Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.
Has E. Hunter Harrison, arguably the finest rail operator in the world, fired the first shot in what could be the final round of consolidations in his industry?
Harrison is the CEO of Canadian Pacific Railway (CP), which has made a merger proposal to CSX Corp. that the U.S. East Coast railroad rebuffed, according to a report in The Wall Street Journal that appeared over the weekend. No details about the proposal, which was reportedly made in the past two weeks, were available, and neither company would comment.
Calgary, Alberta-based CP operates over a network stretching across Canada and extending into parts of the U.S. Northeast and Midwest. CSX's network covers virtually all of the Northeast and goes as far west as Illinois and Ohio. CP and CSX serve Chicago, as do all of the five other major "Class I" railroads, except for Kansas City Southern Railway. The CP and CSX networks overlap slightly in Ontario, Canada; New York state; and Pennsylvania.
A CP-CSX combination would be the first merger of Class I rails since Canadian National Inc. (CN) bought the Illinois Central Gulf (ICG) Railroad in 1998. Harrison, who was head of ICG at the time, would eventually become head of CN.* The next year, CN with Harrison at the helm, proposed a merger with BNSF Railway. That deal was scuttled following widespread protests by other railroads and shippers, and after the U.S. Surface Transportation Board, the successor agency to the Interstate Commerce Commission and the bureau responsible for what's left of rail economic regulation, declared a 15-month moratorium on consolidations while it drafted new merger guidelines.
A CP-CSX combination would have to be approved by U.S. and Canadian regulators, a tall order because, unlike previous eras when companies could argue a merger was necessary to rescue a failing railroad, all of the remaining carriers today are financially and operationally healthy, albeit to varying degrees. Regulators might also take a dim view of further consolidation in a marketplace with only seven large carriers (two of them being Canadian rails with U.S. operations).
Shippers, for their part, want nothing to do with a shipping world that could have as few as two transcontinental railroads. "We've had a long-held view that no further consolidation is appropriate or necessary in an already highly consolidated industry," said Bruce Carlton, president of the National Industrial Transportation League, a shipper group whose members are heavy rail users.
A CASE OF BAD TIMING?
The timing of a CP-CSX transaction would also prove a challenge as the industry has spent the past year fielding customer complaints over an increase in congestion and slow networks—problems created by terrible winter weather, a deluge of crude oil shipments that has led to equipment shortages for other commodities, and a surge in imports hitting U.S. shores earlier than normal as retailers concerned about possible port labor disruptions along the West Coast scrambled to get holiday shipments into U.S. commerce. More than 13,000 workers represented by the International Longshore and Warehouse Union (ILWU) have been working without a contract since the prior six-year pact expired July 1. They have remained on the job as ILWU continues talks over a new pact with the Pacific Maritime Association (PMA), which represents ship management.
John G. Larkin, lead transport analyst at investment firm Stifel, Nicolaus & Co., said in a note today that regulators may block any CP-CSX deal on grounds that a bogged-down network doesn't need the added stress associated with the "rapid-fire integration" model that is favored by Harrison.
Lawrence H. Kaufman, a veteran rail executive, consultant, and author, added that no railroad "wants to deal with the political fallout" of a merger attempt. He also questioned why CP would proceed with a multibillion dollar mega-merger to fix one or two operational problems, the most notable of which would be congestion in Chicago, a major point of North American rail interchange.
In 2008, the Harrison-led CN purchased the Elgin, Joliet and Eastern Railway Co. from U.S. Steel for $300 million to create a bypass around Chicago and alleviate the severe bottlenecks for traffic entering and exiting the city's freight yards. A merger with CSX may serve the same purposes, as CSX owns a small railroad, the Baltimore & Ohio Chicago Terminal Railroad, that could be used as a way for CP to bypass Chicago.
Anthony B. Hatch, a long-time rail analyst, said in an e-mail today that while rail mergers in the 1990s mostly involved parallel networks where the purchasing carrier could achieve economies of scale, a combination with little operational overlap, known in the trade as an "end-to-end" transaction, offers relatively little scale. Aside from improved IT capabilities, not much has changed in the competitive rail landscape since the turn of the century, Hatch said. The analyst opposes further consolidation, arguing that the economic, operational, and political risks far outweigh any potential benefits.
Harrison has said publicly that he supports continued consolidation as a means of reducing rail congestion. He may also see a deal with CSX as a mechanism to expand CP's crude-by-rail penetration. CP expects to haul 200,000 carloads of crude next year, up from 120,000 in 2014, according to estimates from Robert W. Baird & Co., an investment firm. Most of that crude comes from Alberta's oil sands and the Bakken Shale fields in Saskatchewan and North Dakota. CSX, in turn, serves refineries in the Northeast U.S. and mid-Atlantic markets.
Harrison's thoughts aside, the decision to further pursue CSX is likely to fall to William A. Ackman, whose hedge fund, Pershing Square Capital Management LP, is CP's largest shareholder. In May 2012, Pershing Square revamped CP's board and installed a new slate of directors. Ackman then brought in Harrison, who had been in retirement, to revive what many thought was an underperforming business.
