Now that the crunch for chassis has abated from pandemic-fueled shortages, companies can return to business as usual, right? Not so, says Dan Walsh, president and CEO of Trac Intermodal, a North American marine chassis provider based in Princeton, New Jersey.
FreightWaves recently chatted with Walsh to discuss forecasts for chassis demand. Expect e-commerce, the need for supply data visibility and shifting manufacturing patterns in Asia to play a role, according to Walsh.
This question-and-answer session was edited for clarity and length.
FREIGHTWAVES: Is there any reason that the chassis shortage that we saw a couple years ago won’t happen again?
WALSH: I’d say three things in response to that. The first thing that I would say is that in the period ’21 to ’22, we really did see a unique combination of market dynamics: a global pandemic, basically the cessation of all imports and then a massive volume surge. And I think all that put pressure on all parts of the supply chain. Respectfully, what I would say is it wasn’t so much that there weren’t enough chassis to service the volume, it was more that there were a number of points in the supply chain where activity became so congested that nothing moved.
You could think about, for example, the number of chassis that were stuck outside of retail warehouses with containers on them because there was not sufficient labor or space in the warehouse to unload those containers and deck the assets so that they could be put back into circulation. And that manifested itself in extended turn times — almost double or triple what they’ve been in the past. And that just put pressure on everybody in the supply chain to get the assets moving efficiently.
I think those market conditions are relatively unlikely to happen again. But I think they could. And so the question is: What have we done in the event that they do happen [in order to] to minimize the impact? And the first thing that I would say in response to that is that we’ve continued to invest. In fact, we’ve accelerated our investment in the chassis fleet. That includes us adding new assets, refurbishing and upgrading our existing assets and continuing to innovate around our product offering so that we support our customers. And I think that’s the key thing when there’s been a market correction. We haven’t stopped investing.
So I think that puts us in very good stead in terms of asset availability. If we do see an increase in demand, from where we are at the moment, I think there will be an increase in demand more likely in the second half of 2024. If you look at the first half of ’24 [compared with] ’23, current projections show an 8% increase, but I actually think it might be higher than that in the back half.
FREIGHTWAVES: What growth rate assumptions do you plan your business around given that intermodal has lost share to the highway but there has also been a lot of investments by the domestic intermodal providers in taking delivery of containers and also investments by the Class Is in rail terminals?
WALSH: There’s been a lot of collaboration and partnership between all participants in the supply chain to try and make sure that we provide data in a common way so that people have better visibility into assets and can optimize their utilization.
The other thing that I would say with respect to chassis is that it was really just confirmation of something we’ve been saying publicly for a long time — that there is no one size fits all with respect to the chassis provisioning model. There is no silver bullet. You can’t pick one model and say, “Let’s apply it everywhere in the world, everywhere in North America, every port, every rail” and have it work effectively. You have to cater to local market dynamics, including geography regulation, commercial activity — all that sort of stuff.
Our preferred model is the grounded neutral pool, which gives us better control of the assets to make sure that they’re moving around quickly and gives our customers unlimited choice.
FREIGHTWAVES: You had mentioned potential intermodal growth in the second half of 2024. What growth rate assumptions do you have and how do you plan your business around them?
WALSH: We feel good about demand. I think that’s the key takeaway. Going forward, we feel very good about growth. And I say that for a couple of reasons. If you look at the period between 2001 and 2020, U.S. real GDP increased at a rate of 1.8%. At the same time, containers grew 3.6% and chassis grew 3.2%, which implies a GDP multiple of 2.1 times and 1.8 times, respectively.
That’s relevant [because] if you believe in ongoing GDP growth in the United States, based on what’s happened in the past, you’re going to see growing demand for containers and chassis. We believe strongly in the North American economy, and we think it will continue to grow at around maybe 1.7%, 1.8% in the coming period. And as such, we think that our growth will be well north of 3% in the coming years. So what’s important is that we continue to invest in and optimize our fleet so it’s available. And as I mentioned before, we’ve spent north of a billion dollars in the last decade, making sure that that’s happening. We feel very good about the coming growth in the market and the coming demand for our product in the market.
FREIGHTWAVES: Everyone still talks about nearshoring and the extent that that might actually happen in North America. Would that affect Trac at all and how you conduct your business?
WALSH: I think it’s certainly an emerging market dynamic that we need to consider. But I think, really, the question is whether or not we still believe in trans-Atlantic trade and globalization. And I think that the global provision of assets is so deeply entrenched in the North American economy that it will continue.
