Don't know much about geography
Don't know much trigonometry
Don't know much about algebra
Don't know what a slide rule is for

But I do know that one and one is two
And if this one could be with you
What a wonderful world this would be.
-Sam Cooke

There has been a trend over the past few years of trucking companies setting up brokerage divisions. This has culminated in almost all trucking companies operating a brokerage division within their company today. It is common to hear the comment, "I wouldn't be making any money if it weren't for my brokerage division."

Several public companies have switched, or are in the process of shifting, to an "asset light" model. What does this mean? Asset light means many different things. It could mean brokering your customers' loads to another carrier. You get the customer, get the rate, get a carrier to move it for 15 to 20% less as a backhaul, and keep the difference. It could mean putting your customers' loads in your trailer to place on the rails for intermodal service. You get the customer and rate, provide the trailer, line up the rail and drayage for a lesser amount, and keep the difference. It also means switching to an owner operator model or a power only model where owner operators get their own authority. The common goal of the "asset light" model is to move freight without investing in a tractor and a driver.

Why the movement from asset to "asset light" business? Brokerage often operates on a 15 to 20% gross margin, producing a 10% net margin. Trucking companies commonly operate around a 95 operating ratio, more or less, meaning that they operate on a 5% margin before interest and taxes. Capital intensive businesses like trucking tend to borrow a lot and therefore pay a lot of interest.

Setting up a brokerage company involves investing in people to obtain freight and capacity, telephones, computers, a $10,000 bond and some accounting folks. The more prudent ones might also purchase contingent liability and cargo insurance at a price far less than what trucking companies pay for their insurance. Trucking involves all of this and an investment in tractors (with a $1700 base plate per year each), trailers (usually 1.5 to 3 trailers per tractor), a shop, liability, cargo, workman's compensation insurance and many other additional costs. Being in trucking also means competing for the shrinking pool of qualified drivers in a competitive environment and dealing with many other inflationary pressures. Carrier's largest expense is fuel, volatile on a good day; while brokers usually quote rates "fuel in" meaning they keep the fuel surcharge, while requiring the carrier to purchase the fuel. Unlike truckers, brokers know their margin on every load. They don't have to worry about things like utilization, empty miles, detention, downtime, driver turnover, trailer turns, empty trucks and many other things that keep truckers up at night. So it can't be much of a surprise that people in the business are focusing on the higher return for the smaller investment, as opposed to the smaller return for the capital and labor intensive asset model.

Sales efforts by brokers are not too difficult because without the investment in rolling stock, they can quote any rate so long as they can sell it to some trucker after keeping the 15% margin. The broker rate is often lower than the market rate for asset based carriers. Large TPL's have computer programs which analyze bid information and show customers different scenarios. Shifting to brokers always produces savings on the transportation spend. Brokers find capacity largely from small carriers who do not have a sales force, a safety department or much business acumen. Brokerage operates on the principal that every load is a backhaul for someone. Many of the carriers they employ carry the bare minimum insurance, run older equipment, and post poor CSA scores.

There was an article in Transport Topics last week, entitled Agency Safety Scoring Seen as Unfair to Fleets, Brokers. We are starting to hear the gnashing of teeth and rending of garments as CSA gains traction and shippers demand that their brokers use carriers with good CSA scores. This is resulting in brokers losing a significant amount of business because they can't secure the capacity with good CSA scores.

What do these trends portend? These trends have been in place and are systemically unsustainable over time. The higher profit "asset light" businesses will have increasing difficulty securing safe capacity from the trucking industry. It is unlikely that the truckers they use will get any smarter. They will just become scarcer.

What shippers need to fulfill their capacity requirements for the future is more trucks and fewer brokers. To reverse the current trends, the asset based model must become more rewarding than the "asset light" model. Shippers will need to pay asset based carriers an amount that will allow them a 10% to 15% return on their investment and risk. From an investment and risk perspective, it makes more sense for "asset light" models to make a 5% margin by comparison. In other words, we need a flip.

You can't zap freight around the country without a truck and a driver. You can't move nine loads of freight, by giving that to nine brokers if there is only one truck to move that freight. As we saw during the recession, it only takes a short period of time to remove truck capacity from the system. With today's tighter credit standards, increasing scrutiny of regulators, and the ever rising price tags on trucks and trailers it takes time to build capacity for the future.

No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.
Warren Buffett