Industry Focus: 2008 Predictions for Transportation & Logistics

As U.S. economy sputters, "trucking recession" seen easing, 3PL market looks to continue growth.

By Editorial Staff

The domestic U.S. transportation industry has been weathering rising fuel costs and a decline in shipper activity as the country's economy has slowed toward, or tipped into, recession. But the American Trucking Associations' For-Hire Truck Tonnage Index, as reported at the end of February, showed a tick up of 2.4 percent in January, after a modest 1.5 percent increase in December.

Trucking comprises almost 70 percent of tonnage hauled on all domestic freight transportation modes, according to the ATA, which points to truck tonnage as a reliable barometer of the overall U.S. economy. But ATA Chief Economist Bob Costello notes that truck tonnage often leads both recessions and recoveries, and in some cases the tonnage indicator has even rebounded before the overall economy actually started a recession.

"I anticipate that truck tonnage will recover before the general economy, but I am withholding judgment on whether truck tonnage is in a recovery mode until I analyze another month or two of data," Costello said in the ATA statement on the January tonnage report.

3PL Growth Seen

Meanwhile, the broader third-party logistics (3PL) market continues to see expansion, although the cooling economy has slowed the segment's growth rate, according to the latest "Trends in 3PL/Customer Relationships" report from industry analyst firm Armstrong & Associates. Armstrong uses its proprietary database of 3,334 3PL customer relationships to identify the top outsourcers to 3PLs, service demand and market size by industry segment.

"We haven't finalized the numbers, but we anticipate that in 2007 we'll have seen about 7-7.8 percent growth in the U.S. third-party logistics market," says Evan Armstrong, president of Armstrong & Associates. "And in 2008 we anticipate the market will grow 7.5 percent." That compares to an average annual growth rate of just over 13 percent from 1996 to 2006, according to Armstrong, who says that the trend has been for the 3PL market to grow at about four times the rate for the overall economy.

While the "trucking recession" has prompted many service providers in that industry to ease rates down to maintain or add shipper customers, Armstrong does not expect a similar dynamic of dropping prices in the 3PL space. "If you're a company that is just outsourcing logistics and warehousing to a 3PL, then you'll see savings through the outsourcing, but if you've already outsourced those functions and are trying to renegotiate, I don't think you're going to see a significant level of savings," he says.

The Move to Strategic

The market will continue to challenge third-party logistics companies to offer broader coverage in terms of the depth and breadth their range of services. To date, surprisingly, the ongoing use of 3PLs has been tilted toward the tactical rather than the strategic, according to Armstrong & Associates' figures. "Only a small number of the relationships [between 3PLs and their customers], roughly 20 percent, are strategic," Armstrong says. "The rest are tactical." An example of a tactical relationship would be a retailer using a 3PL for regional warehousing, versus a more strategic relationship that might see the 3PL managing inbound and outbound transportation in addition to running warehousing.

Still, as companies look to focus on their own core competencies, they will continue to seek out 3PLs that can assume a larger role in their supply chains and become strategic partners rather than simply tactical service providers. This is prompting 3PLs to grow both organically and through acquisition. One example is ATC Logistics & Electronics, which has grown over the past five years from being primarily a captive 3PL for AT&T Wireless to now serving more than a dozen contract customers with outbound order fulfillment and a host of reverse logistics services.

Geographic expansion also is vital, as customers look to their 3PLs to manage ever-more-global supply chains. Last year, for example, Menlo Worldwide, the logistics subsidiary of Con-way, acquired Chic Logistics, an established provider of domestic third-party logistics and transportation management services in the People's Republic of China, with a vision to create a "'first-mile' logistics in China through 'last-mile' delivery in North America" solution for customers running global supply chains. "Being in the right global markets is very, very important [for 3PLs] these days," Armstrong notes.

M&A Strong in '07

These assorted market trends have driven mergers and acquisitions activity within the global transportation and logistics sector to record highs over the past two years, according to "Intersections," PricewaterhouseCoopers' quality report on M&A activity in the industry. Total deal volume reached a 20-year high with 1,291 deals in 2007, up from the record number reached in 2006. However, total deal value fell in 2007 to $83 billion, down from the two-decade high of $164 billion reached the year before. The report's figures include numbers for the passenger air and passenger ground segments, which can account for significant M&A volume. But shipping, trucking and logistics (as well as cargo air and mixed mode) continue to account for well over half of the mergers and acquisitions activity.

Analyzing the current report's numbers against past figures, Kenneth H. Evans, Jr., U.S. transportation and logistics sector leader at PricewaterhouseCoopers, points out that while shipping has historically been a cyclical industry, the M&A cycle has remained fairly close to peak levels for the better part of three years. "Whenever there is a lot of value being created in companies as there has been in shipping, it just attracts very significant outside investment," Evans says. "It's also generating a lot of cash in the hands of shipping companies to pursue strategic acquisitions."

Will the prospect of a downturn in the U.S. economy put potential M&A deals on the back burner in 2008? Not necessarily, according to PricewaterhouseCoopers. Evans says that, in looking at historical M&A activity stretching back two decades, he and his colleagues typically saw somewhat of a drop in activity as the U.S. economy was entering or passing through recession. But even with all the anxiety about the economy's direction in 2007, the pace continued unabated last year. "What's going to be interesting is to see whether the first quarter of 2008 shows sustainable activity coming up to the level of the last quarter of 2007," adds Emeric Deramaux, manager for transaction services with PricewaterhouseCoopers and a collaborator on the "Intersections" report, "because the market was expecting, and we were expecting, a decrease in at least the financial investors' activity, but it simply has not happened." The Q1 figures, Deramaux says, should shed some light on whether 2008 will see continued growth or somewhat of a slowdown. Stay tuned...