Trucking doesn't get enough love. U.S. demand for freight trucking is massive and shows no sign of slowing down, and new legislation and technology are shaking up the industry in a huge way. In this week's episode of Industry Focus: Energy, Sarah Priestley talks with Seth Clevenger from Transport Topics about where trucking is headed in the next few years and decades.

Tune in to find out how new electronic logging device regulations are changing the industry in a huge way, and what it'll mean for companies; how self-driving technology will and won't disrupt trucking in the next few decades; why Tesla (NASDAQ:TSLA) isn't the only company that's interested in electric semis; and more.

A full transcript follows the video.

This video was recorded on Jan. 25, 2018.

Sarah Priestley: Welcome to Industry Focus, the show that dives into a different sector of the stock market every day. Today, we're talking Energy and Industrials. It's Thursday, the 25th of January, and we're going to be discussing the freight transportation industry. I'm your host, Sarah Priestley, and joining me in the studio is a very special guest, Seth Clevenger from Transport Topics. Seth, thank you so much for joining me today!

Seth Clevenger: Absolutely. It's great to be here, and I appreciate the chance to be on!

Priestley: You braved the cold to get here. [laughs] 

Clevenger: Yeah, maybe a block and a half outside, but it wasn't too bad.

Priestley: So, Transport Topics is the go-to place for news in the freight transportation industry. You guys cover everything from regulation to new tech to major industry events. What's your particular area of expertise and interest?

Clevenger: My particular focus tends to be on the technology side of trucking, anything from electronic logging devices to automated driving technology. How technology is bringing the industry forward is where I spend most of my time, but I dabble in it all.

Priestley: I'm sure technology is keeping you busy on its own at the minute.

Clevenger: It is, absolutely.

Priestley: There's a few things I want to talk to you about today, because though the freight transportation industry may not be seen as the sexiest topic by a lot of people --

Clevenger: Oh, I disagree.

Priestley: [laughs] It has been in the news repeatedly in the past year due to self-driving tech, as I'm sure you're very familiar with, the driver shortage and the ELD mandate, the electronic logging device. The first thing I wanted to ask you about is this new regulation, which is kind of the biggest thing that's happened in the trucking industry in the last 50 years or so. I think it was first announced December 2015 that was coming in --

Clevenger: Correct.

Priestley: -- and it just came in at the end of last year. Firstly, what exactly is it?

Clevenger: This is, indeed, a landmark regulation for the trucking industry. ELDs, electronic logging devices, these are devices that are installed in a truck cab to automatically record when the vehicle is in motion, when the driver is driving. Long-haul truck drivers, commercial truck drivers are required to follow hours of service. These are driving time limits to make sure that drivers aren't driving while fatigued. It's a safety regulation that's been in place for a long time. Up until December of last year, this was done, in many cases, with paper log books. And of course, paper log books are inexact, they take time to fill out, and of course they can be fudged. So the idea here is to move the whole industry to an electronic system that's synchronized with the engine to make sure that hours of service are indeed followed. 

Lots of big trucking companies have already been using these for many years -- some for decades, even. But a lot of the smaller carriers are just now getting onto ELDs. There was quite a rush last year to get compliant with the rule. Went into effect Dec. 18. Sounds like there's still a learning process and there's still a process of making sure that the whole industry is on board. Enforcement has been phased in. Still kind of a conversation, in some cases, between enforcement and carriers that are still learning about ELDs. But come April 1, that's a harder deadline, where trucks will be put out of service for not having an ELD.

Priestley: OK. And then, this hours of service limit, the 55 hours, that's always been the case. It's just, now it's more easily enforced. Is that right?

Clevenger: Right. The rules themselves are not changing. Hours of service don't change with ELDs. But it's all about enforcement. You're going from a paper system to an electronic system, which of course eliminates, or makes fraud more difficult and puts the whole industry on a consistent standard. It's all about enforcing the rules that are already in place. There are interesting questions about how that will affect truck capacity, freight capacity, because it's pretty tight right now. There's a lot of demand. There's a lot of freight being moved and not a whole lot of trucks. That means that trucking companies are able to command pretty good rates in the market right now. Shippers really want to make sure they're working with carriers that are compliant, that are doing the right thing. So a lot of focus and a lot of interest in seeing what happens with freight capacity.

Priestley: The stakes are pretty high for the retailers. If a truck gets taken out of service and it has that load in it, that can be kind of disastrous. The Federal Motor Carrier Safety Administration --

Clevenger: Yes, FMCSA.

