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Trains, Trucks, and Supply Chains
Let’s start with the rail strike.
For those who don’t follow the news closely, the US was on the verge of a rail strike. The main point of contention was whether rail workers will be paid sick leave. Ultimately, Congress intervened and forced the rail union to agree to a resolution:
“Senators passed the bill to force unions to accept a tentative agreement reached earlier this year between railroad managers and their workers and make an imminent strike illegal — without making any changes — by an 80-15 vote. They rejected a measure to offer paid sick leave, 52-43. Both measures required 60 votes to clear the Senate.”
So many questions…
First, why would anyone think it’s ok to have a job without paid sick leave? That really makes me sick.
Second, why does the Senate have the ability to force the Union to accept a resolution? This is clearly not the case in other industries.
Third, why should we even care? It’s not like we plan to gift anyone coal or ore (which is my favorite holiday gift, by the way).
Let’s start with the third question:
“Uber Freight found in an analysis that even if just 20% of rail freight had shifted to trucking due to a strike, trucking demand would soar by about 27% and spot rates could have doubled. It also found a rail strike would cost the economy about $2 billion a day.”
And this may also explain the second question. But, if you’re not familiar with how supply chain and modality choices are made, this statement may look a little odd. In this post, I aim to explain the tradeoff between rail and trucks when it comes to supply chain and logistics (and how things have progressed historically), but also to explore how these factors will change in the future.
How Big is Rail in the US?
To understand how meaningful rail logistics are, just consider that one third of all the tonnage in the United States is transported via railroads.
If your main familiarity with transportation is from the consumer’s point of view, you may find this surprising, but:
“The United States lags behind the rest of the world when it comes to passenger trains, but when it comes to the freight railroad the U.S. dominates. The U.S. freight rail network operates over 140,000 miles of privately owned track in every state except Hawaii, according to the Association of American Railroads. It moves one-third of all U.S. exports and roughly 40% of long distance freight volume.”
And railroads in the US have a long history.
“Railroads played a large role in the development of the United States from the industrial revolution in the Northeast (1810–1850) to the settlement of the West (1850–1890). The American railroad mania began with the founding of the first passenger and freight line in the nation of the Baltimore and Ohio Railroad in 1827 and the "Laying of the First Stone" ceremonies and beginning of its long construction heading westward over the obstacles of the Appalachian Mountains eastern chain the following year of 1828, and flourished with continuous railway building projects for the next 45 years until the financial Panic of 1873 followed by a major economic depression bankrupted many companies and temporarily stymied and ended growth.”
In fact, many claim that: “The North’s victory in the Civil War was partly due to its well-organized rail operations and the fact that most locomotive and railcar-building plants were in the North.”
But in the 1880’s, regulations started hitting the industry. More specifically, the Interstate Commerce Act made railroads the first U.S. industry subject to comprehensive federal economic regulation. Nevertheless, it hasn’t stopped the development of the industry.
“By 1917, the 1,500 U.S. railroads operated around 254,000 miles and employed 1.8 million people — more than any other industry. Rail mileage had already peaked (in 1916), and rail employment would soon (around 1920).”
But the Great Depression deeply impacted railroads. The rail industry revenue fell by 50% from 1928 to 1933. The issues continued after WWII, and throughout the 1950s and 1960s, the rapid growth of truck competition (which was impacted by the deep federal investment in the interstate highway system) led to more railroad bankruptcies.
“Long a competitor with trucks, trains once moved the majority of long-haul freight in the United States. By 1978, rail’s share of intercity freight dropped to 35%. Today, trucks dominate, hauling about 80% of freight, said Tim Denoyer, ACT Research vice president and senior analyst.”
So if quantity decreased by so much, what’s the main advantage of rail (and why is it losing ground…no pun) to trucks?
Rail has many advantages, the first one being its cost efficiency. Rail transportation is estimated to be three to four times cheaper than road transportation. For example, a 2015 study conducted by the Congressional Budget Office, found that moving cargo via rail costs about 5.1 cents per ton-mile, whereas the cost via truck is 15.6 cents per ton-mile, and this because a truck can handle 1 – 2 containers per trip, whereas a train can handle a few hundred.
There are also external costs indicating that rail freight is more cost-effective than trucking. The same study referenced above showed that “external costs” per ton-mile amounted to about $2.62 – $5.86 for road transport, compared to only $0.3 – $0.82 for rail transport.
