Chapter 2: California Freight Competitiveness€¦ · • Land cost and zoning • Cost of doing business (other than transporta on) ... (nearly 40 million in 2019) and direct access

Chapter 2: California Freight Competitiveness

California Freight Mobility Plan 2020

Chapter 2. California Freight Competitiveness 2.-1

2. California Freight Competitiveness Increasing statewide compe��veness is a key priority for the State. California can achieve economic growth, environmental sustainability, and community development with a balanced and effec�ve approach.

California’s compe��veness is vital to both public agencies and private stakeholders. Increasing compe��veness across the state would contribute to local, regional, and state economic development by making California a preferred choice for developers, businesses, and transporta�on providers. This chapter provides a summary of findings based on a research white paper found in Appendix C.

The state, its communi�es, its transporta�on providers, and its businesses compete in several ways:

• The State of California, and California municipali�es, compete for business loca�ons, including produc�on facili�es, distribu�on centers, and offices.

• California producers, manufacturers, distributors, and wholesalers compete for business and market share with their domes�c and foreign counterparts elsewhere and may also compete for business within their own firms.

• California seaports, airports, and freight carriers compete with their counterparts in other states and na�ons for freight transporta�on business.

As California's economy con�nues to grow, and the State con�nues to add jobs, much of this growth is atributable to the growing need and expecta�ons of Californians; the State's well-publicized success in high-tech, biotechnology, and green technology sectors. However, growth has not been uniform across the freight transporta�on and logis�cs sectors. Other states and regions have had success in atrac�ng businesses, especially businesses that do not need to locate in California. California is much less compe��ve when businesses compare California’s manufacturing and logis�cs facility development and opera�ng costs to other states.

Losses of commerce, businesses, and jobs to other states or other na�ons are keenly felt throughout the state and across sectors. Losses of economic ac�vity due to interstate and interna�onal compe��on vary in scope and effect. Losses are highly visible when businesses move away from California or when businesses that might have located in California choose a compe�ng loca�on instead. Other economic losses are less obvious, such as gradual shi�s in business ac�vity away from California. Yet, these less obvious losses can be equally important to California’s aggregate economy and affect some communi�es dispropor�onately.

The role of freight transporta�on in economic compe��veness is usually assumed to be a func�on of freight system capacity, performance, and efficiency.

In most discussions of compe��veness, quan�ta�ve or qualita�ve shor�alls in freight capacity, cost, service frequency, transit �me, reliability, safety, etcetera are presumed to diminish economic compe��veness. The CFMP aims to support long-term compe��veness.



Compe��on for Business Loca�ons

The focus of most regional and state compe��veness discussions is compe��on for loca�ons of new produc�on, distribu�on, or transporta�on facili�es. These facili�es generate jobs, tax revenue, and posi�ve economic impacts within communi�es. Californians are concerned about the poten�al loss of businesses and facili�es that close due to out-of-state compe��on or reloca�on to other states. Although there are many possible varia�ons and combina�ons, most loca�on decisions fall under the following categories:

• Choosing a loca�on for a new produc�on or distribu�on facility • Choosing whether to expand, contract, or close an exis�ng loca�on • Choosing how much produc�on or distribu�on ac�vity to allocate among loca�ons

Loca�on Decision Factors Key factors in loca�on decisions commonly include the following:

• Access to target markets • Workforce availability • Proximity to suppliers, intellectual capital, and other inputs • Availability of suitable sites, buildings, or other facili�es, with appropriate zoning • Fit within exis�ng or planned produc�on, supply chain, and distribu�on networks • Development �meline (e.g. permi�ng, construc�on, environmental documents) • Land cost and zoning • Cost of doing business (other than transporta�on) • Local regula�ons and other restric�ons • Freight transporta�on capacity and reliability • Freight transporta�on service and cost

California’s consumer popula�on (nearly 40 million in 2019) and direct access to interna�onal markets via ports on the Pacific Rim give the state a compe��ve edge on the first criterion, access to markets. Few businesses have a major presence in the California market without a physical loca�on in California. California also has an advantage in atrac�ng business in its strongest sectors, notably in the technology industries. Access to a skilled labor pool, technology suppliers, investment capital, and research ins�tu�ons leads new tech businesses to locate in California and exis�ng tech businesses to expand here. California's compe��veness declines, however, when loca�on decisions are more flexible and cost factors rise in importance.

Freight transporta�on infrastructure capacity such as those on highways, ports, rail lines, or air cargo can be overlooked when businesses are making loca�on decisions. Businesses ordinarily assume that their incremental shipments can be handled through exis�ng infrastructure. Facili�es that require or produce large volumes of marine bulk cargo (e.g. export grain elevators) or specialized cargo (e.g. import autos) need specialized terminals with sufficient capacity. Reliability can usually be achieved, but some�mes at a higher cost. If fleet operators must add drivers, add equipment, and/or allow extra �me to overcome local problems, then costs can increase significantly. Notably, some parts of rural California have limited Surface



Transporta�on Assistance Act (STAA)1 truck route access, which can reduce the ability of those areas to compete for new facili�es.

Freight transporta�on conges�on and its impacts on produc�vity, cost, and reliability are serious concerns for industry stakeholders. While transporta�on cost differences may be rela�vely easy to quan�fy, reliability differences are not. Reduced reliability requires higher inventory levels, but in most cases the greater concern is the ability to meet corporate and customer requirements consistently. Recurrent conges�on reduces produc�vity and can affect reliability. Non-recurrent delays and conges�on are more serious reliability challenges. As California’s transporta�on facili�es of all kinds – highways, arterials, ports, airports, railroads – operate closer to their capacity, the frequency and severity of non-recurrent conges�on tends to rise. In some parts of California, geography and land uses restrict transporta�on corridors. O�en, there are no prac�cal alterna�ves to congested routes.