Priestley: FMSCA brought this in to try and increase road safety, increase compliance, get away from deaths and injuries that are caused by fatigued drivers. But what is this really going to do? This isn't necessarily going to affect some of the big carriers like the J.B. Hunts of the world and the XPOs. It's more going to do the individual driver owners. How many driver-owners -- is this a big-scale problem?

Clevenger: The trucking industry, the freight transportation industry, is very fragmented. You have the big companies, some of the big names you just mentioned. But still the bulk of the freight is moved by small and medium sized carriers. It's not like parcel delivery, where you have UPS and FedEx and the postal service and maybe a few regional players. So much of trucking is small and medium-sized. There's so many companies that need to learn about this, that need to figure this out. It's not just a handful of companies. It's thousands and thousands.

Priestley: And as you mentioned, this is going to definitely affect productivity. There was a report done recently that said the trucking industry will actually lose between 3% and 5% of its overall productivity, smaller carriers potentially losing 6% to 10% productivity. You suggested this is going to increase rates. What else are we going to see as a result of this?

Clevenger: There's going to be more demand for drivers, which I think is already an issue. Let me circle back and suggest that what happens with productivity and capacity really depends on how well you're following hours of service today. The companies that are already doing a good job of this, already using ELDs, should see very little effect. But frankly, to stay in the game, as some of their competitors perhaps, have to get a better handle on it. But a company that's maybe not doubting their I's and crossing their T's on hours of service may indeed see a significant decline in miles, because you can't just fudge the logbook anymore.

Priestley: And it's those one-day long hauls that are going to be hampered most by this.

Clevenger: Right. That's the range where you can see a difference. Some of the factors that come in, truck parking is an issue across the industry. If you're approaching your hours limit and you want to park, and there's no parking, you have to go to the next truck stop, there's an issue there. But that's ultimately an issue with hours of service, not the ELDs. That's an issue today, and it's been an issue for a long time. But maybe with ELDs and some of the data that can be collected with that, there are ways to better plan and make sure that drivers aren't being asked to do something that can't be done within the legal limits. So I think we're going to see better planning and better compliance at the end of the day.

Priestley: Is the actual equipment to install the ELD expensive?

Clevenger: It doesn't have to be. Some of the systems that have been on the market for a long time, these have been geared at the larger fleets that want to do a lot more than electronic logging. So some of these systems are also used for capturing engine data that can tell you how the driver is performing, how the vehicle is performing. The companies that are really proactive, really want to do a great job of coaching their drivers and monitoring their equipment, they're buying the Cadillac ELDs, the expensive systems. But if you just want to comply with the rule, just meet the bare requirements of the regulation, it could be really cheap. We're talking maybe a $20-per-month service charge with free hardware, zero installation. A lot of these newer systems are just a phone app plus a small plug-in device that you can plug into the truck's diagnostic port. So in terms of hardware, it can just be using the driver's smartphone plus a small device. There are some cases where you can buy a dedicated device and not have any service charges. You just buy the device and you're done. So if you're operating an interstate commerce, $20 a month --

Priestley: Shouldn't be that big of a deal. Margins are slim, but ...

Clevenger: Yeah, it's pretty minuscule. Trucking operates on small margins, but ...

Priestley: Not that small.

Clevenger: Not that small.

Priestley: The one thing I wanted to ask you about, I know that trucks with engines built before 2000 are exempt from this. Are we going to see increased prices in the used truck market?

Clevenger: I've heard, anecdotally, indeed there is some demand for pre-2000 trucks. It's based on the engine. So if you're looking at glider kits with a newer truck that has an older engine, that's one option that some of the smaller companies have been looking at. Anecdotally, I do hear that there's demand for older trucks. And we saw that even with the introduction of some of the after-treatment systems, DPFs, diesel particulate filters, in 2007. There was a big pre-buy, lots of companies bought trucks right before that threshold. We may see something on a smaller scale with ELDs. I think people might hold on to their older trucks a little bit longer. But, 2000, that's a pretty old truck by now.

Priestley: Yeah, that's not a long-term solution.

Clevenger: Yeah. A lot of those trucks are going to have a million miles on them by now, which is the end of life for a truck like this.

Priestley: For investors, essentially, what we're saying is, there could be a boon for some of the bigger players in the industry as they command greater rates.

Clevenger: Yeah, I think so.

Priestley: I think I read somewhere that, through the holiday period, there was five trucks for every 12 loads that needed to be delivered.

