Q&A: Victor Garcia, president and CEO of CAI International

Logistics Management Group News Editor Jeff Berman recently caught up with Victor Garcia, president and CEO of San Francisco-based CAI International, a global transportation company offering intermodal container leasing and sales, rail leasing and operations, and global logistics services. Garcia provided insight and analysis over various topics relating to CAI's business and its visibility into different market segments. A transcript of the conversation between Garcia and Berman follows below. 

Logistics Management (LM): Can you please provide an overview of CAI and its services?

Victor Garcia: CAI is celebrating its 30th anniversary in 2019. Over most of that time the company has been in the container leasing business, which is still our largest business. We deal with all the global shipping lines around the world and we provide leases that are typically five-to-eight years on maritime containers to the global shipping lines. CAI has about $2 billion in assets in that business. We also have a rail car leasing operation that we started about six years ago that is a U.S.-focused business in which we primarily lease rail cars to shippers in the U.S., whether they are petrochemical or agricultural companies. We have a wide variety of customers and equipment types. The third leg of the stool is our logistics operation, which has three service components to it. One is truck brokerage, where we have a number of offices across the country and we have a domestic IMC business that is moving cargo on rail, and we have a freight forwarding operation we have gotten into over the last four or five years.

LM: Looking at the ocean and rail markets CAI serves, how would you explain the current state of market conditions for each from a macro level and a more industry-specific level?

Garcia: When we look at, say, the last six months, we saw a very strong market in 2018 and part of it was because the global economy was doing very well but also there was some amount of push forward of cargo that everybody saw and we saw strong demand. The natural instinct was that there would likely be some type of boomerang effect in the first part of 2019 due to inventory restocking, as it relates to the container side. What we have seen now was that towards the end of the year and first couple of months into 2019 is that we have had kind of a normal—in terms of customer inquiries and utilization-or better than normal situation. We have not had many re-deliveries of equipment, which we would normally expect, and when we talk to customers they are guarded but overall think 2019 will be a growth year. We are kind of in this mid-situation right now where people are optimistic but the headwinds in terms of how certain indicators of China are slowing down are a concern, as well as the tariff discussions and the related uncertainty surrounding it. But offsetting that is the general view is that the U.S. economy, generally speaking, is still pretty steady and strong.

LM: Looking at the rail side, U.S. rail carload and intermodal volumes are down. Does that have any material impact on leasing activity or your IMC operations, or is the current state of volumes not telling the whole story?

Garcia: First, as far as intermodal railcars, those are dominated by TTX so there is not a lot of leasing of intermodal railcars. Where we have an impact, or see the effect, of what is going on in the intermodal market is more in our logistics operations. The other car types, where we are active in leasing cars, is that we have seen a very steady progression in the tightening of the market, with the tank segment being the strongest part of that market for all equipment types but in particular for movement of crude oil. That has been extremely tight, and it has been a strong market. There are many reasons for that related to the exporting of petrochemicals. The weakest side of that segment is probably the agricultural side, and I think, in part, because there was a fair amount of supply into that market…and the tariff situation is keeping shipments down and we are running into some issues there. On the intermodal side, things have cooled down. I think people have seen that boomerang effect, and inventories have stocked up, too. This is the weakest part of the year anyway, but I think there is some effect of the prior stocking that had been done, because we had a peak season last year that started two-to-three months earlier than normal. I think we are now seeing the aftereffect of that and most people expect things will improve as the normal season comes back into swing. But there has been some softening over the last several weeks.

LM: On the rail carload side, most of the Class I railroads are very committed to PSR (precision scheduled railroading). What has been the impact of that on your business and on market trends, in your opinion, so far?

Garcia: It is early innings with this. There are a number of things that can affect the business, and we will need to weigh them as we go along. The normal expectation is that there are going to be some issues in realigning and getting used to PSR in the short-term. So that may slow things down a bit and cause shippers some issues. Longer-term, I think, everybody will adjust, and there will be efficiencies that are gained. What it means for our business is that some of the changes will mean that shippers will have to take on responsibility for their own cars rather than relying on the railroads. And I think that could be beneficial to us and to other people who lease rail cars because the railroads will be more focused on types of cars that are more high-volume and higher frequency.

LM: Shifting gears, how do you view what is happening on the retail supply chain side of things?

Garcia: We are not really heavy in the last mile segment, as we are more active in long-haul truckload, but it is clearly Amazon that has been the driver of all this and all of the expectations that are being set on how quickly things are going to be delivered at high service levels. Other players need to adjust to that, too. It is a changing environment, with expectations moving up for how quickly things get moved. We expect that trend to continue and the expectations to rise, with service levels to also improve in that sector, and technology will play a big role in that.

LM: Much has been covered about the Chinese economy slowing down. What is the impact of that on CAI as a company with so many assets and exposure to the global ocean market?

