(Bloomberg News circulated the following story by Angela Greiling Keane on May 24.)
NEW YORK — Norfolk Southern Corp. trains rumble to and from Ford Motor Co.’s factory in Norfolk, Virginia, delivering fenders, frames, axles and engines and then hauling off finished F-150 pickups. That’s about to change.
When Ford shuts the plant in June and moves production to Dearborn, Michigan, trucks will fetch parts from suppliers nearby. Only completed pickups will travel on Norfolk Southern trains.
The shift is part of a historic transition for U.S. automakers and a profit drain for railroads, especially Norfolk Southern, the largest auto carrier. As Ford and its peers cut output, Asian automakers led by Toyota Motor Corp. are adding U.S. factories that rely less on rail shipments.
“This auto slowdown is significantly sharper than what we usually see,” says independent rail analyst Tony Hatch, who is based in New York. Carrying Asian automakers’ U.S.-built cars “is less overall business,” he says.
Norfolk Southern, Burlington Northern Santa Fe Corp. and CSX Corp. all cited declining auto shipments as a reason for lower first-quarter profit, along with harsh weather and weakness among homebuilders. Union Pacific Corp. was the only major carrier to boost earnings in the period.
Auto cargoes are down this quarter, too, according to the companies, and railroads don’t predict a rebound this year.
Investors might have reacted more harshly to the decline had billionaire Warren Buffett and U.K.-based hedge fund TCI Fund Management LLP not revealed rail holdings in April.
Carload Decline
“Fundamentals likely do not matter as much,” as purchases by Buffett and others buoy shares, analyst Edward Wolfe of Bear Stearns Cos. in New York wrote last month in a note to investors. The Standard & Poor’s 500 Railroads Index has gained 23 percent this year, extending gains from 2006 when profits grew.
The carriers’ first-quarter decline in auto carloads — down 14 percent at Norfolk-based Norfolk Southern — extends a trend of steeper declines over the last few quarters amid a more gradual long-term slide.
Shipments of parts and finished autos generated 10.2 percent of U.S. railroads’ revenue in 1990, according to the Association of American Railroads, the industry’s Washington- based trade group. By 2005, that share was down to 8.1 percent.
U.S. automakers’ production plans this year suggest that the drop will continue, as Ford, General Motors Corp. and DaimlerChrysler AG’s Chrysler pare output after a collective loss of more than $15 billion in 2006.
Production Dropping
U.S. auto production averaged 10.2 million vehicles at an annualized rate in the first quarter, compared with 11.2 million a year earlier, according to Chicago Federal Reserve Bank economist Thomas Klier.
Any production cut “gets shot through the entire supply chain,” says David Andrea, vice president of the Original Equipment Supplier Association in Troy, Michigan, a trade group for U.S. auto-parts makers. “Engines and transmissions and body parts and suspension parts would be down in a similar manner.”
The drop is felt most acutely at Norfolk Southern, the fourth-largest U.S. railroad, and No. 3 CSX Corp. because their tracks traverse the eastern half of the U.S., including Michigan and Ohio, the states with the most auto-related jobs.
The two biggest railroads, Union Pacific and Burlington Northern, mostly operate west of the Mississippi River, serving fewer auto factories while hauling more imported Asia-made vehicles from West Coast ports.
Auto shipments generated 10.1 percent of first-quarter sales at Norfolk Southern, making it the most auto-dependent carrier among the four big U.S. railroads. Autos account for 8.4 percent of revenue at Jacksonville, Florida-based CSX.
Impact of Parts
Parts shipments alone accounted for a third of Norfolk Southern’s drop in total first-quarter auto freight volume. The railroad, which serves 29 auto-assembly plants, says it expects to lose 12,000 carloads of parts in 2007 as automakers shrink and relocate production.
When the Dearborn factory takes over pickup production from Norfolk, the flow of parts trains will dwindle. “The parts are close by and will not move by rail,” says David Julian, chief of automotive freight at Norfolk Southern.
