Stringent regulation and soaring insurance costs are causing some carriers in California to question whether they should continue serving the market. Others are closing their doors — creating new complexity for moving freight.
You have to pay to play in California, and some carriers are tired of the game.
The state’s Assembly Bill 5, for example, asks carriers that hire independent drivers to reclassify them as employees, and pay taxes and benefits accordingly. It entitles these new employees to sick leave, worker’s compensation and more — and could increase carrier labor costs by 20% to 40%.
Another growing cost comes from environmental legislation. California clean air rules mandate that by 2023, all trucks and buses use engines built in 2010 or later. Starting this year, the state’s Department of Motor Vehicles will only register compliant vehicles. Other emission legislation aims to eliminate all diesel fuel trucks by 2050, with more monitoring measures coming online to drive enforcement.
For some, cutting back miles and improving capacity usage will help. But the prospect of capital outlay toward new equipment poses a great deterrent for operators.
Alongside regulatory action, nationwide increases in carrier insurance premiums have an especially sharp impact on the West Coast. In California, those costs are nearly triple the national average because the state is perennially classified as a high target state for cargo theft. Likewise, civil juries have demonstrated a willingness to deliver multi-million-dollar verdicts against carriers. Many claim-facing carriers increasingly work with insurers to mitigate costs through an out-of-court settlement that avoids a crippling judgment, but raises long-term costs.
The cumulative effect of California’s trucking environment may ultimately threaten the survival of more operators in the state. Nationwide, the truckload transportation industry lost nearly 800 carriers in 2019, and freight rates remain consistently low in the face of these carrier incurred costs. Some market estimates predict these depressed rates will remain steady for the rest of 2020. Soaring insurance premiums and regulations impacting air emissions and labor relations can increase costs nearly 40 percent. Expect rates into and out of California to increase to offset these carrier expenditures.
Compounded effects of legislation, insurance and other increased business costs will motivate some road carriers to limit working in California. As other states explore additional regulations, there is potential for a ripple effect raising transportation costs that cut into bottom-line profits.
Transportation management providers with analytics capabilities will be increasingly valuable in the design of optimal supply chains that consider business environment characteristics. Likewise, shippers that work with efficiency-minded logistics partners position themselves to help carriers conserve costs through internal best practices that improve productivity and capacity utilization.
