Translinked Regional Freight Study Executive Summary

Translinked Freight Study

December 2011

Prepared for:

Detroit Regional

Chamber

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Translinked Freight Study Executive Summary

Figure 1-1: Map of Translinked Region

Source: Detroit Regional Chamber

1 EXECUTIVE SUMMARY

1.1 Translinked The Detroit Regional Chamber is one of the largest chambers of commerce in the country. The Chamber seeks to power the economy of southeast Michigan through economic development programs, advocacy, strategic partnerships and valuable member benefits. One key initiative of the Detroit Regional Chamber’s Economic Development activities is Translinked. The goal of Translinked is to create an industry cluster of excellence around transportation, distribution and logistics in the region comprising southeast Michigan, northwest Ohio and southwest Ontario. The Translinked strategy envisions the mobilization of public, private and academic resources around a consensus on the physical, financial and institutional infrastructure necessary to create this cluster. This initiative seeks to attract more freight, perform value-added service and become a key intermodal supply hub. The overall goal of Translinked is to create an efficient and cost-effective first-tier multimodal transportation and logistics hub in southeast Michigan, northwest Ohio and southwest Ontario. Translinked is supported by the Michigan Economic Development Corporation (MEDC), the New Economy Initiative (NEI), and the Detroit Regional Chamber. The Translinked region (Figure 1-1) includes major freight centers, including Detroit, Ann Arbor, Lansing, Flint and Port Huron in Michigan, Toledo in Ohio and Windsor and Sarnia in Ontario, Canada. The region encompasses major manufacturing activity (e.g. the automotive industry) and is situated on the principal border crossings for overland trade between the United States and Canada. A comprehensive set of freight infrastructure supports regional economic activity, including rail and road border crossings, airports, marine ports, rail yards, and interstate highways and rail corridors. The region is also connected by rail and highway to major U.S. and Canadian international sea ports, including New York/New Jersey, Halifax, Montreal and Norfolk on the East Coast. The Translinked Freight Study provides, subject to the availability of data on regional freight movements, a data-driven analysis of existing regional freight movements, an assessment of key freight industry trends, and makes recommendations on how to further develop the Translinked region.

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1.2 Recommendations The evaluation of freight flows and industry trends drive the following recommendations for future development of the Translinked initiative:

Establish a Translinked Commercial Marketing Initiative Involve the Private Sector, Remove Barriers that Slow Down Decision Making Remove Variability from the Border Crossing Process Include Rail Facilities and Third Party Logistics Providers (3PLs) that Reduce Transportation Costs,

and Increase Flexibility Marketing Initiative and Freight Corridors

The recommendations and next steps are discussed below. Establish a Translinked Commercial Marketing Initiative Translinked opportunities are with companies that have specific distribution needs, such as a high concentration of customers in Northern Michigan, over to Toronto, and including the US Midwest. Companies that require fastest ocean transits from China or Europe, especially for high value goods, or manufacturers that receive materials used in production from nearby sources are potential candidates.

Involve the Private Sector, Remove Barriers that Slow Down Decision Making Time is of the essence. Comments made during interviews as part of this study suggest there is a perception that the overall direction and ownership of Translinked is unclear, and the initiative lacks sufficient involvement from commercial interests. Commercial participation will be necessary to lend support and

Next Steps: Develop Translinked Marketing Plan TranSystems recommends a detailed, company by company analysis to identify opportunities based on the specific advantages of the Translinked region.

Develop a list of potential Translinked customers. Identifying and selling value will require detailed knowledge of the customer’s business, particularly its supply chain; and facts about the customer’s inventory and supply chain strategy. Carefully identify (segment) beneficial cargo owners (BCO) with high costs, complicated supply chains, or poor inventory performance.

Conduct private sector outreach to gather input. Develop supply chain straw-men using various distribution strategies and present them to shippers to assess the viability of Translinked as a supply chain hub. Demonstrate how a Translinked location reduces lowest landed costs. Present regional advantages, such as the CSX intermodal facility in North Baltimore, OH to private sector logistics managers.

