State of the Logistics Industry

CED Global Logistics Summit State of the Logistics Industry Joseph G.B. Bryan Vice President, Freight Transportation and Logistics Policy Planning, WSP Tim Feemster MBA President Foremost Quality Logistics Moderator Scudder Smith Principal Consultant Freight & Logistics Practice, WSP 1

Agenda Introductions and Opening Remarks-Moderator: Tim Feemster, President, Foremost Quality Logistics State of the Industry Report: Joseph G.B. Bryan, Principal Consultant, Freight Transportation and Logistics Policy, Planning, WSP Trade Wars & Tariff Impacts, Scudder Smith, Principal Consultant, Freight & Logistics Practice, WSP Questions 2

1. Supplier/Vendor Distribution Disruptions 2. Federal, State and Local Regulations 3. LABOR 4. Competition 5. Commodity/Raw Material Pricing 6. ECONOMY 7. Environmental Regulations, Laws, Liability 8. Threats in International Operations/Sales 9. Cyber Issues; Security, Privacy, Theft, Crime Top 25 Risks to the Supply Chain 14. Business Interruption; Natural Disasters, Trade Wars, Conflicts 15. Change in Product Demand; ability to maintain and grow Market Share 16. RECALLS 17. INNOVATION 18. Litigation, Legal Proceedings 19. ATTRACT/MAINTAIN/MOTIVATE Key Personnel 20. Customers/Vendors/Partners Financial Condition 21. Anti-Corruption/Anti-Bribery, FCPA 10. Currency Risk 22. Intellectual Property, Trademark Infringement 11. Inability to Execute; M&A, JV's, Divestitures 23. Insurance Costs and Loss Coverages 12. ACCESS TO CAPITAL 24. Fuel/Electric/Oil; Transportation 13. Ability to Maintain Info Systems and 25. Accounting Standards/Internal Implement Upgrades and New Systems Controls/Financial Reporting Source: BDO Study of 2016 10K s of Publicly Traded Corporations, Dermody, & FQL 3 3

Supply Chain Risk Factors 1. Costs 2. Business Interruption 3. Labor 4. Federal, State and Local Regulations 5. Economy/Competition 6. Information Technologies 7. Cyber Issues 8. Site Specification Specifics Source: BDO Study of 2016 10K s of Publicly Traded Corporations, Dermody, & FQL 4 4

CSCMP Logistics Cost-2018 91.2% 5

State of Logistics Report 2018 CSCMP Steep Grade Ahead CED Global Logistics Summit September 25, 2018 Joseph Bryan WSP USA A.T. Kearney 6

US State of Logistics Logistics Costs $1.494 t % of GDP 7.7% Trans Costs Inv. Carrying $965 b $428 b Transportation = 65% of total logistics spend! Source: CSCMP s Annual State of Logistics Report

2017 US Business Logistics Costs increased by 6.2% to ~ $1.5 trillion Source: CSCMP s Annual State of Logistics Report A.T. Kearney 8

Since 2006 Logistics Costs have risen 20% Average annual increase = $25b 2017 increase was $87b However. As a % of GDP, Logistics expense went from 8.5% to 7.7%, a reduction of 9.4%. Since 1990, the reduction is 30%!

Global Comparison of Logistics Expenditures Economy Higher Output--GDP Better use of resources Multi-use Infrastructure Businesses Market Access Market Integration Cost Efficiency Consumers More Goods and Services Wider Availability Lower Prices/Income U.S. 7.7% GDP Asia 17% GDP China 18% GDP Europe 13% GDP India 13% GDP Japan 11% GDP Mexico 14% GDP