Garcia: I will preface what I say, in that we are a long-term lease business. Any effects are significantly mitigated because customers are responsible for the contractual commitment period and have to keep the units whether or not they have demand. Based on the trends we are seeing, it looks like the way the rhetoric is going that a trade deal will happen, and I think the end result of any trade deal would be an opening up of markets and that would ultimately be good for both sides. If that were not to pass, what we have observed in talking to others and what our expectation is, that over a period of time there will be migration from China to other countries in southeast Asia like Vietnam, Thailand, and Indonesia that will start taking on products that were previously being manufactured in China. That, I think, for our business over time will provide incremental demand, because it is an inefficient movement of cargo and a disruptor of the existing supply chains. Not only does everything need to be realigned or some of it needs to be adjusted but also there are going to be more transshipments in order to move shipments. It is not easy to switch from China to other countries because China has vastly greater infrastructure than many of these other countries, but there are a lot of cargoes that would be there. How that adjusts, we would have to see, but as we look at our business cargo will move as long as demand is there. But it would be moved relatively inefficiently compared to how it is being moved now, which ultimately would mean more demand for our assets.

LM: As time goes on, many industry stakeholders are looking at the potential impacts of IMO 2020 on the ocean shipping sector. What does that mean for ocean container leasing?

Garcia: How IMO 2020 affects CAI is more about the financial health of our customers and if they will be able to pass on the costs. It is a foreseeable event and everyone knows about it and it is going to affect everybody. There is already a lot of planning around how to make the adjustments in order to reflect the costs of low sulphur fuel. I think most of the ships will have to be consuming lower sulphur fuel, because there will not be enough time for capacity to change all these ships to scrubbers over the time period being mandated. My view is that the costs are going to be passed on to the shippers, because it is a uniform cost. Where I think ocean shipping lines sometimes get caught with higher expenses than planned is really when the underlying bunker price moves over a relatively short period of time…and cannot adjust their contracts to reflect the higher price. That is what you saw in the middle of last year, when fuel prices rose significantly. The shipping lines tend to absorb a lot of that, because they could not adjust quickly enough. One thing that is not discussed is that to go from the current fuel to low sulphur fuel is going to require a lot of cleaning of the tanks and everything else, and that is going to put some capacity out of the market for a two-week kind of time period and could constrain the market somewhat just because of the transition over to it.

LM: Looking at the truckload brokerage market, it appears that compared to 2018 capacity has loosened up and spot market rates have come down a bit. How do you view the current state of the market at the moment?

Garcia: I think that across every type of equipment type—we do flatbed and truckload––we are seeing more capacity in the market. It is nowhere near as tight as before. We are seeing truck rates come down, and that has been consistent since the beginning of the year. The expectation is that it is going to stabilize. I don’t believe that we are going to get into that tight market that we were in last year. A lot of what happened in 2018 had to do with the effects of the ELD implementation. We saw that across the board, and it was a big factor and it really tightened up capacity. Things have loosened up significantly since then, and I don’t think we are going to see that scarcity that we had in late 2107.

LM: From a competitive perspective, when looking at the truckload brokerage market, there are a lot of new entrants in the form of digital freight matching providers that are app-based trying to penetrate a very broad market. Are these players shaking things up in a meaningful way?

Garcia: They are certainly getting everyone’s attention. I think whatever form you want to look at it this is a very competitive and fragmented marketplace between carriers and shippers. This is where technology and the use of technology continue to be more and more important. Whether or not to go to a fully digital platform is something that can overtake the market, there is going to be a segment of it…but there is still going to be an importance placed on human contact and relationships, because the complexities and follow-ups that are needed to handle a lot of shipments make it difficult to just rely on just a purely digital platform. Even under the current format, there are a lot of traditional ways of moving with the digital guys that traditional methods of managing the business that they are doing now. More importantly, using the information that is gathered through technology is going to be critical to success because it is going to provide efficiencies and more opportunities. I would be surprised if a fully digital platform will be overtaking the whole marketplace.     

LM: What sorts of inroads are being made on the freight forwarding side, given the current economic outlook?

Garcia: What I see from our customers is that business is still pretty steady, but…what we are seeing is that relative to the demand there is significant capacity available on the carrier side. What we are seeing, in many markets, is freight rates coming down, and there will have to be some rationalization of the weight to try to better align demand with supply in terms of the ship side. Relatively speaking, we are seeing freight rates being lower, which is good for our customers and good for the shipping lines. In terms of demand, it has been fairly steady over all.   

LM: When talking with customers, what are they saying are their biggest pain points or things to keep an eye on, specifically as it relates to ocean, rail and intermodal?

Garcia: On the container leasing side, as far as our relationship with them, there are no major issues. We, as an industry, have the capital to supply them with what they need and there is capacity on the manufacturing side so there really is not an issue there. On our shipping side, the issues are demand concerns that they are grappling with, IMO 2020, and things they are dealing with specific to their customers.