The world’s supply chains are a mess. There are shortages in a bunch of different goods and components, which are getting further compounded by massive delays and gridlock in shipping and other forms of transport, reports Bloomberg.
The podcast
On this episode of Odd Lots, we speak with Ryan Peterson, the CEO of Flexport, which makes software that helps companies manage their supply chains. You can find the episode here. Transcripts have been lightly edited for clarity.
Tracy Alloway: Hello, and welcome to another episode of the Odd Lots podcast. I’m Tracy Alloway.
Joe Weisenthal: And I’m Joe Weisenthal.
The Suez Canal crisis
Tracy: Joe, remember the Ever Given?
Joe:Yeah, that was, that was a great story. It’s not over yet. Is it?
Tracy: So possibly my favorite sort of finance/eco story of all time. It’s still going. So there’s still this legal thing over what’s going to happen to all the actual things that were on the Ever Given after it was stuck in the canal and people are still trying to clear the backlog of container ships, the sort of logjam that came from the blockage, you know, months, at this point, after the thing was actually stuck.
Joe: Right. So it wasn’t actually stuck like sort of blocking the canal for that long. I think it was about a week maybe, or something around that, but it caused all kinds of issues, obviously. And they had to have this huge rescue effort and that cost all kinds of money. And then the last I heard about it — and I probably read an article like a week or two ago — there was some sort of issue with the boat, the vessel, not being allowed to actually continue on its journey until the owners paid up for the, the rescue operation. And I started lost track of it after that.
Tracy: Yeah, that’s exactly right. And of course the Ever Given, it’s sort of, I guess, symbolic of all these logistics snarls that we’ve had recently during the coronavirus crisis and, you know, we talked about it before in various episodes, we’ve talked about basically the surging traffic and shipping container rates going up, but we’ve also talked about this idea that there’s a shortage of lots of different things, including lumber, including semiconductors, and the logistics snarls really play into that. Because if you already have a shortage of things like semiconductors, plus you can’t actually move them to where they need to be, then everything just gets compounded.
Joe: Right. I was just about to use that word compounding because that’s really what it feels like. Like the Ever Given story was kind of wild, the ship like got turned and went into the bank and it was kind of weird, but it really was sort of the perfect emblem of this moment because there are just so many issues. We recently did that episode about with the lumber trader. And so then after that episode, I was like reading about, or I was like following, one of the big sawmill companies. I read their earnings report and they missed…
The Sawmill Company
Tracy: Joe, you read this from my post.
Joe: Oh, I did?
Tracy: Yes. You published it!
Joe: That was the thing about how…
Tracy:… the sawmill company, yeah.
Joe: Yeah, they couldn’t get enough trucks.
Tracy: Yeah, it should have been minting money, but it wasn’t because they couldn’t actually move the wood. Okay. So we’re all on the same page.
Joe: All of these things are piling up on top of each other and chips and trucks and boats, and it doesn’t feel like we’re getting any closer to some sort of equilibrium. Of course, you beat me to that story, Tracy. I don’t know why I would have ever suggested otherwise.
Tracy: But look, what’s really interesting… Well, I’ll tell you one thing, I’ve been trying to ship something on a container from Hong Kong to LA for months now, and I cannot get room on a ship for love or money. So, you know, I’ve been trying to do this for the purposes of journalism/science. So I personally know how bad it is and the guest that we’re about to speak to on Odd Lots is someone that I got in touch with to try to give me some logistics advice and figure out what was going on with my own container shipping woes. And he’s really the perfect person to talk to about this because not only is he the head of a tech platform for global logistics — so this is what he does day in and day out — but he also has about 40 containers still stuck on the Ever Given. So he can talk about that situation as well.
Joe: Well, I’m really looking forward to this. I’m hoping to learn something and hopefully you get some advice on making your shipments.
Ryan Peterson
Tracy: All right. Our guest for today is Ryan Peterson. He’s the CEO of Flexport. Ryan, thanks so much for coming on!
Ryan Peterson: Great to have great to be here. Thank you for having me on.
Tracy: So Ryan, hopefully Joe and I kind of described the extremity of the logistics lo jam correctly in the intro. How bad is it right now?
Ryan: It depends where you sit. If you own a ship or an airplane or a fleet of those, you’re making a lot of money right now. Prices have gone through the roof. And the reason is because people are shipping more things than ever before in human history and all the ships and planes are full, but all the companies, I mean every industry, I think lumber, the lumber one you described is super interesting, but everybody’s having trouble getting anything delivered. And it’s not just you with your little container. It’s some of the best companies in the world are struggling right now.
Tracy: So my little container is 20 feet long for the record, but it only has one thing in it.
Joe: Well, how does Flexport sit within the logistics ecosystem and who are your clients in all of this?
