BGSA Supply Chain Conference Takeaways

Editor’s Note: BGSA Supply Chain 2019 Conference staged at the start of this year provided analysts with several “key takeaways,” says Benjamin Gordon, a Managing Partner at Cambridge Capital and BG Strategic Advisors (BGSA).

The following topics are poised to play a major role in the development of the supply chain of the future. It's in all of our best interests to understand them fully and respond proactively.

The Challenges

We see three major challenges facing the supply chain market today: trade, labor, and technology.

Trade: War and Peace
The first challenge is the choppy political climate.

On one hand, we averted a trade war with Canada and Mexico when the Trump Administration canceled the NAFTA agreement then replaced it with a similar deal in September.

On the other hand, we may be entering a bigger battle with China. President Trump and Chinese Core Leader Xin Jinping agreed to postpone retaliatory tariffs on December 1. But if they fail to reach agreement, the US will impose 25% tariffs on $200 billion of Chinese goods, and China will reimpose 40% tariffs on US cars.

The U.S. supply chain is already feeling the consequences. West Coast shipping data shows a drop in exports to China. In November, over 186,000 containers in Long Beach were shipped empty back to Asia, reflecting an 11% increase. It appears that China is finding non-U.S. sources for products wherever possible.

In the short term, the data is mixed. In fact, the U.S. imported record levels of products last quarter. In addition, Long Beach volumes are at all-time highs, exceeding 7.5 million containers handled. Many analysts believe U.S. retailers pursued a surge in Chinese purchases in late 2018 to beat the 2019 tariffs. If true, this pre-buy could lead to a 2019 slowdown.

An unintended consequence of the Trump trade policy is the trend toward reshoring. Tariffs are intended to encourage American consumers to buy American. In turn, Trump has sought to bring manufacturing jobs to the U.S. Some companies, like Carrier, announced plans to expand manufacturing in the U.S. However, others have announced plans to increase manufacturing in China, in order to avoid U.S.-China tariffs for products aimed at non-US consumers. BMW, for instance, began building the X3 SUV in China, and announced plans to make China an export hub for the electrified X3.

For supply chain companies, the silver lining is volatility. More uncertainty typically means more margin opportunities for freight forwarding and other asset-light companies.

Labor: The $100,000 Truck Driver
The second challenge is the tight labor market: Consider the truck driver.

At Walmart, entry-level drivers are now earning record salaries of $86,000. Fully-loaded to reflect the cost of benefits, this costs Walmart over $100,000 per driver per year. Meanwhile, at YRC, the Teamsters are taking steps toward a new collective bargaining agreement, replacing a 5-year extension that expires on March 31. The contracts cover 20,000 Teamsters. In the words of Teamsters' Ernie Soehl, “we are not interested in concessions in these negotiations!”

Is it a coincidence that trucking stocks have plummeted, and companies like Knight, Werner, ArcBest and YRC are trading at 6x, 5x, 4x, and 3x EBITDA, respectively?

Yet these cost spikes also carry unintended consequences. As labor becomes more expensive, technology becomes more competitive. Will 2019 be the year when autonomous trucks gain traction?

McKinsey estimates that full automation of trucks could slash operating costs by as much as 45% in the next decade, saving the industry over $100 billion. Benefits include:

• Two-truck platooning – yielding 1% savings due to fuel improvement
• Driverless platooning – enabling “follower trucks” to drive unmanned, producing an additional 10% savings
• Constrained autonomy – allowing unmanned trucks to operate in geofenced areas, garnering 20% savings
• Fully-autonomous trucks – eliminating drivers for all functions including loading, driving, and delivery, and achieving a full 45% saving

Are these Panglossian projections, or are they realistic? In Australian mines, Komatsu has been operating driverless construction vehicles for years. And on the passenger side, Intel is launching a fleet of 100 self-driving cars.

To quote William Gibson, “The future is already here. It's just not evenly distributed!”

Technology: The Many Arms of the Octopus
This brings us to the third challenge: technology disruption.

2018 was a year of rapid change and investment in technology. For example, the intersection of ecommerce, cloud technology, and “supply chain 4.0” has led to a surge in digital freight brokers. Convoy became a unicorn. Transfix is rumored to be not far behind. Uber invested aggressively in its Uber Freight initiative. In total, more than 20 companies in this sector raised capital in 2018. Meanwhile, hundreds of enterprises are investing in “Digital Transformation,” as they seek to keep up.

The Biggest Disruptor: Amazon
Many companies are using technology to pursue disruption. None is doing so in a more powerful manner than Amazon. With $740 billion of enterprise value as a war chest, Amazon is deploying its resources to pursue logistics.

Amazon views its logistics business as a differentiator. Last quarter, Amazon delivered over 1 billion holiday packages “for free,” to members of Amazon Prime. It spent over $9 billion on shipping charges last quarter, representing close to a 30% increase over the prior year. And Amazon already delivers about 10% of its own packages.

In 2018, Amazon bought transportation and logistics assets. On the warehousing front, Amazon began to deploy its Whole Foods acquisition in order to turn its stores into distribution centers. On the transportation front, Amazon has doubled down on its aviation assets, announcing that it would add 33% more planes to its lease agreement with ATSG, while extending the duration of the prior leases by 2 to 10 years. ATSG and Atlas air now operate 40 767 planes. In addition, Amazon negotiated warrants that could boost Amazon's ownership to 39.9% of ATSG and 20% of Atlas. Could a purchase of transportation companies be next?

Meanwhile, Amazon has continued to invest in innovation. For a good leading indicator of Amazon's plans, we can look at its patents. Amazon's 2018 patents included a “robotic pitcher.” The Amazon arm intends to identify, grab, and throw objects into bins. Another patent provides ultrasonic pulses on wristbands to guide employees' hands. Crazy or scary? We will see in 2019.

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