Loca�on decisions for manufacturing plants may have flexibility, either within California or in other states. Manufacturing plants that need access to high-tech suppliers or California agricultural products have strong reasons to locate in California. Manufacturing plants that use easy-to- transport inputs (e.g. electrical components) or widely available inputs (e.g. paper or basic metals) may take the full list of loca�on factors above into account and choose loca�ons elsewhere. The ability of the facility to locate in a wide variety of loca�ons implies that either goods movement differences are not likely to be cri�cal, or that there are few significant goods movement differences between loca�ons.

Where more generic inputs such as semi- skilled labor, space, or electrical power are a major part of produc�on expenses, the costs of those inputs will have a greater impact on loca�on decisions. In this case, California’s higher labor, land, or power costs – or percep�ons of higher costs – place the State at a compe��ve disadvantage.

Local Market Facili�es Many goods movement and freight- dependent industry facili�es must be located close to the market that they serve or the sources on which they rely. California does not need to compete for these local market facili�es, although there may be compe��on between ci�es and coun�es within California. In general, businesses shipping common commodi�es with high transporta�on costs rela�ve to their value cannot outcompete nearby compe��on if they have to ship commodi�es far distances. Concrete batch plants, for example, are distributed throughout the state to serve local markets, and cannot serve California ci�es from other states. Food and beverage processors, such as wineries, need to be close to agricultural producers, and many are anchored in California.

Compe��on for California Products and Producers

California producers and their products compete with producers and products from other states and na�ons. The extent and nature of that compe��on depends on commodity type.



• Some California products are differen�ated by source or brand, such as Napa Valley wines, California raisins, or Tesla autos.

• Since customers may not see wines, raisins, or autos from elsewhere as perfect subs�tutes, differen�ated products can o�en command a somewhat higher price and have a greater ability to absorb transporta�on and distribu�on cost differences without losing market share.

• Market demand and produc�on volume help some California products dominate their industry and shield them from compe��on (such as almonds).

• California products that are not differen�ated by source or brand must compete on delivered price and reliability of supply and are more vulnerable to lower-cost produc�on elsewhere.

• See Appendix C for an example case study.

Compe��on for Distribu�on Centers

Distribu�on centers (DCs) can be na�onal (NDCs, serving the en�re na�on), regional (RDCs, serving a region within the na�on), or local in scope. There may also be separate import distribu�on centers (IDCs) handling imported goods separately from domes�c goods. A state or a sub-region may compete as a poten�al loca�on for a na�onal, regional, or import DC.

RDCs in the state may also “compete” for coverage with RDCs in other states. Due to the large size of California, it is unlikely that a major retail business would serve the state without at least one RDC in the state. However, the ac�vity level of California’s DCs may be subject to “compe��on” within the supply chain of various types:

• Compe��on for exis�ng territory – how much of California, or the western states, will be served from California DCs, as opposed to DCs elsewhere?

• Compe��on for expansion – will the firm choose to expand stores or sales in California, thus increasing volume at the California DC, or expand elsewhere?

• Compe��on for new territory – as a producer, importer, or retail chain expands into new markets, will California DCs serve those markets?

Competition for California Seaport Business

California has 12 deep water port complexes, each specializing in a different mix of major cargo types, commodi�es, and service territories. California also has numerous private terminals that handle liquid and dry bulk commodi�es. California container ports compete with other U.S. and North American ports in two ways:

• California ports compete for discre�onary container traffic that can move by rail or truck to other regions through any of its ports. For example, Los Angeles and Long Beach compete with various US and Canadian ports for Asian imports to Midwestern consumer markets.2

• California port ci�es compete with other regions for the loca�on of import DCs and their inbound trade flows. For example, Riverside County might compete with



Georgia for a new import DC that would bring in goods through either Los Angeles/Long Beach or Savannah.

If businesses chose to send discre�onary cargo to other ports, economic ac�vity and employment at California ports and in the transporta�on sector would be at risk. If import DCs locate or expand outside of California, economic ac�vity and employment at California DCs are also at risk, due to compe��on with other regions.

The California ports combined had a 46.7 to 49.2 percent share of the loaded U.S. import container trade in 2000 through 2010. From 2010 to 2017, the Atlan�c, Gulf, and Pacific Northwest port share rose from 52.9 to 57.7 percent. California’s market share declined within those seven years despite increased in loaded containers (TEUs or twenty-foot equivalent units). This apparent loss of market share, shown graphically in Figure 2.1, has prompted concerns over the compe��veness of California’s container ports3.

Figure 2.1. Shi� in Coastal Import Shares

Source: U.S. Mari�me Administra�on 2000-2017 U.S. Waterborne Container Trade by U.S. Customs Ports (series)

However, the market share shi� did not result from net cargo loss at California or Pacific Coast ports, but from faster growth at Atlan�c and Gulf Coast ports. Imports on all three coasts grew rapidly and peaked in 2006-2007, then fell off during the 2008-2009 recession. A�er the recession, growth resumed on all coasts (although interrupted on the West Coast by the labor-

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CA vs Atlantic/Gulf/PacificNW USA Ports Loaded Import TEUs by Year

CALIFORNIA ATLANTIC/PACIFIC NW/GULF



management dispute of late 2014 and early 2015). There was faster growth on the Atlan�c and Gulf coasts for several reasons iden�fied in the literature and trade press:

• Strong growth in the Transatlan�c/ European and Caribbean/South American trades • Increased use of Suez Canal rou�ngs from Southeast Asia, driven in part by a shi� of

manufacturing and sourcing from China to countries in Southeast Asia and the Indian subcon�nent

• Increased adop�on of "three corner”4 and "four corner”5 logis�cs strategies by large importers

• A reduc�on in Southern California import transloading • Rate increases on rail intermodal service, leading ocean carriers to replace some rail

movements from Southern California with truck or rail moves from other ports • Rising costs of loca�ng and opera�ng distribu�on and manufacturing facili�es in

California, versus aggressive economic development efforts from other states • New Panama Canal locks permi�ng larger, more efficient vessels on route to the Gulf

and Atlan�c coasts • Increased cost at Southern California ports due to "clean truck" requirements,

PierPass/Off-Peak fees, and drayage costs increase from port and highway conges�on • Concerns over West Coast labor rela�ons stability a�er the lengthy 2014-2015 dispute

and accompanying shipping disrup�on

Of these factors, only the last two are specific to California ports; the others are shi�s in trade paterns and in the economic context in which California ports must compete. There is no publicly available informa�on on rela�ve costs at different container ports. The fees that marine terminal operators charge their ocean carrier customers are nego�ated and embodied in confiden�al contracts. The rents that port authori�es charge marine terminals operators are also nego�ated and confiden�al.

