of transportation is rising so rapidly because of fuel, greater control of your entire system certainly makes sense."
A global recession, however, would reduce the near-term return on those investments, Ratajczak said, and make it harder for transportation companies to pull the trigger on expansion, especially when it involves hard assets.
"In a world that is trying to avoid risk, acquiring overseas carriers initially may add to risk. Moreover, how are those acquisitions being financed? I realize some transactions continue to be funded, but that is now the major constraint in the world economy."
Major U.S. trucking companies and their subsidiaries that in the last five years have invested in China's explosive growth - YRC Worldwide, Schneider National, Con-way Freight, J.B. Hunt Transport Services, to name a few - may soon be bumping up against another phenomenon: a kind of boomerang effect of offshoring as more manufacturers look at production facilities closer to their end markets in the United States.
Cheap labor and a relatively stable economy pushed the production of technology and electronics goods to Asia over the last decade. But over the last two years, as oil prices have soared, transportation and logistics has become a larger component of the total cost of goods and the wage gap between China and one nearby alternative, Mexico, has narrowed.
"For executives managing global supply networks, the question now is whether or not conditions are moving toward a tipping point," said a recent report by consulting firm McKinsey & Co. "Is this the moment to consider sharply scaling back offshore production plans and bringing manufacturing back or close to the United States?"
FedEx appears to be working on that premise. FedEx recently launched next-day express service in Mexico and the company's comments suggest the ties to international business likely are more important than the dynamics of the domestic market alone. "We're seeing a lot of companies asking us to consolidate their domestic shipping along with their cross-border (Mexican) shipping," said FedEx Express President and CEO David J. Bronczek at a recent earnings meeting.
"We're very optimistic for the Mexican market, bundling our opportunities there into the United States and Canada," he said.
Even China's industrial engine, which helped fuel explosive growth in the trucking sector over the last 10 years, is showing signs of downshifting.
The government recently increased the price of diesel fuel there by approximately 18 percent in response to soaring crude oil prices, according to industry sources there. That could trigger a slowdown in the economy there, and possibly lead to less aggressive investment by the Chinese government in its transportation network. A budget report this year by China called for increasing spending on China's highway network from $68 billion to $276 billion per year.
The changing nature of international manufacturing could put new investment by U.S. trucking under closer scrutiny and raise the stakes for the investments already made.
YRC Worldwide subsidiary YRC Logistics recently closed its purchase of Shanghai Jiayu Logistics, a major Chinese trucking company. YRC is paying $44.7 million for 65 percent of the stock, and up to an additional $39 million in 2010 for the rest.
While YRC calls the acquisition "a key link" to extending and managing its supply chain, it also comes as YRC is trying to trim costs and jump start its long-haul operations in the United States by merging Yellow Transportation and Roadway into a single carrier.
"While providing a strategic opportunity over time in Asia, we believe this acquisition increases a real current cash risk to YRC," said independent transportation analyst Edward M. Wolfe.
Long before becoming $10 billion trucking giant YRC, competitors Yellow and Roadway sought more control of the foreign links in their supply chains to capitalize on growing trade.
Yellow began an alliance with Dutch trucking company Frans Maas in 1992 to tap into the European market. The same year, Roadway and rival ABF Freight System announced overseas alliances of their own. Roadway started a weekly service to the Pacific Rim as a non-vessel operating common carrier, and ABF hooked up with Dutch NVOCC Votainer, allowing ABF to ship cargo to 45 countries.
Yellow ended its relationship with Frans Maas in 2002 because "it wasn't bringing with it what we had expected in revenue and growth," said Jim Ritchie, who oversaw the alliance for Yellow. But it hasn't stopped YRC from expanding its borders. Instead of cultivating alliances in Europe, it's placing bets that owning a trucking company in Shanghai will reap rewards in Asia.
Ritchie, now president of YRC Logistics, said although it took over a year to finalize the deal, it's already paying off.
"We've been approached by our U.S.-based clients to provide service to them on the ground in China, and it's been successful in bringing in business," Ritchie said. "Those that have come to us said they need to get more visibility into the intra-China movement of goods."
The Jiayu purchase gives YRC Logistics 250 local offices, 400 trucks, and another 3,000 under contract as owner-operators. Of Jiayu's 30,000 customers, 90 percent are based in China. Multinational companies make up the 10 percent based elsewhere.
"But we see a shift occurring in China," Ritchie says. "Multinationals are really starting to look for companies that can provide the service they're more accustomed to receiving in the U.S. We've built up a trust in the U.S. with these manufacturers over a long time, and they're interested in figuring out how to bring service to a new level."
YRC Logistics' domestic Chinese customers have become used to dealing with the service flaws inherent in what is still a very fragmented trucking market: no pricing discipline, slack safety standards and low visibility into their supply chains.
"It's like the Wild, Wild East," Ritchie says. "Because the market is mostly owner-operators, they lack the ability to find a balanced lane they can operate in. It's very inefficient to drive 500 miles and come back empty."
He's finding those customers are getting more comfortable dealing with a big name in trucking like YRC. "They're a little more price sensitive - the mindset there is still to see how inexpensive they can get their freight moved," he said. "But this gives us opportunity for solid client loyalty as service improves over time."
Similar experience drove truckload carrier Schneider National to obtain a license last year to provide domestic trucking services in China. The company set up Schneider Logistics (Tianjin) to provide asset- and nonasset-based trucking and logistics services in China and even began offering scholarships this year to logistics students at China's Tsinghua University.
Menlo Worldwide Logistics, a subsidiary of Con-way, took the nonasset based approach to increasing its presence in China.
The company completed its purchase of Shanghai-based Chic Holdings in October 2007 for $60 million, adding 1,500 employees working at 130 sites in 78 cities. It will provide domestic third-party warehousing, logistics and transportation management services throughout the country.
As with YRC, it's been a challenging year for Menlo. "There were a bunch of natural disasters - earthquakes, snowstorms, two highways shut down," said Gary Kowalski, Menlo's chief operating officer. "But our retention rates are at 100 percent. We've renewed all our current customers, and had a 50 percent win rate on new customers."
For Menlo, which has been in China for 10 years, adding Chic Logistics, which generated $55 million in revenue in 2006, boosts its capacity to serve customers by adding 1.5 million square feet of warehousing space. "It gives us a more stable platform for growth," Kowalski said.
It's unclear whether other nonasset-based attempts by trucking companies to expand their international presence - such as Schneider National's 2005 purchase of American Port Services, or J.B. Hunt Transport Service's 2006 partnership with steamship company Matson Navigation - will prove less risky than owning assets overseas in a slowing economy.