Clevenger: Well, I'm not sure if that was the case everywhere, but certainly, demand is high for truck capacity right now. And ELDs, at least the conventional wisdom is, that's the case. I certainly agree with that. That's playing a large factor in this capacity crunch. But if you have trucks that are compliant, if you understand ELDs, if you already do a great job of complying with the hours-of-service limits, you stand to gain. And that's pretty much all of the large players in trucking, have already equipped these devices, in many cases, for several years. There's one company in particular that's been using them for 20, voluntarily. They just want to make sure they comply with the law, they don't have legal problems, and they're doing a good job at being a safe company. Those companies that have been doing this for a long time are very well positioned.

Priestley: Absolutely. And then, another thing you mentioned earlier was the shortage of drivers, which we've seen recently. I think NPR just did a big article on it. One concern with ELDs is more people leaving the industry, some of these independents. I don't know if that's actually going to happen. But is the shortage of drivers having a palpable effect right now? And what do you think is the solution?

Clevenger: I think that was a little more bark than bite. I'm sure there's a little bit of that out there. But when you look at the price, if you're talking about $20 a month, it's hard to imagine leaving the industry over that. And if you're leaving the industry because you're no longer able to fudge your log book, then frankly, maybe you should be leaving the industry anyway. There's not been any sort of mass exodus that I've been aware of. The stories that I hear from the bigger trucking companies that have already been using ELDs for a long time, they describe, sometimes, a little bit of resistance at first when they make an implementation. But then, soon, a lot of those same drivers will say, "This is saving me time. I don't have to manually keep track of and fill out my log book. I don't forget it and then have the roadside inspector tell me that I have a violation because I forgot to fill out my log book. It's all taken care of." So in many cases, the drivers actually like it once they learn about it. These are more the company drivers, the ones that are working for fleets. And I think on the owner-operator side, if you're operating within the legal limits, I don't think it's anything to fear. I don't think any sort of mass exodus is going to be a big problem for capacity. I see it as more of a little bit of hours-of-service compliance along the edges, maybe you add 15 minutes or a half hour here or there where you shouldn't have done it, and now, with ELDs, you're more careful, and you make sure you stay within the legal limits.

Priestley: It's also an aging workforce. I think the average age of a trucker is about 55 right now. You focus on tech, and I'm sure you're fully versed, more than anybody else, on all of the self-driving stuff that's coming out, but it could potentially be really serious for the industry, a serious help, because 70% of the goods in the U.S. are moved by trucks. We still need trucks, people are buying more and more online.

Clevenger: Yes. Trucks aren't going anywhere. This is for sure, for certain. And the driver issue is one that's really been plaguing the industry for a long time. Lots of people in the younger generations have just not looked at trucking as a career option. It's really kind of a cultural thing. Think about parents and kids these days. There's kind of an expectation that if you have any prospects of going to college, that's what you should do. You're pushed down that path. Some of the more vocational jobs are really underserved. The workforce is not really aligned to the needs, and that's certainly the case in the transportation industry. So it's a real challenge for the industry right now to find ways to attract younger people to look at a driving job. And maybe some of this technology is part of the answer. Automated driving tech is something that I think is going to be interesting and exciting to younger people. Maybe it can allow more people to become safe drivers, if you have more systems on board to serve as a backup for the driver. And over time, I think that we'll see companies look at this technology not just as a way to be safe, but also as a recruitment tool.

Priestley: That's interesting. I've seen some estimates suggesting that we could have driverless trucks on the road by 2021. That seems really soon to me. What do you make of that?

Clevenger: Let me dial that back a little bit. It's kind of funny, I almost have to change my message a little bit depending on who I'm talking to. Sometimes I'll talk to truck drivers who are very dismissive of the technology. "This will never happen." Then I feel the need to be kind of a wake-up call. "Yes, this is coming." And then you talk to younger people, students, and they think, "Oh, so there's not going to be any truck drivers in five years." There will be truck drivers in five years. There will be truck drivers in 20 years. I think there will be truck drivers long beyond that, even. 

Automation, I see coming to the industry in stages. All the big players are working on this. All the big manufacturers and suppliers are looking at ways to add levels of automation and driver-assist tech. The big truck makers, the established truck makers, are all looking at this as a driver-assist level right now, for the most part.