Table 2.1 provides a key perspec�ve on the rela�ve growth of California's container port volumes. In the rapid growth era of 1990-2007, Southern California ports outperformed the na�on. Much of the cargo and share growth in that period was atributable to the rapid expansion of rail intermodal container movements through San Pedro Bay in response to the introduc�on of double-stack rail cars. This period also saw an increase in the prac�ce of import transloading: bringing in interna�onal containers of imported merchandise and transferring the goods to domes�c containers or trailers in Southern California. Finally, this period also saw drama�c growth in U.S. imports from China, with Southern California as the leading gateway. The Port of Oakland did not benefit as much from the expansion of intermodal traffic or transloading, and Northern California TEU totals did not grow as fast.

U.S. container ports were hit hard by the recession, with Southern California losing 24 percent of its 2007 peak volume by 2009. Following the recession, the Southern California ports rebounded slightly faster than the na�on. Oakland's volume dropped by 14 percent during the recession but did not grow as quickly a�er par�al recovery in 2010. The labor-management issues in late 2014 and early 2015 hampered recovery for all U.S. West Coast ports.



Table 2.1. Container Port Cargo Growth Rates 1990-2017

Compound Average Growth Rate (CAGR) 1990-2007 2007-2009 2009-2017 United States 6.4% -6.1% 4.4% California 7.9% -8.4% 4.3% Northern California 8.9% -8.9% 4.6% Southern California 3.8% -5.0% 2.1% Pacific Northwest 3.6% -8.1% 1.4% Bri�sh Columbia 11.7% -1.3% 7.1% Source: American Associa�on of Port Authori�es

Compe��on for California Air Cargo Business

As with the State's seaports, the compe��ve posi�on of California’s cargo airports is largely determined by their geographic posi�on rela�ve to major markets. Because both domes�c and interna�onal air cargo tend to be �me-sensi�ve, shippers commonly choose airports based on the combina�on of ground and air transit �me. Direct compe��on for air cargo business is largely regional:

• Oakland (OAK) and San Francisco (SFO) compete for Bay Area air cargo, with OAK prevalent in domes�c and SFO in interna�onal. FedEx has major capacity at OAK. San Jose (SJC) has a smaller air cargo business.

• Sacramento (SMF) and Mather (MHR) compete for air cargo business in the Sacramento area (DHL and UPS serve MHR). Amazon has a fulfillment center near SMF.

• LAX and Ontario (ONT) compete for air cargo in Southern California with LAX having the dominant share. UPS has a major facility at ONT. San Diego (SAN) competes for the southern por�on of the market.

• The numerous other California airports (Stockton, Merced, Fresno, etc.) are served by feeder connec�ons to the major airports. Stockton (SCK) has recently added service by Amazon flights.

California airports compete with other states for hub status and for transfer/interchange freight. Hub airports host a larger number of feeder flights to and from regional airports, as well as a full schedule of flights serving other major airports and markets. The compe��on for West Coast hub status is primarily within California, the nearest alterna�ves are Portland and Las Vegas. The size of the Northern and Southern California markets, however, will keep major air cargo hub loca�ons within the state. Major hubs may also compete for air cargo transfer/transshipment business between foreign and domes�c carriers.

Air cargo is increasingly dominated by the integrated carriers such as FedEx, UPS, and DHL. To use these carriers, the customer tenders the shipment locally, and the carrier chooses the rou�ng and the airports. California airports therefore compete mostly for the business of the integrated carriers rather than for the underlying customer choices.



With the excep�on of the air cargo transloading segment, which stays on the airport footprint, California’s airports are not in close compe��on with those in other states. Goods movement mobility within the state is unlikely to affect the compe��ve posi�on of California airports either na�onally or interna�onally. California’s Cost Difference Trucking Costs U.S. marginal trucking costs per mile are computed by the American Transporta�on Research ins�tute (ATRI)6. As of 2017, ATRI es�mates that the average U.S. marginal trucking cost per mile is $1.691. The average marginal cost share data in Table 2.2 indicates that fuel accounts for 22 percent of motor carrier costs, while driver wages and benefits are 43 percent. The average semi-truck’s fuel economy is about 6.8 mpg. California has rela�vely high diesel fuel prices, and the recent California $0.12 per gallon diesel fuel tax increase adds approximately $0.02 per mile to trucking costs. Table 2.2. Fuel Cost Comparison Chart

Motor Carrier Costs 2009 2010 2011 2012 2013 2014 2015 2016 2017

Vehicle-based (Percentages) Fuel costs 28 31 35 39 38 34 26 21 22 Truck/Trailer Lease or Purchase

18 12 11 11 10 13 15 16 16

Repair & Maintenance 8 8 9 8 9 9 10 10 10 Truck Insurance Premiums 4 4 4 4 4 4 5 5 4 Tires 2 2 2 3 2 3 3 2 2 Tolls 2 1 1 1 1 1 1 2 2 Driver-based (Percentages) Driver Wages 28 29 27 26 26 27 32 33 33 Driver Benefits 9 10 9 7 8 8 8 10 10 TOTAL 100 100 100 100 100 100 100 100 100

Source: ATRI, 2018

Within California, motor carriers are deeply concerned about highway and facility conges�on that reduces driver produc�vity, vehicle produc�vity, and effec�ve capacity. This issue has received the most aten�on in connec�on with port container drayage, where longer �mes spent in terminals and on congested highways to-and-from terminals reduce the number and length of the trips a driver can make within hours of service limits. These issues are not unique to California or to port drayage, as busy Pacific Northwest and East Coast ports have similar problems, and urban conges�on effects all trucks. When in compe��on with less congested regions and ports such as Savannah or Charleston, however, these higher costs place California at a disadvantage. The higher cost of port drayage in California is likely to be a significant factor when choosing the loca�on for import distribu�on facili�es or export- oriented businesses, par�ally offse�ng California’s advantage with close access to Asian markets.