Detroit’s automakers once built cars “near where people actually lived and wanted to buy them,” says Klier, the Chicago Fed economist. “Then your parts kept being made in the Midwest and you shipped them. It’s now back to what it was very early on in the early days of the industry where each model gets made in only one place.”
Expanding F-150 production at the 3-year-old Dearborn factory while shutting the Norfolk plant will shorten some supply lines for Ford.
Proximity to Engines
The trucks’ engines, for example, are primarily made at the Windsor Engine Plant in Ontario, across the Detroit River from Detroit and about 15 miles (24 kilometers) from Dearborn. Ford also makes F-150 engines at a plant in the Detroit suburb of Romeo, about 43 miles from Dearborn. The straight-line distance from Windsor to Norfolk is 515 miles.
For other parts, the route will be just as long. Toledo, Ohio-based Dana Corp. now ships frames by rail to Norfolk from its factory in Elizabethtown, Kentucky, a distance of 533 miles. That’s the same distance from Elizabethtown to Dearborn.
Ford declined to discuss the reasons for moving F-150 production out of Norfolk. The automaker also builds the pickups in Kansas City, Missouri. “There are many business decisions that go into the decision-making process, and one of them can be logistics,” spokeswoman Anne Marie Gattari says.
Lost Business
For Norfolk Southern, the lost business has been among its most lucrative. Auto-shipment revenue averages $2,400 for each carload, compared with $1,201 for all types of shipments, according to Banc of America Securities LLC analyst Marisa Moss. Total freight shipments at the railroad are down 4.7 percent through May 19.
Geography has helped Union Pacific and Burlington Northern keep more of their auto business.
“That’s because we’re more impacted by the ‘new domestics,”’ Burlington Northern Chief Executive Officer Matthew Rose said in an interview, using the industry term for foreign automakers with assembly operations in states such as California and Texas.
Among the major railroads, Fort Worth, Texas-based Burlington Northern gets the smallest share of revenue, 3.3 percent, from autos. At Union Pacific, auto shipments were 9.7 percent of first-quarter sales.
Port Access
The two western carriers benefit from access to California ports, where trains pick up imported Japanese and Korean vehicles and haul them to regional distribution centers.
Along with the eastern rails, Union Pacific and Burlington Northern also have added business as Toyota and other Asian automakers build factories in the U.S. Output at those plants surged to 3.46 million vehicles in 2006, compared with 1.5 million in 1990, according to data from the trade publication Automotive News and the Center for Automotive Research in Ann Arbor, Michigan.
What’s missing — for railroads, at least — is a stream of parts comparable to those flowing into Ford, GM or Chrysler factories. Toyota’s new truck plant in San Antonio illustrates why.
The 6-month-old factory eventually will have 21 parts suppliers on the same property as the assembly plant, with a parts workforce of 2,100. That’s more than the 2,000 Toyota employees who build full-size Tundra pickups at the plant, which is served by Omaha, Nebraska-based Union Pacific and Burlington Northern.
Even where U.S. automakers can’t narrow the gap between supplier and factory, they’re trying to copy their Asian rivals with quicker, more flexible parts deliveries — by truck.
‘Rails Can’t Do That’
“So much today is variety, color, features, that sort of thing,” says Jim Gillette, a Grand Rapids, Michigan-based automotive analyst at CSM Worldwide Inc. “It’s very difficult to ship a lot by rail because the timing of the in-sequence delivery is so important, and the rails can’t do that.”
CEO Michael Ward of CSX said in an interview last month that he doesn’t expect automotive freight to improve this quarter. It’s the only product segment for which shipments will fall, he said.
With other customers, railroads might try to win business by lowering rates, or simply wait out cyclical boom-and-bust periods in commodities such as coal and farm products. Not so with the U.S. automakers, Ward said, because their future is so hazy that there’s nothing the carriers can do.
“They still are in a period of defining what size they want to be on an ongoing basis,” he said. “It’s a tough issue for the whole automotive industry.”