Then, you have technology companies like Uber and Waymo and some start-ups like Embark and Starsky Robotics that are working on ways to get to a higher level of automation where the driver is no longer needed to monitor the road. And maybe the driver rests in the sleeper berth while the truck is on the highway. Maybe the driver is controlling the truck remotely. There's some companies working on that. Or maybe in some very limited cases, you may even see unmanned trucks. But I think that's going to be very localized, small deployments. We have that now on private sites like the mining industry. Maybe we'll see that at truck terminals off public roads. Maybe you'll see one state that wants to be really aggressive, attract a lot of technology investment and wants to really be a leader, then a couple of pioneers that will have maybe one freight corridor that's in a sparsely populated area out West, and you'll see some driverless trucks in very small numbers. That's possible. I could see us seeing something like that within a few years.

But the majority of the trucks that are moving the freight, I think, are going to remain manned, with a driver, but with more and more technology to help the driver. And maybe before too long, we get to a point where there's an autopilot system for highway driving. Automating the last piece, the city driving, the last mile, that's really difficult. When you take the driver out, you have to worry about things like who's going to put the snow chains on the tires or put out the emergency flare. I mean, trucks break down. The real miracle wouldn't be a self-driving truck. It would be a truck that doesn't break down. That would be the one that the trucking fleets would truly rejoice over. But I don't see that day coming. Things are going to break down. That driver is really valuable, even perhaps as they become, perhaps, more like a systems manager, kind of akin to a commercial airline pilot, which I do see happening over time.

Priestley: I completely agree with you. I think for the foreseeable future, it'll definitely be in stages, and drivers will almost become more important and more highly skilled, essentially.

Clevenger: Yes, I think so, too.

Priestley: It's interesting to see, because everybody gets so caught up in Uber's delivery of, I think they did 120 miles to deliver some beer in Colorado.

Clevenger: Right, yes. [laughs] 

Priestley: And all those kinds of things. And they are great, I'm sure we'll eventually get there, but in the interim period, it's going to be a lot of lane-keep assist and all those kind of assistants, because there's just so many edge cases that they can't really factor in.

Clevenger: The last 1% is so difficult.

Priestley: Yeah, exactly. You mentioned a few companies that are working on it. Obviously, Uber, a private company, is working on it. Tesla, Alphabet's Waymo, they're all trying to make this possible, but at different stages. It'll be interesting to see who fights this out, to see who's going to be the dominant tech in this industry.

Clevenger: Absolutely. There's lots of different ways. Lots of suppliers are lining up to compete with each other, and the truck makers are all looking for an edge, what can we do, they're all working on it. They're all pursuing this. It's just how they do it. And there's quite a battle winding up on the software side with companies, Uber and Waymo on the sensor development side, and actually just the braking and steering piece of it. There's been lots of merger-and-acquisition activity there. A lot of the big braking suppliers in the North American trucking industry have acquired steering companies to prepare themselves for this. We see it in the passenger-car market, as you alluded to, with lane-keep assist. We're starting to see some of that capability reach the market. And we'll see that pretty soon in trucking. I think you'll see big truckmakers offer, as an option, some level of automated steering within the next few years. And that's going to be a broad availability across the industry. Not to say broad adoption, but when you buy a new truck, that's an option that you can choose.

Priestley: Yeah. So, slowly, the market will turn over into these. And one other thing that I wanted to mention to you, because I don't know if people are aware of it, is platooning, this idea where they go in convoy. How much of that is automated? Is it that there's no drivers in the back vehicles?

Clevenger: Platooning, I think it's best to think of it as a parallel technology to automation. It can have various levels. There's a company called Peloton Technology that's preparing to launch their system. They've been doing lots of tests and they're looking for a launch this year. That's only what's known as level 1 automation. I don't want to get too into the weeds on this, but that means the driver is still steering the truck. There's two trucks, the driver is still steering, but feet are off the pedals. It's a form of adaptive cruise control, which has been out in the market. 

What's new about platooning is, it adds vehicle-to-vehicle communication. These two trucks are sending signals back and forth, and their braking systems are automatically synchronized. Once you're in this adaptive cruise control, the two trucks will automatically speed up or slow down to maintain a close following distance, actually a much closer following distance than would normally be safe for a human driver. And they can do that because the sensors, the systems, will pick up when they need to stop. And as soon as that first truck starts braking, the second one immediately brakes at the same time. You don't have the one to two seconds lag delay of the human response. That means you can go in this much more aerodynamic, close formation. 

Platooning is really mostly a fuel economy play. When you think about the massive amounts of money that these companies spend on fuel, if you look at up to a 10% fuel economy gain for the following truck, that's really significant. These companies are looking for 1-2% here and there, so a 10% could be attractive for these companies. And I think you'll see some early adopters look at it for that reason. And then, over time, as automation gets more sophisticated, you can add an automated steering piece to that. One of the leading theories that I think has a lot of merit to it is, some of the first truly driverless trucks, unmanned trucks, on the road, will be the following truck on a platoon. You'll have two trucks. The first truck has a driver with driver-assist technology helping them. The second truck will be unmanned. That's something that could happen in fairly short order. That's not decades down the road, I don't think.

