In­dus­try ea­gle eye

Bren­dan Richards has built a for­mi­da­ble rep­u­ta­tion as a trans­port in­dus­try ob­server and looks at the trends of the last quar­ter-cen­tury

Australian Transport News - - Contents - WORDS ROB M CKAY

New KPMG part­ner Bren­dan Richards has built a for­mi­da­ble rep­u­ta­tion as a trans­port in­dus­try ob­server. We in­ter­view him on the trends of the last quar­ter-cen­tury

RM: What wider eco­nomic na­tional and in­ter­na­tional trends have coloured the de­vel­op­ment of truck­ing in the past 25 years and what has it meant for driv­ers, small to medium op­er­a­tors and larger con­cerns?

BR: All the pop­u­lar vi­sions of the fu­ture of trans­port had one thing in com­mon – a world where we moved be­yond oil, but the re­al­ity was quite dif­fer­ent.

As oil be­came more ex­pen­sive, the re­source be­came more ac­ces­si­ble and tech­no­log­i­cal break­throughs be­came more rapid. Oil, gas and coal were read­ily con­verted into trans­port fu­els and other petroleum prod­ucts. Com­bus­tion en­gines be­came more ef­fi­cient.

So even with mas­sive growth in trans­port de­mand, what ev­ery­one thought would drive the fu­ture of the Aus­tralian trans­port in­dus­try – mov­ing away from oil – turned out to be a red her­ring that sim­ply guar­an­teed busi­ness as usual. In­stead of some sort of evo­lu­tion of the tra­di­tional modes of trans­port, what we are get­ting in­stead is a tech­no­log­i­cal rev­o­lu­tion that is threat­en­ing to com­pletely re­place some modes of trans­port.

Tech­nol­ogy is re­mov­ing the driver, op­ti­mis­ing the rout­ing, track­ing the goods, chang­ing the supply chain, elim­i­nat­ing the mid­dle man, con­sol­i­dat­ing the in­dus­try play­ers and in­tro­duc­ing new ones like Ama­zon that aren’t even trans­port com­pa­nies but are tak­ing on the in­dus­try at its own game. Whether you are big or small, your busi­ness model is un­der threat and your rel­e­vance is be­ing ques­tioned.

RM: The early 1990s saw the start of work­place com­put­er­i­sa­tion. How did that im­pact on trans­port busi­ness op­er­a­tions?

BR: Com­put­er­i­sa­tion, in gen­eral terms, cre­ated the sort of ben­e­fits that are still be­ing pur­sued and honed to­day. In­te­gra­tion led to a de­crease in costly er­rors, cus­tomer ser­vice im­proved in terms of both speed and qual­ity, work­ing cap­i­tal be­came faster and eas­ier to ob­tain, trans­parency im­proved and ac­cess to real-time freight data and anal­y­sis be­came a re­al­ity with the ad­vent of RFID and the early days of track and trace.

RM: The pe­riod saw the rise of lo­cal pow­er­houses such as Toll and Lin­fox, which piv­oted from pure truck­ing to lo­gis­tics ser­vices. How did that play out and how were cus­tomer ex­pec­ta­tions changed?

BR: From the out­side look­ing in, you can ar­gue that the rise of Toll and Lin­fox was

“As Australia’s pop­u­la­tion ages, the trans­port in­dus­try will also be put un­der ad­di­tional strain”

“It is the glob­al­i­sa­tion of de­mand that is chang­ing the world, not the glob­al­i­sa­tion of supply”

more a chang­ing of the guard than a se­ri­ous change in di­rec­tion for the in­dus­try.

In many ways, they were tak­ing over from where the likes of TNT, Bram­bles and Mayne left off, and we were left in the same sit­u­a­tion that has al­most al­ways been the case – a cou­ple of ma­jor play­ers and then day­light to ev­ery­one else. The change in cus­tomers’ ex­pec­ta­tions was shaped more by out­side forces – in par­tic­u­lar, the rapid de­vel­op­ments in tech­nol­ogy. Cus­tomers started to ex­pect ev­ery­thing faster and big­ger.

As a so­ci­ety, we have be­come vo­ra­cious con­sumers of the here and now, and that has af­fected trans­port as much as any other sec­tor.