“Adding unpriced external costs to the rates charged by each mode of transport—via a weight- distance tax plus an increase in the tax on diesel fuel—would have caused a 3.6 percent shift of ton-miles from truck to rail and a 0.8 percent reduction in the total amount of tonnage transported. Such a policy would have eliminated 3.2 million highway truck trips per year and saved about 670 million gallons of fuel annually (including the increase in fuel used for rail freight).”
The last two factors mention the environmental impact. To put things into perspective:
“Based on the U.S. Transportation Sector Greenhouse Gas Emissions publication of the US Environmental Protection Agency (EPA) from 2021, the transportation sector contributes about 29% of total emissions.”
Trucks accounted for about 24% of that, while rail accounted for only 2%. The reasons why freight trains are more environmentally friendly than trucks are among others, the fact that the rail network runs on electricity, the lower level of friction, and their ability to transport hundreds of containers in a single trip.
Finally, rail also has a significantly higher range. As it was built from the onset to connect the east and the west as part of the western expansion, rail networks span thousands of miles. Furthermore, train drivers (or enginemen) are able to operate trains for longer periods of time. For example, in the US, truck drivers aren’t allowed to be on duty for more than 14 hours at a time, and of those, they’re not allowed to drive for more than 11 hours straight. In the European Union, truck drivers are only allowed to operate their trucks up to 9 hours per day.
Overall, when we’re talking long-haul, high tonnage, rail is much more efficient. So while in the US only 30% is transported by rail, if we look at the ton mileage, it’s actually closer to 40%.
Why is Rail Losing Ground?
While freight trains run based on a pre-determined schedule between pre-specified points (and very specific points, either stations or ports), trucks are usually dispatched according to actual demand and supply, making them more flexible. Of course, they need to be planned in advance, but they have the ability to shift their schedule, adding both demand and supply points as needed. Because of this, trucks also offer much better coverage.
On the other hand, while trains need a rail network, trucks are able to access any point. This means that even items transported by rail will need to be put on some type of truck to reach their final destination.
Finally, given the fact that every truck in the US has a GPS, it’s much easier to track them compared to rail, which uses scanners with radio-frequency beams to record freight at various points. This poses a problem as the process is not as continuous as GPS tracking, since freight has to move past the scanners to be tagged.
Where is the Future Headed?
As we can see, trucks offer a solution that is much more accustomed to the economy of 2022: fast, flexible, trackable, convenient, and customer friendly.
Rail feels like the value proposition of the previous decade (or even the previous centuries) in offering superior cost efficiency and distance. But it also may be the priority of the next decade, which is about finding a more sustainable supply chain.
And that brings us to the first delivery of the electric Tesla Semi. Will it solve, if not the cost, at least the sustainability issue?
“The company started out by explaining why it is moving from making consumer electric vehicles to an electric class 8 truck. That’s pretty simple: Even if semi-trucks only account for about 1% of vehicles in the US, they account for about 20% of emissions: [...]”
The problem is that these semitrucks are not yet viable as a scalable solution. According to analysts, the batteries needed to operate these trucks are not produced at the same scale as those for passenger EVs, which makes them double or even triple more expensive.
“Charging stations would need to reach megawatt-scale in order to charge multiple large trucks simultaneously on long-haul routes, Soulopoulos said. The most powerful fast chargers for passenger EVs today typically range from about 50kW to 350kW … ‘These stations are not here yet,’ he said. ‘Even the technical standard hasn’t been finalized for those.’”
So if we look into the future, both systems, rail and trucks, require investment in infrastructure. One is more gradual (trucks), while the other requires more upfront capacity (rail network). And in an era that lacks long-term thinking, I can't see how rail can win in the long haul (no pun).
Jeff Bezos always says that you shouldn’t ask what’s not going to change but rather what’s going to remain the same over the next two decades. I think the answer is that people want things faster, and with more options. The fact that we want a more sustainable supply chain? Well, that is yet to be seen.
But back to the strike and its potential impact. Note that this is, of course, related to the fact that there are two supply chains: one efficient, one responsive. Rail is “efficient,” and truck is “responsive.” If the efficient one goes on strike, the responsive one has to increase its price to accommodate the excess demand, making it even more costly for the products that tend to require cost efficiency —and supply chains have not fully recovered from COVID— so a 30% decrease in the “cost-efficient” capacity can be devastating.
And this may be a summary of the entire supply chain saga of the last three years: there is no one solution that fits all. If we only try to maximize one objective function, we end up with a fragile supply chain.
We need rail, we need trucks, and we need air. They all have their roles.
But most importantly, we need to better understand their impact beyond just their pure cost.
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