The Future of Freight Transportation: Technological and Commercial Forces

1. The Future of Freight Transportation: Technological and Commercial Forces Dr. Jean-Paul Rodrigue Dept. of Economics & Geography Hofstra University Hempstead, NY http://people.hofstra.edu/faculty/jean-paul_rodrigue/

2. Outline • (Second) Guessing Future Freight Trends • Why freight transportation is difficult to forecast? • Technological Forces • Cycles, rationalization and the limit to economies of scale • Commercial Forces • Globalization and the squeeze on the profit margin • Geographical Adjustments • Linking the gateways; developing inland freight distribution

3. (Second) Guessing Future Freight Trends • Prediction and forecasting: often a futile exercise • Economic systems are not physical systems. • “The future is not what it used to be”. • Linearly thinking versus non-linear processes • Extrapolation of current trends to assume future conditions. • Rarely works and leads to misallocation of resources. • Bubbles are classic examples: • Stock market and tech (1995-2000). • Real estate (2001-2006?). • Implications • If the future cannot be predicted accurately, the current freight distribution systems must be able to cope with changes. • Issues of adaptability and flexibility.

4. Why freight transportation is difficult to forecast? • Bound to the macro-economic condition of the global economy • Shifting comparative advantages. • De-industrialization, relocation and re-industrialization. • Dislocation of trade flows. • Financial leverage; asset inflation and debt. • How will this unravel? • The bursting of asset inflation. • Cyclical drop in international trade. • Limited changes in origins and destinations. • Inflation (hyperinflation?).

5. U.S. Trade in Goods and Services - Balance of Payments, 1970-2005 (billions of $US)

6. Containerized Cargo Flows along Major Trade Routes, 2000-2003 (in millions of TEUs)

7. Why freight transportation is difficult to forecast? • Freight companies are private entities • Profit driven seeking to maximize the utility of their customers. • Control many segments of the supply chain: • Multi-level and multi-modal ownership (M&A). • Control costs and risks. • Insure reliability of distribution. • Decide the allocation of freight distribution: • Which routes, modes and terminals. • Strategies and decisions kept confidential. • Growing leverage towards public entities. • Challenges conventional public policy.

8. Why freight transportation is difficult to forecast? • Several freight markets • Variety of commodities: • From raw materials, energy, to high value and perishable goods. • Each has its own commodity chain. • Variety of transport modes: • From container transportation to air cargo. • Different terminals. • Variety of stakeholders: • Private and public operators (port authorities). • Cost-based versus time-based.

9. Top Commodity Groups Ranked by Value Per Ton, United States, 2002

10. Why freight transportation is difficult to forecast? • Several value-added activities involved • Transportation (rates). • Warehousing (inventory). • Transfer (intermodal). • Logistics (supply chain management). • Volatility • Security: Indirect tax and additional delays. • Energy prices: Peak oil and energy transition?

11. World Annual Oil Production (1900-2004) and Estimated Resources (1900-2100)

12. Real Price of Oil and Major Disruptions in World Oil Supply, 1950-2005 (projections to 2012)

13. Technological Forces • Cyclic character of transport innovations • Innovations lead to a wave of development. • Introduction: • Private entrepreneurs and innovators. • Growth: • Fast adoption. • Often involves a “paradigm shift” event. • Maturity: • Maximal spatial coverage. • Government involvement (investment, regulations, etc.) • Rationalization/obsolescence: • Diminishing returns (Segment or system-wide). • A mix of regulations (protect public interests) and deregulations (increase productivity). • Our current freight transport systems are in a phase of rationalization.

14. Growth of the US Transport System, 19th – 21st Century 4% Canals Paradigm shift 1825 Peak year 1836 3% Rail 2% Roads Air 1869 1969 1913 Maglev 1825 1836 1891 1946 2001 1% Δt= 55 years Δt= 65 years Δt= 70 years Δt= 30 years 0% 1800 1850 1900 1950 2000 2050

15. Cargo Handled by the Top 5 US Container Ports, 1985-2003 (in TEUs)

16. Length of the Interstate Highway System (in miles), 1959-2003

17. Rail Track Mileage and Number of Class I Rail Carriers, United States, 1840-2003

18. US Household Penetration of Telecommunications, 1920-2005

19. Technological Forces • Implications of rationalization • Economies of scale: • Larger containerships. • Double-stacking. • Large high-throughput distribution centers. • Concentration in gateways and corridors. • Pressures on transshipment and inland distribution. • Supply chains: • Flexibility and adaptability. • Growing functional integration.

