Opining on changes to the American workplace is a little above my pay grade, being a lowly transportation analyst, so I’ll tell you a story instead… Here at Loop Capital, we have three primary offices in New York, Chicago, and Los Angeles. On the back of the state Stay-at-Home orders, we quickly transitioned to more than 95% of employees working from home. On one of our firm-wide conference calls on COVID two weeks after that transition, our CEO said that he monitors the internal productivity metrics every day. In terms of those numbers before and after the transition, he can’t tell the difference. The point, of course, is that the average employer, while maintaining work-from-home capability, has typically been reluctant to use it due to the assumption that most employees don’t have the discipline to work from home with the same degree of productivity. Well, it turns out a lot more people have that discipline than everybody thought. Add to that the new reality of social distancing in the workplace (sayonara cube buddies!) effectively reducing office capacity, we’ll no doubt see fewer employees returning to the office as states open up, with obvious implications for commuter transportation, urban economies, and possibly an adjustment lower in urban populations.
In terms of the transportation industry specifically, the big one is obviously e-commerce. Amazon’s market value has jumped above $1.1 trillion, and UPS said on its recent first-quarter earnings call that the percentage of US packages delivered to residences, as opposed to businesses, jumped from 52% in February to almost 70% in March. Clearly this will recede as businesses open up, but recent events are only going to accelerate the rate of e-commerce adoption that was happening anyway. In a sense, COVID is a giant e-commerce stress test. Companies have been essentially transported into the future where e-commerce is much more prevalent, and related operational capacity, efficiency, and pricing strategies have been put to a harsh test. We’re seeing failures, and lessons are being learned. At some point, they’ll get in their time machine, come back to 2020, and start making changes based on those lessons.
I’ll make two other points, and the first is the likely unwinding of the manufacturing reliance on China. Anyone who watched state governor’s daily press briefings in March and early April heard the same thing over and over: we need more ventilators. Where are they made? China. We need more masks. Where are they made? China. We need more swabs. Where are they made? China. What about now… We need more testing reagents. Where are they made? China. It’s getting ridiculous and on the back of COVID, we should, at the least, see a diversification in the manufacture of critical components and likely some degree of near-shoring to our USMCA partners (Mexico would benefit Kansas City Southern and Union Pacific) or outright onshoring back to the US.
Finally, and getting away from supply chains and markets, there’s a self-perception angle to all of this that I think will stay with the transportation companies. These networks have long been deemed critical infrastructure by the Cybersecurity and Infrastructure Security Agency, which is essentially part of the Department of Homeland Security. This has allowed the employees' exemptions from the Stay-at-Home orders and allowed these networks to continue to operate while other businesses have been shut down. Transportation workers are “essential workers” and have stepped up when we really needed them (maintaining the food chain, for example). There’s a growing sense of pride and further crystallization of the heavy responsibility here that I think will permeate the corporate cultures of these companies for the better, off an already high base.