Here's Why Tariffs Are Coming To Global Commerce

Good Evening,

First, as always, thank you for joining.

It’s been a busy week, apologies for the late delivery of today’s edition.

Tons going on all around the world. 2025 is definitely going to be a year that will force a lot of companies to make real and meaningful changes to their daily execution.

Here’s what this issue brings:

• A (relatively) short overview of the US tariff situation and my take why it’s happening… just not at the levels you expect. Sharing what I see for short and medium term changes that everyone should know.
  

• There’s a ton of hype around AI in Supply Chain and Logistics. I’ve shared some of my favourite use cases before - here’s another one. Warehouse pick paths.
  

• Covenant Logistics had some decent numbers to share last week. Let’s Dive in and see where they really made their money and what it says about where the market is headed

Tariffs Are Coming, But Not At 60%. Here’s How Supply Chains Will Adapt

There’s a lot of discussion happening right now about tariffs.

Will they happen?

Won’t they happen?

What does the business need to do in order to adapt?

Here’s are the key messages before I even explain why:

1. There will be tariffs

2. Not at the amounts currently being reported on

3. It’s not about low cost goods

What Most People Aren’t Talking About

It’s easy to feel that all of the talk on tariffs was nothing more than an election ploy to curry favour with the general public.

Promises of strengthening the country and bringing back manufacturing.

While reshoring will always be on the table, it isn’t a short term solution to shifting power on the world market.

The goal of what’s being reported on isn’t to put and end to retailers like Shein or Temu. The goal of the tariffs is to rebalance the relationship between the US and China (that has been shifting more toward’s China’s favour).

There’s a massive trade imbalance between China and the US.

In 2023 for example, the US imported $535B worth of goods from China, while only exporting $153B. This type of imbalance has been a huge factor in China’s growing economic power.

With these YoY deficits, China has become the largest holder of US debt (they actually have been for some time).

As of August 2024, they held $774.6B in U.S. Treasury securities (as reported by Investopedia). While huge, this is about 60% of what they held in 2013, when they had $1.3T.

Since the tariffs are more about the US getting concessions and agreements from China, while also reducing risk associated with geopolitical changes, there’s little chance that these types of policies won’t go in place.

What Are The Likely Outcomes?

The most obvious are staggered tariffs.

This allows the policies to go in place, show strength while also limiting consumer backlash from rapid changes in prices.

It will also allow the US to see how China and other countries around the world react.

It’s important for nations like the US to tread slowly. With decades of manufacturing having been moved to China, as well as the fact that China controls the largest part of the rare earth elements market (which dominates the electronics and battery industries), there’s a lot to manage.

The largest companies are already strategically reshoring and friend-shoring.

This started in 2018 the first time these types of tariffs came to be, and the new mandate and focus of the current administration will only accelerate the activity.

While there’s a lot of talk of bringing manufacturing back to America, the reality is most is going to Mexico and ASEAN countries.

The US simply would not be able to complete with current manufacturing quality and costs that have been established by China. It would take massive investment in infrasture and would take years to get to some type of cost parity (if it were ever even possible)

How much would an iPhone cost in America? (Video) (Article)

China will also most likely make concessions in order to keep their strong access to the US market to drive their export based economy.

Agriculture and energy where two industries that had changes in policy during the last term, and it’s highly likely more work would be done here (especially since desired targets that were set were never achieved).

The other most likely shift will be improved market access for US companies wanting to do business in China - who currently has all kinds of barriers in place making it extremely difficult for technology or financed based companies to properly penetrate.

Supply Chain Implications

Even small tariffs that stay attached to manufacturing or importing from China will force companies to re-assess their supply chain (most have been already).

Businesses that are heavily leveraged into segments where China drives a large part of the value chain will struggle the most with margins.

These are areas are electronics, clothing and batteries / EVs.

Just like Amazon did to dramatically improve their domestic US activity, large companies will likely move into strategies of regionalization before they ever start heavily reshoring.

This means more split supply chains.

Apple and Tesla for example area already well underway building parallel supply chains to better support East vs West activity.

In the short term, we are also going to see more companies pushing up their safety stock levels. This could be anything from 10%-20% more inventory in the system to protect against delays and impacts that new tariffs will likely cause.

If you have a long supply chain, and you haven’t been exploring ways to create more breathing room in the system, this should be a top priority for your organization for the first half of 2025.

We will also see more diversification in manufacturers. While this strategy has been widely used in areas of logistics, you still see heavy consolidation when you move further back the chain into manufacturing.

Finding more ways to get your product made while still being able to hit the MOQs that provide the base margin for your business is crucial for long term success.

eCommerce is likely to also continue to drive a higher demand for air freight. Businesses selling higher margin or highly time sensitive product will leverage these options to promote more value to their consumers.

The key to being able to navigate these challenges is going to be in your data. Never has it been more important to be able to tease out every insight and opportunity from your system information.

Broad based strategies that have been deployed to make processes simpler have most likely come at the expense of some lost opportunity.