Reducing conges�on and increasing reliability is a long-term effort. The State is inves�ng in freight transporta�on improvements through implementa�on of the Road Repair and Accountability Act of 2017, also known as Senate Bill (SB) 1. SB1 provides stable, long-term funding for both state and local transporta�on infrastructure. SB 1 projects an es�mated average of $5.4 billion per year over the next ten years for a strategic mix of state and local transporta�on projects, depending on tax and fee revenue. The current budget provides $4.8 billion in new SB 1 funding, of which $307 million is available to improve trade corridors, and $250 million is available to increase throughput on congested commute corridors. Railroad Costs California is served by two Class 1 railroads: BNSF and Union Pacific. The two railroads have extensive networks across western states, with connec�on to other railroads at Midwestern gateways, as well as to Canada and Mexico. California’s shortline railroads predominately operate within the state. Their rates and services would not ordinarily effect compe��veness with other states.

Railroad rates charged to California customers or rates for routes through California ports with rates elsewhere cannot be compared since economic deregula�on in 1980, most railroad traffic has travelled under confiden�al, nego�ated contract rates rather than under published tariffs. Those contracts may include annual volume commitments, rate �ers, fuel surcharges, or rebates that are not reflected in any public records.

Railroad opera�ng costs may be slightly higher in California than in other states. There has been a series of California Air Resource Board (CARB) ac�ons designed to reduce emissions from both line-haul and yard opera�ons, including: increased use of low-sulphur fuel; low- emission, high-efficiency road locomo�ves; and hybrid and other low-emission switching locomo�ves. Some of these costs have been offset by grants, such as those under the Carl Moyer program. In many respects, the CARB ac�ons simply accelerate U.S. Environmental Protec�on Agency (US EPA) requirements. Recently, the railroads have been acquiring low-emission locomo�ves for use across their systems. Over �me, any higher costs in California will thus tend to equalize.

Ocean Shipping Costs The ocean shipping rates paid by customers include the cost of vessel opera�ons, the cost of terminal opera�ons, fees assessed by ports, canal tolls, and ocean carrier overhead. The rate differences between California ports and their compe�tors are likely to be small and based on minimal differences in underlying cost. Container shipping at all U.S. and Canadian ports is dominated by the same carriers and carrier alliances. Many of the terminal opera�ng costs are similar between California ports and compe�ng ports elsewhere. All West Coast port terminals in North America are covered by the same basic labor contract, and many are operated by the same firms. The ports’ own charges tend to be highly compe��ve. Vessels calling California ports do incur slightly higher costs for low-sulphur fuel and cold-ironing. Almost all relevant rates and fees are contained in confiden�al, nego�ated contracts. Assembling a quan�ta�ve comparison from available data is currently not possible.



Air Cargo Costs The air cargo industry is dominated by the integrated carriers, FedEx, DHL, and UPS, and trailed by smaller air freight forwarders and airlines offering belly cargo space on passenger flights. Air cargo opera�ons in California have similar costs as in other states, and California customers likely face similar rates for air cargo service.

Labor Costs As Figure 2.2 shows, California median earnings for transporta�on and material moving occupa�ons and for produc�on occupa�ons are comparable or even lower than in some compe�ng regions. California ranks first in a na�onal study7 of total land valua�on by an economist at the U.S. Bureau of Economic Analysis. That study es�mated the combined value of all land in the country, finding that California accounts for 17 percent of the total value of the land in the 48 con�guous states. High land values can be atrac�ve for investors but can discourage development of facili�es which could locate less expensively elsewhere. Commercial and industrial land prices are driven up by the value of land in residen�al development. In California, residen�al land values as a percentage of total property values have increased substan�ally over the last 40 years.

Energy and U�lity Costs The price of gas, water, diesel, natural gas, and electricity affect California’s compe��veness for business loca�ons and freight movement. Energy and u�lity costs, including electricity and water, can be prominent factors in facility opera�ng costs and impacts the decision-making processes for facility loca�ons. These factors become more important for facili�es that use electric power for ligh�ng, climate control, and produc�on equipment, and water for processing. These costs also affect the cost of living for employees. Figure 2.2. Median Earnings Comparison, 2016

Source: Massachusets Ins�tute of Technology Living Wage Calculator



California’s average commercial, industrial, and residen�al electric power rates are high compared with most other states. According to the U.S. Energy Informa�on Agency (EIA), in 2018, California had the 5th highest average commercial electricity rates, the 6th highest average industrial electricity rates, and the 7th highest average residen�al electricity rates. California's average commercial electricity rates over the course of a year study were 59 percent higher than the US average for all other states. California's average industrial electricity rates are 100 percent higher than the average for all other states. California’s average residen�al electricity rates were 49 percent higher than the average of all other states for this period8.

The higher industrial electric power rates combined with "near-zero" emissions mandates to implement electrically powered equipment at port terminals can lead to higher costs for terminal operators. Diesel fuel prices are an especially important factor in freight transporta�on, as the freight industry s�ll heavily depends on diesel-powered trucks and rail locomo�ves. Compared with other states, California’s average diesel fuel prices are usually second-highest, behind only Hawaii. In September 2018, for example, the average diesel fuel price in California was $0.86 higher than the average for the other states, a 27 percent difference9.

Average natural gas prices for transporta�on, building hea�ng, and industrial process use are also higher in California than in other states. The U.S. EIA reports that for the 12 months ending July 2018, California’s average residen�al natural gas rates were 16 percent higher than the average for other states. In the same period, California’s average natural gas rates for commercial customers were 7 percent higher than the average for the rest of the U.S., while industrial natural gas customers in California paid an average natural gas rate 77 percent higher than the average for the rest of the country.

