Marty Freeman, president and chief executive officer of less-than-truckload (LTL) carrier Old Dominion Freight Line (ODFL), recalls conversations with his team and customers this time last year and feeling some optimism that by mid-2023, the freight and logistics markets would be in the midst of a rebound.
“Well, I guess you can say I was disappointed that [scenario] never materialized,” he shared in a recent interview. Persistent inflation, the impact of some 11 interest rate hikes on the cost of capital and subsequent business investment, declining imports, and a massive inventory overhang from pre-pandemic ordering all conspired to flip that expectation on its head as 2023 wheezed to a close.
As for 2024, “we’re not hearing any doom and gloom, but no one is sticking their neck out and saying [the market] will grow 5 to 6% in the coming year,” Freeman said. He believes the LTL market is relatively stable following the closure of Yellow and the redistribution of its shipments to other carriers, although he noted that some of the freight has yet to find a permanent home. He also shared the results of a recent poll of customers that found that their expectations, while muted, were for flat to modest LTL growth in 2024.
That’s a bright spot. Overall, the expectations among shippers, carriers, and logistics service providers is for little to no recovery and a new year saddled with many of the same challenges and issues they faced in 2023.
And while many sources interviewed for this story bravely claimed to be “cautiously optimistic” about the coming year, geopolitical conflicts, slower economic growth, bottom-dwelling rates, too many trucks chasing too little freight, and flattening demand for warehouse space are expected to keep the pressure on the market. That likely will drive more carriers, brokers, and logistics service providers to scale back, if not exit the market completely.
NOT YOUR TYPICAL CYCLE
“In typical market cycles in the past, 5 to 10% more capacity would enter the market in the upcycle, and that much would leave in the downturn,” pointed out Mac Pinkerton, president of North American surface transportation for C.H. Robinson, one of the nation’s largest freight brokers and logistics service providers. “The influx of new carriers at the start of this upcycle was considerably higher … a record, more than 100,000 carriers in one year [during the pandemic]. There was no precedent for how much or how quickly capacity [at that level] would contract once the market turned.”
Pinkerton explained as well that “rates have been at the bottom of the market, bouncing along at the cost of operating a truck for 18 months. That defies all past experience.” Typically, when a market bottoms out, within a few months capacity tightens and rates rise. “Not in 2023,” he said. Capacity is slowly contracting, but since carriers made record profits during the pandemic and were able to pay down debt and build cash reserves, “more carriers have been able to weather the downturn longer than usual,” he noted. “They can run loads at current depressed rates because they lowered their operating expenses or are drawing on cash reserves” to stay in business while they wait for the upturn.
Evan Armstrong, chief executive officer of consulting firm Armstrong & Associates, did not see 2023 as having a lot of surprises for third-party logistics service providers (3PLs). “After 2021 and 2022, it was pretty obvious that we would not have a comparable growth year [in 2023],” he noted. “Seeing the 24% decline in 3PL revenues [from $405.5 billion in 2022 to an estimated $308.2 billion in 2023] was not a surprise.”
On the bright side, Armstrong believes “the freight recession has hit bottom, and now we are coming out of it.” He expects to see the traditional soft first quarter in the freight market and a pattern of single-digit growth from the second quarter on. For the U.S. third-party logistics sector, his projection for 2024 is growth of as much as 5%, to $321.0 billion. That compares to pre-pandemic 3PL market revenues of $212.8 billion and $231.5 billion in 2019 and 2020, respectively.
“This is a good time for shippers to run an RFP [request for proposal] event, lock in the more normalized rates on transportation, and make sure you have good agreements—and good relationships—with your core carriers into the next two to three years,” he advises. For 3PLs, which find their warehouses still relatively full, 2024 is about “how to be utilizing and optimizing the space, managing costs, and making sure you have fair agreements that work for both parties.”
ADVANTAGE: OCEAN SHIPPERS
The same cyclical pattern is showing up in the ocean container freight market—and presenting shippers with the same opportunities as in trucking to fine-tune their capacity needs and rates, noted Mike Bozza, deputy director for ports at the Port Authority of New York and New Jersey.
“As we look back at the tremendous volumes we saw in 2021 and 2022, that was a huge frontloading of cargo that we are still dealing with. Inventory levels remain high, and restocking [has been lower] than anticipated. It’s been a surprise for us how long it’s taken for the inventory overstocking to right itself.” He expects the soft market conditions to extend well into 2024.