Ryan: Yeah, so we work with about 6,000 great companies around the world that regularly ship. We actually have more than 10,000 customers, but 6,000 of them are shipping constantly — like everyday. Medium-sized, big-size, big companies, household names, some of the most important brands in the world, as well as like we have almost all of the direct to consumer e-commerce businesses that are these up-and-coming companies. So we have all of those as customers. They contract Flexport to manage the full end-to-end from shipping, everything. Once it leaves the factory loading dock all the way into their downstream network for distribution into the U.S. and we handle air, ocean freight, customs and the delivery, both pickup and delivery for trucking.
Tracy: So talk to us a little bit about the containers on the Ever Given then. What was your role there in the logistics chain and what’s their current status?
Ryan: Yeah, we do have, we have 43 containers sitting on that ship still. That’s our European customer base, obviously. They contracted us to ship containers out of, mostly out of those ones left from China. You’ve seen the pictures of the ship. They’re stuck. The name of the game here is second-order effects. You just couldn’t predict what was going to happen. So you’ve got the 43 that are stuck on that ship, but actually 120 other ships containing 1,200 Flexport containers were stuck behind that ship or ahead of it, depending which way they’re going. And also couldn’t be delivered and had to get delayed.
And that’s the biggest cost that’s going to come about through litigation and everything else that flows through here, is all of these people feel like ‘Hey, you owe me money, you blocked my delivery.’ And all of that, that’s going to be a lot of lawsuits. It’s not just the cost of the rescue operation and the dredging of the canal and everything else. It’s like all these people had their cargo delayed. And how do you quantify that? It’s like, is it the lost profits that they would have made from delivering those goods? It starts to be a really hard exercise that will get settled in a court of law, or many. And it’s gonna take a long time to shake out.
Trapped commodities
Joe: I don’t know if there’s client confidentiality, but can you tell us some of the items that are stuck on the, what types of items are stuck on that boat?
Ryan: Yeah, there is a lot of confidentiality, but I know that one of our customers is a relatively famous company that makes, and I can’t share this anybody, that make keyboards and mice — many container loads of that. By the way, of the 43 containers we have, all of the customers except for three opted into cargo insurance which will cover the damages in the eventual lawsuits that come out of this. Those three are going to have to work through it and make sure it doesn’t bankrupt them. But one of the little-known facts about global shipping is under ancient maritime law, the company shipping the cargo — not the owner of the ship — but the company who owns the cargo, the products on there, is liable when something like this happens. Yeah. And the reason… that’s a law called general average, it’s a fascinating Wikipedia article.
And the reason that that’s true, under ancient sort of not, I mean, ancient. Yeah. It goes back I think hundreds of years, the reason that that was true is that in a storm or an accident at sea, you don’t want people to stop and argue about whose cargo they’re going to throw overboard … You don’t want these arguments. You don’t want the mariners like worrying about that, just throw the cargo over and save the ship is the principle. And you’ll sort it out later. And the way you sorted out later is everybody agrees that we will share equally in whoever’s cargo got thrown over, the rest of the people will make them whole. And that’s a principle called general average. And the ocean carrier under the law has the right to invoke general average and declare it and say, okay.
And so that’s what Evergreen has done. They have declared general average, which means all of the customers who have cargo on that ship are going to be liable for the damages that come through. And it could be billions of dollars in aggregate and it gets divided pro-rata based on the commercial invoice value of your goods. When you do get your goods put on that ship, you should pay for cargo insurance. Because if something terrible happens, all of a sudden your little Bloomberg research project could, you know, bring your whole…
Joe: Yeah Tracy, you got to make sure that you don’t get bankrupted.
Tracy: Oh man, that’s actually a really good point. And now I’m worried about like bringing all of Bloomberg down with this one shipment. All right, this is actually something that I wanted to ask you about. So I’m hoping you can expound on that point, who is actually liable for the snarls that we’re getting in global shipping traffic? Like when stuff goes wrong, who bears responsibility? Not just in terms of, I guess, insurance for lost or delayed cargo, but also who bears responsibility for solving the problem? Like who do your clients go to and say, I can’t get my stuff shipped on time. Someone needs to fix this?
Ryan: That’s on us as a logistics industry. It’s really tough. The analogy that I’ve been using with my teams is that we’re doing wedding planning, outdoors, and all of a sudden we’ve been moved to Seattle. And it’s like, well, you better be warning your customers about what’s going on. Tell them that ‘Hey, we’re, we’re not able, like 30% of ships are not making their schedule right now. 37% of containers are getting rolled, which is what it’s called when you get bumped in an airline. When you get bumped to the next plane, that’s called getting rolled in ocean container sipping. 37%. Industry standard, industry average before the pandemic was 8%. So it’s just a huge spike in failure, service delivery failure.
And it’s a ton of second-order effects because when that — the Ever Given is a really good example. That ship, okay, it’s six days late. The ships behind it were six days late. I mean, the Ever Given is going to be months late, but the ones behind it were six days late arriving. But now they were supposed to go to the next port and the next port. And they’re going to be delayed there. And all those other bookings that were supposed to get put on, get rolled and have to find a new, you know, what ship do they go on? It’s a mad scramble. That was just like adding insult to injury after a year of this — well, at least six months — of really excess capacity and not enough ships to move all the cargo that’s trying to move.