Table 2.3. Distribu�on Center Opera�ng Cost Ranking, 2015

Rank Distribu�on Warehouse Loca�on Total Annual Opera�on Costs 1 Stoughton, MA $15,018,230 2 Meadowlands, NJ $14,631,975 3 Idaho Falls, ID $14,576,733 4 Bordentown, NJ $14,273,497 5 Newburgh, NY $13,660,758 6 Tracy, CA $13,302,372 7 Paterson, CA $13,104,947 8 Hesperia, CA $12,937,809 9 Apple Valley, CA $12,923,646 10 Victorville, CA $12,913,886 11 Mira Loma, CA $12,912,925 12 Bethlehem, PA $12,894,630 13 Casa Grande, AZ $12,694,040



14 Miramar, FL $12,573,879 15 Kent, WA $12,490,728 16 Mesquite, NV $12,490,074 17 York, PA $12,120,409 18 Kingman, AZ $11,936,644 19 Springfield, OR $11,935,905 20 Fernley, NV $11,899,135 21 Columbia, SC $11,728,259 22 Humble, TX $11,661,803 23 Cordele, GA $11,450,594 24 Ritzville, WA $11,351,481 25 Chesterfield, VA $11,238,491

Source: Compara�ve Distribu�on Warehousing Costs in Port and Intermodal-Proximate Ci�es, 2015 Boyd Company, Inc.

Compara�ve Distribu�on Center Costs The combined impact of these various cost factors is evident in overall opera�ng costs for distribu�on centers or other industrial facili�es. Table 2.3 compares the cost factors for poten�al distribu�on center loca�ons. Warehouse opera�ng costs were scaled to a hypothe�cal 500,000 sq. �. facility employing 150 nonexempt workers and shipping over-the-road to the nearest intermodal and port city10. As Table 2.3 indicates, California loca�ons had the highest annual combined costs except for a few loca�ons in the Northeast and Idaho. The es�mate for Tracy, for example, was 16 percent higher than in Cordele, GA, and the company would save $1.85 million annually by choosing Cordele over Tracy. More detailed analysis and informa�on is provided in the Appendix C.

Percep�ons of California’s Business Climate

Many of the freight industry stakeholders contacted for the CFMP 2020 perceive an “an�- business” a�tude in California, and see that a�tude manifest in environmental regula�ons, high taxes and fees, and opposi�on to facility development. Opinions and concerns over California’s friendliness to business are evident in state rankings on the ease of doing business, or as places to start a business. Examples include the following:

• WalletHub, a personal finance company used a variety of sta�s�cs to rank states as places to start a business. Although California ranked 8th overall, it lagged behind states such as Texas and Georgia, which are making strong efforts to atract firms. California ranked 46th in business costs11.

• USA Today placed California 15th among the best states in which to do business12. • A 2018 CNBC poll placed California 25th among “America’s Top States for Business.”13

California was ranked: 12th on workforce, 24th on infrastructure, 48th on cost of doing business, 11th on the economy, 21st on quality of life, and 1st on technology.

• A 2018 ranking by Area Development did not list California among the Top 20 States for Doing Business14.



• A 2009 study by the Public Policy Ins�tute of California15 found that California typically ranks highly on produc�vity, but poorly in terms of taxes and costs.

California may be viewed as a magnet for high-tech research and product development, with superla�ve access to venture capital and exper�se. These advantages, however, do not translate well for a wholesaler seeking to build a distribu�on center.

Compe��ve Economic Development Industry outreach efforts have revealed opportuni�es over California’s economic development efforts and the linkage of those efforts to goods movement, logis�cs, and freight transporta�on infrastructure. In Fiscal Year 2016, California ranked 48th among the 50 states for state spending on economic development and related func�ons, as compiled by the Council for Community and Economic Research. Higher spending by the Southeast states is noteworthy and paralleled with strong economic development in that region.

Examples of aggressive economic development ini�a�ves are described in Appendix C and include such examples as Georgia’s economic development efforts with the Port of Savannah and Canada’s Asia Pacific Gateway ini�a�ve. These ini�a�ves atract cargo flows, manufacturing plants, distribu�on centers, and jobs away from California.

Implica�ons for Compe��veness and Poten�al Improvements Compe��veness is a mater of degree rather than a dichotomy. California’s compe��veness varies depending on the type of decision being made, the industry sector and products involved, and the loca�on within California.

• California is highly compe��ve in sectors where its resources, products, markets, and capabili�es are difficult to match elsewhere. Examples include unique agricultural products and high-technology research and development. Freight mobility is a minor factor in those sectors.

• California is much less compe��ve for businesses or func�ons that can be readily located elsewhere and that are vulnerable to high transporta�on, labor, land, or u�lity costs. Distribu�on is one such sector, and distribu�on centers that do not need to be near California markets or ports are increasingly likely to locate elsewhere. Freight mobility can be a significant factor in such sectors.

California is currently atrac�ng and will con�nue to atract business ac�vity �ed to specific California industry clusters, such as the high-tech or green energy sectors. California is in a unique or advantageous compe��ve posi�on in those cases.

California is also experiencing and will con�nue to experience "organic" growth in businesses and establishments serving the popula�on. For the most part, businesses seeking to serve California customers will con�nue to have a physical presence in California.

Some of the perceived losses of economic ac�vity and market share are resultant of exogenous logis�cs developments and strategies. Wider Panama Canal locks have reduced the cost of shipping from Asia to the East Coast versus the West Coast, and port market shares have



shi�ed in response. As import volumes grow and import supply chains mature, importers have established mul�ple import routes and facili�es, again reducing California’s market share.

The measures and ini�a�ves that can improve California’s compe��veness through increased capacity, reliability, and efficiency are the same as those that can improve performance for California’s own needs. For example, California public agencies might improve the state’s compe��veness on trucking costs by:

• Increasing capacity on state highways and local roads to reduce conges�on • Deploying ITS technologies to reduce conges�on and lower trucking costs • Providing greater financial assistance to ease emissions limits, clean truck

requirements, and clean fuel taxes (alignment to State objec�ves) • Reducing truck driver �me spent at marine terminals and other freight facili�es • Improving truck driver training to increase the supply of drivers • Increasing the supply of truck parking in public loca�ons

California’s compe��veness is affected by several non-transporta�on factors cited in the industry focus groups conducted for the CFMP. These factors include the following:

• Workforce availability and cost of living • Land and development costs and uncertainty • Environmental regula�ons • Lack of linkage between goods movement and economic development efforts

Increased compe��veness in these areas will require policy ini�a�ves and ac�ons outside freight transporta�on sphere.