As a result, import container volumes are down, and ship operators have been parking vessels, eliminating some schedules, and “slow steaming” others in a bid to cut expenses. “Shippers have had to adjust,” Bozza said. “If your schedule is canceled and your cargo is time-sensitive and misses a sailing, you really have to be on top of that.”
Yet the news coming out of New York/New Jersey, the biggest port complex on the U.S. East Coast, isn’t all bad. While volumes through September were down 21% from 2022, “from an operational perspective, things are fluid, we are handling current volumes well, and it’s giving our terminal operators some breathing room for when things normalize and we see an uptick.”
Bozza noted that taking out the surge from the pandemic years, comparing the port’s 2019 TEU (twenty-foot equivalent unit) volume of just under 7.5 million boxes to the projected 2023 results, “we would be right around what we had projected as normal year-to-year growth.” He added that the port has increased its share of the total U.S. container shipping market from 15% to 16% and has held onto most of the freight diverted earlier this year from the West Coast by shippers diversifying their ports of call ahead of a threatened strike.
As if to illustrate the woes befalling ocean freight, Maersk, the world’s largest containership operator, announced in its third-quarter earnings report that it was laying off some 10,000 workers this year in response to a freefall in shipping volumes and rates that cut its revenues in 2023’s third quarter almost in half compared with the same period last year.
The layoffs will take the company’s global workforce to under 100,000 people. “Our industry is facing a new normal with subdued demand, prices back in line with historical levels, and inflationary pressures on our cost base,” Maersk CEO Vincent Clerc said in a statement.
OPPORTUNITIES AHEAD
Nevertheless, within the dark clouds of a troubling freight and logistics market, there are some silver linings. Among those: the federal government’s CHIPS act and the jump start it’s providing to U.S.-based semiconductor manufacturing and its logistics support industries, the Inflation Reduction Act, and the Infrastructure Investment and Jobs Act, which is funding the electrification of the American economy as well as improvements to highways, public transit systems, and ports. And then there are the incentives driving the growing adoption of electric vehicles (EVs)—autos, pickups, delivery vans, forklifts, buses, and other commercial trucks.
All this means fresh opportunities for specialized services and resources in inbound logistics, warehousing, material handling, and transportation management that are unique to electrification projects and the broader EV market—and that 3PLs are ideally positioned to provide, noted Rock Magnan, president of Silicon Valley-based 3PL RK Logistics Group.
Those programs “have generated a lot of enthusiasm and the promise of tremendous investment,” he said. For 3PLs, the opportunity is to pivot and build on existing traditional services by introducing new capabilities and resources designed to support the growth of these new green industries.
“Whether it’s finished lithium-ion batteries, their raw materials, or used batteries coming back for recycling, there is a huge market emerging for logistics services to support these developments,” he said. “But to do so takes thoughtful strategy, agility, and flexibility in how you prepare your business to service these needs, many of which are unique and require specialized capabilities, facility design and operations, permitting, and trained personnel.”
He noted that RK has been providing warehousing services for EV automakers and battery producers since 2014, adding that in the coming year, the company will surpass 5 billion batteries handled through its facilities.
Another trend expected to accelerate in 2024 is efforts by companies to diversify their supply networks, with a goal of shortening supply chains, reducing risk, and increasing resilience. Those still remain at the top of logistics planners’ priorities as they apply lessons learned from the pandemic, according to a report from consulting firm McKinsey & Co.
In a statement announcing the results of its 2023 “Supply Chain Pulse Survey,” McKinsey said its research revealed “a profound revolution” in supply chains, as companies adopted more advanced tools for planning, execution, and risk management.
Among the report’s findings: 78% of respondents physically changed their supply chains to improve resilience by increasing inventory buffers. An equal percentage began implementing dual sourcing strategies for raw materials.
But perhaps the most interesting finding was the rise in companies actively exploring nearshoring or reshoring strategies and changing their supply lines as a result. Some 64% of respondents said they are transitioning from global to regional supply chains. Two-thirds indicated they were taking bids from suppliers located closer to their production sites. The report noted that these are long-term structural adjustments that can take two years or longer to fully implement.