Joe: So yeah, explain that. Ever Given aside, what have been the main factors that explain why the system is basically buckling. Where are the big pain points coming from?
Ryan: The first thing, and the easiest thing to point to is just like way more demand, way more volume is being shipped. And my own working hypothesis for this — and didn’t predict this in advance, so I’m not claiming to be smart. And I just sort of looked at the data ex-post and rationalized it, which we’re all capable of doing — but ex-post, we can look backwards and say, well, all of these consumers who got locked in their homes and couldn’t go out, you got to get your dopamine somewhere, and so you just buy stuff on the internet. And people have bought way more things than they were buying before. And you’ve had this like big shift. And the data does bear this out — you’ve had a big shift from services, which are way down, double digit percent down, onto durable goods, onto home goods, upgrading your furniture. And so that’s the first thing — just like way more cargo getting shipped. And you have the same number of ships, in some cases less because of actually the ocean carriers cut back.
We all predicted as an industry and as a world, as like economists around the world, everyone predicted that goods purchases would fall off a cliff. And the opposite happened, which I think is a lesson that we should all take from this is like maybe don’t be so certain in predictions of the future. But we all predicted that. And ocean carriers actually pulled back capacity. A lot of companies pulled back orders and their factories made other plans. And then all of a sudden get new orders. So you’ve got a logjam at the factory where right now it’s taking — I talked to one bicycle producer, a pretty big brand, two weeks ago — and it’s taking them 300 days when they place a purchase order with their factory, 300 days before it’s ready to get picked up, which normally this is like a 30 day process.
So you’ve got delays at the factory. Ships, there wasn’t enough capacity. Well, we also ran out of containers. And this is a really interesting second-order effect. Imports have surged. U.S. exports are down like 20% of containers. If you don’t have containers being exported, you don’t have empty containers to put those imports in coming back. And it needs to run in a loop. So normal days, pre-pandemic, 60% of containers leaving the United States were empty. It’s running around 80% right now. But for a while, the ocean carriers weren’t on top of this and just shipping back extra empties to make sure that they have enough capacity. So there was a moment a couple of months ago where we were as an industry, as a society, 500,000 shipping containers short in China.
Empty containers
Joe: Sorry. I’m sorry. Could you just explain that? Why is the shipment back of empty containers a problem?
Ryan: Because normally you have full stuff going. But U.S. exports fell off a cliff. And nobody thought ‘Hey, I still need the container. Even if I’m not exporting the goods.’
Joe: Oh, so the ships were going back to China, but leaving empty containers.
Ryan: The empties were staying here because they would get imported and usually they get exported automatically. And that’s like, just a really quick reaction. You know, the industry was not made to change this fast. It’s physical goods type of stuff happening in the real world, it’s not software.
Tracy: Can you go into that in detail? Because this is something that we spoke about with a previous guest on shipping, but how flexible is the industry? I get the sense that it isn’t very, and you’re dealing with, you know, massive ships and huge ports that take a lot of coordination and big lead times, but why can’t it respond to — you know, at this point, it’s a change in the world that’s sort of been going on for more than a year — so why does it take so long to respond to it?
Ryan: Yeah. I mean, it’s my personal obsession is to try to make this industry more agile and bring technology to bear. And a lot of it is a lack of technology. A lot of these companies are running old systems. I’ve heard the word AS/400 more times than I ever want to hear again in my life. That’s like an operating system built by IBM as a predecessor to OS/2, like we’re talking about early 80s technology that’s still running. And it’s hard to switch out a system that runs such vital systems and, you know, it’s running your company. And so some of it is technology and lack of tech to be agile.
Some is, I don’t know, a sense of bureaucracy. So for example, with these empty containers, we saw this problem coming. Like six months ago, we were like ‘Hey, the exports aren’t happening. There’s going to be a lack of empty containers in China, we went to a couple of ocean carrier partners of ours and said, we want to ship empty containers. We’ll pay you to ship them. We want to make sure we have empties available. And they told us sure, but once it arrives there, we’re taking it back in and it’s our container. And we’re like, okay, well, I’m not going to pay you to ship it empty. So we didn’t do it. And then fast forward a couple of months and they didn’t have any empties. We’re like ’argh, we were offering to pay you to do this, and you’d be making more money right now.’
So some of it is just like, how do you get older companies to be less bureaucratic and be agile and respond to change, which is not something they’ve really had to learn. I think we’ve seen this with a lot of institutions. I don’t mean to just pick on any particular industry. We’ve seen this with healthcare distribution, we’ve seen it across the board, and the pandemic has really exposed a lot of our institutions. And I think it’s a wake-up call. These are not stupid people. They’re like, Oh wow, okay. We really have to invest and upgrade our technology systems. And we’re seeing a good partnership there, but in the midst of a pandemic, it’s hard and mistakes were made for sure.