Freight Carrier Industry Workforce

Workforce America’s workforce is experiencing significant changes as “baby boomers” con�nue to re�re, and with many re�ring early. Seventy million people are es�mated to re�re in the US in the next decade, which will have massive impacts on industries and economy throughout the country. As companies address the issue of an aging workforce, some companies are implemen�ng reten�on and succession planning, as well as addi�onal incen�ve strategies, such as job-sharing, flex�me, telecommu�ng, and part-�me work. All levels of employment are undergoing constant change and face great challenges and opportuni�es as new technologies are developed and are applied throughout the freight industry. Freight modal, supply chain, and logis�cs industries will need to implement more transi�onal training to upskill displaced workers.

Trucking Truck driver employment falls into following categories: Delivery Driver, Driver, Line Haul Driver, Log Truck Driver, Over the Road Driver (OTR Driver), Produc�on Truck Driver, Road Driver, Semi Truck Driver, and Tractor Trailer Operator. In 2017, the California workforce consisted of 136,920 Heavy and Tractor-Trailer truck drivers. The majority of those drivers work in the Los



Angeles-Long Beach-Glendale Metropolitan Division and the Riverside-San Bernardino-Ontario Metropolitan Sta�s�cal Area (MSA), with 34,800 and 25,290 employed respec�vely. Between the years of 2016 and 2026, the US Department of Labor projects 18,200 annual job openings for Heavy and Tractor-Trailer truck drivers. With stricter enforcement of hour-of-service (HOS) regula�on, the industry will need more drivers and trucks to do the same amount of work due to the need for breaks and limited HOS flexibility.

Drivers are either paid a salary, paid hourly, or paid by the mile. Drivers specializing in heavy hauling or hauling low boys (low deck semi-trailers with a drop-in deck height), household moving services, catle, hazardous materials, or refrigerated units are o�en paid more. For trucking companies that are unionized, employees are typically represented by the Interna�onal Brotherhood of Teamsters Union. As of May 2017, California’s median yearly wage for a Heavy and Tractor-Trailer truck driver was $45,56016. Local minimum wage laws create an expensive and difficult circumstance, as drivers must be paid the local minimum wage whenever within the jurisdic�on. A driver may be subject to five or more rates during a single trip, which creates challenges in monitoring and complying.

According to a March 2019 Journal of Commerce (JOC) ar�cle17, the average driver turnover rate at large truckload carriers (those with more than $30 million in annual revenue) was 98 percent in the second quarter, 87 percent in the third quarter, and 78 percent in the fourth quarter. A carrier with 100 drivers and an 87 percent turnover rate could spend nearly $500,000 on recruitment and replacement annually. Carriers are focusing on truck driver development, not just recruitment, to gain greater control over the stability and quality of their workforce and capacity while reducing driver turnover rates.

At the same �me, trucking firms are raising driver pay--some�mes mul�ple �mes in a year. In the US, the average age of a commercial truck driver is 55. Currently, there are roughly 30,000 unfilled truck driving jobs, and these numbers will con�nue to climb. The current long-haul driver shortage is due to an 18-year low US employment rate of 3.7 percent (as of October 2018), as well as higher-paying employment alterna�ves to truck driving form a barrier to recruitment. According to the US Bureau of Labor and Sta�s�cs (BLS), the economy added on average 213,000 non-farm jobs a month in 2018; however, employment in transporta�on and warehousing only increased by 184,000 in 2018. Driver shortage and turnover is a func�on of California’s high cost of living, insurance costs, regula�ons, lack of experienced drivers, and interested but unqualified persons. Many trucking companies are ac�vely recrui�ng military veterans. At the same �me, many truck driving schools are also ac�vely recrui�ng veterans to get training for their commercial driver’s license using the Servicemen’s Readjustment Act of 1944 (also known informally as the GI Bill) or other veteran’s educa�onal benefits. Formal educa�on is not a requirement for seeking and obtaining a truck driver posi�on. However, important skills and knowledge are necessary.

Rail The railroad industry response to the aging workforce is to ac�vely recruit military veterans for both Class I and short line railroads. Veterans transi�on favorably to rail posi�ons because they



respond well to a chain of command, have experience working in teams, can either bring a unique skill set or modify their skill sets to meet rail industry needs, and importantly, have been well-trained for safety. According to the American Associa�on of Railroads (AAR), nearly 20 percent of current US railroad employees are veterans18. Sacramento City College and San Diego City College (SDCC) offer Railroad Opera�ons associate degrees and cer�ficate programs. SDCC offers an appren�ceship program in Railroad and Light Rail Opera�ons. Appren�ceship programs and web-based training are offered by various organiza�ons, such as the Interna�onal Union of Opera�ng Engineers and the Teamsters Appren�ceship Fund for Southern California.

The Class I and short line railroads in California provide railroad careers that tend to be rela�vely stable. Railroad employees are also among the best-paid workers in American industry. However, some short line railroads find it difficult to recruit employees due to the requirement for mul�ple skills while paying lower wages than Class I railroads. America’s major freight railroads supported 1.5 million jobs, nearly $274 billion in output, and $88 billion in wages across the US economy19.

Currently, California is home to 8,153 freight railroad employees, with an average wage and benefits package of $123,400 per employee20. According to AAR, in 2017, there were approximately 165,000 freight railroad employees in the US, and the average US Class I freight railroad employee earned $125,400 (including fringe benefits). Approximately 82 percent of Class I rail employees and more than half of non-Class I rail employees are unionized under one of more than a dozen labor unions. Labor rela�ons in the rail industry are subject to the Railway Labor Act (RLA). Under the RLA, labor contracts do not expire. Rather, they remain in effect un�l modified by the par�es involved through a complex nego�a�on process which can take years to conclude.

