BNSF Logistics looks to capitalize on “industrial renaissance”

Ray Greer, President of BNSF Logistics, is positioning the 3PL subsidiary of the rail company owned by Berkshire Hathaway to become a global leader in the project cargo sector. He wants BNSF Logistics to capitalize on the “industrial renaissance taking hold around the world.”

Matt Miller: What made BNSF Logistics focus on project cargo? Ray Greer: At the macro level, the focus is industrial products. We would put into that category mining, oil and gas, renewable energy, power generation, engineering construction. …If you look at the North American region, there is not a dominant freight forwarder or logistics provider, so we believe with our focus on industrial products, we can become the North American leader to serve clients here and around the world. As we began to profile the industrial products market, project cargo emerged as a very key component of that. … We began to evaluate the market and look at options to build that capability, whether we build it ourselves or buy it. We acquired Albacor [December 2012], which put us in things like power gen, the construction side. But if you look at all the verticals in industrial products, we still have a long way to go. Miller: Why the focus on industrial products? Is it because of the commoditized nature of other shipping? Greer: No, that’s more recognizing there’s an industrial renaissance going on around the world. Regions like North America and Europe are upgrading their infrastructure. Developing parts of the world are getting their infrastructure in place for the first time. The mammoth capital forecast to go into these different parts of the world, in the categories of industrial products, it’s just mind-boggling. So, it’s more the macro trends of capital deployment and the role the North American global multinationals play in that process. The other thing that’s intriguing, the industrial products sector in North America has balance of trade. We export as much as we import.

Miller: If you look globally, is it still a largely fragmented market, with Panalpina, CEVA and Kuehne+Nagel the biggest of many players, or is it that they dominate in certain markets and others are up for grabs? Greer: The market is still very fragmented. There are a lot of small entities here and around the world that serve the project cargo market and serve the industrial products space. However, if you look at the large global shippers, they prefer working with large stable multinational companies. The part that is different is those that are available to them [in North America] are foreign multinationals. Part of the strategic hypothesis here is the Justice Department has ratcheted up compliance standards on foreign corruption. It is becoming increasingly top of the mind for multinational companies here. We think our ability to insert ourselves into that discussion, being headquartered here in the US, that adopts the standards of foreign corruption [practices] as defined by the US, we give these customers confidence that we share their standards and have them in place around the world. We worked very diligently to certify and establish foreign corruption standards globally. Over 180 of our global service partners have been certified. This is more than just trying to go in and compete on price. This is about competing on the standards of business, hitting the real critical points around foreign corruption standards. It has a lot to do with the fact that there is not a North American company that has industrial products competency. …The brand not only speaks to an industrial image but it speaks to integrity… Miller: What made you choose Albacor as a platform for investment? Did you ever contemplate building your project cargo business from scratch? Greer: We did look at building it from scratch, going out, finding the right people and hiring them. I can tell you that we’re doing a hybrid of both. We bought Albacor. …I like the competency of the organization and the people and the team that ran the business. It gave us entry into the US and Canada. It gave us a kind of instant project imprint within North America. The parts that they [Albacor] didn’t have are in the areas of design and engineering. We found them in a small engineering firm in Iceland. We hired their people and established an engineering group that can essentially take an oversized, over-dimensional product and start to think differently about how it moves, whether on the water, on the rail, or on the truck. That engineering team has been established in Houston. That’s just an example of how we’re taking an organic approach in how we build this. On one side, we bought a company. On the other side, we hired some very talented engineers to help us work on providing design-engineering services for the transport of heavy-lift items. They understand the marine side of heavy lift as well as the rail side. The key component of what we’re doing is incorporating the rail in our solution that a lot of people don’t tend to think about. Miller: What about the E-P Team, which you also acquired in late 2012? Greer: The E-P Team is also project related. Albacor brought more the international ocean rail project capability. E-P Team brought us air—oversized, over-dimensional air-side project cargo. The other thing they brought us is entry into the aerospace and defense market. When we did our industrial product review in the markets, we found that the government aerospace defense groups had similar characteristics as the industrial product category. Miller: Project cargo, almost by definition, is complicated, unique and involves very large and sophisticated service and support. How are you building up that part of the business? Greer: We continue to look for acquisitions that will further penetrate us in the industrial product space and into the project cargo space. We’re in discussions with numerous companies that could be a good fit for us and might be for them.