Once strategies are validated, market regional advantages in industry publications, such as DC Velocity, Inbound Logistics, Journal of Commerce, and American Shipper. The KC (Kansas City) Smartport initiative is an excellent model for marketing strategies that may be applicable to the Translinked initiative.

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credibility to the project. It should be noted that recent improvements in Ohio, such as CSX’s Northwest Ohio Intermodal Terminal at North Baltimore, Norfolk Sothern’s Heartland Corridor Initiative serving Columbus, and BNSF’s Chicago rail terminal adjacent to the CenterPoint Intermodal Park have been noticed in the industry. Successes in the Translinked region itself, such as improvements at the Port of Toledo, have been attributed to public/private cooperation and agreed priorities. Barriers impeding Translinked progress should be identified, and addressed. Slow-moving initiatives will lose out to locations that are established, and proven, and that have active engagement with the private sector.

Remove Variability from the Border Crossing Process Supply chain managers work to eliminate events that introduce variability into supply chains. The Translinked region opportunities will be aided by addressing perceptions about the unpredictability of border crossings. The inclusion of the Toronto area population of 5 million within a distribution range served by the Translinked region will elevate the effectiveness of the region as a transportation hub. Therefore, addressing perceptions about unpredictable crossing delays is critical.

Next Steps: Identify and Remove Barriers to Progress Focus and prioritize opportunities based on strengths identified in the Marketing Plan, and gather private sector support as quickly as possible.

Solicit active and ongoing participation on the Translinked committee from companies such as railroads and third party logistics companies to provide a sense of what is commercially viable. The CN Railroad for example actively participated in the design, and invested $25 million in the new West Coast ocean terminal at Prince Rupert, BC - private investment will signal commercial viability. The Detroit Intermodal Freight Terminal (DIFT) may be another example of a successful transportation related public/private development.

Public sector involvement and coordination is crucial, but all parties should adhere to commercially based priorities. A failure to agree on priorities may signal an inability to move the project forward, and a review of Translinked overall goals and makeup is advised.

Next Steps: Assess and Manage Border Crossing Perception

As part of the development of the Translinked Sales/Marketing plan, gather border crossing information, including an assessment of perceived vs. real barriers, expected delays, and suggestions for improvement.

Based on this input, develop strategies to correct misconceptions about crossing delays, or work with US and Canadian customs agencies to develop programs that reduce variability in border wait times. An evaluation of the effectiveness of the Fast Past program, which allows truckers to us the “FAST” lane, and reduces the amount of paperwork, should be included in the analysis.

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Include Rail Facilities and Third Party Logistics Providers (3PLs) that Reduce Transportation Costs, and Increase Flexibility Distribution centers (DC) on-site at rail terminals, including multiple rail carriers, will reduce truck drayage costs. Include railroads and shippers in terminal location and design discussions. The presence of 3PL services, such as warehouse and distribution services, will enable shippers to introduce flexibility to their supply chains and will provide distribution options in the Translinked region without requiring shippers to commit capital to an owned facility.

Marketing Initiative and Freight Corridors The Translinked region is strategically located on several major trade corridors, notably cross-border with Canada. In addition, the region’s consumers and industry are served by several important port gateways in the U.S. (e.g. ports of New York/New Jersey, Norfolk and Los Angeles/Long Beach) and Canada (the ports of Halifax, Montreal and Prince Rupert). In developing the Translinked marketing initiative discussed above, focus should be placed on companies that could benefit from the following freight corridors:

International trade via:

− Canadian ports of Halifax, Montreal and Prince Rupert.

− U.S. Northeast ports, notably New York/New Jersey, Norfolk, and Baltimore. Investments in rail infrastructure by CSX and NS are making these gateways even more accessible for the Translinked region.

− U.S. West Coast ports, which are the principal gateways for U.S. trade with the Far East.

Highway and rail corridors serving major consumption markets in the U.S.

