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October 2007

Rail News: Canadian National Railway - CN

Canadian (Inter)National - the making of one transportation company's global strategy

— by Pat Foran, Editor

If you're running a business these days, you're likely buying from, selling to or serving someone from another country or continent. You're part of the global supply chain. And nowhere is that more apparent than with North American railroads, where the growth engine that is intermodal continues to connect them with ports of call the world over.

Those connections continue to compel railroad strategists to look beyond the rail yard and toward the transportation horizon. By beginning to think "transportation" vs. merely "rail," they're also beginning to redefine "growth."

Witness the evolutionary transformation under way at Canadian National Railway Co., which continues to seek ways to capitalize on burgeoning global trade opportunities.

When CN acquired Illinois Central Corp. in 1998, it became North America's only rail network to connect three coasts: the Pacific, Atlantic and Gulf of Mexico. With E. Hunter Harrison onboard — first as chief operating officer, then as president and CEO — CN turned "precision" (aka "scheduled") railroading into an art form, becoming arguably the best-run railroad in North America.

And as CN nurtured that continuous-improvement culture railroad-wide, including the intermodal business unit via the Intermodal Excellence (IMX) program, Harrison & Co. set their sights on what it would take to take CN to the next level.

"Our stated goal has been to be the best railroad in North America — not just get there, but stay there — and we think we are," Harrison said during a July 23 interview in his Montreal office a few hours before CN announced its second-quarter financials. "But as we started viewing all the trade opportunities, and looking at this franchise, we started thinking, 'What's the possibility of being able to transfer what we know to something broader?'"

And becoming, say, the best transportation company in North America ... or anywhere, for that matter? CN's giving it a shot.

In addition to leveraging that tri-coastal port network — most recently by opening an intermodal terminal and transload center at the new Port of Prince Rupert, and preparing for what in five years' time could be booming traffic at the port of Halifax — CN's making in-roads into the freight-forwarding arena.

Unwinding History

Launched in 2005, CN WorldWide schedules and manages door-to-door international shipments moving via rail, truck and water, and provides port handling, warehousing, customs and billing services.

Initially focusing on freight moving between Europe and Eastern Canada via the Port of Halifax, CN WorldWide last year launched operations in China through offices in Shanghai, Beijing and Shenzhen. And earlier this year, the Class I unveiled CN WorldWide North America, with plans to expand its network of freight-handling facilities in the continent.

Now, CN WorldWide has offices in 12 countries in central and western Europe, and five in China. Soon, it'll open an office in South America.

"These services will help generate new rail opportunities, market share increases with existing rail business, and back-haul opportunities through the Port of Prince Rupert to Asia," Harrison says. "Combined with our unique port network and our solid North American franchise, we are providing local markets with a global reach."

And themselves with a potentially formidable global strategy.

"We're re-entering certain lines of business that railroads, including CN, had gotten out of," says CN Executive Vice President of Sales and Marketing Jim Foote. "This goes back to buying the IC and our desire to, in a rational way, unwind history."

The rational unwinding included a few more strategic acquisitions and co-production agreements, and a lot more focus on precision railroading. But the IC deal was huge.

With IC in the fold, CN's network connected with ports on the Pacific Ocean (Vancouver, Prince Rupert and Kitimat, British Columbia); the Atlantic (Halifax, Nova Scotia; Saint John, New Brunswick; Quebec City and Montreal, Quebec); and the Gulf of Mexico (Mobile, Ala.; Gulfport, Miss., and New Orleans).

CN redrew its rail map a few more times post-IC, acquiring the Wisconsin Central Ltd. in 2001; and three Great Lakes Transportation L.L.C. properties (Bessemer and Lake Erie Railroad Co., the Duluth, Missabe and Iron Range Railway Co. and The Pittsburgh & Conneaut Dock Co.) and BC Rail Ltd. in 2004.

But CN didn't lay its strategic foundation by merging and acquiring alone. Like other Class Is, CN began seeking collaborative ways to extend its reach, as well as boost network capacity.

