Tracking the long haul in rail

We review the North American industry’s investment and capacity utilisation for moving vehicles by rail.

The port of Portland, on the US northwest coast, is an obvious destination for vehicles exported from Asia; Toyota, Honda and Hyundai all use the port to handle imports. The shipping logic is simple: Portland offers reduced ocean transit time, which means using less bunker. But in contrast to ports on the US east coast or in southern California, Oregon and the wider Pacific Northwest region are not major consumer markets for vehicles.

According to Sebastian Degens, the port’s general manager for marine business development, only around 15% of the 300,000 vehicles that will pass through Portland this year are destined for the local market. The balance – around 255,000 cars, SUVs and light trucks – make use of the port’s rail transport links, using Class-1 railways Burlington Northern Santa Fe (BNSF) and Union Pacific (UP) to travel to population centres as far away as Salt Lake City, Utah; Denver, Colorado; Minneapolis, Minnesota; St. Louis, Missouri; Chicago, Illinois; Detroit, Michigan and even New York.

Such longhaul rail freight is crucial to many logistics strategies. Honda, reports Degens, has given up on east coast ports, and is now entirely a ‘land bridge’ operation.

“Most carmakers regularly look at this option,” he explains. “The choice is to ship by rail from the west coast or pay Panama canal tolls and take an extra 30 or so days on the water.”

As well as ocean time, rail connections from the east coast are generally poorer, which means more reliance on road transport from highly congested areas such as the northeast. Nissan, says Degens, has recently tested using Portland as a route through to the New York area for urgent shipments, should the need arise. Most OEMs rely on a hybrid solution. Toyota and Hyundai ship to Portland and use the rail-operated ‘land bridge’ as the route to market in about 35 states, with the rest served by the east coast ports directly.

Covering the North American network
Even without using cross-country rail routes, the logic of rail as a road transport substitute is clear: rising road fuel costs, environmental concerns, lower pricing and generally faster transit times are increasingly difficult arguments to counter. Overall, industry sources estimate that around 70% of North American vehicle shipments are by rail – a higher proportion than anywhere in the world.

A typical example of how manufacturers and logistics providers use rail across the North American network can be found at Glovis, the logistics arm of the Hyundai group, which ships around 660,000 vehicles a year by rail – 48% of the total volume of vehicles it moves – reveals Art Lim, director of operations at Glovis America.

From the port of Tacoma, Washington, Kia vehicles are shipped by rail to four railheads: Denver; St Paul, Minnesota; Elwood, Illinois; and Kansas City, Kansas. From the port of Portland, Hyundai vehicles are shipped to the same four railheads. Finally, both Hyundai and Kia vehicles are shipped by rail to Texas from a third west coast port – National City, in San Diego, California.

Rail is also used to move vehicles from Kia’s assembly plant in Georgia to the southwest, the central states, and the Pacific Northwest. Glovis moves by rail to the same destination points from Hyundai’s plant in Alabama.

Improving direct rail links
According to Lim, Glovis’s vehicle distribution network is designed to allow the company to load and ship by rail directly from its ports of entry and assembly plants, as opposed to first shuttling to a rail yard for loading.

It’s a strategy that has been picked up across the industry in an effort to reduce handling and transport moves. Most of the newer plants in North America include direct rail links.

At Kansas City Southern, for instance, which transports Mexican-built vehicles into the midwest and Gulf of Mexico coastal states, the majority of its automotive business in Mexico comes from plants directly served by rail, according to Doniele Carlson, acting vice-president of corporate communications at the railway. “We are actively working with auto manufacturers to encourage them to locate more plants on our line,” she adds.

Ports are also increasingly using improved and upgraded links and handling facilities to win business. The South Carolina Ports Authority, for example, has invested $23m to expand its Columbus Street Terminal at the port of Charleston, along with the development of rail handling facilities, as part of a strategic plan to handle more ro-ro cargo, in particular volume from BMW’s plant located 200 miles (320km) inland. The plant is connected to the port by Norfolk Southern, which transports BMW vehicles to the port for export.

But what many people don’t realise, says Alison Skipper, public relations manager at the South Carolina Ports Authority, is that the port authority actually owns the land on which the Spartanburg plant sits, having acquired it in the 1980s thanks to its proximity to a key Norfolk Southern route.

The 900-acre (365 hectare) parcel of land involved, she explains, was a holdover from an early 1980s plan – which has been revived this year – to build an intermodal inland extension to the port authority’s coastal container port at the nearby city of Greer, intended to give local businesses a direct rail connection from the Spartanburg area to the port of Charleston, which would take up to 50,000 trucks a year off already crowded roads.

Should it be built, the link could serve inbound freight arriving by Norfolk Southern rail for the Spartanburg plant, which is just a short drive from the Greer intermodal operation, as well as vehicles departing for the port.

