2018 was a record year for 3PLs but a tough year for shippers. The 3PLs were the beneficiaries of a perfect storm in the trucking market, driven mainly by the enforcement of the electronic logging devices (ELD) mandate and an exacerbating truck driver shortage. Spot rates rose an extraordinary ~30% y/y on average for the first half of the year, which led brokers to break contracts and left shippers with no option but to pay. Morgan Stanley’s Truckload Freight Index (TLFI), which has been a benchmark of truck market conditions for the last 20 years, soared and hit multiple highs in 2018. It seemed as though there might be no end in sight, but sentiment has gradually shifted, and the truck market began to rebalance in July/August. Truck spot rates have kept falling from their July 2018 all-time high. Most industry observers (us included) had expected an early and robust peak season to show up in the TLFI and truck spot rates (as early as early September rather than the usual early October timing) due to shipper concerns about repeating 1H18’s challenges in securing truck capacity heading into what should have been one of the strongest holiday seasons on record. However, peak season never really showed up in the data, and spot rates started sliding back toward normal.
Could 2019 Mark a Role Reversal from 2018?
We believe 2019 could look more like 2015 than 2018. While many were expecting surging trucking supply to be the cause of the market softening, that scenario has not played out. We are instead concerned that demand is the real issue and that 2019 could be similar to 2015-16, when the transportation complex went through a freight recession even as the overall economy held up, thanks to slowing industrial production, high retail inventories, a macro hiccup in China, weakness in the energy complex, a strong USD, and overhang from a heady previous year – all of which are factors that apply to today’s environment as well. However, more than cyclical inflections, we are monitoring potential structural shifts as well. Have shippers been so burned by the 2018 rate surge that they move away from the spot market/brokers completely to lock in dedicated capacity with asset-based carriers? It is interesting to see the rapid normalization of spot rates since July, even as contract rates remain up HSD y/y. Based on continued anecdotal conversations with shippers, carriers, and even brokers, we wonder if 2019 will be the year we see the start of a new relationship between carriers, brokers, and shippers – one that values long-term visibility and stability rather than shorter term opportunism.
2019 Could Also Be an Interesting Inflection in the Secular Evolution of 3PLs
2018 has been an exciting year in the space as new tech entrants (Amazon, Convoy, Loadsmart, and others) continued to ramp. Convoy, for example, raised $185 mm in a Series C financing, valuing the company at $1 billion. Clearly the new entrants are gaining momentum and the “traditional” players are not sitting still, either – see JB Hunt’s traction with their JB360 platform and CH Robinson’s technology initiatives as well. But with digitization generally comes price transparency, democratization of information/data, and price deflation. This is great news for shippers and carriers, but what impact will it have on traditional 3PL players that are used to making 20-40% gross margins? How will small mom-and-pop players, who still make up the very long tail of this industry, be able to fight a technology war with Silicon Valley and transportation giants? Three main questions will determine if 2019 will be the year of the new digital brokers: Will they manage to gain more traction in a looser market than they did in a tight 2018? Will they be able to expand beyond Fortune 500 customers to SMEs? And lastly, will they be able to push toward their holy grail of start-to-end automation?
Blockchain Is Bridging the Gap to Automation
This past year, we saw Blockchain and cryptocurrencies fade from the front pages, but we also saw some interesting and critical developments with the commercial adoption of Blockchain in supply chains. In recent months dexFreight completed its first Blockchain-based shipment using smart contracts, Walmart decided to mandate Blockchain use, and Europe’s largest port tested the technology. Although the technology is still in its early stages, we believe Blockchain has the potential to transform supply chains/logistics through enhanced visibility and automation, effectively transforming the 3PL space as we know it today. Will this take three years, five years, or 10 years? We don’t know – but it is likely that initial steps will be taken in 2019.
Ravi Shanker is Executive Director, Morgan Stanley.
This article originally appeared in the March/April, 2019 issue of PARCEL.
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As of November 30, 2018, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Knight-Swift Transportation Holdings Inc, Saia, Inc., Schneider National Inc., Union Pacific Corp., XPO Logistics, Inc..
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