Joe: From the companies that you work with, obviously, I assume in normal times there’s already complicated stuff, but you know, what’s sort of going on inside at the corporate level as they have to pivot to this kind of thing that — I don’t know, maybe, I don’t know if it normally runs on autopilot, but it’s sort of smooth — to this becoming a major strategic focus for their ability to conduct business.
Ryan: We’re talking about brands, like companies that need to get their products in stock. The logistics team has been, I sometimes call it like the offensive linemen of business. Like you don’t really get noticed until you commit a penalty and then everybody’s off at you, and the rest of the time it’s just like ‘yeah he blocked somebody that’s his job.’ And I think we’re finally seeing the opportunity for these people, these teams to become much more strategic and get a seat at the table and talk with the CFO, talk with the head of marketing and sales and the e-commerce team about ‘Hey, where’s the stuff?
I mean the dirty little secret is that the best brands in the world have no idea where their products are and that’s in normal times. And now really they have no idea where it is or when it’s going to get there. And it’s all the previous models have stopped working. And they need technology. They need answers that can show them, ‘Hey, show me on a satellite where this ship is and show me, use machine learning to predict when is it actually going to clear customs and get delivered to me? So I can communicate that downstream to the end consumer all the way to the end consumer who cares, when their couch is going to arrive. And that’s an age-old problem.
No one can tell you when your couch is going to arrive, but it’s been compounded in the last couple of months. And we’re trying to at least be able to give people visibility. Even if you can’t run it faster, and I can’t make the ships not be stuck at the port waiting, but I can tell you what the estimated wait time is, and I can tell you what current throughput levels at that port terminal are etc. And that’s what the Flexport technology platform is built for. So we’ve found this whole thing — you know the silver lining in us, is like we’re all of a sudden, normally we just shipped cardboard boxes through our platform and no one thinks it’s that interesting — all of a sudden here I am talking to you all and trying to talk at board levels and really getting in there and trying to solve real problems for people.
Loading ships
Tracy: So this actually leads to a question that I wanted to ask you as well. Can you talk to us a little bit about how the economics or the process of actually loading container ships work? So you just mentioned that you have technology and machine-learning that help you estimate that process. It seems to be really complicated. And again, I’m speaking a little bit from personal experience here, but I keep getting rolled from ship to ship to ship, which means there’s someone else who is taking my space on the ship that I was supposed to get. And either they’re paying higher rates, or I don’t know, maybe they’re a bigger client for the company. But explain exactly how that works. Who gets preference on these extremely crowded ships?
Ryan: Yeah. And I’ll tell you the way it’s worked traditionally in the industry. And then I’ll tell you where I think there are opportunities are for innovation on top of that. Traditionally it works by who has the best relationship with this person, probably named Lars sitting in Copenhagen or something, who’s making these decisions. And it is like pretty human-driven. They’re going to look at factors like how long have you been a customer? Do you ship a lot with them? How much money are you paying them, obviously, and things like that. But they’re not really, they don’t have a lot of systems to try build this in terms of actual algorithms. It’s people kind of horse trading and communicating by email and prioritizing things. So a lot of favor trading and taking care of people.
In fact, I have a, an employee of mine who used to work at another company in this industry and he said that he spent seven years trying to sell this like household name, this retailer. And they finally agreed to give him 20 containers and they paid extra to make sure that they got a loaded. And then his company has just rolled all 20 containers. And after seven years of work trying to close this account, he just lost it on the first day. And it was just like disaster. It was just a lack of systems. Everybody wanted to support him, but there was no place to like star those containers and be like, we need to prioritize these.
Look at some point, if the ship is full, you do have to decide who gets on and who doesn’t. And what we’re building towards is a world where you prioritize people based on their own past reliability. Because it goes two ways in that 30% of all ocean containers that are booked with carriers get canceled, and that was pre pandemic numbers. And so the reason that you have an 8% roll rate in a world where ships were only at 90% capacity or so before the pandemic. So how are you at 108%? Well, they have to overbook. If you have a 70% book-to-show ratio, or a 30% cancellation ratio, you’re going to — you can’t, you can’t make money selling a 70% full ship. So you overbook your container ship, and then people cancel on you and you sort it out. And on the average, people are getting rolled.
Joe: So it’s kind of like a commercial flight that way, where they might overbook. They just assume some people aren’t going to show up. And then if everyone does show up, then they have to bump them.
Ryan: It’s exactly like that. But the airline industry on the passenger side has like been really early adopters of technology and computers and data science. And they’ve done pretty good. I mean, I don’t get bumped almost ever anymore. You don’t hear those announcements on the loudspeakers anymore.
Joe: Wait, so is it book-to-show? Is that like a term that you guys use?
Ryan: Yeah, book-to-show. It’s the opposite of cancellation.
Joe: So we’ve learned book-to-show, what was the other one?
Ryan Peterson: General average.
Joe: I’ve already learned. If we stopped right here, I would have already learned plenty.
