Searching for answers
Questions decision-makers should already be asking.
By Walter Kemmsies
Recent data shows that world economic activity and trade are recovering. This implies that decision-makers need to change their stance from 'batten down the hatches' to positioning themselves to benefit from recovery.
Given that competitors who move first in the transportation industry often have the advantage, the window of opportunity is starting to close. Those who have not formulated and/or implemented a business investment strategy will soon find themselves trying to catch up with the industry's first movers. That isn't a good situation to be in if the recovery becomes robust, and an even worse situation if the recovery remains anemic for several years.
Regardless of how one feels about the outlook, it is important to at least ask the right questions in order to develop a successful strategy.
A list of the most important general questions to be considered is offered below. Given the state of the world economy, it begins with the important high-level issues, because at times like these it is important to think global and act local.
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What sectors of the economy will drive the next business cycle and which will struggle to survive? In the last several decades, no two business cycles have been led by the same industries. In the 1990s the technology and telecommunication industries led economic growth, but not in the 2000s. In the next cycle it is more likely that economic growth will be led by another set of industries than in the last cycle. The fastest growing industries could emerge because of demographic change, technological progress or government policy.
How will aging baby boomers affect economic activity? The proportion of the U.S. population that is 55 years of age or older is rising from 25 percent in 2010 to 29 percent by 2020 and 30 percent by 2030. Before 2030 more than 100 million Americans are projected to be over the age of 55. Canadian population projections are similar to U.S. statistics. This is the fastest-growing consumer market. It is important to understand how, when and where this demographic segment will spend its money and time.
How will outsourcing continue to evolve? As the population ages, labor shortages will emerge. Footloose industries will continue to reposition themselves to control costs, including moving manufacturing facilities to other countries. If so, this will support trade volume growth. However, it is not clear whether near-sourcing will outpace outsourcing to far-flung locations. This could be positive or negative for different segment of the freight movement supply chain.
How will the operating models of companies evolve? Besides moving production facilities to lower labor cost locations, companies could seek to lower the operational and financial costs of their logistics. Senior managers at major importers have recently indicated that inventory costs, particularly the financial cost of carrying inventory, will be included when estimating logistics costs.
How will North America compete in an increasingly globalized economy? Emerging market economies are growing faster than mature economies because of higher population and productivity (output per capita) growth. North America, Europe and Japan will become less dominant economies. For the United States, in particular, exports would need to grow faster than imports.
Which countries will be winners and losers? Some countries have sustained artificially high growth rates due to intervention in currency markets and others due to excessive borrowing to finance infrastructure growth. This could end badly in some places and negatively impact trade flows.
Which ocean carriers will thrive or struggle to survive? Will increases in fuel costs affect ship design and operation? Ocean carriers have had to lay-up a substantial amount of their fleets and delay new ship orders, while adopting stringent cost-cutting and new operating partnerships. The need to continue to strategically plan and be best-placed for the future will remain a constant challenge. But how will this be achieved, particularly if the economic recovery is not very robust? If the recovery is robust, will fuel costs rise substantially and therefore put some fleets at an operating cost disadvantage?
Which ports have the capacity to attract more and higher valued cargo? The expansion of the Panama Canal, potential growth of Suez Canal volumes, the cost of moving goods via all-water versus surface transportation and the reaction of the various segments of the supply chain will impact ports' competitive market areas.
Will highway congestion increase the cost and time of trucking service? U.S. roads and bridges require a lot of repair work to bring them to a state of good repair. The U.S. population is projected to continue to grow faster in the southern half of the country and along the coasts. This will increase congestion in those regions' roadways. With an aging population that drives less and more fuel efficient automobiles, how will this be funded? If it isn't, highway congestion will increase the cost and slow the velocity of trucking services.
Will changes to the railway industry make it more or less competitive with trucking? Changes to the railroad industry are making the mode more competitive with medium-distance trucking. Long-haul goods movement has generally shifted to railroads, except for the highest value, most perishable goods. As the quality of their service has improved and rates have increased, railroads have become more profitable. Beneficial prospects for future business have encouraged railroads to direct substantial investment capital into improving their networks and intermodal terminals to prepare them for additional future business. However, there are legislative efforts to change how the industry is regulated. This could affect the competitiveness of other segments of the freight movement supply chain.
Perhaps the most important question concerns environmental regulation. If not handled carefully this could have widespread effects across all industries and world economies. But that is a discussion worthy of its own column. For now this list encompasses most of the key issues that managers will embed, either consciously or subconsciously, in their decisions.
Walter Kemmsies is chief economist of Moffatt & Nichol, a marine infrastructure engineering firm. He can be reached at (212) 768-7454 or e-mail, wkemmsies@moffattnichol.com.