Passing the Buck

These days, it’s hard to get out of bed without tripping over another piece of sour economic news.

The other day it was flat trade statistics. Coming our way, there were record-level purchases of industrial machinery and materials, which is good news for trucking companies and the economy as a whole. New, more productive equipment means manufacturers can pump out more goods at a lower cost.

On balance, there was little to show for it, however. The auto industry’s current funk saw to that. Efficient production is great, but folks have to want to buy what you build.

A nagging side effect of the automotive malaise is the impact on companies that supply the industry with parts and materials, and what this means to freight rates and fuel surcharges for the truckers who haul for them.

Take steel, for instance. Stelco Inc., Canada’s largest steelmaker, is predicting a $50-million loss in its fourth-quarter 2000, and a break-even year overall. The company has been creamed by slumping demand and foreign steel dumped here at cheap prices. It’s also captive to the same overhead-intensive, inflexible business model that dooms all big steel companies whenever the economic winds shift.

Stelco’s response? Whack production in 2001, scale back spending by 50%, cut inventory, and tell suppliers to cut their prices by 5%. Stelco has even asked some vendors to make cuts retroactive-retroactive!-applicable to contracts negotiated last year. (Stelco wouldn’t comment on its requests until after its quarterly financials are reported.)

Rival steelmaker Dofasco Inc.-a far more profitable venture-chimed in next, saying it would seek similar rate relief should suppliers cave in to Stelco’s demands.

For manufacturers with weight to throw around, wrenching price concessions from suppliers is hardly imaginative, strategic thinking. Shoot, Stelco no doubt stole the idea from DaimlerChrysler, which is demanding a 5% price-cut from its own suppliers. (Those pesky automakers again.) Where does this leave steel haulers?

After months spent scratching and clawing for fuel surcharges and slim rate increases, they stand to see these gains disappear in an instant. Steel companies are served by a lot of small trucking firms where more than 50% of their business is hauling steel. They have all the leverage of a playground see-saw. Take it or leave it? These trucking companies will lose either way.

I talked to the manager of a large, well-run Northern Ontario fleet who has weaned his company off any major work for Algoma Steel. He was telling me how the short-term pain of leaving a cut-rate account is always worth it in the long run.

“Looking at the state of the economy and the state of business in 2000, we figured that was the year to drop a couple of big accounts that weren’t worth the business,” he says. “What happened was that those accounts quickly succeeded in finding other trucking companies to take their freight.”

There’s no twist of the gut when he sees one of his competitors’ trucks hauling for an account he walked away from.

“I know that guy is keeping very busy, and therefore has less opportunity to go after profitable accounts,” he explains. “Also, it keeps him on the weak side financially. Why run 50 trucks up and down the road to make a big splash but not make any money doing it? Someone always will take that freight. For us, there are other shippers out there who will pay a little more for exceptional work. Losing clients is acceptable when you make it up on your bottom line.”

A positive outlook after all, although for some I fear it comes too late.