(The following article by Gregory Richards was posted on the Virginian Pilot website on March 3.)
NORFOLK, Va. — One by one, they arrive at what amounts to a big parking lot in Chesapeake. Ford F-150 pick ups, fresh from the assembly line just more than a mile away in Norfolk, ready to be loaded onto trains and big rigs to travel to dealerships throughout the country.
The trucks appear to be in every color of Ford’s palette: white, blue, black, red and gray. Some with crew cabs, some without. Four-wheel drive seems to be a popular option. Nearly 1,000 of them, all in nice, neat rows.
Three times a day, five days a week, trains from Norfolk Southern Corp. stop by to haul away bi-level rail cars, each stuffed with eight F-150s.
A year ago, the trains pulled away a total of 70 to 80 rail cars daily from the 17-acre yard, which is owned by the railroad.
Now the loads are down to about 30 a day as production at Ford’s Norfolk Assembly Plant winds down, part of a broad retrenchment by Detroit-based automakers in the face of declining sales.
“In this business, you get used to changes,” said Otis Martin, manager of the yard, called the Chesapeake Auto Terminal, as he stood amid the trucks last week.
The auto industry cutbacks can be felt throughout many businesses, from those that supply parts to the plants to those that take away the shiny finished products. Among railroads, which typically carry 70 percent of all new vehicles in addition to moving parts, Norfolk-based Norfolk Southern has the most exposure.
Of the four largest U.S. railroads last year, Norfolk Southern derived the highest percentage – at least 10.4 percent – of its revenue from shipments of vehicles and auto parts. It connects with 29 auto assembly plants in North America, more than any other railroad, serving as a main rail carrier for Ford, DaimlerChrysler, General Motors and Toyota.
Overall, the company bills itself as North America’s largest rail shipper of automotive products.
Despite the automotive industry turmoil, David F. Julian, president of Norfolk Southern’s automotive and supply chain services group, remains optimistic about growing that business for the railroad. Some estimates show
18 million vehicles being made annually in North America by 2015, an increase of about 18 percent from last year, as more drivers hit the roads and existing vehicles are replaced.
“Automotive is very volatile,” Julian said, pointing to changing consumer tastes for vehicles. “But that’s something Norfolk Southern has successfully dealt with for a long, long time. You have to continually have new plans to stay abreast of the market.”
This time, he thinks, is no different.
Serving automobile manufacturers is a tough business.
Many assembly plants have shifted to “just-in-time” production that depends on parts arriving as they are needed, so shipments can’t be late. Transporting the finished vehicles from factories to dealers is a delicate operation, especially with mile long trains, as scratches and dents in cargo costing tens of thousands of dollars each just won’t do. Also, the automakers’ size makes them formidable business partners, even for the country’s major railroads.
“You’re dealing with the largest manufacturers in the world who carry a significant amount of business leverage,” said Julian, who has headed Norfolk Southern’s automotive sector for 16 years. “You really have to understand what their needs are… and negotiate successfully with them. It’s all hard.”
Norfolk Southern has thrived in this environment, increasing its share of the railroad automotive market from fourth to first in the 1990s, Julian said.
How it achieved that strong position is the result of several factors. Norfolk Southern signed a unique contract with Ford in 1996 that put most of the Ford vehicles moving by railroad on its tracks. And i ts purchase – along with rival railroad CSX Corp. – of Conrail in 1997 opened up access to more Midwestern auto plants.
Also, to increase its share of the auto parts business, it developed an innovative system in which trucks make daily runs to pick up batches of parts from suppliers and then transfer the loads to trains for transport to assembly plants. With it, Norfolk Southern captured business that otherwise might have moved solely via truck.
Additionally, Norfolk Southern, with its 21,000 -mile rail network blanketing the eastern half of the country, has been selected as the primary carrier by 13 of the past 20 assembly plants built east of the Mississippi River.
Many factors go into where a new auto plant is built, including road and rail access, state incentives and the quality of the labor force. Julian said Norfolk Southern has been able to get ahead by having a team that keeps in close contact with state and regional economic development agencies, which are contacted early on by prospecting automakers. It also maintains a database of about 2,500 available pieces of land along its tracks to help automakers choose sites.
The strength of Norfolk Southern’s automotive business is now being tested.
