LOOKING BACK AND FORWARD

LOOKING BACK AND FORWARD

We all recall the pervasive anxiety about possible computer-generated turmoil as year 2000 (Y2K) neared. Looking back, the fact that it was a non-event may be the biggest story. Some maintain the $600 billion spent worldwide to make computer systems Y2K-compliant was massive overkill. Others counter that the preparation was necessary. But the focus of senior executives on the problem will have a lasting effect. Companies had to assess realistically the risk, reward and role of information technology. Y2K demonstrated that information technology providers could actually deliver services on-time and on-budget when closely managed.

Y2K solutions justified significant investment in the swift deployment of new, and comprehensive, hardware and software. One result has been rapid growth in both business access to the Internet and e-commerce. Amidst this blaze of activity in the transportation industry, many new players have been unable to make the grade. Perhaps the greatest letdown has been the failure of the transportation exchange. The concept seemed so simple. Customers would post requirements and watch as a reverse auction drove down their costs while carriers engaged in a frenzy of bidding. Most of these enterprises have not lived up to expectations for many reasons, the major one being a lack of simultaneous supply and demand. And the lack of liquidity was not limited to exchanges. Many transportation markets began to experience capacity shortages (e.g., truckload). Carriers were faced with more demand than supply -- and no need to engage in cutthroat bidding (e.g., railroads). Some carriers (e.g., ocean lines) recognized that a load at any cost was not always a desirable solution.

As e-commerce tools became mainstream, B2B marketplaces increasingly resembled their industries. Opportuni-ties for startups became more limited as the actual industry participants formed their own Internet portals. Six trucking companies formed Transplace.com. FreightWise and Arzoon were financed by various combinations of railroads and other transportation companies. Additionally, two competing initiatives got under way in ocean shipping (Inttra and Global Transportation Network).

Transportation may also be affected by e-commerce initiatives of transportation users. Covisint, an exchange formed by the major automotive companies, may result in transportation being purchased like any other factor of production. The intention is to reduce the cost of producing an automobile by thousands of dollars and to shorten the production cycle time by weeks. This proposition presents both challenges and opportunities to transportation and logistics companies serving these industries.

Unlike past years, 2000 brought no major ocean carrier consolidations, and lines seemed to enjoy a period of relative tranquility. Activity in 2001 will depend heavily on the world economy and planned introduction of significant vessel capacity.

There has still been plenty of merger and acquisition activity. The largest event was the initial public offering of Deutsche Post World Net AG in November that raised $5.6 billion. In the past two years, Deutsche Post has become a global provider by spending over $5 billion buying transportation companies in the United States and Europe.

In November, FedEx purchased American Freightways for $1.2 billion. Combined with its Viking Freight subsidiary, FedEx will operate the second-largest regional LTL carrier in the country. This transaction supports the contention of many industry experts who believe the future of domestic air cargo will be a ground product with day-definite delivery.

Elsewhere, companies have taken steps to enter new markets and achieve economies of scope and scale. Ocean Group and NFC had a merger valued at $2.2 billion in February and renamed their global logistics company Exel. EGL, a predominantly domestic forwarder, acquired Circle International, providing EGL significant international product extension and revenue growth.

Any discussion of global trade must include China. The passage of most-favored-nation status for China normalizes trade relations with an emerging economic powerhouse. Recognizing the importance of freight logistics, the Department of Transportation selected UPS (as opposed to passenger airlines) for six of the 10 new weekly flights between the U.S. and China.

Transportation is often cited as a leading economic indicator for recession and recovery. Although the economy seems to be holding its own, there is concern whether Alan Greenspan can engineer a soft recovery. Transportation companies are also very sensitive to the price of fuel (and possible turmoil in the Middle East).

The economy is global and increasingly reliant on electronic commerce. Transportation and logistics industries are integral parts of both. The events of 2000 reinforced this view and the events of 2001 should see an acceleration of the trends supporting these forces.

Ted Prince is a principal with Transgistics LLC in Richmond, Va., and a former chief operating officer for 'K' Line America Inc. He can be reached at ted.prince@transgistics.com.