How the Industrial Internet Is Changing Rail Transport

Cutting-edge software could revolutionize transportation in the 21st century.

Jan 6, 2014 at 6:00PM

Collectively, we now watch more than 6 billion hours of video on YouTube every month. Some of these videos are mesmerizing and dramatic but generally useless; others are informative but dull.

Once in a while, however, you stumble across a video that's mesmerizing, dramatic, and informative at the same time. Recently, I happened across a YouTube upload by General Electric (NYSE:GE) that fit the bill.

It's a stunning look at the potential impact the industrial Internet will have on cargo rail transport. First and foremost, it's a promotional video, but also a vivid illustration of how the much-hyped "Internet of things" could work. For business-centric investors, it's a view into rail operations that might otherwise be hard to come by.

The video, shown below and titled "Over 2 Million Containers, 2,000 Routes," shows the logistics ballet at the intermodal transportation facility in northwestern Ohio. "Intermodal" is industry lingo for goods transported in a single container, and the facility serves as a state-of-the-art hub financed in part by the East Coast-based railroad CSX (NASDAQ:CSX).

In recent months, GE announced another partnership with CSX to develop natural gas locomotives, but that pilot program will only begin field testing in 2014. Meanwhile, the ambitious effort to streamline rail hubs is well under way. Take a look for yourself and read on for further insight on the power of connectivity.

While you weren't looking, rail transport got cool. Set to heart-pounding techno music that recreates the sounds of the machines, a day in the life of an intermodal hub operator resembles a deejay set at a hot New York nightclub. But don't rush out to apply for a position just yet. These hub operators work in the middle of Midwestern farm fields operating 1,000,000-pound cranes, and only 200 employees manage up to 30 trainloads per day.

The hub operators are few and far between thanks to a highly efficient, robot-powered network. This network uses elements of GE's Rail Optimization Solutions, which is associated with the wider industrial Internet rollout. At the Ohio hub, it might look like business as usual -- goods and products are transferred from train to truck and vice versa -- but it's being done in a radically different manner than before.

With the industrial Internet, containers, robots, and shipping vessels no longer move about in isolation. Instead, communication flows freely at all times through tiny computer chips. As it was billed from the get-go, it's like the regular Internet, but for "stuff" instead of people. So, just as teenagers check in on apps like Foursquare as they move about their neighborhoods, various products like sporting goods, appliances, and apparel are constantly checking in as they traverse the East Coast.

Why, you ask, is this even necessary? Well, it changes the game in terms of efficiency, resulting in time and energy saved. Which means lower shipping costs on goods we use everyday. GE estimates potential cost savings of 10-14% solely due to increased rail usage versus trucking on highways. This stems from a projected 32,000 gallons of fuel saved by each locomotive per year.

If you think of the rail system in terms of your rush-hour commute, imagine the difference GE's optimization efforts could make: A network allowing every vehicle to communicate could compensate for bad drivers, reduce the need for stoplights, and potentially eliminate bumper-to-bumper traffic. Who knows, this scenario might not be too far down the road!

For now, we're left to marvel at the flow of goods and commodities through a train hub in the heart of the Midwest. But, if all goes according to plan, this hub is just the beginning for GE -- or CSX for that matter. CSX has invested $575 million over several years in a public-private partnership to create the Ohio intermodal hub, which opens up new opportunities for rail travel in the eastern corridor.

The highly efficient process shown in the video allows for double-stacked railcars to be unloaded quickly. This is crucial for CSX, because it increases the amount of cargo that can be hauled by a single locomotive. An increased load capacity in intermodal goods means that CSX can make up for declining coal volumes. All in all, it's a long-term bet, but one that should produce outsized efficiency gains.

Of course, no element of this giant infrastructure project would be possible without long-term bets by CSX and GE. By looking deep into the future of transportation, leadership at both companies is pushing for constant improvement, which could translate to market-beating returns. In 2013 alone, GE and CSX outperformed the Dow Jones Industrial Average by an impressive 9% and 20%, respectively. To be frank, both companies have found a place in my portfolio in recent years, and I wouldn't bet against them at this point.

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Isaac Pino, CPA owns shares of General Electric. The Motley Fool owns shares of CSX and General Electric. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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