The shipping and logistics space is being rapidly transformed by technology. Innovations in this space span the way buyers and sellers transact (digital freight brokerages), the way goods are monitored during shipment (sensor-enabled real-time monitoring) and the manner in which risk is managed (novel approaches to pricing insurance). With diverse opportunities like these, it is no surprise that this is a space ripe for significant disruption.
And yet technology is not the only force driving change. Regulators are taking a fresh look at the lives of workers in the gig economy, often concluding that many folks classified as independent contractors ought to be treated as employees. As we will see, this is causing a sharp uptick in the creation of small-motor carriers. At the same time, oddly enough, driver scarcity is forcing innovators in the shipping and logistics space to think very hard about how to entice new drivers into the market.
Two forces — driver scarcity and regulation — are working in unison to forge the shipping and logistics space of tomorrow. Before we dive into precisely how this is happening, let me introduce the dramatis personnae in this ecosystem:
- Shippers — These are the folks who have goods that need to be moved from point A to point B.
- Carriers — These are the folks who shippers hire to load goods on a truck and move them from point A to point B. I will use carriers and small-motor carriers as interchangeable terms.
- Brokers — These are the people who connect shippers with carriers, often doing the hard work of making sure that carriers are properly licensed and have the appropriate levels of insurance.
- FMCSA — Federal Motor Carrier Safety Administration, the body responsible for facilitating safety programs, licensing motor carriers and ensuring compliance with a wide range of shipping and transportation rules and regulations.
A tale of software and shipping
Today, shipping runs on a backbone of telephone calls, manual logging and delayed payment. Yet the shipping ecosystem of the future will have an entirely different nervous system. Before we examine how driver scarcity and regulation will shape this future system, let’s consider where we are today.
Historically, the shipping industry functions on the basis of trust and deep-rooted professional relationships. The largest shippers have relied for a very long time on an entrenched broker network that connects them with carriers capable of moving cargo reliably at scale. Brokers are paid for reducing risk for the shippers by properly vetting the carriers. These relationships form the nervous system of the traditional trucking industry.
This traditional approach to shipping is being disrupted by a number of well-well-funded, ambitious startups. Companies like Samsara, Convoy, and Freight Rover are introducing next-generation hardware, software tools and other solutions to optimize shipping at scale. These companies have different theses about how to properly optimize shipping tasks, but the common thread is that they all appreciate the need to leverage new technology to remove unnecessary friction between ecosystem actors.
The wake of disruption is going to benefit everyone in the shipping and logistics space.
Carriers will get two important benefits: (1) instant access to shipping jobs and (2) a data platform for managing and understanding their businesses. Shippers will also receive two things essential to optimizing their revenue — (i) a constant supply of reliable carriers and (ii) a wealth of real-time data about live and legacy shipments.
The role of regulation
Against the background of the disruption described above, there has been a lot of regulatory activity affecting the shipping and logistics space. In general, the government is becoming more active in regulating the way in which the shipping industry runs, especially when it comes to the treatment of drivers and the unreasonable demands often imposed on them by aggressive shipping schedules.
The first change came from Congress at the end of 2017 in what is known as the Electronic Logging Device (or ELD) mandate. In a nutshell, the ELD mandate requires carriers to have an approved logging device in their trucks to ensure that their hours of service are properly logged and available for regulator review.
This is surely just the beginning of regulatory activity. Not only has Congress expressed interest in closely monitoring Hours of Service — the amount of consecutive hours a truck driver may lawfully drive — the ELD mandate is widely viewed as a way to better enforce those rules.
Thus, at the federal level, you have a regulator who wants to keep granular tabs on what truck drivers are doing. What about at the state level, what’s going on there?
At the state level, many states are adopting laws that require an employer (including shippers and carriers) to classify someone as an employee if he or she provides services for the employer’s core business. In short, if the employer’s core business is X and a person is hired to do X, then that person is an employee.
In California, for example, this is known as the ABC Test from the Dynamex decision handed down by the California Supreme Court. In that case, Dynamex believed they could lawfully classify their delivery drivers as independent contractors. The benefit of doing so is that independent contractors are not entitled to key employee benefits, including healthcare and expense reimbursements. The California Supreme Court decided that Dynamex made a mistake in not classifying these drivers as employees.
Developments like the ABC Test are already transforming the shipping world. Under this test, a driver is almost always going to be legally entitled to the status of “employee” because a driver in the shipping world is by definition being hired to fulfill the core business activities of the shipper.
So, let’s combine the regulatory developments happening at the state and federal level. At the federal level, Congress is encouraging the rapid adoption of monitoring technologies like ELDs. At the state level, employers are facing pressure to classify drivers as employees. Increased tech-based monitoring is thus occurring at the same time that drivers are getting increased rights to employee benefits at the state level.
This is a big deal. Drivers are getting increased leverage vis-à-vis their employers, while the employers (i.e. shipping companies and carrier owners) are being required to use safety-enhancing monitoring technologies. Regulation is moving in one direction — toward providing a greater degree of protection for truckers.
By increasing the protections truckers enjoy, federal and state regulators are producing powerful secondary incentives. If you are a trucker and want to operate a for-hire carrier business (i.e. your own business), you cannot do so without obtaining something called a DOT Authority. A DOT is a federal license to haul things and people, and without it you can’t lawfully engage in any shipping activities.