Much has changed since then. For example, revenues in the second quarter rose 12 percent from year-earlier figures, while operating income jumped 40 percent year over year. Perhaps most significantly, operating ratio—the ratio of expenses to revenues—stood at 65.1 percent, a near 7-point drop from the year before. A lower operating ratio means greater profitability for the carrier as it takes less of every dollar to run the business.
To put CP's second-quarter operating ratio in perspective, its ratio through the first quarter of 2012 stood at 80.1 percent. The prior management team had hoped to reduce the ratio to between 68 and 70 by 2016.
*Editor's note: An earlier version of this article incorrectly said that Harrison was head of Canadian National (CN) at the time of its merger with Illinois Central Gulf Railroad.
There’s a photo from 1971 that John Kent, professor of supply chain management at the University of Arkansas, likes to show. It’s of a shaggy-haired 18-year-old named Glenn Cowan grinning at three-time world table tennis champion Zhuang Zedong, while holding a silk tapestry Zhuang had just given him. Cowan was a member of the U.S. table tennis team who participated in the 1971 World Table Tennis Championships in Nagoya, Japan. Story has it that one morning, he overslept and missed his bus to the tournament and had to hitch a ride with the Chinese national team and met and connected with Zhuang.
Cowan and Zhuang’s interaction led to an invitation for the U.S. team to visit China. At the time, the two countries were just beginning to emerge from a 20-year period of decidedly frosty relations, strict travel bans, and trade restrictions. The highly publicized trip signaled a willingness on both sides to renew relations and launched the term “pingpong diplomacy.”
Kent, who is a senior fellow at the George H. W. Bush Foundation for U.S.-China Relations, believes the photograph is a good reminder that some 50-odd years ago, the economies of the United States and China were not as tightly interwoven as they are today. At the time, the Nixon administration was looking to form closer political and economic ties between the two countries in hopes of reducing chances of future conflict (and to weaken alliances among Communist countries).
The signals coming out of Washington and Beijing are now, of course, much different than they were in the early 1970s. Instead of advocating for better relations, political rhetoric focuses on the need for the U.S. to “decouple” from China. Both Republicans and Democrats have warned that the U.S. economy is too dependent on goods manufactured in China. They see this dependency as a threat to economic strength, American jobs, supply chain resiliency, and national security.
Supply chain professionals, however, know that extricating ourselves from our reliance on Chinese manufacturing is easier said than done. Many pundits push for a “China + 1” strategy, where companies diversify their manufacturing and sourcing options beyond China. But in reality, that “plus one” is often a Chinese company operating in a different country or a non-Chinese manufacturer that is still heavily dependent on material or subcomponents made in China.
This is the problem when supply chain decisions are made on a global scale without input from supply chain professionals. In an article in the Arkansas Democrat-Gazette, Kent argues that, “The discussions on supply chains mainly take place between government officials who typically bring many other competing issues and agendas to the table. Corporate entities—the individuals and companies directly impacted by supply chains—tend to be under-represented in the conversation.”
Kent is a proponent of what he calls “supply chain diplomacy,” where experts from academia and industry from the U.S. and China work collaboratively to create better, more efficient global supply chains. Take, for example, the “Peace Beans” project that Kent is involved with. This project, jointly formed by Zhejiang University and the Bush China Foundation, proposes balancing supply chains by exporting soybeans from Arkansas to tofu producers in China’s Yunnan province, and, in return, importing coffee beans grown in Yunnan to coffee roasters in Arkansas. Kent believes the operation could even use the same transportation equipment.
The benefits of working collaboratively—instead of continuing to build friction in the supply chain through tariffs and adversarial relationships—are numerous, according to Kent and his colleagues. They believe it would be much better if the two major world economies worked together on issues like global inflation, climate change, and artificial intelligence.
And such relations could play a significant role in strengthening world peace, particularly in light of ongoing tensions over Taiwan. Because, as Kent writes, “The 19th-century idea that ‘When goods don’t cross borders, soldiers will’ is as true today as ever. Perhaps more so.”
Hyster-Yale Materials Handling today announced its plans to fulfill the domestic manufacturing requirements of the Build America, Buy America (BABA) Act for certain portions of its lineup of forklift trucks and container handling equipment.
That means the Greenville, North Carolina-based company now plans to expand its existing American manufacturing with a targeted set of high-capacity models, including electric options, that align with the needs of infrastructure projects subject to BABA requirements. The company’s plans include determining the optimal production location in the United States, strategically expanding sourcing agreements to meet local material requirements, and further developing electric power options for high-capacity equipment.
As a part of the 2021 Infrastructure Investment and Jobs Act, the BABA Act aims to increase the use of American-made materials in federally funded infrastructure projects across the U.S., Hyster-Yale says. It was enacted as part of a broader effort to boost domestic manufacturing and economic growth, and mandates that federal dollars allocated to infrastructure – such as roads, bridges, ports and public transit systems – must prioritize materials produced in the USA, including critical items like steel, iron and various construction materials.
Hyster-Yale’s footprint in the U.S. is spread across 10 locations, including three manufacturing facilities.