It wasn’t so much that the ma­jor trans­port com­pa­nies be­came play­ers on the world stage as that their cus­tomers were al­ready there and de­mand­ing a level of ser­vice far in ex­cess of any­thing seen be­fore but for far less money. It is the glob­al­i­sa­tion of de­mand that is chang­ing the world, not the glob­al­i­sa­tion of supply.

RM: As large firms turned into gi­ants, what has con­sol­i­da­tion meant for medium and smaller op­er­a­tors?

BR: The ma­jors have recog­nised the need to be more rel­e­vant to their cus­tomers by deep­en­ing their in­volve­ment in the supply chain. The re­sult is that the gap be­tween the trans­port ma­jors and min­nows has widened, driven by: • The in­creas­ing pace of glob­al­i­sa­tion and the abil­ity of the ma­jors to pro­vide one-stop-shop so­lu­tions for cus­tomers who have grown to play on the world stage • De­vel­op­ments in tech­nol­ogy, par­tic­u­larly in the fields of pre­dic­tive anal­y­sis, net­work plan­ning tools, freight track­ing, cus­tomer soft­ware in­te­gra­tion, driver safety aids. If the medium and smaller op­er­a­tors want to com­pete then they need to come to­gether in col­lab­o­ra­tive net­works and pro­vide the depth and breadth of ser­vice that the cus­tomer wants.

Up un­til now, the min­nows have held back – mostly for fear of los­ing a cus­tomer to some­one who you thought was a part­ner in a so­lu­tion for that cus­tomer. But the other rea­son is when you are al­ready es­tab­lished and well cap­i­talised, tech­no­log­i­cal de­vel­op­ment typ­i­cally works in your favour. You can adopt it ear­lier, im­prove your of­fer­ing and re­in­force your value propo­si­tion. So over time, the gap be­tween the ma­jors and min­nows widens.

What’s more, for the lit­tle blokes, tech­no­log­i­cal ad­vance­ment not only proves to be a bar­rier, but also ex­poses their vul­ner­a­bil­ity. For ex­am­ple, in the last mile of de­liv­ery where supply chains va­por­ise, we’ve seen the rapid emer­gence of crowd­sourc­ing mod­els that have in­tro­duced a whole new level of com­pe­ti­tion to the sec­tor.

Think uberCargo, Rock­e­tun­cle and VanGo VanGo. They don’t nec­es­sar­ily hurt the big boys but they play havoc with the small-to-medium op­er­a­tors.

The min­nows need to get to­gether in or­der to fight back or they need to get out.

RM: Speaking of con­sol­i­da­tion, fi­nance houses of var­i­ous stripes have been cru­cial, with first banks and then ven­ture cap­i­tal mak­ing their mark. How did that go? The role of pri­vate eq­uity firms seems to have waned. Is that it for that sort of money man?

BR: Pri­vate eq­uity in­ter­est in do­mes­tic lo­gis­tics took off around 2008, with the likes of ABN AMRO, KKR, CHAMP and Gre­sham all hav­ing a crack at one time or an­other. What those ef­forts have in com­mon is that they all ended in vary­ing de­grees of fail­ure.

The ba­sic un­der­ly­ing cause, I be­lieve, is that trans­port is a highly cap­i­tal-in­ten­sive in­dus­try with low profit mar­gins. The fre­quency of churn of cap­i­tal, as you buy new trucks etc., mean that there are very few trans­port busi­nesses that are ca­pa­ble of gen­er­at­ing the cash flows that are so im­por­tant to pri­vate eq­uity.

As a con­se­quence, once pri­vate eq­uity is in there, they look to free up cash from other ar­eas of the busi­ness. What they tend to do is iden­tify ar­eas of ‘un­nec­es­sary’ cost that turn out to be far more im­por­tant than they thought.

The end re­sult is that there is a grad­ual or rapid strip­ping out of the fun­da­men­tals that drive a suc­cess­ful freight busi­ness and, sooner or later, an exit for the pri­vate eq­uity firm. It’s hard to see any­thing chang­ing in that re­gard and I’m not sure that we will be see­ing too many more pri­vate eq­uity buy­outs in the fu­ture.

RM: What does the growth of huge trans­port and lo­gis­tics fa­cil­i­ties at the edges of cities tell us about the chang­ing task?