$billion 2017 YoY 17/16 Transportation costs 5-yr. CAGR Full truckload 289.4 6.4% 4.8% Less-than-truckload 62.4 6.6% -2.1% Private or dedicated 289.6 9.5% 6.8% Motor carriers 641.4 7.8% 4.8% Parcel 99.0 7.0% 7.9% Carload 59.0 7.3% -0.5% Intermodal 21.4 10.7% 2.6% Rail 80.5 8.2% 0.3% Airfreight (includes domestic, import, export, cargo, and express) 67.2 3.1% 1.5% Water (includes domestic, import, and export) 41.0 1.1% -0.4% Pipeline 36.4 5.8% 5.8% Subtotal 965.5 7.0% 4.2% Inventory carrying costs Storage 148.0 4.2% 3.1% Financial cost (WACC x Total Business Inventory) 151.6 5.0% -1.0% Other (obsolescence, shrinkage, insurance, handling, others) 128.4 4.6% 0.9% Subtotal 428.0 4.6% 0.9% Other costs Carriers' support activities 50.5 3.9% 4.8% Shippers' administrative costs 50.7 6.0% 4.9% Subtotal 101.2 4.9% 4.9% Total US business logistics costs 1,494.7 6.2% 3.2% 2016 s expenditure declines in 9 segments turned into increases for all 16 segments in 2017 Intermodal and private/dedicated fleets had highest jumps Parcel increased 7% in 2017, following a strong 10% in 2016 Water and airfreight saw relatively modest increases Inventory costs rose 4.6% in 2017 vs a -3.2% decline in 2016 led by higher inventory and financing costs Other costs increased 4.9% in 2017 from a - 2.0% decline in 2016 led by administrative costs

Motor carriers: Truck tonnage up 4.2%, with acceleration in back-half of the year Truck Tonnage Index Seasonally adjusted monthly values (2015 [index year]= 100) 115 110 +4.2% 105 100 95 Jan Mar May Jul Sep Nov Jan 2016 2017 2018 Source: Bureau of Transportation Statistics Mar May Jul Sep Nov Jan Mar A.T. Kearney 12

2.6 2.4 2.2 2.0 1.8 1.6 1.4 In 2017 dry van spot market rates leapt 30% Dry van spot market rates by week $/mile Contract: up to +15% Spot: +30% Week 1 5 10 15 20 25 30 35 40 45 50 1 5 10 14 2017 2018 Note: Includes fuel.- Source: Truckstop.com Prices soared in 2017: spot market (up to 30%) and contract rates (up to15%) Carriers largely responded by purging their least profitable customers and ordering record numbers of new assets Variety of tactics deployed to soften the blow: researching dedicated models, operational improvements and freight efficiency initiatives Load-truck ratio peaked in 2017, as manufacturing activity peaked A.T. Kearney 13

Rail: In 2017 carloads rose 3% to 3.1 million For the first half of 2017, carloads trended higher than 2016; 2018 is following a similar trend US Class I rail traffic Thousand carloads 270 265 260 255 250 245 240 235 230 +3% 2016 2017 2018 Sources: Association of American Railroads; A.T. Kearney analysis Much of the gain was on strong demand for intermodal Operating ratios continued to decline as railroads cut headcount, optimized asset utilization and rolling stock inventory, and increased train speeds and lengths Coal shipments for domestic utilities stabilized after years of considerable declines Increased demand and precision railroading triggered a rise in complaints A.T. Kearney 14

Water and ports: a stormy year The spread between East and West Coast rates has been declining $1,000 per FEU (Forty Foot Equivalent Unit) 5000 3000 1000-1000 2010 2011 2012 2013 2014 2015 2016 2017 USWC Note: TEU is twenty-foot equivalent unit.- Sources: port statistics; A.T. Kearney analysis East and Gulf Coast ports volume growth of 7.9% outstripped a 1.3% rise on the West Coast Shippers took advantage of lax pricing discipline to negotiate 2018 contracts at or below last year s rates Over 2018, fundamentals are expected to be more or less balanced with rising fuel prices increasing costs for shippers Ultimately, capacity and pricing discipline will determine whether carriers or shippers benefit more from the strong global economy A.T. Kearney 15

Parcel: e-commerce growth drives growth E-commerce grew 15.5% to reach $448.3 billion, 9.1% of GDP Expenditures (billions of dollars) 450 400 350 300 250 200 150 100 50 0 0,0 2010 E-commerce Sales Percent of Nominal GDP 2011 2012 2013 2014 2015 +15,5% 2016 448 9,1% 2017 % of GDP 10,0 9,0 8,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0 Parcel expenditures rose 7% to almost $100 billion in 2017 Rising volumes and customer expectations force a capital-intensive re-think of last mile supply chain Carriers have room to raise prices while markets are figuring out who will bear investment burdens Same day/shorter expectation will continue to grow Parcel cost headwinds may impede e- commerce strategies, particularly in costsensitive segments A.T. Kearney 16