Battles on the west coast
In northern California, the port of Richmond is also investing further in rail freight capabilities. The port has ploughed more than $50m into modernising vehicle handling and associated rail facilities at its Point Potrero Marine Terminal, says executive director Jim Matzorkis.

The port has so far won two important customers, including an $85m, 15-year contract to import Honda vehicles, followed in 2011 by a five-year contract to handle Subaru vehicle flows.

While Matzorkis claims the port has the rail and handling capacity to add more customers, the major west coast ports are fighting back, with rail investment evidently imperative to winning over carmakers. Portland has recently invested $11m in four rail-related initiatives that provide space to build up rail loads and store railcars, along with making associated infrastructure improvements, according to Degens.

Such investments often depend on multiple parties, including public and private bodies, as well as the railways. A yard expansion project completed this year at Portland was funded by the port, the Oregon state transport department, along with Union Pacific and the BNSF.

“The two railroad companies compete for automotive business, with most facilities being for joint usage,” Degens explains. “Projects such as this rail yard expansion bring greater rail network efficiencies in the transportation of goods to all the port’s customers.”

Worry over railcar shortages and allocation
While rail links and facilities are an important part of port developments from Portland to Charleston, as well as new plants – including Volkswagen’s Chattanooga, Tennessee factory, and those being built in Mexico – there is an undercurrent of concern about the precise state of North America’s automotive railcar capacity.

At this past spring’s FVL North America conference at Newport Beach, California, for instance, Christine Krathwohl, global director for logistics at GM, pointed to serious backlogs in Mexico and elsewhere in North America. She also questioned whether railcar allocation was being handled effectively, highlighting that GM, the largest US carmaker, had access to proportionally fewer railcars than competitors.

Mike Nelson, rail strategy manager for Toyota Logistics Services, also voiced concerns in the light of the carmaker’s plans to increase North American production. “We’re already suffering with railcar shortages, and I shudder to think about what will happen in the next 24-36 months,” he said.

GM’s allocation issue could be down partly to its production network, which stretches from Canada to Mexico, but another issue lies in fleet capacity. Roughly 55,000 railcars served a market of 16m-17m light vehicles per year before the recession. Today, around 49,000 railcars serve a market selling at a 14m annual rate. While the ratio of sales to railcars is about the same, some OEM logistics managers say privately that capacity was already too tight prior to the recession.

But the situation is complex, as capacity and utilisation vary throughout the rail network and at different times of year. According to Bill Mikkelsen, Ford’s manager for North American vehicle logistics, overall capacity and load are roughly balanced, with shortages at strain points.

“At quarter ends, or during the first quarter of the year, there can be acute shortages, especially at the extremities, such as routes to Canada or Mexico,” he notes. “Throw in weather-related issues affecting rail movements, seasonal peaks in demand, and segment shifts in the markets – such as light trucks instead of smaller cars – and it’s all too easy for bottlenecks to occur.”

An industry making improvements
However, the rail industry is responding, both as individual companies and through TTX, the industry-owned collaborative body which serves as ‘pool manager’ for the nation’s fleet. TTX helps to boost effective capacity through utilisation improvements such as balancing return loads.

Major railways, including UP, BNSF and Kansas City Southern have all made fleet investments. Kansas City’s Carlson, for instance, notes that the railway has made significant investments in Automax railcars – which are adjustable and can handle more vehicles than typical equipment – to support originations in Mexico. UP has also introduced an adjustable railcar to its fleet.

According to Dave Fleenor, assistant vice-president for automotive sales and marketing at BNSF, railways are justified in being cautious about railcar investment, given the volatility in new vehicle demand and the $200,000 cost per unit. Nevertheless, his company has also increased its fleet. The railway will ship more vehicles this year than in 2007, even though overall freight across its network is still forecast to reach only 80-85% of 2007 levels. “We’ve got the newest multilevel fleet in the industry, and we’ve invested heavily in Automax,” he says. “Contrary to some operators, our fleet didn’t get significantly smaller in the downturn – we parked railcars, rather than scrapped them – and we’re once again building and buying railcars, with a planned 5-10% addition to the fleet ongoing.”

And while the reload system has its issues, Carlson says that overall the system is efficient. “Allocations continue to be addressed, and continuous improvements are being made.” For example, in June the railways voted to add previously excluded Automax railcars to the TTX fleet, and put in place measures to penalise poor railcar utilisation, according to Fleenor.

While the railcar fleet will have to increase as sales climb, equally critical appears to be investment in direct rail ramps and handling facilities at ports and plants. The challenge for generating such investment is that it rarely comes from one company or body alone, but rather depends on collaboration and combined investment from the public sector, including port and municipal authorities, as well as among logistics providers and commitments from manufacturers themselves. The strength of the North American rail sector for vehicle movements is predicated on this coordination, and its future – including the ability to better serve new import, export and manufacturing flows – will be no less dependent on it.