The Roemer Report August 1985

TRUCKING AND TBIGGER EXPENSES SQUEEZE PROFITS: HE SATURN PROJECT:

Trucking industry trends generally mirror U.S. economic activity. So when the ailing economy finally energized In ‘83, we were exuberant about the future. Indeed, industry tonnage and revenues have increased handsomely. Last year's combined gains were estimated at 5%. The Commerce Dept. forecasts an even brighter outlook for ‘85. Yet many carriers still find their bottom line in the red. The reason: rapid expense growth. I.C.C.-regulated motor carriers reported 1984 expenses about 3% ahead of revenues. These costs tell into three key categories…(1) Fixed operating expenses. State fuel taxes, permit fees, etc. surged higher last year.

Employee benefits also represented a bigger buck for carriers…

(2) Overhead costs. in an industry-wide push toward diversity, firms spent heavily to beef up service and improve communications. Sales and marketing activities also accelerated.(3) Interest ex­penses. Rising interest rates reflected substantial investments In tractor and trailer purchases last year. Similar outlays for facility expansion and improvements also boosted the interest quotient…is there an "up" side to this profit squeeze? Our answer is yes. Motor carriers are rapidly gaining the cutting-edge expertise needed to manage their revolution­ized market. Service and equipment support will be in place to exploit the results. We believe many of these expenditures will eventually pay back in profits.

ESCAPING THE ERISA SNARE: Two questions: Why would hundreds of chronically unprofitable motor carriers continue to operate year after year? What makes it financially advantageous for these carriers to stay in business, even at a loss? Answer to both: The Employee Retirement Income Security Act (ERISA). This multi-employer pension plan inflicts such a heavy financial liability for withdrawal that ailing carriers cannot afford to give up the fight. They're driven to hauling loads at rock-bottom prices -- Just to stay in the game. It's the "one bad apple spoils the whole bunch" scenario, as below-cost pricing spreads to other lower-echelon carriers, forcing them to compete with ERISA victims. Eventually, suppressed pricing hurts nearly everyone in the industry.

Legislative reform of ERISA could help syphon off terminally ill carriers. But it's a poor bet for the near future. Since ERISA is applied across diverse industries, tell-swoop legis­lative solutions are highly unlikely. Major revisions will take time. Still an ERISA escape provision would let the dying die gracefully, and the strong survive -- with much needed pricing stability.

A CAUTION LIGHT FOR STEEL HAULERS: In the depressed steel industry, management-labor unrest has been simmering for some time. Last month it reached a boiling point at Wheeling­ Pittsburgh. The seventh largest U.S. steel producer filed Chapter 11 bankruptcy proceedings, then imposed an 18 wage­ and-benefit reduction on steelworkers. Employees walked out at all nine plants. As each day of the strike edges Wheeling­ Pitt closer to financial disaster, steel producers wonder if this is a sign of things to come. Are we headed toward Industry-wide upheaval? Many plants are gearing up for contract negotiations next year. Expect management to seek wage concessions like those at Wheeling-Pitt. Steel industry strikes could spread like wildfire, insiders predict. The effect on steel carriers es likely to be profound. With competition for declining tonnage already at cut-throat levels, extended production delays could force many carriers out of business. Steel producers would eventually foot the bill -- a genuine no-win situation… Most steel haulers are small carriers, located near production facilities. If they fold, transportation costs will soar. What can steel carriers do to prevent extinction? Bill Rieck, vice president of the Specialized Carrier and Rigging Assn., suggests diversifying. Hauling less volatile commodities could help a carrier stabilize his operation. The shaky future of steel may offer few other choices.

SATURN AND THE TRUCKING INDUSTRY: Forget all the hoopla you've heard about GM’s Saturn plant and the high profile sales pitches created by the states courting the facility. In the end, Tennessee got the plant because of the fundamentals…pure and simple. There are some strategic points here for fleet owners. The first: transportation costs were a pivotal reason behind the choice of Tennessee. Another key element: GM planners calcula­ted that the U.S. population has shifted further south. Their figures show that 76% of the U.S. population is within 500 miles of the plant. According to Saturn President William E. Hoglund, low freight costs were the most important economic factor in the selection. It should be noted that Nissan located in Smyrna, Tennessee five years ago. Manufacturers love the work ethic of Tennesseans. The upshot? Some are beginning to talk about Tennessee as an emerging little Detroit. Look for a host of suppliers to locate there also. It's going to be a big and growing source of freight. Finally, it suggests that the vortex of manufacturing-oriented trucking could be heading south.

MANAGING OPPORTUNITY: If asked to state their job title, very few business leaders would say "Manager of Opportunity." Yet, according to Geoffrey Place, vice president of R&D at Procter & Gamble, that is precisely the role of every corporate futurist. Markets are in constant state of flux -- and the pace of today's market shifts is quickening. Hence, a company's leaders must be able to identify and develop opportunities that promise a compet­itive edge.Place cites two basic approaches to opportunity management…(1) Existing opportunities. Fairly easy to uncover and exploit, these pivot on current market conditions. They generally involve clear, short-term objectives and minimal risk. Beware of "band-aid" solutions, however. Historically, companies faced with market crises have often scrambled for the fast but terminal response. (2) Future opportunities. In most cases, these do not occur as natural extensions of present conditions. Rather, they are the barely predictable outcome of many evolutionary forces -- technology, politics, economics, arts, etc. The keen business visionary can interpret, though not control, them. Armed with an understanding of the company's long-range goals, he/she can track and intersect emerging market trends…Managing future opportunities, says Place, is hitting "a moving business target.11

LIVING WITH DISINFLATION: After years of double-digit inflation, U.S. consumers are enjoying a trim 3.5% annual price rise. Forecasters claim the rest of the 80s will remain stable. But there are rumblings in the business sector, where disinflation is creating a backlash. Corporate profits are painfully sluggish, as the skyrocketing prices of the 70s slow to a snail's pace. The budget deficit, with sustained high interest rates, has done its share of damage. In turn, the dollar remains strong and the import glut puts competitive pressures on U.S. industry. Deregulation adds fuel to the fire, squeezing prices and profits. To buoy profits, managers are ruthlessly re-trenching -- often trimming staffs and salaries. The remedies affect every business phase, from design to production to marketing. A tougher stance on productivity mandates major investments in labor-saving equipment. Many firms now depend on product diversification to desensitize prices…In times of high inflation, corporate debt for expansion can be covered with ever-cheaper dollars. The reverse is true during deflation. Shrinking today's debt-to-capitalization ratio is expensive, thanks to the mighty dollar. But most executives believe their earlier investments will buy a badly needed competitive edge. While few would wish for a return to high inflation, disinflation could alter business basics throughout this decade.