Mari�me Mari�me careers include shipping and transporta�on, naviga�on, engineers, offshore opera�ons, technology, shipbuilding and repair, port and marine terminal opera�ons, clerical, and others. In the ocean shipping industry, two primary organiza�ons represent labor and cargo carriers on the West Coast. Labor is represented by the Interna�onal Longshore and Warehouse Union (ILWU). Domes�c carriers, interna�onal carriers, and stevedores that operate in California, Oregon, and Washington are represented by the Pacific Mari�me Associa�on (PMA). Members of the PMA hire workers represented by the ILWU. PMA members employ longshore, clerk, and foreman workers along with thousands of “casual” workers, who typically work part-�me.

The terms of employment are governed by labor contracts that are periodically nego�ated between the two organiza�ons, and the results are applied to all US West Coast ports. Similar processes and organiza�ons are found in the country’s other mari�me regions. When agreements cannot be reached, as happened in 2002 on the West Coast, strikes or lockouts can occur, which may severely disrupt the en�re freight movement system and some�mes have las�ng impacts as shippers permanently redirect their products to ports in other regions or



countries. Tens of thousands of trucking, railroad, warehouse, and other support workers may be temporarily out of work because strikes and lockouts stop the flow of goods that other sectors handle. The 2002 dispute was es�mated to cost the US economy $1 billion per day.

As of December 2017, PMA members employed 13,985 registered union workers at 29 West Coast ports in California, Oregon, and Washington, and thousands more workers who typically worked part-�me. Since the signing of the 2002 agreement that brought the widespread use of technology to the West Coast, the registered workforce has increased by 36 percent.

A major issue that promises to become more prevalent and complex over �me is the implementa�on of cargo handling automa�on. Much of this technology is already in place in other countries, par�cularly in Asia and Europe, where, in some loca�ons, highly automated terminal opera�ons already handle cargo and requires few people to operate. Some ports in California already have, or are planning to implement, various degrees of automa�on. The automa�on trend is likely to accelerate.

The Mari�me Administra�on na�onally provides limited funding to six state mari�me academies. One such academy, the California Mari�me Academy (Academy), is part of the California State University System and is the only Mari�me Academy on the West Coast. The Academy prepares students for careers in interna�onal business and logis�cs, marine engineering technology, global studies and mari�me affairs, marine transporta�on, mechanical engineering, and facili�es engineering technology. The na�on’s mari�me academies educate young men and women for service in the American merchant marine, the US Armed Forces, and in the na�on’s intermodal transporta�on system. Located in Vallejo, the Academy’s enrollment is currently at approximately 1,017 students (as of Fall 2018).

Air Cargo In the aeronau�cs industry, the Federal Avia�on Administra�on (FAA) increased the re�rement age from the previous mandatory re�rement at 55 years old to 65 years old for scheduled pilots. The FAA also ins�tuted a new rule requiring scheduled pilots to get a minimum amount of uninterrupted rest – at least 10 hours between shi�s. This will impact the movement of belly cargo, but the rule does not apply to cargo pilots. Many cargo pilots are pushing to be included in this regula�on; however, the FAA has not yet applied this to the cargo industry and is s�ll considering the mater. Consensus across the industry (pilots, air traffic controllers, airport managers, etc.) appears to be that the rate of re�rement may hinder the development and opera�ons of avia�on ac�vity. The FAA uses the Veterans Recruitment Appointment (VRA) program, which acts as a hiring authority to expedite the hires of veterans.

The air cargo pilot employment falls into at least three different categories: Airline Pilots, Copilots, and Flight Engineers. The defini�on includes, “Pilot and navigate the flight of fixed-wing, mul�-engine aircra�, usually on scheduled air carrier routes, for the transport of passengers and cargo. Requires Federal Air Transport Pilot cer�ficate and ra�ng for specific aircra� type used. Includes regional, na�onal, and interna�onal airline pilots and flight instructors of airline pilots.” In 2017, the median income for California airline pilots was



$198,370. The average median income across the US was $137,330. The projected annual job openings between 2016 and 2026 is 940 jobs within California, and 8,100 jobs across the US. As of 2016, there were 8,600 airline pilots in California and 84,000 in the U.S.

California’s freight industry needs to increase efficiency to remain economically compe��ve, and to improve environmental sustainability while retaining high paying jobs and educa�ng/increasing training for the freight industry workforce so that the industry can successfully transi�on for con�nued success going forward.

Freight Dependent and Support Industry Workforce

Technology and the use of ar�ficial intelligence (AI) can increase produc�vity, cut opera�on costs, and increase a customer’s experience and sa�sfac�on. All industries rely on safe and efficient movement of goods, whether by road, sea, rail, or air. There are some industries, however, where this movement is essen�al to the sector’s compe��veness and ability to operate. According to the Southern California Associa�on of Governments (SCAG), “Goods movement-dependent industries are defined as industries that operate frequent inbound and outbound freight vehicle trips and costs associated with goods movement have sizable impact on their business expenses. Key industries include construc�on, manufacturing, wholesale trade, retail trade, and transporta�on and warehousing.”21 Altogether, these industries employed roughly 5.2 million Californians in 2018, which grew compared to 2017 employment figures. The California agriculture industry is also heavily reliant on efficient and dependable freight transporta�on. These industries rely upon agriculture products, raw materials, semi-finished and finished products to warehouse, and processing distribu�on centers before they are moved to final loca�ons to be consumed. Freight plays a significant role in suppor�ng California’s $2.75 trillion economy.

Construc�on The construc�on industry was hardest hit during the Great Recession. The industry has rebounded in recent years as the economy con�nues to grow. In 2017, the California construc�on industry employed 893,094 people and its GDP was valued at $65 million.

The passage of SB 1 in 2018 helped secure addi�onal funding for local and regional transporta�on projects, which in turn helps the construc�on industry. The State will need to ensure that funding con�nues to keep pace with the level of maintenance required and the freight transporta�on system con�nues to operate.