Cross-border highway and rail corridors with major consumption markets in Canada, notably markets in Ontario.

The marketing initiative should also incorporate testing the perceived value of the different North American Gateways, such as the Prince Rupert Gateway, with the fastest transit from China, or the Halifax Gateway, and evaluate shipper preferences of North American gateways into the study area. The market strategy initiative should include shippers who transport the fastest growing commodities. For example, Machinery and Parts Manufacturing, and Electronics Manufacturing have projected ten-year annual growth rates of 4.4 percent and 5.0 percent respectively. Keep in mind that these growth rates may reflect a recovery from steep declines experienced during the economic downturn; however, logistics service opportunities may emerge as the recovery continues.

Next Steps:

Confirm importance of the Detroit Intermodal Freight Terminal (DIFT) during the development of the Translinked Marketing and Sales Plan.

Revitalize and develop a sense of urgency around the DIFT rail project if potential users are attracted to this kind of facility.

Explore willingness of large DCs, trucking companies; 3PL’s to locate near new DIFT facility, and zone appropriately if needed to support logistics facilities.

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Figure 1-2: Selected Regional Freight Flows in 2009

Notes:

(1) Domestic flows include some international cargo that moves as “domestic” freight – e.g. overseas imports moving in domestic 53-foot containers from the U.S. discharge port to the Detroit BEA.

(2) Import and export refers to cargo that moves intact between U.S. ports and the Detroit BEA.

Source: TranSystems derived from IHS Global Insight Transearch Data

1.3 Regional Freight Flows Regional economic activity generates inbound, outbound and internal freight flows. The Translinked region also sees freight moving through the region between Canada and the rest of the U.S. An overview of selected regional freight flows in 2009, the latest year for Transearch Freight Data1, is presented in Table 1-1. The largest flows are domestic inbound, outbound and through, and freight flows related to Canada (inbound, outbound and through). Several characteristics of freight flows are discussed in the remainder of Section 1.3.

1 This Study includes content supplied by IHS Global Insight (USA), Inc; Copyright 2011 IHS Global Insight (USA), Inc.

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Table 1-1: Selected Regional Freight Flows in 2009

Total Tons Tons by

Truck

Tons by

Rail

Tons by

Water

Tons by Other

Modes

Total

Value

Detroit BEA Freight Flows in 2009 (Million Tons and Billion $)

Total 286.60 206.07 52.81 26.60 1.12 $413.5

Domestic 1 212.00 160.42 30.85 20.69 0.04 $248.8

Inbound 107.54 66.10 22.44 18.99 0.02 $107.1

Outbound 51.30 42.00 8.20 1.07 0.02 $101.7

Internal 47.07 46.22 0.21 0.63 0.00 $26.1

Through 6.09 6.09 0.00 0.00 0.00 $13.9

Canada 54.02 34.09 18.85 0.00 1.08 $129.7

Inbound 5.97 3.37 1.95 0.00 0.65 $18.3

Outbound 3.16 2.40 0.39 0.00 0.37 $10.7

Through 44.89 28.32 16.51 0.00 0.06 $100.7

Mexico 2.64 1.12 1.52 0.00 0.00 $14.0

Inbound 1.63 0.56 1.07 0.00 0.00 $10.1

Outbound 0.94 0.49 0.45 0.00 0.00 $3.6

Through 0.08 0.07 0.01 0.00 0.00 $0.2

Import & Export 2 17.93 10.44 1.59 5.91 0.00 $21.1

Detroit BEA – Toledo BEA Freight Flows in 2009 (Million Tons and Billion $)

Total 3 15.81 14.57 0.35 0.89 0.00 $6.95

Inbound 10.84 9.82 0.14 0.88 0.00 $4.47

Outbound 4.97 4.74 0.21 0.01 0.00 $2.47

Detroit BEA – Windsor CMA Freight Flows in 2009 (Million Tons and Billion $)

Total 4 1.42 1.16 0.19 0.00 0.07 $4.75

Inbound 0.25 0.19 0.06 0.00 0.00 $1.28

Outbound 0.18 0.13 0.00 0.00 0.05 $0.39

Through 0.99 0.83 0.13 0.00 0.02 $3.08

(1) Domestic flows include some international cargo that moves as “domestic” freight – e.g. overseas imports moving in domestic 53-foot containers from the U.S. discharge port to the Detroit BEA.