Now we can see how these secondary incentives work. While federal and state regulators are shifting power to truckers by providing them with additional protections, it is becoming much more appealing to start for-hire carrier businesses. The barriers to entry aren’t high on the business licensing side for DOT, so new small-motor carriers mainly have to worry about getting the assets they need (i.e. trucks to do the shipping with) and plugging into the right levels of demand (which is what Uber Freight and Convoy are designed to provide).
Driver scarcity
We just saw that regulation is driving the creation of new motor carriers. And that is a good thing, because there is a worrisome shortage of truck drivers. Let’s consider why that is the case.
According to the American Transportation Research Institute (ATRI), driver pay comprises about 34 percent of operational costs per mile. This is a very large cost driver. It means that if drivers become a scarce resource, the costs of shipping will increase dramatically. (I will not consider the future role of autonomous trucks here. However, some pretty dramatic innovations in autonomous-vehicle tech will be addressed in a separate piece.)
Drivers are already a scarce resource. The American Trucking Association (ATA) has collected data pointing toward a current driver deficit in 2019 of 130,000. That dearth of drivers is predicted to reach 175,000 by 2024. The driver deficit cannot simply be remedied by quickly on-boarding new drivers to existing pools of motor carriers for one simple reason: carriers won’t just hire anyone. Drivers must have a driving history characterized by safe driving and successful deliveries. This isn’t an Uber or Lyft scenario where an existing supply of competent drivers can be quickly signed up to serve the market’s immediate needs.
Because drivers have to be carefully trained, what is getting in the way of recruiting them? Quite a few factors stand in the way. First, truck driving takes a significant toll on the body, a toll that is not offset by compensatory benefits or perks. Second, historically there has been lax regulation of working hours for truckers. This has contributed to inhumane working conditions, conditions which in turn cause a great deal of driver attrition. Third, being an experienced driver with a great record of delivering on time is not correlated with the kind of outsized wages that would otherwise act as a natural counterweight to the first two problems.
The end result is a system — in part fueled by regulation and in part by driver scarcity — that is creating the conditions for the rapid creation of new motor carriers. Some of these will be small carriers with a few trucks and multiple drivers. Others will be single-driver carriers who form their own businesses. The common thread uniting all of these carriers will be (a) the special protections they receive from state and federal regulators and (b) wide access to an array of innovative logistics, payment and scheduling platforms that do not depend on closed-broker relationships or outmoded technologies.
Technology adoption
Growth is being driven by a number of shared needs across different types of motor carriers. All carriers want to optimize their revenue by reducing waste, optimizing loads and reducing key cost drivers. These carriers also want the convenience of modern logistics platforms to ensure that they can click a button and immediately find loads. The platforms that help carriers address one or more of these concerns will be quite successful.
Yet there are specific technologies that are being built and refined to address the regulatory pressures and driver scarcity challenges noted earlier. On the regulatory side, platforms that help carriers keep track of driving hours, routes and compliance with the FMCSA’s rules and regulations will be incredibly appealing to newly created motor carriers. Companies like San Francisco’s KeepTruckin have already started to conquer this problem.
On the driver scarcity side, players that automate regulatory compliance will have an edge for two key reasons. First, compliance itself is getting more complex. New carriers want to focus on moving key business metrics — not on what regulatory edge cases they need to hire a lawyer to fix. Second, regulators will one day expect digital freight brokerages and other shipping logistics platforms to facilitate and monitor compliance. After all, the FMCSA will surely not fail to recognize that these new platforms are supplanting the role traditionally played by brokers in this ecosystem. Furthermore, these next-generation platforms are going to function as vast, accurate repositories for data about the national shipping market.
Finally, there are a number of healthy signals around technology adoption in this space. VCs are pouring a lot of money into shipping tech firms, reflecting a high level of confidence in future adoption. Uber Freight reportedly has a $500 million annual revenue run rate, despite the company being just two years old. Samsara recently raised $100 million to build a sensor and logistics platform for the shipping ecosystem. Finally, Transfix, a company out of NYC building a digital freight brokerage, generated $100 million in revenue in 2018 alone.
The road ahead
Very few industries are transformed by technology alone. Technology is usually optimally effective when it can aid or accelerate cultural, political and economic changes that are already well underway. By working in tandem with these larger changes, technology can play a deeply important role in facilitating innovation, often doing so in a way that fairly distributes the social and economic benefits to all market participants.
Two forces — regulation and driver scarcity — are defining the problems that the shipping and logistics disruptors of the future need to solve. We saw that driver scarcity poses a stiff challenge, one that cannot be solved unless entrepreneurs find ways of gradually integrating new drivers into the shipping ecosystem of the future.
As for the impact of regulation, traditional carriers can no longer rely on a fleet of independent contractors in many U.S. jurisdictions. Given that rules like the ABC Test trigger the growth of new small-motor carriers, a new balance of power will be struck between shippers and carriers.
This new balance of power could have a prosocial impact on both the carriers and the shipping ecosystem as a whole. Whether that happens will be determined by how effectively the entrepreneurs in this space build technology that directly addresses the unique, dynamic needs of modern small-motor carriers.