BR: Pop­u­la­tion growth is go­ing to be mas­sive and most of it will be in our cap­i­tal cities. This will put enor­mous strain on the in­fra­struc­ture of those cities and make the tra­di­tional modes of trans­port – road, rail, sea and air – in­creas­ingly ex­pen­sive and dif­fi­cult to op­er­ate.

As Australia’s pop­u­la­tion ages, the trans­port in­dus­try will also be put un­der ad­di­tional strain with the age profile of the trans­port work­force eas­ily the old­est in Australia.

As that work­force re­tires, skill short­ages be­come a prob­lem that will be dif­fi­cult to over­come un­less the in­dus­try can some­how make it­self more at­trac­tive to young peo­ple.

As our pop­u­la­tions and our cities grow we can ex­pect to see very so­phis­ti­cated lo­gis­tics hubs that re­ceive all the goods com­ing into the city and al­low for their ‘last mile’ dis­tri­bu­tion by a va­ri­ety of trans­port ser­vices in­clud­ing drones, Uber-type freight de­liv­ery op­er­a­tions and even per­sonal pickup.

These will be sup­ple­mented by huge net­works of de­liv­ery kiosks lo­cated in ar­eas such as schools, train sta­tions and su­per­mar­kets. You will lit­er­ally be able to or­der some­thing on­line at work and pick it up from a kiosk on your way home. This is al­ready hap­pen­ing across Europe and Asia. What we are start­ing to see is the evo­lu­tion of the ‘ last mile’ into a com­plex mul­ti­modal de­liv­ery ecosys­tem.

RM: Truck­ing has so far tri­umphed over other freight trans­port modes, with rail ef­fec­tively be­ing co-opted and coastal ship­ping hav­ing with­ered. How did that hap­pen?

BR: Road trans­port came to dom­i­nate the Aus­tralian mar­ket for non-bulk freight be­cause of its ad­van­tages in price, speed, con­ve­nience and re­li­a­bil­ity. How­ever, while an­a­lysts are pre­dict­ing 75 per cent growth over the next 20 years, prof­itabil­ity is un­der pres­sure with skill short­ages and re­duc­tions in the fuel re­bate driv­ing up costs. Low bar­ri­ers to en­try are also putting se­vere pres­sure on rates and mar­gins. The key strength of rail freight is its abil­ity to trans­port heavy or bulky prod­ucts over long dis­tances.

Un­for­tu­nately, suc­ces­sive decades of un­der­in­vest­ment have cre­ated sig­nif­i­cant in­fra­struc­ture con­straints. The North-South Cor­ri­dor is un­com­pet­i­tive, with slow tran­sit times and poor re­li­a­bil­ity.

As a re­sult, only 20 per cent of all goods trans­ported be­tween Mel­bourne and Bris­bane go by rail. Be­tween Mel­bourne and Syd­ney or Syd­ney and Bris­bane, it’s even worse. The East-West Cor­ri­dor is more com­pet­i­tive given the longer dis­tances and the abil­ity to dou­ble-stack freight cars be­tween Ade­laide and Perth. Con­se­quently, 81 per cent of all goods trans­ported in the re­gion go by rail.

How­ever, that is threat­ened by an age­ing rail fleet. Australia has about 2200 lo­co­mo­tives with an av­er­age age of 36 years. That makes them one of the old­est and least-ef­fi­cient fleets in the world, and that is lim­it­ing their abil­ity to be a com­pet­i­tive al­ter­na­tive to road.

Coastal freight only ac­counts for a lit­tle more than 100 mil­lion tonnes of cargo and, on av­er­age, this has seen a small de­cline each year. The Aus­tralian Gov­ern­ment has in­di­cated that it con­sid­ers it strate­gi­cally im­por­tant for Australia to have a vi­able coastal ship­ping in­dus­try in a com­pet­i­tive do­mes­tic trans­port sec­tor, but there re­mains a ten­dency for Aus­tralian busi­ness to dis­miss coastal sea freight as a trans­port op­tion.

Above: Lin­fox es­tab­lished it­self as one of the na­tion’s main lo­gis­tics providers Op­po­site: New KPMG part­ner Bren­dan Richards

Above: Along the Newell. Bren­dan Richards notes only 20 per cent of freight be­tween Mel­bourne and Bris­bane is trans­ported via rail

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