Are Trucking Companies Planners or Reactors?

Editor’s note: Written by Aaron Terrazas is Director of Economic Research and Dorothy Mensah is a Data Scientist at Convoy, a digital freight networkThis is one in a series of periodic guest columns by industry thought leaders.

Do truckers think about the future when planning their businesses, or do they just expand whenever they’ve got cash to burn? The answer to this question has sweeping implications for the freight market. Our answers – until now – have been anchored exclusively in anecdotes instead of in data.

The story that trucking companies – particularly small and mid-sized trucking companies – grow opportunistically, inevitably over-expanding their businesses during tight freight markets and planting the seeds of subsequent market crashes in the process, is a key assumption that underlies freight industry folklore about what drives the industry’s notorious boom-and-bust cycle.

Over the past several weeks, this idea has become all the more important as the freight market has abruptly softened and analysts begin to question what forces are behind the shift: Is it a sudden stop in consumer activity, or have two years of climbing spot rates allowed carriers to overextend their businesses?

We recently surveyed 135 trucking companies to learn how they think about their business expansion plans. The data show that it’s impossible to characterize all trucking companies in a single brushstroke: They hold a wide range of beliefs about how and when to build their businesses.

For economists, a classic distinction is between forward-looking “planners” and backward-looking “reactors”. Planners attempt to calibrate their business investments based on informed predictions about where demand for their services will be in the future – even if these predictions are imperfect. By contrast, reactors are mostly responding to past (particularly recent past) market conditions that have allowed them to invest or retrench.

About one-third (32 percent) of the carriers we surveyed – the largest single group – said that they try to plan their business expansion based on where they think the freight market is headed. Slightly under one-third (30 percent) said that they grow their businesses whenever they have the resources to do so. Another quarter (22 percent) said they have no plans to expand their business, and 16 percent said that they think about growing their business in a different, unspecified way. (The survey was conducted in December 2021.)

As expected, the data also reveal some important differences. Despite perceptions otherwise, small trucking companies are very intentional about their growth: 36 percent of trucking companies with four or fewer trucks said they try to expand their businesses in line with freight market expectations. That compares with 10 percent of trucking companies with five or more trucks. In general, larger fleets are a lot more cautious about growth: 45 percent of trucking companies with five or more trucks have no growth plans, compared to 18 percent of trucking companies with four or fewer trucks.

Similarly, older trucking companies tend to be more cautious, or more deliberate, about how they expand their businesses: Over half (58 percent) of trucking companies with four or more years of experience say they either don’t plan to grow their business or try to grow their business based on the direction of the market, compared to just one-third of trucking companies with less than three years of experience.

In general, small but experienced trucking companies are the most intentional planners while larger fleets were most likely to have no growth plans. Reactors were a minority across firm sizes and ages.

The idea that trucking companies inevitably over-expand during tight freight markets precipitating each subsequent market crash is deeply embedded in the industry’s boom and bust psyche. But it also relies on the assumption that truckers are hopelessly naive when it comes to managing their businesses in the long run. The data does not necessarily support this dim view of the hundreds of thousands of small businesses that are the backbone of American supply chains.

While there is some evidence that some trucking companies – particularly smaller and more recently incorporated carriers – do expand their businesses opportunistically, they are far from the majority. Instead, our analysis suggests that many truckers are smart – smart enough to plan for the future, even if sometimes they do so imperfectly because the future is inherently uncertain.

If this is indeed the case, the industry will need to find a new explanation for the freight market’s most recent slump. welcomes divergent thoughts and opinions on transport technology and trucking industry issues. Use the comments section to cite yours. Qualified opinion leaders are welcome to offer suggestions for opinion columns. Contact [email protected]

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