(2) Overseas import and export cargo that moves intact between U.S. ports and the Detroit BEA. (3) Freight moving between the Detroit BEA and the Toledo BEA. (4) Freight moving between the Detroit BEA and the Windsor CMA, and freight moving through the Detroit BEA

between the Windsor CMA and the rest of the U.S.

Source: IHS Global Insight Transearch Data

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Figure 1-3: Detroit BEA Cargo in 2009 by Transport Mode

Note: Includes domestic and international, and all directions

– inbound, outbound, internal and through

Source: Derived from IHS Global Insight Transearch Data

Detroit BEA Freight Flows The Detroit-Warren-Flint Business Economic Area (Detroit BEA) covers the cities of Detroit, Flint and Warren, and surrounding areas. The Detroit BEA had total estimated cargo flows amounting to 287 million tons in 2009 with an estimated value of $414 billion. Total cargo comprises several different transport modes – truck, rail, water (via the Great Lakes), air and other – and includes all trade flows, domestic and international, inbound, outbound, internal (movements within the Detroit BEA) and through (not stopping in the Detroit BEA). Truck is the dominant mode with 72 percent of cargo volume and 81 percent of cargo value, the larger share of value reflecting the higher-value commodities that move via truck. Rail handles both lower-value and higher-value commodities, and it accounts for 18 percent of both volume and value. The water mode accounts for 9 percent of tons but less than one percent of value due to the low-value bulk commodities shipped by water. The highest value freight is shipped by air. Total cargo is spread across different directions and trades (Figure 1-4). Domestic cargo accounts for 74 percent of total tons and 60 percent of value. Domestic cargo includes some international cargo that moves as domestic freight to or from U.S. ports (e.g. New York/New Jersey). International trade related to Canada accounted for 19 percent of tons and 31 percent of value, while international trade with Mexico was one percent of tons and 3 percent of value. Import and Export trade that moves intact to and from U.S. ports accounted for 6 percent of tons and 5 percent of value. Inbound and outbound cargo amounted to 183 million tons in 2009 with an estimated value of $270 billion. These flows are driven by industry and consumption, and generate the principal demand for warehousing and logistics facilities. The largest directional flow is inbound to the Detroit BEA. The region also has a large volume of internal cargo movement (18 percent of total tons and 7 percent of value), a significant share of which is truck shipments to and from warehouses within the region and drayage of containers to and from intermodal rail yards. A large amount of cargo also moves through the Detroit BEA, notably between Canada and other regions of the U.S., and is handled by the border crossing points in the Detroit BEA.

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Figure 1-4: Detroit BEA Cargo in 2009 by Trade Flow


Figure 1-5: Detroit BEA Cargo Tons in 2009, Total and Warehouse-able


When evaluating the region’s cargo, it is helpful to focus on commodities that are more suited to added-value logistics services or undergo some form of manufacturing process. Such commodities will be of primary interest to the development of industry and logistics services. The broadly defined “warehouse-able” commodities are those with a relatively high value per metric ton and/or commodities that are processed (e.g. food products) as opposed to raw materials (e.g. grain). These commodities are more likely to require added-value logistics services. Warehouse-able cargo was an estimated 141 million tons in 2009, 49 percent of total Detroit BEA cargo. Warehouse-able cargo accounted for an estimated 90 percent of total cargo value, which reflects the higher value nature of warehouse-able commodities (e.g. consumer products). These commodities accounted for 42 percent of inbound tons, and their share was highest in the cross-border inbound trade – 64 percent of tons from Canada and 99 percent of tons from Mexico – and compared to 41 percent of domestic inbound tons. Warehouse-able commodities accounted for 66 percent of total outbound tons. Penetration by trade was – domestic outbound 68 percent of domestic tons, shipments to Canada 48 percent and shipments to Mexico 87 percent.