Airfreight: Need for speed drove volumes and prices up Drewry East-West Average rate $ per kilo 3.4 3.2 3.0 2.8 2.6 2.4 Note: Index shows average of all-in airfreight buy rates paid by forwarders to airlines for standard deferred airport-to-airport airfreight services. Source: Drewry's Sea & Air Shipper Insight +4% 2015 2016 2017 2018 Air freight volumes rose 9% in 2017 due to surging demand for ultra-fast shipments while the prices rose 4% The increases came mostly in Q4 IATA forecasts 4.9% growth between 2018-2022 Although we expect the pace of modernization and digitization to accelerate, we don't foresee short-term digital disruption A.T. Kearney 17

After 3 years of stability, inventory levels increase 3.9% to ~$2.6 trillion Total US private inventories $ billion 2,271 2,196 2,032 1,933 2,344 2,413 +3.9% 2,536 2,505 2,511 2,608 2008 2009 2010 2011 2012 2013 2014 Note: Total US private inventories includes manufacturing, retail, and wholesale and represents stock or goods available for sale. Annual numbers are the yearly average.- Source: Bureau of Economic Analysis 2015 2016 2017 A.T. Kearney 18

Warehousing: innovate or die Rental rates rose 4% in 2017 and increases accelerated in 2018 Weighted Average Asking Rent $ PSF 6,0 5,9 5,8 5,7 5,6 5,5 5,4 5,3 5,2 5,1 5,0 $5,44 2016 $5,44 $5,57 $5,63 $5,68 2017 +4.0% $5,70 $5,80 $5,84 $5,99 2018 Rents rose 4% nationally, with West 6.1%, Midwest 4.4%, South 4.1%,Northeast 2.6% Pop-up warehouses are back by popular demand Warehouse efficiency becomes paramount for companies striving to meet ever-shrinking e-commerce delivery lead times Autonomous mobile robots (AMRs) are popular again, to address rising pressure to improve worker productivity Robotic-centric solutions are easier to set up and use; and are faster, smarter, cheaper Space availability tumbled to a historic low of 7.3 percent in the first quarter of 2018 Source: Cushman and Wakefield; MARKETBEAT U.S. Industrial Q1 2017 - US_Industrial_MarketBeatSnapshot_Q117.pdf; MARKETBEAT U.S. Industrial Q1 2018 - US_Industrial_MarketBeatSnapshot_Q118.pdf A.T. Kearney 19

Proliferation of Distribution Centers DCs more than tripled in 4 years, almost doubled in 2 Retail and manufacturing Average size is dropping: small paired with large Driven by need for faster time to market Source: Tompkins International

Amazon Influence Holds Down Retail Inventory Turns Fewer turns mean more inventory and more room to hold it Source: Alix Partners, CapIQ

Percentage of Online Orders with Same Day Delivery Same day is small but growing 56% of people surveyed are Amazon Prime members = free delivery Amazon cultivates fast by making it free Because fast closes the convenience gap vs. storefront retail Source: Alix Partners- National survey conducted 11/17

New Prologis Seattle Multi-story Warehouse Opening 2018, 5 miles from downtown = fast delivery Designed for e-commerce fulfillment activities using 53 trailers 590,000 SF in 3 stories on 13.7 acres - vs. typical 47 acres Triples the volume of freight generated per acre as can automation

Trends and Outlook: Shifting currents Rising demand and tight capacity put carriers back in the driver s seat Innovation Grid: a Ten-Year Outlook Impact High Medium Low 0 Years Uberization of Freight Autonomous Mobile Robots Fleet monitoring systems vehicles Coopetition supply chains Predictive cruise control Artificial Intelligence Applications Electric Fleets Warehouse sharing Semi autonomous Blockchain Remote diagnostics On-demand courier delivery 5 Years Platooning Hydrogen Fuel Cells Tube logistics Circular Economy Logistics Fully Autonomous Trucks Logistics marketplac e Drone / UAV delivery Airless Tires 10+ Years Sharing Economy IoT & Big Data On-Demand Logistics Autonomous / Equipment Solutions On-demand 3D printing Timing Alternative Energy Projections of a healthy growing economy, tight capacity and e- commerce expansion promise a steep grade Artificial Intelligence, Autonomous Mobile Robots and Uberization of Freight are expected to have the most disruptive impact in the near term Crumbling infrastructure will exacerbate logistics efficiency until serious investments are made Looming threat of global trade wars casts of fog of uncertainty Note: IoT is Internet of Things. UAV is Unmanned Aerial Vehicle. OTA is Over-The-Air.- Source: A.T. Kearney Analysis A.T. Kearney 24

Goal CSCMP s Evolving Role Connect, Educate and Develop the world s Supply Chain Professionals! Supply Chain Concierge Service Join the Community visit CSCMP.org!