Transportation and Warehousing The transporta�on and warehousing sectors currently employ 600,618 Californians. The warehousing jobs that make up this sector rely on freight movement to receive and ship goods to and from the warehouses and storage facili�es. Warehousing is meant to act as a storage facility and intermediary between the various links in a supply chain. Warehousing incorporates diverse purposes, such as storage, bulk storage, and transloading. Warehouses can also be distribu�on centers, where func�ons such as sor�ng, palle�zing, pick and packing, labelling,



assembly, and wrapping of goods occur before shipment to retailers or consumers directly. Warehousing relies on efficient, reliable, and resilient transporta�on to ensure prompt delivery and pick-up of goods. Efficient goods movement ensures that warehouse capacity is not over-filled nor empty, else monetary losses may incur for the warehouse operator, as well as nega�ve downstream effects.



Endnotes

1 Note: Surface Transportation Assistance Act (STAA), 1982. Allows large trucks to operate on the Interstate and certain primary routes called collectively the National Network. These trucks, referred to as STAA trucks, are longer than California legal trucks. As a result, STAA trucks have a larger turning radius than most local roads can accommodate. Other states allow STAA vehicles on all roads where they are not expressly prohibited. California allows STAA vehicles only on roads where they are expressly permitted.

2 Note: Discretionary cargo is maritime cargo for which the United States port of unlading is different than the United States port of entry. This means that shippers have the discretion to bring the cargo through almost any port in the United States because the cargo is not bound to any particular location. Cargo can be moved to final destinations across the country using the intermodal transportation system.

3 “U.S. Waterborne Foreign Container Trade by U.S. Customs Ports 2000 – 2017.” United States Department of Transportation, MARAD (Maritime Administration). https://maritime.dot.gov/data-reports/data-statistics/us-waterborne-foreign-container-trade-us-customs-ports-2000-%E2%80%93-2017.

4 Note: Using three import ports, such as Los Angeles, Savannah, and New York-New Jersey 5 Note: Using four import ports, such as Los Angeles, Seattle, Savannah, and New Yok-New

Jersey 6 “An Analysis of the Operational Costs of Trucking: 2018 Update”. American Transportation

Research Institute. October 2018. Print. 7 Larson, William, “New Estimates of Value of Land of the United States,” U.S. Bureau of

Economic Analysis, 2015. The estimated values were aggregated from valuation of different property types, including agricultural areas, federal land, and developed suburban and urban areas.

8 “Electric Power Monthly Average Price of Electricity to Ultimate Customers by End-User Sector Report”. U.S. Energy Information Administration Independent Statistics and Analysis. https://eia.gov.

9 “Gasoline and Diesel Fuel Price”. U.S. Energy Information Administration Independent Statistics and Analysis. https://eia.gov/petroleum/gasdiesel/.

10 “A Blueprint for Action Report”. The Boyd Company, Inc. Pg. 10, http://growadamscounty.com/wp-content/uploads/2015/05/Blueprint-for-Action-Report_.pdf.

11 McCann, Adam. “Best and Worst States to Start a Business.” WalletHub. July 8, 2019. https://wallethub.com/edu/best-states-to-start-a-business/36934/.

12 “Best and Worst States to Do Business.” USA Today. March 5, 2018. https://www.usatoday.com/story/money/business/2018/03/05/economic-climate-best-and-worst-states-business/376783002/.

13 “America’s Top States for Business 2018.” CNBC. July 10, 2018. https://www.cnbc.com/2018/07/10/americas-top-states-for-business-2018.html. Web.

14 Gambale, Geraldine. “2018 Top States for Doing Business: Georgia Ranks #1 Fifth Year in a Row.” Area Development. https://www.areadevelopment.com/Top-States-for-Doing-Business/Q3-2018/overall-results-georgia-ranked-top-state-by-site-selection-consultants.shtml.



15 Kolko, Jed, David Neumark, and Marisol Cuellar Mejia. “Business Climate Rankings and the

California Economy”. PPIC. 2009. Print. 16 “Occupational Employment and Wages, May 2017.” United States Department of Labor,

Bureau of Labor Statistics. March 30, 2018. https://www.bls.gov/oes/2017/may/oes533032.htm#nat.

17 Cassidy, William, B. “Pay hikes cut US driver turnover at big truck fleets.” Journal of Commerce. October 30, 2019. https://www.joc.com/trucking-logistics/labor/pay-hikes-cut-truckload-driver-turnover-big-fleets_20190314.html.

18 “Railroad Jobs: A Highly Skilled & Compensated Workforce.” Association of American Railroads. https://www.aar.org/wp-content/uploads/2019/10/AAR-Railroad-Jobs-Issue.pdf.

19 “Overview of America’s Freight Railroads.” Association of American Railroads. October 2018. https://www.aar.org/wp-content/uploads/2018/05/AAR-Overview-Americas-Freight-Railroads.pdf.

20 “U.S. Freight & International Trade Stats.” Association of American Railroads. February 2019. https://img1.wsimg.com/blobby/go/29e544b6-eb7c-4706-9d4f-78d8700070f6/downloads/Notes%20on%20Freight_Intl%20Trade%206-19.pdf?ver=1561742750285.

21 “Final 2016 RTP/SCS.” Southern California Area of Governments (SCAG). http://scagrtpscs.net/Pages/FINAL2016RTPSCS.aspx.

https://www.bls.gov/oes/2017/may/oes533032.htm#nat

https://www.joc.com/trucking-logistics/labor/pay-hikes-cut-truckload-driver-turnover-big-fleets_20190314.html

https://www.joc.com/trucking-logistics/labor/pay-hikes-cut-truckload-driver-turnover-big-fleets_20190314.html

http://scagrtpscs.net/Pages/FINAL2016RTPSCS.aspx

Documents

Chapter 2: California Freight Competitiveness€¦ · • Land cost and zoning • Cost of doing business (other than transporta on) ... (nearly 40 million in 2019) and direct access