Last year, the traditional “Big Three” automakers – Ford, General Motors and DaimlerChrysler’s Chrysler Group – all significantly cut their output. North American production of 15.2 million vehicles last year was 3 percent below 2005 and was the lowest number manufactured since 1996, said Donald W. Seale, Norfolk Southern’s executive vice president and chief marketing officer.
Ford closed Norfolk Southern-served plants in St. Louis and Atlanta, and General Motors shut down its Oklahoma City plant, from which another railroad brought vehicles to Norfolk Southern to distribute. Until several years ago, Norfolk Southern served 34 assembly plants, five more than it does now.
Increased production from Toyota and other “new domestics” has only partly offset cuts by the Big Three. The Detroit automakers produced a combined 780,498 fewer cars in North America in 2006 compared to 2005, while Toyota and Honda made 329,116 more, according to Global Insight, an economic forecasting firm.
Norfolk Southern moved 561,900 carloads of finished automobiles and auto parts last year, down 8.8 percent from 2005. Yet, because increased demand for rail transportation has given Norfolk Southern strong pricing power, automotive revenue hasn’t declined nearly as far. The railroad generated $974 million from automotive shipments last year, slightly below 2005 and just above the amount for 2004. Its total revenue for 2006 was $9.4 billion.
Softness in the automotive industry was one of the main factors cited by Credit Suisse Securities analyst Jason H. Seidl when he downgraded Norfolk Southern’s stock in January to “neutral,” saying it had reached a “near-to-intermediate term peak.” However, most of the roughly dozen other analysts who follow the company haven’t changed their position recently.
When auto plants are darkened, Norfolk Southern doesn’t lose all of that freight, Julian said. Much of the production of F-150s that occurs in Norfolk, for example, will likely shift to Ford’s Dearborn, Mich., plant, which Norfolk Southern also serves.
“As long as they maintain their market share, they’re still going to produce the same number of vehicles,” Julian said of Ford.
It’s the railroad’s parts shipments, constituting about 20 percent of its automotive revenue, that it loses.
Many of the assembly plants being closed are outside the Midwest core of auto manufacturing. The engines, body stampings, transmissions and other pieces that Norfolk Southern ships to Norfolk Assembly, for instance, mostly originate in Michigan or Ohio. Once F-150 production moves to Michigan, those parts would likely move by tractor-trailer trucks, taking business away.
“Unfortunately, this plant – the logistics, the distance of the markets – puts it at a disadvantage,” Julian said of Norfolk Assembly.
The importance of automobiles to Norfolk Southern is demonstrated by Ford.
Not only is Ford the railroad’s biggest automotive customer, but since the formation of Norfolk Southern in 1982, it has been the railroad’s largest customer across all of its business units.
Julian said Ford may have slipped from that spot last year because of reduced production. However, 2006 customer rankings aren’t being disclosed for “competitive reasons,” said railroad spokesman Robin Chapman.
In the long-term contract signed 11 years ago, Ford agreed to ship about 3 million vehicles a year on Norfolk Southern. That’s significant, because Norfolk Southern moves about 5 million vehicles annually.
“That was a big jump in market share,” Julian said.
The contract called for Ford to build four “mixing centers” that would gather vehicles from different plants and group those heading to common destinations. The centers, each about 250 acres, were built near Fostoria, Ohio; Shelbyville, Ky.; Kansas City, Mo.; and Chicago to speed shipments from Ford’s North American assembly plants – now numbering 17 – to final distribution centers and then dealerships.
Julian compared the centers to airport hubs where feeder routes converge. It’s an arrangement Norfolk Southern doesn’t have with other automakers, he said, although DaimlerChrysler is now testing the concept.
The strategy was to sort nearly all vehicles in the centers. But that’s no longer the case. Large metropolitan areas warranted their own trainloads of vehicles direct from the factories, so now roughly 40 percent of Ford’s vehicles are processed in the complexes, Julian said.
The agreement expires at the end of 2009, and Julian said talks are under way for a possible extension.
Also looking forward, Norfolk Southern hopes to increase its automotive revenue by attracting more assembly plants to its rail network and by expanding the services it offers, Julian said.
Norfolk Southern, for instance, plans to begin hauling larger trucks, not just cars and pick ups, from factories, Julian said. Such trucks, including the big rigs seen pulling trailers down highways, are too big to squeeze into the multilevel rail cars that carry automobiles and pick ups. So the railroad is developing single-level rail cars to accommodate them.
Seventeen North American plants produce those trucks, he said. “That’s a big market.”