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Road transport: changed conditions ahead

The digital economy is upending industry sectors from the media to banking to hotels and taxis. Is the road transport sector immune? Far from it.

On the positive side, the rapid evolution in e-commerce, widely distributed manufacturing chains and larger logistics networks should drive demand for trucking. But it may (will) also bring driverless trucks, delivery drones or some kind of Uber of trucking.

Even if the market was stable, the Australian road transport industry faces considerable challenges: investment in the sector is down, debt is growing. Meanwhile ANZ estimates the industry needs $A3.5 billion in new capital over the next five years – which equates to around $A50,000 in equity contributions per business.

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Critical

Transportation and storage represent about 5 per cent of Australian GDP.  To put that into perspective, Mining and Finance respectively represent less than 10 per cent each - and have been shrinking in recent years.

"The rapid evolution in e-commerce, widely distributed manufacturing chains and larger logistics networks should drive demand for trucking.” - Timothy Suffield

The road transport sector generates around $A40 billion annually in revenue. From an employment perspective, there are more than 40,000 business in the sector with half of these business represented by owner drivers with just one truck.

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Meanwhile, road transport is becoming increasingly important as complex supply chains grow in scale, on-time inventory management becomes the norm and on-line sales grow.

All these themes are heavily reliant on the efficient transportation of goods right across the supply chain.

Consolidation

Our report The Road Once Travelled, a road transport economic and benchmarking analysis, identifies some key themes:

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  • The industry will continue to consolidate due to increased competition and increased operating costs. Although the industry will consolidate in terms of the number of companies, it will provide an increasingly greater and more efficient service.
    The number of employees in the sector will continue to grow subject to no disruptive technology shock (driverless vehicles/drone etc) or regulation change. 
  • Leverage and debt usage has grown in the sector over recent years however there has been a sharp decline in CAPEX investment resulting is Australia carrying the oldest average fleet age on record at roughly 14 years.

To put this into perspective, the average age of the trucking fleet in USA and Great Britain is 6.5 and eight years respectively. Australia’s aging fleet is not sustainable! 

Interestingly, recent ANZ research indicates a 32 per cent increase in total imports of transport equipment for calendar 2017 suggesting this worrying trend may be narrowing.

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  • Diversification may appear attractive but investing outside of pure road cartage doesn’t make sense for everyone.

    A number of companies have invested into storage and other vertically integrated services and are not generating a sufficient return on their capital. 

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  • Trucking businesses which heavily rely on sub-contractors are winning market share through price cutting.
  • ANZ predicts the sector will have to invest in excess of $A3.5 billion over the coming five years.

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Opportunity

The outlook for the sector is complex and far from clear – but that doesn’t mean there is not opportunity.

In summary, we see a range of pros:

  • Growing and steady demand;
  • Increasing merchandise imports and exports (trade liberalisation vs Trump);
  • Australia is conveniently located beside world’s manufacturing hub;
  • No immediate trucking substitutes;
  • Increasingly complex supply chains which rely on trucking activities; and
  • Innovation - drones & driverless cars.

As well as cons:

  • Intense competition to continue;
  • Profit continues to be pinched as a result of increased access, safety and licensing costs;
  • Consolidation of industry- who will survive?;
  • Skill-shortage driving increased wages;
  • Restrictions in vehicle size; and
  • Aging fleet not sustainable.

Timothy Suffield is an Associate Director, IIB at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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