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October 8, 2012 2:30 AM, EDT

Shippers Adjust Capacity as Global Trade Slows

By Daniel P. Bearth, Staff Writer

This story appears in the Oct. 8 print edition of Transport Topics.

ATLANTA — A slowdown in global trade is forcing shippers and carriers to make adjustments in inventory and freight hauling capacity, transportation and supply chain experts said at the Council of Supply Chain Management Professionals annual conference here last week.

With the exceptions of 2008 and 2009, global trade is now growing at less than the rate of growth in gross domestic product for the first time in 25 years, said Gene Ochi, executive vice president of UTi Worldwide.

“There is no tailwind to grow trade,” he said in a presentation to media representatives here Sept. 30. “When economies stagnate, supply chain costs rise.”

Ochi said many companies appear to be willing to stockpile more goods because the cost of carrying inventory, with interest rates at historic lows, is less than the cost of transportation.

Inventory replenishment, and hence demand for freight transportation, “will remain low until the cost of capital increases,” Ochi said.

The slowdown in trade is hurting revenue growth for logistics companies in the United States, according to Evan Armstrong, president of Armstrong & Associates Inc., Stoughton, Wis.

Armstrong said net revenue for international transportation management is projected to grow only 3% in 2012, down sharply from a 15% annual growth rate between 1995 and 2011.

Domestic transportation management, by contrast, is projected to grow 10% in 2012, a slight decline from the 11.6% annual growth rate since 1995.

Third-party logistics providers in Asia, Europe and North America are projecting lower growth rates over the next three years, based on a survey of 31 large 3PLs by Robert Lieb, a professor of supply chain management at Northeastern University in Boston, and Kristin Lieb, assistant professor of marketing communications at Emerson College.

“Growth projections in all three regions are in the single digits,” Lieb said. “We have not seen this in 20 years.”

In Europe, the slowdown is likely to lead to consolidation among logistics service providers, while in North America, Lieb said, many 3PLs are targeting health care with more than half of CEOs surveyed saying they expect the medical devices segment to be the biggest source of new revenue in the next three years.

Economic growth in the United States remains very weak with new factory orders falling sharply in August and many truckload freight carriers reporting lower profits as volumes decline.

“When orders slip, output will eventually follow,” said Bob Costello, chief economist for American Trucking Associations, in a Sept. 28 newsletter. “We believe that output will be about half of the rate in 2013 (2.5%) as in 2012 (4.9%).”

Costello said companies are nervous about the economic outlook, in part, because of the inability of Congress and the Obama administration to reach agreement on the federal budget deficit and prevent automatic cuts in government spending from taking place in January.

“Cash on hand at corporations is at a record level, so the ability to spend is not the problem,” Costello said. “However, what business wants to take the risk of hiring more people or upgrading/adding more capital equipment when we could walk off the cliff early next year, causing an instant recession?”

A survey by Transport Capital Partners released last week shows that most trucking companies are reluctant to add capacity.

“Carriers are unwilling to add capacity when they can’t find drivers to fill the seats,” said Richard Mikes, a partner at TCP. Three out of four carriers surveyed reported unseated trucks.

Tommy Barnes, president of Con-way Multimodal, a unit of Con-way Inc., Ann Arbor, Mich., said trucking firms “are still taking capacity out of the market.” And with fuel prices on the rise, Barnes said he expects to see more freight diverted to intermodal service and more multiyear shipping contracts “to lock in capacity.”

Notwithstanding economic uncertainty at home and abroad, a survey by UPS Inc. of executives in the technology sector found growing confidence in the future of global trade and U.S. exports. Rising incomes in developing markets was cited as a factor in driving demand for high-tech products, while recent free-trade agreements are expected to boost imports and exports between the United States and countries in Asia and elsewhere, UPS officials said.

Some 85% of executives surveyed said the Obama administration’s goal of doubling exports by 2014 is either “very likely” or “somewhat likely” to be achieved compared to only 40% who were as confident when the goal was announced two years ago.

More U.S. manufacturers are also thinking about bringing production back to the United States from overseas, said a study by Lisa Ellram of Miami University, Wendy Tate and Kenneth Peterson of the University of Tennessee and Tobias Schoenherr of Michigan State University.