“Our leadership is fully invested in meeting the needs of businesses that require BABA-compliant material handling solutions,” Tony Salgado, Hyster-Yale’s chief operating officer, said in a release. “We are working to partner with our key domestic suppliers, as well as identifying how best to leverage our own American manufacturing footprint to deliver a competitive solution for our customers and stakeholders. But beyond mere compliance, and in line with the many areas of our business where we are evolving to better support our customers, our commitment remains steadfast. We are dedicated to delivering industry-leading standards in design, durability and performance — qualities that have become synonymous with our brands worldwide and that our customers have come to rely on and expect.”
In a separate move, the U.S. Environmental Protection Agency (EPA) also gave its approval for the state to advance its Heavy-Duty Omnibus Rule, which is crafted to significantly reduce smog-forming nitrogen oxide (NOx) emissions from new heavy-duty, diesel-powered trucks.
Both rules are intended to deliver health benefits to California citizens affected by vehicle pollution, according to the environmental group Earthjustice. If the state gets federal approval for the final steps to become law, the rules mean that cars on the road in California will largely be zero-emissions a generation from now in the 2050s, accounting for the average vehicle lifespan of vehicles with internal combustion engine (ICE) power sold before that 2035 date.
“This might read like checking a bureaucratic box, but EPA’s approval is a critical step forward in protecting our lungs from pollution and our wallets from the expenses of combustion fuels,” Paul Cort, director of Earthjustice’s Right To Zero campaign, said in a release. “The gradual shift in car sales to zero-emissions models will cut smog and household costs while growing California’s clean energy workforce. Cutting truck pollution will help clear our skies of smog. EPA should now approve the remaining authorization requests from California to allow the state to clean its air and protect its residents.”
However, the truck drivers' industry group Owner-Operator Independent Drivers Association (OOIDA) pushed back against the federal decision allowing the Omnibus Low-NOx rule to advance. "The Omnibus Low-NOx waiver for California calls into question the policymaking process under the Biden administration's EPA. Purposefully injecting uncertainty into a $588 billion American industry is bad for our economy and makes no meaningful progress towards purported environmental goals," (OOIDA) President Todd Spencer said in a release. "EPA's credibility outside of radical environmental circles would have been better served by working with regulated industries rather than ramming through last-minute special interest favors. We look forward to working with the Trump administration's EPA in good faith towards achievable environmental outcomes.”
Editor's note:This article was revised on December 18 to add reaction from OOIDA.
A Canadian startup that provides AI-powered logistics solutions has gained $5.5 million in seed funding to support its concept of creating a digital platform for global trade, according to Toronto-based Starboard.
The round was led by Eclipse, with participation from previous backers Garuda Ventures and Everywhere Ventures. The firm says it will use its new backing to expand its engineering team in Toronto and accelerate its AI-driven product development to simplify supply chain complexities.
According to Starboard, the logistics industry is under immense pressure to adapt to the growing complexity of global trade, which has hit recent hurdles such as the strike at U.S. east and gulf coast ports. That situation calls for innovative solutions to streamline operations and reduce costs for operators.
As a potential solution, Starboard offers its flagship product, which it defines as an AI-based transportation management system (TMS) and rate management system that helps mid-sized freight forwarders operate more efficiently and win more business. More broadly, Starboard says it is building the virtual infrastructure for global trade, allowing freight companies to leverage AI and machine learning to optimize operations such as processing shipments in real time, reconciling invoices, and following up on payments.
"This investment is a pivotal step in our mission to unlock the power of AI for our customers," said Sumeet Trehan, Co-Founder and CEO of Starboard. "Global trade has long been plagued by inefficiencies that drive up costs and reduce competitiveness. Our platform is designed to empower SMB freight forwarders—the backbone of more than $20 trillion in global trade and $1 trillion in logistics spend—with the tools they need to thrive in this complex ecosystem."
Global trade will see a moderate rebound in 2025, likely growing by 3.6% in volume terms, helped by companies restocking and households renewing purchases of durable goods while reducing spending on services, according to a forecast from trade credit insurer Allianz Trade.
The end of the year for 2024 will also likely be supported by companies rushing to ship goods in anticipation of the higher tariffs likely to be imposed by the coming Trump administration, and other potential disruptions in the coming quarters, the report said.
However, that tailwind for global trade will likely shift to a headwind once the effects of a renewed but contained trade war are felt from the second half of 2025 and in full in 2026. As a result, Allianz Trade has throttled back its predictions, saying that global trade in volume will grow by 2.8% in 2025 (reduced by 0.2 percentage points vs. its previous forecast) and 2.3% in 2026 (reduced by 0.5 percentage points).
The same logic applies to Allianz Trade’s forecast for export prices in U.S. dollars, which the firm has now revised downward to predict growth reaching 2.3% in 2025 (reduced by 1.7 percentage points) and 4.1% in 2026 (reduced by 0.8 percentage points).
In the meantime, the rush to frontload imports into the U.S. is giving freight carriers an early Christmas present. According to Allianz Trade, data released last week showed Chinese exports rising by a robust 6.7% y/y in November. And imports of some consumer goods that have been threatened with a likely 25% tariff under the new Trump administration have outperformed even more, growing by nearly 20% y/y on average between July and September.