Priestley: One last thing I wanted to ask you about, because we have a lot of Tesla fans here, is, what did you make of the Tesla semi?

Clevenger: I was fortunate enough to be there at the unveil in L.A. back in November. Of course, it was a very typical Tesla event. Lots of the Tesla superfans were all there, very enthusiastic. And Tesla, of course, brings this coolness factor that might have some appeal to trucking, as it looks to attract some younger drivers, as we mentioned earlier. This is a really fascinating concept. This is an all-electric a Class 8 truck. It's not a hybrid. There's no fossil fuels at all. It's relying solely on electric power up to a 300-mile range, is what Elon Musk said it would be, at least for the longer haul version. This is still only going to be a regional truck, and I imagine the early adopters will only be using it for local routes and maybe some regional haul where it's kind of a line haul, point A to point B, for a specific customer that wants to take advantage of it and be able to say that they're moving their freight with zero emissions, that they're a greener company. 

There's been some interest. The truck won't be produced until at least 2019. This was just the unveiling of the vehicle. But some of the big players are already lining up to secure orders, some of the big companies that like to test all the alternative fuel options out there. UPS, Wal-Mart are among the big names that have already placed reservations for significant numbers of trucks, Tesla semis, and will be quite interested. I was able to sit in the seat, but I wasn't able to test drive it. So I can't give you a review there.

Priestley: It's a very different cab, isn't it?

Clevenger: It's a very different cab. In fact, it feels like you're in a Formula One race car, because the driver's seat -- and there's one, there's not two seats -- is in the center of the cab. You're not offset to the left. Which is a very different feel. Its design is aimed at improving visibility for the driver. If you're ever in a big rig, you'll see how difficult it is to see around you. So this is part of Tesla's way of solving that. There's a jump seat so you can have, kind of like an airline jump seat for a flight attendant, so if you have a driver training situation you can have somebody also there. But it's really, you're sitting in the middle of the vehicle, which is a very different feel. And I think some old-school drivers will absolutely hate that, and I think some younger people will think, "Wow, this is so cool, I can't wait to drive this."

Priestley: "That sounds dope."

Clevenger: Yeah, so it just depends who you are. I think some of these companies will definitely use it as a recruiting tool. We talked about Tesla's electric truck. I should also make it clear that the traditional players, the established truck makers, are all looking at electrification as well, mostly in urban delivery and short-haul. But the big players like Daimler trucks, Freightliner, Navistar, Volvo, Paccar, they're all, to various degrees, dabbling in electrification. They all see this as a path forward. Diesel is not going anywhere, especially for long-haul irregular route where you don't know where you're going from week to week. That's going to be the diesel, I think, for a very, very long time. But short-haul, fixed route, we could see electrification in relatively short order, I think. And that's going to be a fascinating change for the industry.

Priestley: We were talking about Cummins before we started recording the show. Even them, a diesel engine maker --

Clevenger: Yeah, even Cummins. And Cummins is synonymous with diesel. They are diesel engines. For those who don't know them well, they're the largest engine maker for classic trucks in North America. And they make diesel engines for lots of other applications and industries. Even they're working on getting into the electric game, electrification, electric components for trucks. So you can be pretty sure that this is the way the industry is headed, when Cummins --

Priestley: Gets on board.

Clevenger: -- when the diesel kings are fully invested in electric, as well.

Priestley: Seth, thank you so much for coming in today! You've really broadened my horizons on the trucking industry, that's for sure. Hopefully you can come in again at some point, that would be great.

Clevenger: Absolutely! This was great! I appreciate the opportunity to be on. Let's make trucking sexier! It's a fascinating industry.

Priestley: It is!

Clevenger: It's sometimes taken for granted and not fully appreciated, but there's lots of interesting things happening.

Priestley: Yeah, absolutely, I 100% agree. That's it from us today. If you would like to get in touch, please feel free to email us at IndustryFocus@fool.com or tweet us on Twitter @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. The show today was kindly mixed by Austin Morgan. I'm Sarah Priestley. Thanks for listening, and Fool on!

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Sarah Priestley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Cummins, and Tesla. The Motley Fool owns shares of Paccar. The Motley Fool recommends FedEx and XPO Logistics. The Motley Fool has a disclosure policy.