Mature industries require disciplined leadership

John Lyboldt is president of the Truckload Carriers Association, the only trade association focused entirely on the truckload segment of the motor carrier industry. Prior to joining TCA in 2016, Lyboldt spent 35 years in the automobile industry, most recently as senior vice president of the National Automobile Dealers Association. The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates.

It’s now been four years since I took the helm of the Truckload Carriers Association (TCA), after spending 35 years serving the automobile dealer industry. When I first joined TCA, I was warned that trucking had a way of “getting in your blood.” I can now confirm that trucking is pulsing through my veins. This is due, in large part, to the relationships I have formed with people from carriers and vendors throughout North America. If you are a part of, or connected to, the North American trucking industry, I have no doubt that you share the same sense of pride that I feel being connected to this great industry. It is not lost on me how privileged I am to serve and advocate for truckload.

As the industry shut the door on a tumultuous year, which was immediately preceded by what many have described as one of the more robust years for trucking in the past decade, I thought it would be appropriate to reflect on my observations drawn from my time here with TCA, as well as my time in the auto industry – both of which are not for the faint of heart, or the ill prepared.

This reflection begins with stating a fact that trucking, like the automobile industry, is a mature industry, and strongly correlated (painfully at times) to the rising, and receding, tides of the economy, supply and demand. 

There are some key characteristics of mature industries, and when considered in their entirety, it should be hard to argue that the transportation industry is not structurally limited in terms of growth, especially in relation to other industries. 

The Harvard Business School has defined a mature industry as:

  • Slow to no growth, in real market terms;
  • Buyers are more experienced, and informed;
  • Pricing is competitive;
  • Products are not highly differentiated (their purpose); and
  • Difficult to attract and retain talent. 

With that being stated, I want to clearly establish that despite this fact, there are opportunities for carriers of all sizes and modes to achieve significant financial and personal rewards as participants in this great industry. Success in a mature industry, or any industry for that matter, is value. The value that one receives must be greater than what is given. This is true for employees and customers. Value is the summation of quality, convenience, service and price, not necessarily equally. Studies show under normal conditions and circumstances, price is least weighted.

In mature industries, the most telling symptom is the degree to which the industry is affected by GDP and the health of the economy. Many feel that trucking and the automobile industry are both “commodities.” I think that is both an inappropriate and polarizing term in both contexts. Having worked side by side with leaders in both industries, and spent time understanding their businesses, opportunities and challenges, I can’t think of many other industries with the number of variables and problems to solve on a daily basis. However, you cannot argue that our industry, like the auto industry, is inextricably linked to the output of our collective efforts (GDP).

There is a ceiling every week, month and year on the potential revenue our industry can generate. That is why the capacity (supply) is such an important measure of current and future health. If capacity stays the same in a healthy economy, rates will rise, or at least stay consistent over time. However, as soon as additional capacity enters this constrained market, it can’t help but have a detrimental effect on rates, and earnings potential.

Some people will read the above paragraph as an attack on the American Dream, and maybe even an attack on the independent owner-operator community, which is sometimes unfairly blamed for capacity changes in trucking. The low barriers to entry for all participants in this industry has led to the revenue and earnings roller coaster that feels like the new normal. We know that carriers of all sizes added capacity in 2019, attempting to take advantage of something that many felt was a once-in-a-decade earnings opportunity. It’s human nature, and it’s a powerful force to fight. My observation of the top performing carriers and auto dealers was that a decision made to invest in new asset was never made if margin would be eroded by the additional capacity or supply. Asset utilization is a common phrase in trucking, but it’s pretty ubiquitous in all of business. You want to maximize the return on that asset, while minimizing the risk of that new asset, which is truly an additional variable to manage in the business. As a wise confidante in the industry says, “more trucks, more problems.”  

A common theme emerging in trucking is the stark mismatch between the default pricing method (rate per mile) and the time it takes to complete a load. The availability of ELD data to accurately quantify the actual time between load and unload is now being used to better price freight, and reward shippers for understanding that the inefficiencies in the supply chains should not rest on the shoulders of our valuable drivers. The byproduct of this emerging measurement system is that carriers will now be able to calculate the actual yield (including time) on every load, lane and truck. Carriers and independent owner-operators should be embracing ELDs to get properly compensated for their time.

With “peak auto” having been predicted for decades, some analysts argue we’ve already reached this level. Truck dealers have been grappling with ways to grow their earnings with a cap on equipment sales revenue potential. Adding more competition is not the answer in the dealership industry, as it simply erodes the margin potential for all. Dealerships, instead, have become more scientific about bundling other services and establishing success metrics to target. An example is a term that is very well known in the truck dealer industry – “absorption rate” – which is the degree to which parts and service gross profit covers (or absorbs) all the operating expenses of the dealership. If you are at 100% you do not have to sell a vehicle to break even for the month. The most successful truck dealerships (otherwise known as “stores”) run at a 100% or higher absorption. The stores with higher absorption rates have more flexibility to negotiate margin across all departments and can make it through downturns and be better positioned to grab market share via acquisitions and franchise awards. The stores with a low absorption rate are dependent on equipment sales, holding margins in parts and service and dangerously exposed to the moves in the economy and their market.

In a similar fashion, top performing carriers can leverage their valuable shipper relationships to offer complementary services that provide value to the customer, while also diversifying their service offerings. There are lots of ways to diversify in transportation, utilizing the same customer base. Brokerage has seen a resurgence among asset-based operators in recent years. This has been aided by the emergence of technology to source safe carriers and provide transparency to customers – as if the load were being hauled by their own trucks. Likewise, many of the top performing companies in our TCA Profitability Program (TPP) have heavily invested in warehousing, import/export services and even supply chain consulting. In a recent conversation with a TCA member, and successful trucking entrepreneur, he relayed to me that had he not invested early on in his career in their warehousing operation, he would not have had the collateral available to make it through the 2008/2009 recession. Now, bringing it back to the “absorption rate” concept, if you didn’t haul one load next month, what percentage of your trucking overheard would be covered by the profits of your complementary service offerings? If it’s less than 50%, maybe it’s time to revisit your strategic plan.

Over the past four years, just like the dealership industry, trucking has witnessed the emergence of disruptive threats to their traditional model. Digital brokers, semi-autonomous trucks and other tech have the long-term potential to structurally change transportation. However, the adoption of these technologies appears to be slower than many people have expected. The byproduct of these advancements is the vast reduction in the number of personal relationships that were traditionally established between carriers and their shipper partners. With change and transition comes uncertainty, for you and your customers. With uncertainty usually comes a “scarcity” mindset and we pull back, typically starting with money. It would appear that maximum short-term efficiency gains are the primary objective of this disintermediation. However, what happens when the s##t hits the proverbial fan? A nuclear lawsuit, a stolen load, a natural disaster. All these targeted gains could be eroded very quickly in these situations. My message to truckload is to double down on the personal relationships.

A recent Accenture survey of 1,000 business decision makers found that, contrary to popular belief, they value a strong “brand” over any other factor, including price. Don’t avoid automation and technology. But have an abundance mindset and use these investments and tools to build a company that shippers have no choice but to value, while also providing the personal touch that sets you apart. People buy from people they know, like and trust. It has been said that time is the new currency and the market will reward whoever gets there first. It’s time to double down on the customers that value your service, your drivers, your knowledge and most importantly your time. Go against the grain – be different. #TruckloadStrong