20. Five Generations of Containerships First Generation (1956-1970) Length Draft TEU 135 m 500 Converted Cargo Vessel < 9 m < 30 ft 200 m Converted Tanker 800 Second Generation (1970-1980) 10 m 33 ft 1,000 – 2,500 215 m Cellular Containership Third Generation (1980-1988) 250 m 3,000 11-12 m 36-40 ft Panamax Class 290 m 4,000 Fourth Generation (1988-2000) Post Panamax 275 – 305 m 4,000 – 5,000 11-13 m 36-43 ft Fifth Generation (2000-?) Post Panamax Plus 13-14 m 43-46 ft 5,000 – 8,000 335 m

21. Channel Depth at Selected North American Ports, 1998 (in feet)

22. Commercial Forces • What is the market telling us? • “Globalization works fine, as long as people are trading for different goods. But when they begin competing for the same market with the same goods, someone's going to be out of a job. It's all very well for the Chinese to grow rice and Americans to grow wheat. They can trade with each other. But when they both produce cars...somebody's going to lose.” Denning (2005) • The US is losing comparative advantages in a wide array of industrial and service sectors. • Competitive devaluation: fooling ourselves.

23. Share of Global GDP Growth, 1995-2002

24. Changes in the Value World’s Merchandise Trade, Production and GDP, 1960-2003 (in %)

25. Increases in U.S. Commercial Freight Shipments andRelated Growth Factors, 1993–2002

26. Changes in the Relative Importance of Logistical Functions in Distribution Systems

27. Conventional and Contemporary Arrangement of Goods Flow Conventional Raw Materials & Parts Manufacturing Distribution Customers Local Distribution Raw Materials National Distribution Regional Storage Retailers Storage Contemporary Supply Chain Management Customers Raw Materials Distribution Center Manufacturing Retailers Material flow (delivery) Core component Information flow (order)

28. Geographical Adjustments • What changes in transport? • Flows (including its direction). • Origins. • Destinations. • Modes used. • Gateways • Land: Commonly a simple transit function with logistics and manufacturing activities. • Air: Linked with an important metropolitan area and with regional air / road connections. • Maritime: Large terminals with strong high capacity inland connections (rail and road). Land Logistics Manufacturing Border Air Maritime

29. Major Modal US Gateways, 2003

30. NAFTA Truck Flows, 2003

31. Road Volume to Capacity Ratio, 1998

32. Geographical Adjustments • Multimodal integration of freight transport • Operational limitations. • Problem of modal dependence (80% trucking). • Geographical specialization of modes, modal shift and freight diversion. • Entropy and energy • Maintaining the cohesion and productivity of freight distribution. • Growing disorder and energy costs. • Urban/Suburban Supply Chains • Coping with the “last mile”. • Difficulties to maintain just-in-time and timely supply. • High distribution costs. • Adaptation of modes and delivery times.

33. Geographical Adjustments • Efficient coastal freight distribution system • Coastal transportation so far unaffected by deregulation. • Trashing the Jones Act. • Efficient inland freight distribution system • Gateway strategies. • Corridor strategies.

34. Port Inland Distribution Network Albany Syracuse Boston Hartford / Springfield Worcester / Framingham Davisville New Haven I95/New Jersey New York Reading Potential Regional Barge Port Philadelphia Hanover Inland Rail Terminal Wilmington Camden LO/LO Barge Service Inland Rail Route Baltimore Freight Cluster Washington

35. Conclusion • Technological forces • Rationalization of freight distribution. • No paradigm shift in sight. • Commercial forces • Global trade imbalances (flows). • Congestion at gateways. • Stressed freight distribution capacities. • Paradigm shift imminent (energy). • Proactive transport policies • Leads to misallocations. • Damage the economy, initiatives and innovations. • Government policies: listening to the freight market.