Since 1999, CN has entered close to 100 co-production agreements with all six other Class Is, and half of the pacts are with rival Canadian Pacific Railway. Like routing protocols, co-production pacts are designed to increase efficiencies and improve service by optimizing the use of both railroads' existing infrastructure.

"Hunter Harrison and Jim Foote both strongly believe that if we go the shortest route, we'll get more business," says Francois Hebert, CN's VP of network strategies.

Take a co-production pact CN forged with CPR early last year. The agreement enables the roads to operate each other's trains into and out of the Port of Vancouver, where container volumes are expected to grow significantly during the next decade. The pact's helped reduce congestion significantly, Hebert says.

"And they're selling that in China — 'Vancouver is fluid because two railroads are working together,'" he adds. "We'll continue to pursue co-production on their own merits, but we also know that Vancouver is very important to [CN] WorldWide."

The IMX Factor

Amid the merging, acquiring and co-producing, Harrison and his chief lieutenants continue to preach the precision gospel.

Under precision railroading, CN runs regularly scheduled trains that leave at predetermined times. Each car or container has a specific trip plan that fits the design of the train schedule — which, CNers believe, means they're focusing on what matters most to the customer: the carload/shipment, and not the train.

CN marked a seminal event in the precision railroading evolution when the railroad applied the approach to intermodal — particularly the international segment. For CN, key intermodal growth markets include the stretch between the ports of Vancouver, Halifax and Montreal, and the segment between the ports of Vancouver and Montreal, and the U.S. Midwest.

Launched in 2003 as a pilot program on the Halifax-to-Chicago corridor, IMX enabled CN to provide pre-defined daily train capacity, and slot, gate and equipment reservations. IMX has helped CN meet intermodal equipment demands and make terminals more fluid, which is paying off, profit wise.

"Intermodal used to be at the bottom here, in terms of margin," says Paul Waite VP of IMX. "Now, it's close to the top third."

Perhaps just as important, the IMX experience taught CN strategists that much more about how the supply chain works — and, at times, doesn't work — as well as how and where a focused organization like CN might be able to better leverage its rail franchise and tri-coastal port network.

"The progress we've made with IMX sets the table nicely for CN WorldWide," Waite says.

So did a trip Harrison took to Europe in the early 2000s. During his travels, he had a conversation or two with a few freight transportation professionals about what it took to "get products from A to B — actually, more like A to Z — over there," Harrison says. "You could see there was a need."

Meeting A Market Need

Particularly in the realm of freight forwarding. Generally, freight forwarders organize the movement of goods on behalf of an exporter, importer or other entity. And there are a lot of them out there — in all, about 40,000 forwarding and logistics firms, estimates the International Federation of Freight Forwarders Associations.

How well was CN positioned to meet customers' forwarding needs? Pretty well, Harrison and his team figured — particularly if they could apply the precision-railroading principles as well as they had with IMX.

"We began looking at a lot of the things we did internally, before my time here, when we did other things to support rail transfer — transload, cargo flows — all these things for the customer," Harrison says.

CN would need to build some warehouse or transload-related facilities — or, in some instances, acquire them, such as the 2003 purchase of Stellar Distribution in Chicago.

"Basically, we started to bring the control of the operations in-house and started to leverage them with the railroad," says Keith Reardon, who in 2003 served CN as AVP of transload and CargoFlo, a bulk commodity transfer terminal network. "When we operate a facility, we look at the best interest of the customer, facility and the railroad — we cut out all the noise and streamline the supply chain."

Other railroads have tried the "one-stop shopping" approach — a term Harrison doesn't like — but not necessarily the way the precision-oriented CN might attempt to pull it off.

"Could we get cut off along the way? Sure," Harrison says. "But this is something we could do without a lot of capital [investment] and risk."

The decision was made. And in May 2005, the Class I unveiled wholly owned subsidiary CN WorldWide.

Based in Rotterdam, Netherlands — home of the world's largest non-Asian container port — CN WorldWide schedules and manages door-to-door international shipments moving via rail, truck and water, and provides port handling, warehousing, customs and billing services.

"The business model is similar to precision railroading — the more we control, the more visibility we have, the better product we have," Foote says. "We run the business just like we run the railroad — it's extremely efficient, and we're extremely hands on, with a focus on customer service."