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Detroit BEA Freight Flow Forecast The forecast of inbound and outbound freight (warehouse-able) commodities is presented in Table 1-2. The Base projections of cargo flows driven by assumptions related to regional, national and international economic activity, and relationships between industry inputs and outputs. Total inbound and outbound freight is projected to have increased from 89.9 million tons in 2009 to 97.8 million tons in 2010, driven by recovery from the recession and growth of industries in the region. Total inbound and outbound freight is projected to increase to 126.0 million tons in 2020, based on domestic economic growth and the expansion of cross-border trade with Mexico and Canada, and growth of trade with overseas markets. The projected 10-year (2010 to 2020) compound annual growth rate (CAGR) is 2.6 percent.

Table 1-2: Inbound and Outbound Freight Forecast for 2020 – Base, Low and High

Inbound Freight (Warehouse-able Commodities)

2020 Tons CAGR 2010 to 2020

Trade 2009 Tons 2010 Tons Base Low High Base Low High

Domestic 44,334,660 47,678,414 59,970,374 57,318,605 63,775,639 2.3% 1.9% 3.0%

Canada 3,835,424 4,232,502 5,513,774 5,127,613 5,798,233 2.7% 1.9% 3.2%

Mexico 1,613,233 1,761,005 2,981,832 2,708,501 3,145,764 5.4% 4.4% 6.0%

Import 1,205,197 1,343,248 2,028,841 1,859,298 2,273,105 4.2% 3.3% 5.4%

Grand Total 50,988,514 55,015,169 70,494,821 67,014,016 74,992,742 2.5% 2.0% 3.1%

Outbound Freight (Warehouse-able Commodities)

2020 Tons CAGR 2010 to 2020


Domestic 34,989,373 38,422,157 49,083,371 44,989,601 51,752,543 2.5% 1.6% 3.0%

Canada 1,512,627 1,665,247 2,218,630 2,059,365 2,308,990 2.9% 2.1% 3.3%

Mexico 812,665 927,945 1,451,046 1,369,738 1,658,503 4.6% 4.0% 6.0%

Export 1,581,080 1,796,395 2,756,368 2,495,304 3,036,918 4.4% 3.3% 5.4%

Grand Total 38,895,745 42,811,744 55,509,415 50,914,008 58,756,955 2.6% 1.7% 3.2%

Inbound & Outbound Freight (Warehouse-able Commodities)

2020 Tons CAGR 2010 to 2020


Domestic 79,324,033 86,100,571 109,053,745 102,308,206 115,528,183 2.4% 1.7% 3.0%

Canada 5,348,051 5,897,749 7,732,404 7,186,977 8,107,223 2.7% 2.0% 3.2%

Mexico 2,425,898 2,688,950 4,432,877 4,078,239 4,804,267 5.1% 4.3% 6.0%

Import & Export 2,786,277 3,139,643 4,785,209 4,354,602 5,310,023 4.3% 3.3% 5.4%

Grand Total 89,884,258 97,826,912 126,004,235 117,928,024 133,749,697 2.6% 1.9% 3.2%

Source: TranSystems Forecasts and IHS Global Insight 2009 data. Low and high case projections are also presented in Table 1-2. The basis for these alternative projections is that the principal driver of freight flows is economic activity, represented by indicators such as disposable income and industrial production. In addition, housing-sensitive commodities are subject to more uncertainties going forward due to uncertainty as to the timing of recovery in regional housing markets. In general, the sensitivities for non-housing related commodities (e.g. transportation equipment) are -0.5to +0.5 percent per year. Secondary traffic is assumed to be 25 percent housing-related and the sensitivities are