Ryan: I haven’t even gotten into all the Viking English that still predominates in global trade. There’s a lot of it. The word for trucking is called drayage, which is I guess, it’s an old word for dragging something like when you had to horses dragging. You have a bill of lading. Well, lading is an old English word for loading. To show you how ancient this industry is, like the bill of lading is a piece of paper that serves as title to the merchandise. By default in global trade, in this 2021 today, by default, that piece of paper needs to be flown across the ocean to be given to the new owner. So your containers going along slowly like this, your piece of paper gets flown around, and then you need to present that at the port to be able to pick up your container. It’s crazy.
Tracy: I just realized I’ve been pronouncing all of these words wrong in my head. I always thought it was bill of ‘lading’ and ‘drayage.’ So thank you for clarifying that.
Ryan: Thanks for having me on. Look, if someone has to get rolled from your ship, your ship is overbooked and you have to choose who gets rolled. You should be able to look at past performance and go, ‘Hey, look, give me your forecast of how much you’re going to ship and what you’re shipping. And then I’m going to look at how accurate you are in your forecast and how good you are at maintaining that book-to-show ratio, that you actually shipped what you booked. And then I will reward you when, when someone needs to get rolled, it won’t be, you it’ll be someone else who’s way unpredictable.’ And I can give that person an opportunity to pay more, to be treated like a more predictable client.
And I think you can bring some sanity to this industry … And one of my dreams is to like send the person who makes the, the company that makes the best forecast, I want to send them one of those big golf sweepstakes checks that they have to go and try to cash in. Because no one, the guy who makes the forecast in the back office of one of these companies, like really, no one has ever recognized that person for doing anything.
Joe: Like an industry award show is what your name.
Ryan: Yeah. I don’t know that anyone would care, but I think their finance department would celebrate him or her for an afternoon.
Unloading containers
Tracy: This leads to another thing actually that I wanted to ask you. And I’m sorry, we have such a long list here, but can you talk a bit more about the situation at the ports and the actual unloading of containers? Because you know, on the one end, it’s difficult to get on a ship. And then at the other end, it seems to be difficult to actually get unloaded at your destination port. So what’s going on there?
Ryan: Yeah. And similar problem. All the ships are sailing. All of them are sailing completely full. We still use like 1970s technology download these ships. I mean, we all like look at those containers and think they’re kind of cool, but like that’s a 1970s innovation and we still unload them one or maximum two at a time. So it takes you eight hours to unload a ship when it arrives. And that’s if you have a full crew, full work crew, full group of longshoremen — stevedores, they’re called — at the warehouse. The workers on at the port. Obviously Covid has had impacts on work, on staffing. And the union has told them, I understand, that if they don’t feel safe, they can not come to work. So they’ve had [hard] time getting enough people. These are brave people going to work throughout the pandemic and they have been hit pretty hard by Covid in these various port terminals around the world. So they haven’t been able to be fully staffed. And even when they are, it just takes so long to unload these ships.
That’s one backlog. Second is the truckers, and you need to be able to find a chassis. The chassis is like the trailer that you put a container onto, so that it can be dragged around by a truck. And we haven’t had enough chassis. You know, all these second order effects that are really hard to predict — bullwhip effect it’s called in supply chain.
Joe: Oh yeah. One thing I noticed. So by the way, we’re recording this May 3rd — so the latest ISM manufacturing reports came out and I was reading the ones for Europe this morning. And one of the things that it said was that manufacturers, we all know they’re facing backlogs and delays and supply issues and that because of the uncertainty about their ability to get supplies that they’re increasing their orders. And so, they’re compensating for a supply uncertainty by actually amping up their orders cause then presumably they view that as increasing the chance that that they’re actually going to get [stuff]. Uh, but then I have to imagine that that only further exacerbates the shortages, because if everybody is fearful of shortages and everybody increases their orders, and then you actually sort of manifest shortages. So I’m curious about how that sort of second-order effect where this sort of the compensation for expected delays creates more problems.
Ryan: Yeah, and then what happens when you actually get all your order and you realize, ‘Oh, I ordered too much stuff.’ Then you cancel and you cut all your orders back to zero. And it’s just all this volatility in the system. And that is actually a lot of what happens. So because when we first started into the pandemic, a lot of almost every business was staring at the abyss and said, ‘Hey, we’ve got to cut all the…’ They didn’t order anything. I mean, you probably heard that from your, I didn’t get to listen yet to your lumber podcast, but…
Joe: Yeah, yeah, yeah. It was the same thing. They sold everything ground.
Ryan: Exactly. And that’s happened to a lot of industries. And then all of a sudden, the one that was the worst that I’m aware of was, well, I don’t know. I don’t know how to compare it with lumber — but the furniture industry had a really hard problem because as what’s happened with price of ocean freight, it’s gone through the roof, right? Because it’s at capacity now, it’s whoever’s willing to pay the most gets on the ship. And the furniture people would have like kind of low margins. We’re sitting this out and they’re going, ‘Hey, I’m not going to ship when the price is that high. I’ll just wait and I’ll sell down my inventory in the U.S. And so now all of a sudden, they’re going, ‘Wait a minute. I’m like out of inventory and I’m just going to have to pay this price.’
