After experiencing tremendous growth in 2018, it is likely the pace of growth in the trucking sector will correct itself as a result of numerous factors, explains Paola Bennett of Sertant Capital.
General Transportation Industry Overview
A major trend we are seeing on the lending side relates to the decision-making process. In the past, a strong customer relationship and a good track record of healthy business practices was enough to capture the interest of borrowers. Today, we have seen a significant shift in decision-making factors from borrowers. Business owners and fleet managers are now more informed and exposed to different financing structures, making them more sophisticated borrowers. Additionally, technological advances such as autonomous vehicles, electric vehicles and telematics push fleet managers to concentrate on leasing partners who can provide a more consultative approach to help measure performance of their assets that run on different technologies. Borrowers seek a more comprehensive lending partner to satisfy their more informed buying behaviors.
Understanding the borrower’s business, and how they can optimize operational efficiency, is part of the 360-degree servicing borrowers seek more of in a lending partner. It is a value add we’ve seen that sets lending partners apart and from the rest in the eyes of the borrower. To that point, lending partners are turning to business intelligence tools, such as our proprietary platform, Sertant Insight (S.I.), that allows fleet decision makers and operators 24/7 visibility to various performance indicators for their fleet. These types of proprietary technological platforms provide both the lender and borrower with key metrics that improve decision-making and show the customer we are deeply invested in understanding their company and improving their operational efficiencies.
From an economic standpoint, credit conditions remain positive; however, there are signs of a hardening market with tighter credit standards on the horizon. The manufacturing industry should remain healthy, however. Consumer spending will likely remain steady based on growing household salaries and low unemployment rate.
We source and assess economic indicators from a variety of industry resources. This combination of resources assists us with forecasting and determining proper leasing structures. Research companies such as ACT Research provide valuable insight into what customers are experiencing. ACT is a helpful customer-centric resource as it aggregates data from end-users and manufacturers to provide an outlook on general sector behaviors and decision-making trends from a logistics, distribution and spending perspective. ACT also provides greater understanding of new and recent technologies being introduced to the market, including sentiment on how the technologies are being received and its effect on the transportation industry.
In addition to research companies, involvement with leading industry associations serves as another source of economic intel. Organizations such as NEFA and ELFA are helpful channels for the transfer of knowledge on industry regulations and economic trends between leasing companies and their customers. All these resources provide helpful insight on economic indicators because of their ability to aggregate perspectives from various market components and key stakeholders across the industry.
Since perspectives on the transportation industry may differ between industry verticals, involvement in key associations in other industry verticals is another valuable resource. We seek out thought leadership, participate in seminars and webinars, and attend conferences within the food and beverage, agriculture and poultry associations.
The compilation of these various economic resources enhances our efforts to create comprehensive strategies tailored to each industry and each individual customer. We are better equipped to be innovative in our leasing structures and pricing because of the economic insight we collect from these intellectual channels.
From a global perspective, the manufacturing side of the equation is one point of concern. The ongoing trade negotiations with China and the reduction of overall business create a multinational economic distress, ultimately affecting the transportation industry. Less goods produced will impact the volume of goods being transported, resulting in an overload of trucks coming into the secondary market.
These economic factors combined bring us to a very crucial factor as lenders and lessors. In order to create financial structures for leasing, we lean on the health of the economy to forecast residual values. As we enter a slowdown in the economy, we can expect an increased supply of trucks entering the market in the five to ten years to follow. In addition, having fewer goods to deliver, different logistics solutions and other technologies replacing trucks, we must adjust our forecast valuation of assets resulting in higher rates for borrowers. It is important for consumers to understand that, depending on their lease structure, obtaining a significantly lower rate for their leased equipment could have a tremendous negative impact for them when returning the equipment.
Trucking in 2018 and into 2019
Trucking in 2018 experienced tremendous growth, as did several other sectors in the United States coming out of a recessionary period. While the growth in 2018 was phenomenal, it is likely that the pace of growth in the trucking sector will correct itself throughout 2019. There are several factors that would attribute to the industry’s self-regulation.
A shortage of drivers is one of those factors. The shortage of drivers has agonized fleet managers for decades. To help solve the issue, manufacturers and process engineers are leaning into technology and other logistics arrangements.
The evolution of delivery channels to distribute goods has helped resolve the issue of driver shortages. Delivery of goods continues to shift to a localized distribution model as opposed to the traditional distribution hub model. Several retailers such as Amazon and Walmart have already transitioned to this localized distribution model. Smaller trucks typically suffice to complete delivery in a localized distribution model. Operating smaller trucks does not require employee drivers to have CDLs (Commercial Driver’s Licenses). By utilizing smaller trucks, the localized distribution model closes the gap of driver shortages by opening employment to a broader population of drivers, including both commercially and non-commercially licensed truck drivers.
Different technologies are also disrupting the transportation industry. Consumers are becoming more impatient in all aspects of life. We are living in a world that demands instant gratification. Social media has been the primary agent of this societal shift. In today’s fast-paced landscape, we can livestream our personal life and obtain instant feedback from our social network in a matter of seconds. We communicate in a very effective and expeditious way and are connected 24/7. Additionally, nearly every person has access to a mobile device and the internet. This further perpetuates the expectation of instant gratification.
All this said, we now demand delivery of goods to be at our door step within hours. Companies such as Amazon implemented solutions such as Prime “eligibility” to help curb the need for speedy delivery; however, two-day delivery is not fast enough. Consumers want an even faster solution. Drone technology used by Amazon, Google and Workhorse are disrupting the transportation industry by allowing consumers to have their items delivered within hours of ordering. The continued advancement of drone or other trucking alternative technology, such as autonomous vehicles, will contribute to the self-correction of the trucking industry into 2019.
As a lender in the transportation industry, we observe the industry in a unique way. Our approach is customer-centric, focused on listening, processing and understanding the borrowers’ needs to deliver the best solution possible. We must be flexible in creating lending opportunities for assets that are not necessarily transportation assets. Independent equipment finance companies, such as Sertant Capital, strive to close the gap between bankable and non-bankable deals and open lines of financing for diversified assets that are replacing or enhancing the transportation industry.
ABOUT THE AUTHOR: Paola Bennett is Director of Commercial Operations & Analytics at Sertant Capital Fleet Management.