On Tariffs, Technology, and Transport: A Q&A with Analyst Kristine Kubacki

Time was, the industrial transportation industry was fairly straightforward. You ship items from the dock or the manufacturer to a regional distribution center and then to local stores where consumers drove the goods home. As consumers, we were responsible for the “final mile” all of the time. If traffic or weather caused delays for shippers, the drivers could opt to drive a little longer to reach their destination and collect payment. But now, trucks are strictly monitored, home delivery is booming, a trade war is ensuing, and autonomous vehicles are looming. 

Our Industrials and Industrial Equipment analyst, Kristine Kubacki, talks about the transportation market navigating a strong economy and shifting trends in geopolitics, technology and e-commerce. 

What are the fundamental factors driving the cycles in the transportation industry?

The fundamentals behind the industry today are what I like to call the “Three E’s”: the Economy, Electronic log devices (ELDs), and E-commerce. 

  • The economy is on a roll right now and generally speaking, demand in the industry is sky high. Across the board, from truckers to original equipment manufacturers (OEMs) to suppliers, things are really good – we see healthy cash flow, solid M&A activity, etc. However, we’ll have to wait and see what the implications of tariffs and trade war talk are. As the pulse of global trade, global freight flows will be an early indicator of where we’re headed. 

  • ELDs, which are meant to precisely measure and cap truck drivers’ service to a max of 50 hours per week, could have a big impact on the industry though there’s debate on how big. Before ELDs, drivers would keep track of service via paper log books, and it wasn’t hard to cheat on your hours logged. These devices should make the roads safer by ensuring drivers get enough rest, but they take out capacity as truckers may end up driving fewer miles per day. However, while we know that ELD’s are having an impact on industry capacity, there is no consensus on just how many fewer miles ELDs will account for.

  • Coinciding with the new ELD mandate is a complete disruption of supply chains by e-commerce, which has contributed to a very tight market. The final leg of delivering goods, the so called ‘last mile,’ used to be you and me going to the store, getting the item and taking it home. But more and more, the last mile is home delivery. This is causing a lot more touch points (by trucks) between fulfillment centers, distribution centers, and suppliers. 

Together the “Three E’s” are creating interesting and sometimes opposing dynamics across the industry. While the economy has buoyed the transport industry overall, companies have to adapt to new realities to continue the good times.

Given the tightness of the market, who’s winning and who’s struggling? 

It’s a good time to be a trucker, but it’s challenging for shippers. Pricing has been crazy high coming into this year, so shippers are just trying to keep their bills down. This fall will be particularly challenging, as truckers are not adding to their fleets in big ways. They’re replacing fleets but don’t want to add too much capacity. Furthermore, trucking companies are significantly challenged to find and recruit drivers to meaningfully grow their fleets.

So, lots of supply and not enough trucks to carry them away?

Yes, so shippers are in bidding wars to get their products moved. Moreover, in past cycles we’ve seen railroads (via intermodal service) act as a relief valve on trucking tightness. Yet, in this cycle the rails are seeing modest volume growth across all commodities and struggling in their own right with service performance. Net, there aren’t a lot of options for shippers except to pay up!

There’s been a lot of hoopla around autonomous vehicles the past few years. How long until trucks just drive themselves?

No doubt driverless vehicles are capturing headlines and imaginations these days, but the real innovations are decidedly less attention-grabbing. The meaningful adoption of automatic manual transmissions (AMT) is a big advancement, for example. Also, truckers are aggressively adopting technologies that drive increased safety (i.e. anti-collision systems) and fuel efficiency (i.e. adaptive cruise control).

In that light, it seems autonomous vehicles are a ways off for the trucking industry.

Driver assist technologies are making it simpler and safer to drive trucks and serve as the baby steps the industry is taking in the long road to autonomous trucking. But they are baby steps.

The more immediate future of transportation is electric vehicles (EVs), which are gaining steam in the industry, just like they are in the general auto market. 

It’s starting with niche applications to begin with – in the medium duty market and in inner cities, for example. Companies are determining the applications where it makes the most sense, and OEMs will be introducing a lot of more platforms for EVs. 

EVs are the next area to watch, and that will likely move much faster than autonomous tech, at least in this industry.

What is the biggest threat to investors in the space?

Simply put, it’s the economy. There are the natural ebbs of the cycle to worry about, but we also have tariffs and trade wars to fret about this time. 

Tariffs are causing input costs to rise and are already forcing some companies to reconfigure their global supply chains – OEMs are thinking beyond primary source suppliers to tier 3 and tier 4 suppliers. That’s not an easy feat. And no one knows how long the situation will last. 

In addition, demographics and a driver shortage are also raising concern. A significant portion of the driver population is reaching retirement age, and despite efforts to increase pay, companies have had a hard time attracting truck drivers because the lifestyle is so tough. 

From the shipping perspective, this all means that things are very tight right now, and expensive. But if you add capacity, what’s going to happen? At the least it is going to shift supply chains, and at the worst it will drive the industry into an economic downturn. That’s the biggest unknown right now.

And lastly, as an industrial analyst, have you ever test driven a big rig? 

I am grateful that a few of the companies I cover have entrusted me with the keys of several big trucks to take around test tracks. Recently, I drove a few Paccar trucks around their European test track in Eindhoven, Netherlands. I drove a prototype EV truck through a city driving course. It was very cool! There is very little sound produced from an EV drive train. I have a significant amount of respect for truck drivers; maneuvering tight turns is hard enough, let alone dodging traffic and erratic drivers!