A 'WorldWide' Birth

To run CN WorldWide, Harrison and Foote selected Anita Ernesaks, a graduate of CN's Railroad MBA program. During her 17-year CN tenure, Ernesaks held various management positions in the marketing, finance, process reengineering, operations and logistics department.

As AVP of sales, she was responsible for revenue forecasting, regional sales, account development and customer coordination. And as VP of eBusiness, she was charged with leading initiatives to enable customers to do business with CN in real time.

"We put Anita in Rotterdam and said, 'Go for it,'" Foote says.

She couldn't wait to get started.

"The world is changing — look at international trade flows," says Ernesaks, CN VP and WorldWide's Global Managing Director. "Years ago, it was north-south and a focus on NAFTA. Now, there's China, and North America's looking for alternate sources of supply."

Going The Distance

CN included. The Class I's execs knew they had a good product offering in North America, but could they take it international? And door to door, at that?

"Not just from Edmonton to Chicago or Montreal to Memphis, but Germany to Chicago, or the Netherlands to Chicago," Ernesaks says.

But how to pull it off? For Ernesaks, step one was learning the lay of the freight-forwarding land overseas. What did the international marketplace want? What were international shippers looking for?

To develop a service design strategy, she spent a lot of time the first year meeting with service providers and port authorities to talk about how things worked and how processes might be improved.

"One of the key things I learned was the significance of distances," Ernesaks says. "In North America, we don't always think how vast the distances are or how long it takes to get from place to place. In Europe, most of the GDP is within 750 kilometers, and the infrastructure to move product actually works pretty well. It works in China, as well — a lot of the manufacturing is near the coast and ports."

That on top of the fundamental differences between railroading and freight-forwarding.

"This is a completely different industry," Ernesaks says. "CN WorldWide is a non-asset-based company, operating in a very competitive marketplace. There's thousands of forwarders around the world."

But Ernesaks knew her precision-railroading experience would serve her well at CN WorldWide, regardless of whether she's managing actual assets.

"Our priority is to keep that box moving, so the philosophy is pretty much the same as it is at CN," she says.

Initially, CN WorldWide focused on freight moving between Europe and Eastern Canada via the Port of Halifax. But it wasn't long — about a year and a half — before CN WorldWide was moving freight across the Pacific, as well.

In October 2006, the Class I announced CN WorldWide had launched international freight forwarding operations in China through offices in Shanghai, Beijing and Shenzhen.

"Our presence here enables us to better serve our customers in China and support the increasing trans-Pacific trade," Ernesaks says.

Team 'Jet Ski'

Then, in April, the Class I unveiled CN WorldWide North America and appointed Keith Reardon to serve as VP and managing director of the integrated transportation service provider.

His "mandate," as CN officials refer to it? Expand the scope and scale of CN's non-rail capabilities —including warehousing and distribution, bulk handling and customs services, supply chain visibility tools and, as of last month, one-stop-shop truck dispatching (via CN Truckload) in Memphis — across North America.

"Keith knows what customers want and how to get things done — that will be a key differentiator in this business," says Foote, who calls Reardon "an operating guy with a good vision."

Another graduate of CN's Railroad MBA program, Reardon, too, is quick to reference the railroad's five guiding principles (service, cost control, asset utilization, safety and people) in describing his approach to managing the operation, which currently includes a sales force of 20.

"You have so many pieces of the supply chain, and so many hand-offs," he says, adding that his staff supports the sales and marketing people for CN, the railroad. "We're trying to provide a service that streamlines all that."

And given the dynamics of the freight-forwarding universe, the WorldWide sales force needs room to do it.

"This requires a much greater degree of entrepreneurialism and aggressiveness and decision-making artistry — we need to give them space to do that," Foote says. "These guys are not battleships — they're jet skis. And we can't let the big CN railroad slow them down too much. That's the primary reason for creating 'North America' — to begin to give it room to grow faster."

Overall, CN WorldWide's "jet ski" team comprises about 100; of that total, only four have been "expatriated, so there's a lot of regional expertise," Ernesaks says. "In China, for example, our people are very familiar with the local markets and the different transportation modes."