And so furniture imports are only up 25% year-over-year, but volumes in Q1 are up two X year over-year, because volumes had gone to zero in previous quarters. So you get these crazy oscillations like that. And yeah, it can lead to all these second-order effects that are really hard to predict. I don’t know. It’s hard to see how we get through this other than just time. It takes time to play it out and let things come back to what, I don’t know that there’s a concept of equilibrium, but it’s something along those lines.
Logistics snarls
Tracy: Here’s a dumb question on that point, but do you see the logistics snarls as good or bad for the global economy? And maybe that’s a weird question, but I can kind of see people arguing it both ways. So on the one hand, if you know, you’re short now, then you’re boosting orders. You kind of assume that there’s going to be demand for the foreseeable future. And eventually people start adding capacity, which would be a good thing for the economy. But on the other hand, it does create this volatility as you just described. People can’t get things. There’s a lot of uncertainty built into the system. And even if prices for, you know, say furniture or lumber are soaring, you can’t actually deliver the goods and make money off of it. So net-net is this good or bad?
Ryan: I don’t know. I don’t know if there’s a judgment, like a moral judgment or a good/bad judgment there because it depends where you sit, you know? And like, I do think it’s kinda good that we’re shipping more stuff that seems like a positive economic indicator that people are feeling comfortable. Right? If, if shipping had collapsed we’d be having a different conversation about the Great Depression or something. So on that sense, it’s good. Is it good that we shift spending from services onto goods? Like really hard for me to say, I don’t have a judgment on that. Like I think enjoying life and having some nice experiences might be better than buying stuff. Right? Sometimes. So hopefully all those people in service jobs get a chance to get back to work and that, you know, that it’s kind of like you’re seeing this mix shift.
Now you will see it… if it stays high long-term, if like good stay high, that seems good. And you will see assets. People will invest in ships. I’m sure people are doing it right now. If they had certainty that that was going to happen, they’d be placing orders for more ships, but it takes years for a new ship to come online from the moment you order it. From where I sit it’s entertaining. I mean, I like to just see what happens in the world. And it’s also really challenging. We have to solve problems for our customers. So that part is what we live for. Like, we’re here to solve problems. So I don’t think — we’re not complaining about it at Flexport. We become more useful than we were in the past.
Joe: I want to go back to the point you made about the furniture importers and the low margins that they have. I mean, this is again, very similar themes to our discussion about lumber. But you know the saw mills were sort of shocked, didn’t really believe that the lumber prices were going to stay high. So like no one really ever invested to increase the capacity. How much are the issues — you know, we’ve just seen this steady worsening worsening, just today I saw, you know, shipping rates on average hit a new high — how much has there been this effect of companies essentially thinking that, Oh, it must be the peak. So I’ll wait and I’ll wait. And then having to scramble further to pay up more because they’ve delayed so long in their shipping.
Ryan: I think that’s pretty common. And so right now, the world’s ocean freight industry, about 60% or 70% of the world’s ocean freight is contracted on an annual basis, versus spot market. Where they’re signing like an annual rate and saying, ‘Hey, this is going to be, I’m going to pay this rate for the year.’ And they go and contract that with ocean carriers or with a freight-forwarding company, or a platform like Flexport. And right now is the season when that happens. It’s like April and May is when these decisions get made, these contracts get negotiated. And so it’s like the worst possible timing. And these companies are struggling to get capacity.
And imagine being that logistics manager at a major corporation, who you are told by every company you talk to, sorry, I can’t give you a capacity. Your company’s not going to grow. You’re not going to hit your sales goals. Like, I can only ship half of what you want to ship. That is a really difficult position to be in. And yet it’s a brand new position. So these companies, a month ago, might’ve been able to negotiate and get space, but they didn’t want to pay the rates. And it’s sort of a wake-up call like, ‘Oh my goodness, I’m not going to get any space unless I pay the rates.’ Companies are sort of having that moment of opening their eyes and going ‘Okay. I guess we have to make a decision. Are we going to do this or not?’
Tracy: In your experience, are companies absorbing the costs of higher shipping rates themselves, or are those costs getting passed on to consumers?
Ryan: I think it’s going to get passed through. Good companies can raise their prices and people will pay for the product. Because it’s happening to all the competitors equally, right? So you’re just going to see it come through in the form of more inflation.
Joe: Are we going to see some of these DTC companies that were probably growing really fast and have huge demand face the situation, in which they could have grown really fast in 2020 or 2021, but their top line just didn’t grow by that much because they just couldn’t move product?