The ROI used to be there when you looked at effort / requirements versus time saved, these days unfortunately those that can get into the weeds will find themselves in a much better position to navigate the coming waves of changes.

Simple apps and off the shelf tech stacks won’t be able to drive the same value alone. Having expertise on your team or being able to get insights from areas of trust is essential.

Robots Can Do More Than Improve Picking

You know that I’m a huge fan of technology and tools.

I think there is a ton of promise for AI in logistics.

I also thing that most of what we see people talking about right now is lipstick on a pig.

But some stuff is interesting.

I’ve shared with you before some of the best ways I see to use AI in logistics.

Today I’m sharing another one that applies to warehouses.

A couple of articles caught my attention last week.

One was about a partnership between Nvidia, Accenture and KION. The other was from a company called ProGlove.

Both of these articles shared something in common.

Both had ways that AI was being leveraged to merge AI into physical operations.

What I liked about the applications in both articles, was that they show how new tools will allow for a whole new world of optimization to start happening.

In ProGlove’s case, the company is using data that is being collected from their wearable scanners to identify bottlenecks, optimize pick paths and better balance labour requirements.

From the Nvidia side, everything was bigger and bolder, but it still hits the same place.

This new partnership has the goal of optimizing warehouse operations by merging physical AI with digital twins.

This would allow warehouse providers/teams to simulate and quickly adapt to changing conditions.

These digital twins take in real-time data from on the floor sensors, CAD drawings and lidar scans to create different “what if” scenarios based on what processed through the warehouse.

What’s wild, is that Nvidia has also created a system called Cosmos, which is a foundational AI model trained on 9 trillion parameters, understands physical dynamics (e.g., gravity, friction) to generate 3D simulations of warehouses. This avoids "hallucinations" by grounding simulations in real-world data.

Julie Sweet (CEO of Accenture), also stated in the article that projects leveraging these tools saw a 50% reduction in manual labour and operational costs, while also cutting warehouse planning time in half.

Those are massive improvements to daily operations.

So, while I think that there is a massive opportunity to be had, these rapid advancements are also showing very clearly the importance of data.

Not just in having information.

But having the systems and tools in place to structure and squeeze the most value out of everything you are doing.

It already feels like there is almost no point to be buying new material handling equipment, or goods to person travel bots if they don’t have the ability to read and record the additional types of environmental data that these new systems are leveraging.

It’s never been harder, or more important, to choose the right type of investment for your future.

Robotics and automation isn’t cheap.

They have to be planned out and installed.

It’s a commitment for any 3PL to find the right type of system for their space and for their customers.

And once you choose, it’s not something you are quickly going to swap out for something else.

Here’s the question then.

Are you looking at upgrading your operations and are you even aware of the importance of getting the right systems and sensors into your space?

With A Fleet Of Almost 10,000 - It’s Warehousing and Managed Services That Carrier The Day

Covenant closed another year last week.

Executives from the company had soundbites all over the news sharing their optimism for the freight market in 2025.

While they had a harder 2024, they are probably right to be optimistic for the the new year.

But they are also taking advantage things that most others can’t.

The best place to start is always with the numbers.

Here is the consolidated and Q4 YoY performance for all four covenant divisions.

And here are the results just for Managed Freight and Warehousing:

By far the strongest drivers of profitability for the company.

What was also interesting to see was the huge revenue growth in the dedicated freight business.

If you aren’t aware, the dedicated freight segment of Covenant Logistics provides customers with committed truckload capacity over contracted periods, typically aiming for three to five years in length.

Dedicated Segment

• Freight Revenue: $80.7 million (+22.4% YoY)

• Operating Loss: ($3.8 million) vs. profit of $4.3 million in Q4 2023)

• Adjusted Operating Income: $3.9 million (vs. $5.7 million in Q4 2023)

• Operating Ratio: 104.1% (vs. 94.5% in Q4 2023)

• Fleet Growth: 198 additional tractors (+16.2%)

(They were hit with a number of setbacks in 2024 that impacted the profitability, however it’s clear to see from the growth that most customers seem to be looking for stability and control for larger bases of activity).

Here is the strategy that is being actioned for each line of business:

1. Expedited - Focus on rate increases, exiting less profitable business

2. Dedicated - Continued expansion into high-service niches

3. Managed Freight - Maintain profitability by optimizing costs

4. Warehousing - Targeting high-single-digit margin growth

This is the same type of strategy we are seeing from multiple large players.

Move away from low profit or unprofitable business, leverage rate increases from larger contracts, strategically use own assets when it makes sense and outsource when it doesn’t, provide additional value added services to be more of a '“one-stop-shop”.

It’s a solid playbook and one that works well when you have the assets.

It’s a challenge for those that are trying to manage everything as an asset light operation or aren’t able to provide more than basic services.

This type of activity is going to continue in the market and it will help create large strongholds for the big players while leaving a lot of smaller providers in never ending cycles of quotes and RFPs.

That’s it for this week. Thanks for being here.