That familiarity appears to have success written all over it. For 2007, CN budgeted $100 million in freight forwarding revenue — about $50 million each from Europe and Asia, Foote says.

"This is not a huge revenue producer at this point, but we think it could be one day," Harrison says. "I can easily see this being a $1 billion business unit in five or six years."

Adds Foote: "The potential here? It's unlimited."

Early Signs Show Promise

Ernesaks declined to provide current figures, but said she was pleased with the diversified customer base her staff had been able to cultivate to date. She's also encouraged by the way the marketplace has accepted CN WorldWide.

"What we've found is that, by having the rail expertise, we can talk about railroading with credibility, which is unusual in this environment," Ernesaks says. "It's about terminal interfaces — not only on land, but ports — and the routing perspective that we have. It's also about shipment visibility, keeping them informed about where shipments are. And, of course, it's about executing the plan."

Bottom line: There's an eager marketplace out there seeking the kind of services CN WorldWide provides, CN execs say. One challenge is making sure they don't bite off too much too soon.

"We've had a lot of requests for other trade lanes — China to Europe, and China to Australia — but we've really tried to keep on our plan," Ernesaks says. "If you try and do too much, you don't deliver."

Since doing what you say you'll do is one of CN's guiding principles, not delivering isn't an option. Expect measured steps, at least for the near term.

"Actually, the biggest issue so far has been getting people to think 'CN WorldWide,' versus 'CN, the railroad,'" Foote says. "It's getting the mind-set of the organization comfortable with that concept."

What's Next?

Not that CN managers or employees have all that much time to get comfortable with the "think transportation" shift.

Whether they're working on the railroad proper or serving customers via WorldWide, CNers will have their hands full as the winds of global change continue to blow in the vicinity of CN-served ports and terminals.

Last month, the Class I opened an intermodal terminal and transload center at the new Port of Prince Rupert in Prince George, British Columbia. CN partnered with Maher Terminals of Canada Corp. and the Prince Rupert Port Authority to fund the project.

Served by ocean carrier COSCO Container Lines Americas Inc., the port and terminal/transload complex can be reached from Asia in 58 fewer sailing hours compared with other West Coast ports.

CN's complex will handle containerized export products moving to and from Asian markets through the new port.

The intermodal terminal initially will handle 500,000 twenty-foot equivalent units (TEUs) annually. The terminal eventually will be expanded to handle 2 million TEUs.

"I think the Asian Tiger is going to continue to roar," Waite says. "We're very excited about Prince Rupert."

Operated by CN WorldWide North America, the Prince George Distribution Centre offers daily rail service from the terminal to the port.

Transload services include product transfer, inspection, consolidation/deconsolidation, inventory control, transportation, dray service for container pick-up and deliveries for source loading provided by CN Truckload.

"CN has great expectations for the Prince Rupert container terminal," Harrison says.

But there's another continent push-pinned with a 'Great Expectations' flag: the Indian subcontinent, which CN serves via the Port of Halifax.

In May, the Halifax Port Authority and the Suez Canal Authority entered into a memorandum of understanding aimed at promoting an all-water route between Asia and the Indian Subcontinent by moving cargo through the Port of Halifax via the Suez Canal.

"When the Suez opens up, the East Coast is going to be as active as the West Coast," Foote says.

Adds Waite: "Halifax still has lots of capacity, and within four or five years, India will be just like China. So, we're gearing up on the sales side."

So is CN WorldWide, which next year will send a team to India "to get a footprint and understand who the players are," Foote says.

Sticking To The Plan

But as much potential as these markets offer in terms of intermodal and CN WorldWide opportunities, CN strategists are committed to stick to the plan. The road to global transportation, they know, is long.

"It's all about the disciplined execution of a plan — day after day," says Ernesaks, adding that CN WorldWide is just now beginning to explore opportunities in conventional bulk shipping and LTL. "For us, what works very well is our ability to integrate the service that CN offers and really make it easy for the customer. That's our goal — to make all of this simpler."

Sounds like a global plan.


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