Tariffs and Trade Wars Assessing Impacts of Tariffs on Trade and the Economy Historic Perspective Rationale and Mechanics Affected Classes and Impacts War Games

Historic Perspective Stages of Economic and Container Trade Growth 20,000 I. II. III. IV. 60,000 U.S. Real GDP $Billions 15,000 10,000 5,000 50,000 40,000 30,000 20,000 10,000 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 U.S. Real GDP TEUs (000) U.S. TEUs (000)

Historic Perspective Stage I. Economic and Container Trade Growth 20,000 I. II. III. IV. 60,000 15,000 10,000 5,000 0 50,000 40,000 30,000 20,000 10,000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 U.S. Real GDP $Billions U.S. Real GDP TEUs (000) U.S. TEUs (000)

Historic Perspective Stage II. China in WTO and Rapid Container Trade Growth 20,000 I. II. III. IV. 60,000 15,000 10,000 5,000 0 50,000 40,000 30,000 20,000 10,000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 U.S. Real GDP $Billions U.S. Real GDP TEUs (000) U.S. TEUs (000)

35 Historic Perspective Stage II. China in WTO and Rapid Container Trade Growth Imports of Apparel in $Billions Billions 30 25 20 15 10 5 0 China Vietnam Honduras Mexico

Historic Perspective Stage III. Great Recession and Recovery Change in Real Inventories in Billions of 2012 Dollars

Tariffs and Trade Wars Rationale and Mechanics Rationale: Protect intellectual property Increase economic growth by reducing trade imbalance Bring jobs back to the U.S. Mechanics Both sides escalate base of commodities and tax rates Importers taxed, collections to governments

Tariffs and Trade Wars Affected Classes and Impacts Governments Collect Tariffs (Taxes) Business net income decreases and/or Consumers pay higher prices, inflation rises Government deficits decrease unless revenues are spent (e.g. on trade adjustments) or compensatory tax cuts For a limited range of commodities demand may be inelastic, or there may be limited substituition, expecially in the short term Consumers just pay more and the government collects the taxes (see above) Almonds, soybeans, lobster, water chestnuts?

Tariffs and Trade Wars Affected Classes and Impacts For many products 2018 imports may be accelerated to avoid Jan. 1 increases to 25% rates. Increase in imports will add to 2018 trade imbalance and lead to a decline in 2019 Impact on GDP growth should be neutral as increases in inventories will be offset by increases in imports. Government deficits decrease unless revenues are spent (e.g. on trade adjustments) or compensatory tax cuts.

Tariffs and Trade Wars Affected Classes and Impacts Shifts in Foreign Sourcing For some commodity products importers sources may be shifted to other competitive countries relatively quickly. For importers of many other products, modifying supply chains by switching to alternative country sources may take years. Shifts in Manufacturers Locations A subset of U.S manufacturers may ultimately decide to move production of imported products to the U.S. but such decisions may be delayed by the possibilities of trade disputes being resolved. Other global manufacturers may move their some U.S. production to other countries where imported products are not subject to high tariffs or where their exports to China are important.

Tariffs and Trade Wars Affected Classes and Impacts Closely Integrated Product Trade A Fishy Example U.S. fish exports are shipped to China where they are processed (filleted) and then shipped back to the U.S.

War Games Tariffs and Trade Wars Does China s large share of U.S. imports give it an advantage since it may be difficult to quickly move sourcing to other countries? $ Billions U.S. Imports China China % Total All Products 2,342 505 22% Computers/Printers/Parts/Monitors 148 83 56% Line Telephony/Cellphones 112 72 64% Apparel/Footwear/Leather Goods 109 43 40% Furniture 63 32 51% Toys/Games/Sporting Goods 31 26 82%

War Games Tariffs and Trade Wars Trade War Casualties An ongoing trade war is likley to cause damage to the economies of both China and the U.S. as well as the rest of the world. It is therefore in both countries interests to come to a solution to the developing trade war. But if the trade war becomes a game of chicken from which neither of the countries can extract itself, the damage could become a significant reality..

Questions??? Joseph G.B. Bryan Vice President, Freight Transportation and Logistics Policy, Planning, WSP Tim Feemster MBA President Foremost Quality Logistics Moderator Scudder Smith Principal Consultant Freight & Logistics Practice, WSP 41