One of the things that we’ve done is establish a global project center in Houston. It becomes the central place from which our global service partners and our teams pull upon to design, quote, execute project moves around the world. That center over time will evolve to be a multi-modal project cargo execution center, which simply means that they’ll have the wherewithal to work everything from route management design to engineering to actually executing the project. Part of the issue with project cargo is that it’s not consistently out of the same origin or destination. Every project is different. Therefore, we’re trying to be thoughtful about how we deploy people in the field. Right now, we’ll take people out of Houston and get them in the field to the extent a project needs that. But we also have 180 foreign global service partners around the world, linked into the Houston global project center to support any project. Miller: You’ve moved, for example, wind blades from India to Brazil. How do you cope with sophisticated business that is so far-flung? Greer: Of these global service partners that we’ve certified around the world, one of the best is in Brazil, a company called Overseas Logistica. We have co-invested with them to put resources on the ground in Brazil. They manage the resources. They manage the activity whether it’s coming in or out of Brazil. We have a very trusted relationship with them. The global projects center in Houston is the control center for the load of that ship in India and the end-loading in Brazil. But Overseas Logistica in Brazil or our partner in India are actually on the ground executing local efforts, quoting and pricing and doing the work. If it’s necessary, and it’s so specialized, we will send somebody overseas. But it’s really a case-by-case basis. You’re aware of WWPC? Miller: You’re a member? Greer: We are and we plan on being a very active member. We have felt that the members of the WWPC have the opportunity to benefit from us being a member because we can really begin to enable them to compete with some of the larger players. They can now talk about their relationship with us and we think it further legitimizes WWPC and opens the door for that member in a foreign country to have a conversation with prospects. Miller: You mentioned co-investing with your partner in Brazil. Is that a model you think of doing elsewhere? Greer: We’re open to it. We’ve done it in two or three countries. Co-investment simply means people because that’s what this business is all about. Finding the right person to hire and we will help fund the resource to support sales or operations. We look at that in markets that are developing. If there is a developed part of the world like in Western Europe and we felt we had something coming down the pike that we could change the way things operate, I would fund development in that part [as well]. Miller: How heavy on assets do you expect to be? Greer: We’re reviewing that now. I don’t ever see us being in the ocean business. Competing against them is not in our best interests. Today, we’re a completely non-asset based company. The only assets we own are computers. But we see some latent need in certain sectors where it could make sense for us to own some assets. We’ll be industry specific. There are certain vertical industries where they [clients] don’t want to work with non-asset providers. They want to go straight to the assets. Miller: Such as? Greer: Large multinationals that have got the purchasing power to negotiate and they’ve got the resources to negotiate directly with an asset provider. They’re less inclined to work with the non-asset company. The middle market is more inclined to use a company like us because they don’t have the resources either in quantity or competency to support their business. The idea of owning assets for us is being able to penetrate the larger multinational that otherwise wants to negotiate directly with the asset providers. That would be the reason for us to do this. Miller: You said you don’t see yourself operating, say, a fleet of ships. What about support equipment? Greer: This comes down to return on invested capital. How many turns a year we can get out of it? Because of the random nature of these projects, actually the destination tends to be the same more often than the origin. You can be building a big mine in Canada or Mongolia and that’s the destination for several years but the origin where everything is coming from is different. The best example of this for us right now is the development going on in the wind energy sector in west Texas. It’s probably the most activity of any region in the US, so we went in and secured the trans-load facility. We will put in place assets, manage trans-loading of blades, powers and actually run the trans-load center [for that region]. We do business with probably 30,000 different asset providers, whether it’s trucking, heavy haul, and heavy lift. We’ll use them on the ocean side and figure out how to capitalize on the destination side. Because that’s really where you can put assets in place and figure out how to get utilization for them. Miller: You’re run as an independent subsidiary of BNSF. But I’m wondering if there are points of intersection with BNSF. Greer: We are a wholly owned subsidiary governed by a board comprised of the three senior executives of Burlington Northern Santa Fe LLC. They’re great people to work with. They pretty much leave us alone; let us execute our business strategy. There is no mandate that we must use [BNSF]. In fact, we’re rail neutral. What we try to do is design a solution for a customer that’s optimum in service and cost. If that means BNSF Rail is optimum then of course we show them preference. If they’re not and there’s a better way to skin the cat, whether moving it by truck or whatever. We have great cooperation with [BNSF], like this west Texas trans-load site, but it’s the market itself. The market wants us to be neutral. So we try and maintain that neutrality in everything we do, but we will work in great cooperation with [BNSF] on projects that we think intersect the two companies. Miller: You obviously have financial muscle behind you. Is that an added benefit or a necessity? Greer: The Berkshire Hathaway brand stands for many things. I would say most companies like ours would spend millions and millions and decades to establish that brand. The BNSF brand stands for similar things that we benefit from. BNSF Logistics, being a 12-13 year old company, is benefiting from that brand awareness and that brand management that has occurred over decades. It does lend itself to instant credibility but after that, it really comes down to our people executing. The customer is not going to do anything with us again, if we do not execute properly to the one shipment or project. On the financial side, we don’t spend a lot of time focusing on our balance sheet. We look at it every month. We look at it every quarter. But we’re not trying to figure out how to optimize the balance sheet and go out and raise money and distract management’s attention away from building the company to go deal with banks or investors. The benefit of the financial stability and strength is that we spend 99% of our time building and running the company and we spend 1% of our time worrying about the other things… the Berkshire Hathaway brand and the BNSF railway brand, they afford us that luxury, the ability to just focus, run the business.

Miller: Is there one example of project cargo undertaking that illustrates the complexity and difficulties of your project cargo operations? Greer: What we are working on is new innovation that we believe is transformative…We’re researching some verticals that have freight flows that are oversized and over-dimensional and trying to rethink the way they move, so that we can step in and change the cost model and change the efficiencies of how the industry works. We decided to focus on wind energy as our first market. Logistics, as a percentage of revenue, runs somewhere in the 7% to 8% range. On the low-end [there’s] semiconductors, where logistics might run 2%; Automotive might run 8%. The wind energy sector is north of 15%. We really zeroed in on that sector that needs help, needs innovation. It’s that kind of disruptive capability that I want our company to stand for. We have a team of five or six people working fulltime, designing prototypes. We’ll be testing them by the end of the year. … By the time we are done, we would have invested millions.