Ferrier Hodgson partner Brendan Richards has built a formidable reputation as a transport industry observer. Rob McKay interviews him on the trends of the last quarter-century
RM: What wider economic national and international trends have coloured the development of trucking in the past 25 years and what has it meant for drivers, small to medium operators and larger concerns?
BR: All the popular visions of the future of transport had one thing in common – a world where we moved beyond oil, but the reality was quite different. As oil became more expensive, the resource became more accessible and technological breakthroughs became more rapid. Oil, gas and coal were readily converted into transport fuels and other petroleum products. Combustion engines became more efficient. So even with massive growth in transport demand, what everyone thought would drive the future of the Australian transport industry – moving away from oil – turned out to be a red herring that simply guaranteed business as usual. Instead of some sort of evolution of the traditional modes of transport, what we are getting instead is a technological revolution that is threatening to completely replace some modes of transport. Technology is removing the driver, optimising the routing, tracking the goods, changing the supply chain, eliminating the middle man, consolidating the industry players and introducing new ones like Amazon that aren’t even transport companies but are taking on the industry at its own game.
Whether you are big or small, your business model is under threat and your relevance is being questioned.
The early 1990’s saw the start of workplace computerisation. How did that impact on transport business operations?
Computerisation, in general terms, created the sort of benefits that are still being pursued and honed today. Integration led to a decrease in costly errors, customer service improved in terms of both speed and quality, working capital became faster and easier to obtain, transparency improved and access to real time freight data and analysis became a reality with the advent of RFID and the early days of track and trace.
The period saw the rise of local powerhouses such as Toll and Linfox, which pivoted from pure trucking to logistics services. How did that play out and how were customer expectations changed?
From the outside looking in, you can argue that the rise of Toll and Linfox was more a changing of the guard than a serious change in direction for the industry. In many ways, they were taking over from where the likes of TNT, Brambles, and Mayne left off and we were left in the same situation that has almost always been the case – a couple of major players and then daylight to everyone else. The change in customers’ expectations was shaped more by outside forces – in particular, the rapid developments in technology. Customers started to expect everything faster and bigger. As a society, we have become voracious consumers of the here and now, and that has affected transport as much as any other sector. It wasn’t so much that the major transport companies became players on the world stage as that their customers were already there and demanding a level of service far in excess of anything seen before but for far less money. It is the globalisation of demand that is changing the world, not the globalisation of supply.
As large firms turned into giants, what has consolidation meant for medium and smaller operators?
The majors have recognised the need to be more relevant to their customers by deepening their involvement in the supply chain. The result is that the gap between the transport majors and minnows has widened, driven by:
* The increasing pace of globalisation and the ability of the majors to provide one-stop-shop solutions for customers who have grown to play on the world stage
* Developments in technology particularly in the fields of predictive analysis, network planning tools, freight tracking, customer software integration, driver safety aids
If the medium and smaller operators want to compete then they need to come together in collaborative networks and provide the depth and breadth of service that the customer wants. Up until now, the minnows have held back – mostly for fear of losing a customer to someone who you thought was a partner in a solution for that customer. But the other reason is when you are already established and well capitalised, technological development typically works in your favour. You can adopt it earlier, improve your offering and reinforce your value proposition. So over time the gap between the majors and minnows widens.
What’s more, for the little blokes, technological advancement not only proves to be a barrier, but also exposes their vulnerability. For example, in the last mile of delivery where supply chains vaporise, we’ve seen the rapid emergence of crowdsourcing models that have introduced a whole new level of competition to the sector. Think uberCargo, Rocketuncle and VanGo VanGo. They don’t necessarily hurt the big boys but they play havoc with the small to medium operators. The minnows need to get together in order to fight back or they need to get out.
Speaking of consolidation, finance houses of various stripes have been crucial, with first banks and then venture capital making their mark. How did that go? The role of private equity firms seems to have grown have waned. Is that it for that sort money man?
Private equity interest in domestic logistics took off around 2008 with the likes of ABN AMRO, KKR, CHAMP and Gresham all having a crack at one time or another. What those efforts have in common is that they all ended in varying degrees of failure. The basic underlying cause, I believe, is that transport is a highly capital-intensive industry with low profit margins. The frequency of churn of capital, as you buy new trucks etc., means that there are very few transport businesses that are capable of generating the cash flows that are so important to private equity. As a consequence, once private equity is in there, they look to free up cash from other areas of the business. What they tend to do is identify areas of ‘unnecessary’ cost that turn out to be far more important than they thought. The end result is that there is a gradual or rapid stripping out of the fundamentals that drive a successful freight business and, sooner or later, an exit for the private equity firm. It’s hard to see anything changing in that regard and I’m not sure that we will be seeing too many more private equity buyouts in the future.
What does the growth of huge transport and logistics facilities at the edges of cities tell us about the changing task?
Population growth is going to be massive and most of it will be in our capital cities. This will put enormous strain on the infrastructure of those cities and make the traditional modes of transport – road, rail, sea and air – increasingly expensive and difficult to operate. As Australia’s population ages, the transport industry will also be put under additional strain with the age profile of the transport workforce easily the oldest in Australia. As that workforce retires, skill shortages become a problem that will be difficult to overcome unless the industry can somehow make itself more attractive to young people.
As our populations and our cities grow we can expect to see very sophisticated logistics hubs that receive all the goods coming into the city and allow for their ‘last mile’ distribution by a variety of transport services including drones, Uber-type freight delivery operations and even personal pickup. These will be supplemented by huge networks of delivery kiosks located in areas such as schools, train stations and supermarkets. You will literally be able to order something online at work and pick it up from a kiosk on your way home. This is already happening across Europe and Asia.
What we are starting to see is the evolution of the ‘last mile’ into a complex multimodal delivery ecosystem.
Trucking has so far triumphed over other freight transport modes, with rail effectively being co-opted and coastal shipping having withered. How did that happen?
Road transport came to dominate the Australian market for non-bulk freight because of its advantages in price, speed, convenience and reliability. However, while analysts are predicting 75 percent growth over the next 20 years, profitability is under pressure with skill shortages and reductions in the fuel rebate driving up costs. Low barriers to entry are also putting severe pressure on rates and margins. The key strength of rail freight is its ability to transport heavy or bulky products over long distances. Unfortunately, successive decades of underinvestment have created significant infrastructure constraints. The north-south Corridor is uncompetitive with slow transit times and poor reliability. As a result, only 20 percent of all goods transported between Melbourne and Brisbane go by rail. Between Melbourne and Sydney or Sydney and Brisbane, it’s even worse. The east-west corridor is more competitive given the longer distances and the ability to double-stack freight cars between Adelaide and Perth. Consequently, 81 percent of all goods transported in the region go by rail. However, that is threatened by an aging rail fleet. Australia has about 2,200 locomotives with an average age of 36 years. That makes them one of the oldest and least efficient fleets in the world, and that is limiting their ability to be a competitive alternative to road.
Coastal freight only accounts for a little more than 100 million tonnes of cargo and, on average, this has seen a small decline each year. The Australian Government has indicated that they consider it strategically important for Australia to have a viable coastal shipping industry in a competitive domestic transport sector, but there remains a tendency for Australian business to dismiss coastal sea freight as a transport option.