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Faced
with this scenario, which is moving further
from the realm of the hypothetical and closer
to reality, XPO Logistics' acquisition of
Con-Way begins to make a lot more sense.
Here is a purportedly asset-light firm,
but now it can safeguard its main business
by deploying 'guaranteed capacity"
in the form of its own fleet of trucks,
whenever capacity tightens.
In
this way, XPO hopes to be able to navigate
periods of tight capacity in the market
by reallocating a substantial portion of
order volumes to its own assets, thus ensuring
that a certain degree of profitability is
attainable.
The
company will then be able to use its more
flexible brokerage capabilities when labour
supply rises, and go back to earning greater
margins; the incentive that attracted the
company to the business in the first place.
This
is an astute move, given that the solutions
for labour scarcity are few. One measure
that should alleviate the situation is the
opening of the US border, in order to allow
competition from Mexican truck drivers.
Such a move would theoretically prompt an
influx of capacity into the market, which
would in turn relieve capacity constraints.
Although
the charter of the North American Free Trade
Agreement (NAFTA) stipulates that Mexican
truck drivers are allowed to operate across
the country's border, full implementation
of this guarantee has not been forthcoming
from the American side until very recently.
The
reasons for this are deeply political. The
American trucking unions have been vociferous
in their opposition to such measures, as
this would in effect, drive down their earning
potential by introducing greater competition
for services. Another salient trend is the
atmosphere of anti-immigration rhetoric
whipped up by American politicians, who
aim to use popular discontent as a way of
promoting their campaigns.
Improvements
are on the way though, as it was announced
in January 2015 that Mexican drivers who
qualified for permits would be allowed to
cross the border and operate long-haul in
the United States. This will be an evolutionary
process however, with the permits system
in itself holding back a significant number
of drivers (for good or ill), and border
checks causing significant delays.
Moreover,
the benefits of this liberalisation are
likely to be highly regionalised, as a result
of two factors; geographical proximity,
and the rise in intermodal traffic, which
currently bypasses most of the issues associated
with the border crossing anyway.
The
second initiative that could help combat
the shortage is an improvement in driver
retention. While Con-Way has been notably
successful in this area, many other trucking
companies have struggled to retain drivers,
posting a significant revenues. The solutions
to this issue, however, are mainly based
around making improvements to the working
conditions and compensation of drivers,
and as such, necessitate an increase in
spending; thus reducing profitability further,
exactly the situation freight brokers are
attempting to avoid.
As
such, capacity is set to become a problem.
Therefore, the situation likely to unfold
will be one characterised by M&A. This
will in turn lead to two successive outcomes;
consolidation, and competition.
At
the moment, CH Robinson is still far ahead
of all rivals in the industry, in revenue
terms, but there is a pattern of expansion
forming, with XPO joined by UPS (which acquired
Coyote Logistics), and Kuehne + Nagel (ReTrans),
among others. As Bradley Jacobs himself
stated, the industry is currently "begging
to be consolidated" with an extensive
number of medium sized companies currently
operating in the market, and M&A in
the logistics industry as a whole currently
at a high point.
The
inescapable consequence of this will be
more intense competition between the major
players, with the potential for new entrants
likely to be dictated by their financial
clout and technical capabilities. Expertise
in the latter could see competition arising
from unlikely sources, as with Uber in the
taxi industry.
As
of now though, it is far too early to say
who will come out on top. Nonetheless, with
each of the companies mentioned above turning
over annual revenues in excess of $13 billion
per year, the battle for market share is
shaping up to be a clash of titans.
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