There are some things that are happening which are of interest. For example, if you think about the movement of manufacturing and production in Asia, particularly away from China and into, say, India and so forth, then potentially you’ve got a Suez Canal delivery option, which is more East Coast-centric. And I think that could be interesting in terms of how that volume comes into the United States, which we believe will continue to grow and will be distributed between the various ports and locations. So, East Coast growth over the West Coast and how will that play out?
I think that nearshoring is something that we certainly need to be cognizant of, particularly given the statements made by President Biden around the criticality of certain industries — microchips, for example, and deeming that a national security issue. There might be ongoing activity where other industries are designated that. But I do think globalization will continue to grow. I think that there will continue to be trans-Atlantic moves and it might just alter somewhat how the products are distributed in North America.
FREIGHTWAVES: Is there coordination between the volume of containers that a company like J.B. Hunt is taking delivery of and the volume of chassis that you take delivery of?
WALSH: No, not specifically. I mean, in that general context that I talked about before, that if you think about GDP growth, then the growth of containers and chassis are very tightly correlated to GDP. So as long as GDP is growing, we believe that there’s a very tight correlation between GDP growth and demand for chassis and demand for containers. If you believe that the GDP is going to continue to grow, then you can believe that chassis and container demand is going to continue.
FREIGHTWAVES: For purposes of planning the marine chassis fleet, are you expecting a shift back to more share of imports for the West Coast ports or do you see any other trends in port market share gains around North America?
WALSH: It’s a really interesting phenomenon, I think. Just go to the data first in ’23: East Coast ports were higher than the West Coast ports in total import volume in the first half [of 2023] by 3%, right? And that’s excluding Canada and Houston. But now we’re starting to see signs of more freight returning to the West Coast. And if you look at the Global Port Tracker from the National Retail Federation, they’re projecting that LA/Long Beach import volumes in the second half of ’23 will grow by 6.4% compared to the same period in 2022.
What I think is going to happen, in summary, is some of the volume that went away from the West Coast is going to go back, but not all of it. Again, you have this initial indication that some of the changing locations for manufacturing inside greater Asia may open up the viability of the East Coast ports, and I think that’s something that people need to keep an eye on. But the data suggests that the West Coast is going to grow from where it is, although it might not get back everything that shifted away. I also think that on the West Coast, some of the issues that were of concern — uncertainty with respect to the ILWU [labor] agreement, etc. — some of those have been managed away.
So I think there is a higher degree of certainty at the moment. I think some of the things that were outstanding and were causing people to take a closer look — coupled with congestion issues — are starting to dissipate. And on the back of that, you’re seeing some of that volume go back. But I also think, historically, when it shifted away, not all of it has gone back. And that’s why you’re seeing the growth of New York and New Jersey, the South Atlantic over recent years in particular.
FREIGHTWAVES: Is there anything else that you’d like to mention that might be good for readers to know about?
WALSH: With respect to e-commerce, I do think that it is going to continue to have a massive impact on our supply chain. In my opinion, what e-commerce reflects is changing consumer behavior and changing consumer expectations. The consumer wants stuff faster, they want it delivered to their home and they want the ability to send it back for free. I think COVID accelerated the development of e-commerce by 10 years. And if you look at the sales in e-commerce in the first quarter of 2023, it’s 15.4% of total sales. And it continues to grow: growing 2.1% in the second quarter of 2023 and 7.5% year on year. So I think that’s going to continue to put pressure on us to be faster, to be more efficient and to be more responsive to the customer.
Also, our retailers are going to continue to be focused on the customer interface and how they’re managing that, particularly through technology. And then the back-end logistics requirements that go with that I think are going to continue to shape the supply chain going forward. So that expectation from the consumer which has shifted is going to translate into acute improvement expectations for all of us in the supply chain.
The only other point that I wanted to say was about retail inventory. You’ve seen the retail inventory-to-sales ratio remain relatively flat since March 2023, showing that the market has leveled off. Personally, I think that metric is a very good forward indicator. I don’t think we’re through the destocking of the inventory. I think it’s going to be a muted peak season this year, but I think that will correct in ’24 and that will drive volume growth when retailers start pulling product towards them and putting it back on the shelves. There was so much activity in that space and some of that inventory is still being disposed of, but I think we’ll be through most of that [inventory] as we head into the second half of ’24 and volumes will be lifted as a result.
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