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-0.2 to +1.5 percent per year. The growth sensitivities for international flows are -1.5 to +1.5 percent per year. A stronger recovery in regional, national and international economic activity would be expected to drive a healthy growth of international trade. Total inbound and outbound shipments of warehouse-able commodities are projected to have 10-year compound annual growth rates of 1.9 percent under the Low Case and 3.2 percent under the High Case. The projections indicate that truck shipments will grow at a slightly faster rate than shipments by rail. This result is driven by several factors – (1) the macro nature of the forecast models, with their underlying assumptions on industry input and output relationships, and fixed modal shares for individual commodities, (2) the large amount of freight moving between the region and truck friendly origins and destinations in the East North Central region, and (3) the current transportation mode distribution. However, the macro forecast models do not take into account significant transportation industry factors that are expected to accelerate the growth of rail usage. The trucking industry is faced with several challenges that are encouraging shippers to expand the use of rail in their supply chains. These factors include fuel price increases, favoring rail over highway transport, the cost of recruiting and maintaining truck drivers, investments by railroads in intermodal rail hubs tied to logistics parks, and increased marketing and attractive pricing by railroads of shorter haul intermodal rail services. For these reasons, it is likely that the use of rail in the supply chain strategies of shippers will expand in the future. Detroit BEA – Toledo BEA In 2009, 15.0 million tons of domestic freight moved between the Detroit BEA and the Toledo BEA, 10.4 million tons inbound from the Detroit BEA and 4.6 million tons outbound from the Detroit BEA. Truck is the dominant mode accounting for 92 percent of inbound freight and 96 percent of outbound freight. Detroit BEA – Windsor CMA The Windsor area has a diversified economy with a strong presence in the automotive sector, agriculture, and food products, and emerging sectors that include high tech manufacturing. A total of 1.4 million tons of freight moves to and from the Detroit BEA, and to and from other regions of the U.S through the Detroit BEA. Truck is the dominant mode of transport, accounting for 88 percent of freight shipped to the Windsor CMA and 72 percent of the tons shipped from the Windsor CMA. The respective shares for rail were 5 percent and 28 percent.

1.4 Industry Trends and Location Comparison Logistics managers are continuously evaluating their logistics networks to squeeze excess transportation expenses and other costs out of their supply chains. The availability of all transportation modes is essential in order to enable logistics managers to have the flexibility to choose the mode that best suits shipment needs. Lowest-cost transportation options, such as rail, are selected provided that service is available, and transit time and reliability meet service level requirements. Trucking costs are the largest portion of the supply chain expense. Locating DCs in high-density customer/supplier areas reduces trucking expenses enough to more than compensate for lower ocean and rail costs to competing regions. Because of this, supply chain strategies that reduce trucking as much as possible have been a major goal of supply chain managers. Warehouse locations are chosen based on the cost of the facility, and their proximity to customers and suppliers, thereby reducing trucking costs. Labor, green initiatives, government incentives, etc. are considered after transportation service and rate level requirements are met, and these considerations typically influence a specific site location among competing sites that meet transportation requirements.

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Figure 1-6: 10-Hour Truck Drive-Time Area Comparison: Detroit, MI, Chicago, IL, Columbus, OH, and Harrisburg, PA

Source: TranSystems

The Translinked region performs well under a variety of criteria used by shippers and manufacturers to select locations, including transportation infrastructure (rail and highway and airports), access to ocean gateways for international trade, and the availability of warehousing and distribution facilities. The Translinked region must compete against two regional hubs – Columbus, OH, and Chicago, IL – that are well established and in a strong position to compete for DC operations in the Midwest. Columbus has a higher U.S. and Canadian population reach, and Chicago has superior rail and air cargo services, as well as a large Midwest distribution reach. Both of these locations have competitive labor and industrial real estate costs as well. Translinked region opportunities are with companies with specific distribution needs, such as a high concentration of customers in Northern Michigan, over to Toronto, and including parts of the U.S. Midwest. Companies that require fastest ocean transits from China or Europe, or manufacturers that receive materials used in production from nearby sources are other potential candidates.