Local freight trucking in the United States and Canada have identical segmentation for product and services, so why does the Canadian local freight trucking industry have consistently higher profit margins than the local freight trucking industry in the United States? Understand the key factors that drive industry profit today.
Both the US and Canada offer the same truckload services, less-than-truckload services, intermodal services and dry bulk services to buyers. However, the United States generated a profit margin of 5.4% with an annual growth of -1.4pp over a five-year period (2015–2020), while Canada generated a profit margin of 14.9% with an annual growth rate of 0.3pp over a five-year period (2014–2019) (Mieles 2019)[1](Cook 2020)[2]. Most people would expect the opposite to occur due to the sheer immensity of the American trucking industry generating $42.3 BN in revenue, $2.3BN in profit and providing 343K jobs for 211K businesses in 2020. However, industry profitability is not based on size, but rather on industry composition. Canada’s competitive landscape and high demand levels make the Canadian local freight trucking market more profitable than the United States local freight trucking market.
Companies in the Local Freight Trucking industry in Canada primarily compete based on fleet size, equipment type, geographic scope of operations, service type and type of freight carried, as well as freight rates, quality of service, reliability and transit times. These companies have expanded their reach by providing value-added services from related industries such as warehousing, packaging, logistics and tech to develop a sustainable competitive advantage. That can be done one of two ways, either by acquiring smaller companies to offer a multitude of different types of services or adding technological features to pre-existing services. It’s no longer acceptable to provide the minimum.
In both Canada and the United States, most truckers have evolved with freight technology so that their environmental and operational costs of conducting business go down, and to monitor transportation activities more effectively. They have adopted tracking systems when moving freight and online forms to save time for business transactions. But the most significant adoption will be the implementation of autonomous motor vehicles on the commercial market to lessen the number of drivers on the road. The best small- and large-scale operators now compete based on value, not price, removing mass price-based competition from the Canadian and American local freight trucking market. Price-based competition lowers industry profits because industry players sell their services at a lower rate each time to beat each other out, making both industries as a whole less profitable.
Small-scale non-employers represent 63.3% of all establishments operating within the Canadain local freight trucking industry and 86.7% of all establishments operating within the United States local freight trucking industry. However, that is slowly changing as large-scale operators purchase smaller companies to enter new geographic markets or expand the scope of their value-added services. Which in turn minimizes their per-unit costs because they are able to spread fixed costs over a larger volume of freight, while also locking in long-term contracts with large clients. Canada is indicative of this trend with the Canadian local freight trucking industry being 23.4% mergers and thus 23.4% less competitive than the American local freight trucking industry (Mieles 2019)[1](Cook 2020)[2]. Its less saturated market makes the industry less prone to periods of overcapacity, where internal competition intensifies leading to price discounting, resulting in decreased margins and a significant number of business failures.
The relative ease with which a new competitor can enter the industry causes there to be a large number of small operators and sole proprietors in the market for local freight trucking. For example, Local Freight Trucking industry players generally need only a commercial driver's license and a truck to begin operating. To obtain a CDL, most states require an individual to be 18 years old; however, licensing requirements differ from state to state. Such low barriers to entry in the United States only exacerbates internal competition. This in turn leads to greater periods overcapacity, where price discounting and business failures drop industry profits.
In both industries, demand is determined by industrial production, personal consumption and competition. The adoption of just in time inventory management, a major industrial production trend has increased demand for local freight trucking in Canada and the United States. In JIT inventory management, manufacturers and retailers only purchase materials as they are needed, instead of purchasing goods and storing them for later use. As a result, downstream clients have required smaller, more frequent deliveries of key inputs, generating significant revenue opportunities for industry operators. This increase of road-freight activity enables trucking operators and manufacturers to form close relationships, which eventually develop into long-term contracts. These long-term contracts provide them with a consistent flow of work, which in turn boosts industry profits. The more disposable income there is per person, the greater transportation there is by local freight trucking. The steady expansion of the broader Canadian economy has resulted in increased consumer spending and a greater volume of manufacturing inputs and consumer products being transported by industry operators. Likewise, consumers in the United States have become more willing to make discretionary purchases, which in turn bolstered manufacturing and retail activity. So, when the economy is performing well, people spend more on consumer goods, and demand for transportation services increases boosting industry profits. External competition restricts demand for local freight truck operators throughout the United States and Canada. More competition means a lower amount of industry operators, which in turn means less industry profit to be gained. Even though the amount of external competition is minimal due to each mode of transportation being limited to its own infrastructure, it still plays a role in helping to drop industry profits in the United States.
The low and stable price of crude oil in Canada inhibits the industry to generate additional revenue through fuel surcharges, but it does not bring profits down. Unlike in the United states where fluctuating fuel prices prompt industry revenue to decline and thus lower profit.
The unique composition of the Canadian local freight trucking industry driven by low internal competition and economic stability makes it more profitable than the American local freight trucking industry. Both industries face the same struggles of price-based competition and external competition constraining demand dragging profits down. As well as the same opportunities to boost profits either through freight technology and value-added services to limit price-based competition or the adoption of logistics trends like just in time inventory management. However, the United States does not have the same level of low internal competition and crude oil prices to help offset profits to drive them back up. It’s highly saturated nature, volatile price tendency and low entry barriers only drags profits further down.
So, what does the United States local freight trucking market need to do in order to be more profitable than its neighbour to the North?
The industry needs to increase compliance costs to meet environmental regulations in order to make it harder to enter into the industry. Light barriers to entry create the perception that it’s easy to succeed in the local freight trucking market. This perception enables newcomers to enter into the industry with minimal knowledge and drive profits down for the industry fast. Higher diesel prices and better economic conditions would also benefit the industry tremendously. A better economy means more consumer spending, which means higher demand for local freight trucking and more industry profits. Higher diesel prices would provide the industry with a unique ability to generate additional revenue through fuel surcharges. That would give them a distinct advantage, which would help to offset industry profits.
What adjustments would you make to the American local freight trucking industry?
[1] https://my-ibisworld-com.proxy.bib.uottawa.ca/ca/en/industry/48411ca/industry-at-a-glance
[2] https://my-ibisworld-com.proxy.bib.uottawa.ca/us/en/industry/48411/industry-at-a-glance
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