Bearing out that trend is U.S. Department of Commerce data showing that for the first six months of this year, Mexico surpassed China as the U.S.’s biggest trading partner, with imports to the U.S. totaling $239 billion. By contrast, China generated $219 billion in imports.
Steve Sensing, president of supply chain and dedicated transportation solutions for Ryder, has witnessed this shift among some of Ryder’s customers. He believes that as shippers evolve and restructure their supply chains through nearshoring and other strategies, 3PLs must also pivot and both invest in new services and strengthen their core business offerings.
“I think we are still learning” he said of the lessons from 2023. Yet a challenging year did not stop Ryder, which operates some 95 million square feet of warehouse space in North America, from continuing to add capacity in major metro areas like Chicago. It is also picking up complementary acquisitions, like its recent purchase of Impact Fulfillment Services and its 1,000-employee workforce. Based in North Carolina, Impact Fulfillment Services (IFS) provides contract packaging, contract manufacturing, and warehousing services for some of the largest consumer brands in the U.S.
Going into 2024, many manufacturers and CPG (consumer packaged goods) companies, fresh off the challenges of 2022 and 2023, remain conservative and risk averse, which is “delaying some decisions on their capacity and service needs for 2024,” Sensing said. Warehouse lease rates are no longer seeing the all-time-high year-over-year increases of the past few years, he noted. One area of focus for Ryder is the driver market, where turnover is down “and drivers are available. Now is the time to recruit drivers, before the market turns up again,” he said. “We are among the best at recruiting and retaining drivers, as 85% of our driver jobs bring them home every night.”
DIGITAL FREIGHT TECH HITS A BUMPY ROAD
The market for transportation and logistics technology also rode the wave up and then came sliding down. If anything, the past year demonstrated that digital freight brokers, who once boasted that they were disintermediating traditional brokers, weren’t immune to the freight recession and, in fact, found their model struggling to survive.
Digital forwarder Flexport in October announced a major restructuring, laying off 600 employees, rescinding dozens of job offers, and subleasing some of its office space in a bid to cut costs. Venture capital darling Convoy, which provided digital freight-booking services and which counted Amazon founder Jeff Bezos among its investors, shut its doors in October, citing the “massive freight recession” and laying off 500 employees in the process.
The moves didn’t surprise Bart De Muynck, principal at Bart De Muynck LLC, who has tracked the freight tech industry for years, previously working in business services for Pepsico, as a vice president-analyst for Gartner, and more recently as chief industry officer for project44. He expects to see more freight-related tech firms close in 2024, as well as a shakeout among the smaller freight brokerage firms that got in when rates were high and capacity tight but now are struggling.
He cites the failure of Convoy and the bankruptcy of ocean tech firm Slync as signs of the changing narrative surrounding traditional versus digital freight brokers.
Digital brokers, often funded by private equity or venture capital, invest heavily in technology platforms, with a goal of eliminating manual work (people) and automating large parts of a brokerage’s operations. Digital brokerages still mainly sell freight capacity first but do it in a way that enables a more automated transaction for both the shipper buying the freight service and the carrier executing the shipment. They pitch technology as their core competitive advantage.
A traditional broker utilizes technology but also stresses the intrinsic value of people and their market knowledge, experience, communication, relationships, and hands-on service.
The disruption, or some would say disintermediation, pursued by digital brokers in the freight markets “was not like what Uber did with for-hire taxi services. That model [in that market] worked,” De Muynck noted. “The pure digital freight brokers were not immune to freight market cycles. When freight goes down, their revenues [from transactions as well as subscriptions] go down like everyone else’s. Yet due to the cost [and debt servicing of] huge investments in their tech platform and the growth-at-any-cost mentality, they hit the wall,” he said, adding that since they pitched themselves as tech companies (versus freight forwarders), they were hiring employees at salaries that were two and three times the going rate.
The upside, De Muynck said, is that the rise of digital brokers forced traditional brokers to “look harder than they ever had before at technology in the space and the need to adopt it”—both customer-facing technology and back-office systems. “That enabled them to improve service and cut costs, while still maintaining the ‘tribal knowledge’ and market relationships that historically have been a broker’s ace in the hole,” he explained.
“I don’t see how any of them [pure digital brokers] will survive,” De Muynck added. “There is not a single VC [venture capital] or private equity firm that is going to put more money into a digital freight broker now. Not in this market.”