Ryan: I think you’ll see that they still grew. I mean, the market has grown and that’s what’s happened, but you won’t be able to see that, ‘Hey, they might’ve been able to grow even faster if they could’ve got more product to market.’ And some of them, the ones that are really good businesses with good margins are shifting to air, or that really care about the customer experience and demand that growth and know they need to keep growing and need to get to the next level of their business. So they’re shifting some capacity over to air freight and getting creative. You know, one of the things that you can do, you can pay more to guarantee your space on the ship and it costs a couple thousand bucks extra, but guarantees it. And so you’re seeing a lot of people — like pre-pandemic Flexport, and about 11% of the containers that we shipped were on these premium products. And now it’s, I think it passed, it was 18% a couple of weeks ago, and it’s gotta be above 20% by now. We’ve been getting more and more demand for that.
Tracy: Yeah. This was an option that was offered to me, but Bloomberg’s budget does not extend that far to premium shipping rates. You mentioned air cargo just then, how nimble is that industry? Cause I imagine, you know, maybe repurposing some old passenger planes is probably a lot easier than trying to source new ships?
Ryan: 50% of the world’s air cargo flies in the belly of passenger planes, by the way, which is a horrifying thought for you as you leave Hong Kong to imagine what’s down there — don’t think about it next time you’re flying Cathay. Those planes are all grounded, which has cut out 50% of capacity on the air side from the start of the pandemic. And it basically hasn’t come back online. So that’s the first thing. We experienced this firsthand. So last year at the start of pandemic, we recognized pretty early on that their hospitals didn’t have enough PPE to get enough masks for their frontline healthcare workers. And that was true all over the world. And, our Flexport team just stepped up and we actually chartered 77 passenger planes and filled the cargo holds, but also the seats and the overhead compartments, we just stuffed masks everywhere.
Ended up shipping about 500 million units of PPE, 425 million units of PPE, to five continents to healthcare workers. So we were able to do it, but the break-even price was pretty high. So passenger planes only make money. I want to say above 10 bucks a kilo (that’s Asia to U.S.) Air freight prices are normally like four bucks a kilo. Right now they’ve gone back up above $10. So we’re in the range where you might see some passenger planes come back on and be used, but they don’t need to be fully retrofitted. Like that’s a longer-term thing. And I don’t think the airline, the passenger airlines have reached that state very much yet. Old 747s are mostly gonna end up keeping flying now that they’ve retired the 747. You’ll see those live on as cargo planes for a long time and they will get retrofitted. But you can actually use them as a passenger plane and just ship cargo in the luggage holds and the overhead compartments, if you are so desperate as we were last year.
Filled trucks
Joe: What is the state of the trucking market right now? And how much of a bottleneck or how much is, for your clients, how much are the sort of after after the container is taken off the port it goes onto a truck — how jammed up is that?
Ryan: There’s a few different trucking markets that are loosely related, but are somewhat independent. And so are the one that we play in is called drayage. That’s ocean port trucking, where you’re hauling a container out of a port. And then we call it cartridge. I don’t know where that term came from. Old English, I’m sure. Cartage is airport trucking, when you’re picking up a shipment at an airport. And that’s where Flexport operates. And I have the most insight and expertise there rather than full truckload, domestic trucking, like point-to-point within the country, or the other one is called ‘less than truck load,’ shipping a pallet point to point. On the ocean trucking, you have seen definitely shortages of drivers and chassis, so that’s the equipment shortage I mentioned a little earlier.
Flexport has a big advantage. We’ve built technology for these truckers. So we have a suite that — we had about 140 trucking companies that run our software — with a mobile app and a hardware device that plugs into the engine. About 35% of all the drayage trucks in America have Flexport software on them. And so we’re able to get access to trucks and find the closest truck to the port and assign them a load, assign that driver a load. And we’re now doing it at 97% of our shipments, no human intervention. We just assign the load and the driver goes and picks it up. So it’s running fairly smoothly for us, but we’ve seen the trucking companies that come on board that use Flexport are struggling to get enough drivers. And that’s a long-term trend. You’ve got a driver shortage. It turns out young people don’t really want to drive trucks. So the average age of truck drivers in this country keeps getting older and older every single year.
Tracy: So here’s the big question. What’s your instinct on how long this will actually go on for and what’s going to eventually hopefully solve the problem?
Ryan: Well, I think this problem is going to get solved with vaccines and a return to normalcy is our best hope. It’s that people start spending money in bars and restaurants and hotels and travel to plane tickets, and don’t have as much money to buy stuff online and buy goods. And that will sort of be, that’s what a literal return to normalcy is. Our economy used to look more like that. On what timeline does that happen? Your guess is much better than mine. I don’t know.
Joe: But are you seeing any easing yet?
Ryan: No, not really. We’re still seeing similar levels of ordering. And, like, to your point earlier, if I can’t get my stuff, maybe I should order twice as much stuff. And you’re seeing that kind of behavior more than a return to normalcy.
Tracy: At some point, are people going to have massive inventories and then maybe they’ll stop shipping things so much?
