Fleet order-to-delivery (OTD) has been brutal this model-year due to severe weather conditions, which exacerbated rail congestion, creating huge backlogs of vehicles needing to be shipped. We are still several months away from publishing AF’s annual OTD survey, so we are reliant on anecdotal stories we are hearing from the field. They’re not pretty. Railway backlog is particularly impacting ship-thru units requiring upfitted equipment. Bodies are ordered, but the chassis are delayed, which creates a domino effect where upfitters don’t produce additional bodies until the chassis arrive. These delays shift one fleet’s production into another fleet’s reserved schedule. Now, body production is out of sync with chassis delivery, which means fleets have a depreciating chassis sitting at an upfitter, which is unusable. There are numerous other stories, but the worst part is that some fleets are being warned to anticipate rail delays again this winter.
Freight Volume is Booming
One man’s misfortune is another man’s fortune. Such is the case with the rail transport business in North America, which, although struggling to keep up with demand, is experiencing boom times. However, as all fleet managers are painfully aware, this strong demand to haul freight has created widespread railway congestion. Rail shipment of fleet vehicles is critical to acceptable OTD times. While fleet is important, in the larger scheme of things, fleet vehicle shipments only represent a tiny percentage of overall rail shipments. Fleet represents less than 20 percent of overall automotive shipments, which, in turn, only represents 9 percent of total rail freight. The fastest growth in railroad traffic is in the shipment of crude oil. This has been heaven-sent for railways as it has helped offset declining coal shipments, but this has been the root cause of much railway congestion. The demand on rail assets for oil shipments will only increase. Predictions are that oil production in the Bakken formation in North Dakota and Montana could increase to 2 million barrels per day in the coming years.
In addition, there have also been dramatic increases in the rail shipment of agricultural products. In 2013, record harvest occurred in many states and Canadian provinces, causing delays in getting grain to market, primarily due to the shortage of rail cars and crews, along with increased congestion, especially for freight traveling through the Dakotas to the Pacific Northwest. But, what brought everything to a head was last winter’s severe weather, which created the proverbial “perfect storm” that severely strained the rail network throughout North America. Some are beginning to believe the rail congestion experienced this winter is more of a symptom of a systemic infrastructure weakness and not solely the consequence of severe weather.
The weak link is the looming shortage of locomotives to move this increased freight volume, which some view as the Achilles heel of the rail industry. As rail industry trade publications report, each of the seven North American Class 1 carriers is “power short.” These reports state that putting older locomotives back in service will not work in many cases, due to fuel costs and emissions requirements. Weather and regulatory issues, such as braking, dictate train length, which, in turn, determines overall freight capacity. In addition to a shortage of locomotives, there is also a shortage of crews. As the national economy improves, railroads are ramping up to hire enough new employees, in particular engineers. Most railroads have increased their locomotive orders for 2014. The industry’s locomotive production capacity is approximately one thousand units per year, and reports indicate that the two major manufacturers – EMD and GE – will be sold out in 2014.
One beneficiary of the rail congestion is the vehicle hauling industry, with many OEMs having a positive experience with truck haulers and are considering making some of these switches permanent. While there is an additional cost to move vehicles long distances by truck, it is less expensive than having vehicles sit stranded waiting for rail pickup.
Expanded North American Production Capacity
One factor contributing to rail congestion is the increasing automotive production capacity in North America. With seven new plants forecasted to come online in Mexico between 2013 and 2020, the expected exports to the U.S. will rise substantially. Rail-based vehicle exports from Mexico to the U.S. and Canada will increase from 1.67 million units in 2013 to 2.81 million by 2018.
Over the past 32 years, most global OEMs have built new assembly plants in North America. There are currently 18 transplant assembly plants in the U.S., with the majority of them located in states where, traditionally, there has not been domestic automotive assembly plants. These 18 plants now represent a growing share of automotive rail shipments.
Another example is the Volkswagen Group, with imports from Europe to the U.S. projected increase from 248,500 units to 350,000 units by 2018. In addition, VW will increase the number of vehicles it exports from Mexico to the U.S. from 246,000 in 2013 to 310,000 by 2018. This expansion in production capacity will add further pressure on its rail network, which it uses extensively to ship vehicles assembled in Mexico to the U.S.
Lastly, many people are unaware that the U.S. has become a significant exporter of American-assembled vehicles, which are transported by rail to ports for shipment. For instance, General Motors, Ford, and Chrysler exported over a million cars in 2012, including 740,000 to Canada. Honda exported more than 20 percent more automobiles from the U.S. than it imported from Japan in 2013. Similarly, Toyota exported 130,000 U.S. assembled units in 2013 to 32 countries. Other significant exporters of U.S. assembled products are BMW from its plant in Spartanburg, S.C., and Nissan, which had a 37 percent increase in exports.
Worrisome Clouds on the Horizon
The growing suspicion is that we may experience railway congestion next model-year similar to what we experienced this model-year, with the degree of congestion contingent on the severity of the weather. This is one time where I hope my forecasting intuition is dead-wrong. However, the clouds on the horizon look worrisome.
Let me know what you think.