Ryan: That’s possible. Yeah. And I think that’s the downside of all of this. We’re all trying to predict the future and we’ve just proven we’re pretty bad at that. And so right now everyone’s predicting the future is going to look more like what we see today and you just keep on ordering and ordering and ordering. And then at some point your customers have shifted and they stop buying your cool new products and they start spending money on the bar like they used to, and you’re stuck with all this inventory. So yeah, that’s the bullwhip effect where it just oscillates back and forth.
Flexport
Joe: Flexport is a technology company. And I feel like, you know, in normal times, everybody wants to, I assume, wants to optimize their inventory and having extra days of inventory that they’re not selling is a liability. And you want to just — in the dream scenario, get the ship,right a minute before you’re going to sell it, and everything’s just in time. And a) is that a fair characterization of how a lot of your clients operate? and b) is there a sort of a risk to this just in time thinking, will there be a sort of rethink post-pandemic, post-crisis about the costs of perfect optimization. And how are you thinking about when things normalize, whatever that means, will there be any changes to behavior?
Ryan: Yeah. And it’s gotta be case by case, industry industry. Like some industries, it is absurd to have no inventory of PPE in stock. Like that is almost criminally negligent. You know, you can’t have life-saving equipment with no inventory. It will be a decision for each company based on the margins and how much it costs them to sit on product. And is this product going bad, fast fashion? Like, is it going out of style in two weeks, maybe you revisit, maybe it could last a month or something. I do think you’re definitely going to see a reconciling there. And this is by the way, a longer term trend is like in the old world — what I grew up in — my mom bought all our clothes in the Sears catalog, and you just had one distribution center in the middle of the country and you could provide a three week or a seven day shipping time from one site.
But if you want to get to an e-commerce world where it’s two hour delivery, you got to have inventory cached sort of — the internet term would be edge cashing, you’re edge cashing your inventory, keeping it close to the customer. And you’ve got to have inventory in every single zip code almost, and that’s a lot more inventory. So now you need to really be smart. Like how much inventory do I want? What’s the value of that customer proposition of saying two hour versus two days versus two weeks versus two months. And that’s the trade-off that every brand has to make is between the customer experience they want to create, and the lost sales,if they don’t have goods in stock, versus the cost of working capital. And these are old models. Like in business school, you’ll see this model in an Excel operations class. Most business school grads like saved that Excel file and still have it from their professor.
But no one’s ever been really good at feeding real-time data into that model. And that’s what technology enables today is like, we can show you what are actual lead times when you place the order with your factory, what’s the actual transit time, not like you’re fudge fudge factor, 30-day number that you put it in your Excel model, but what are we seeing trailing 90 days, what’s the distribution curve. Data data will help with these problems. But at the end of the day, it’s a trade-off that you have to make between growth and the cost of capital.
Tracy: So what should Tracy do to like get her … I don’t even know what she’s shipping, but like what is she doing wrong?
Ryan: I do think it’s projecting yourself. You gotta make that company that’s trying to ship your cargo believe you’re going to be like this important and long-term customer that’s going to be there for them in the future. Maybe call the guys, call the team at Bloomberg, that shifts all your umbrellas and swag and everything. Maybe they got some hookups for you.
Tracy: All right, I’ll give it a go.
Joe: With Lars in Copenhagen?
Ryan: But yeah, I mean, I think they have to prioritize. And I’d probably do the same thing, no offense to you. Who’s going to be there for me next year and the year after, if I got to choose which customer gets on the boat, there’s sort of a two-way exchange that goes on in these negotiations of who gets on the boat.
Concluding the session
Tracy: I can’t believe my mostly empty container being shipped for the purposes of stunt journalism is not a priority for these companies. Amazing. All right. Well, Ryan, it was lovely talking to you. Thank you so much!
Joe: Thanks Ryan!
Ryan: Thank you all, it was great to chat.
Tracy: Joe, I love that conversation. So nice to be talking, you know I like talking about markets and I like talking about economic and financial theory, but sometimes it’s nice to talk about actual things and the way they move around the world. And I think I mentioned this before, but it kind of gets to one of my pet themes for the year, which is this idea that economics actually does a terrible job of incorporating and thinking about logistics. And this is the year that’s kind of proven that. But the other thing I liked in that conversation was Ryan’s point that this whole problem started from expectations and an incorrect view of what the future actually turned out to be. And now we’re trying to solve it with expectations yet again, ramping up inventories and orders. And the big question is whether or not it’s actually going to materialize the way we think it is.
Joe: You took the words right out of my mouth. And I think that’s exactly right. Like everything is expectations and everything like in so many conversations, expectations about the future end up affecting the right now. And in all different kinds of ways. So whether it’s expectations like, oh shipping costs are gonna come down, so we’re going to like hold off and then we have to pay more. Or even, Ryan’s point is like, well maybe you’ll get greater investment in shipping capacity but only if there is the expectation that global shipping remains very high. And of course, as we talked about with [Marc] Levinson this sort of the decline of globalization — that leading to consolidation of capacity. Everything about expectations ends up having an effect right now. And I just think that’s such a fascinating thing that turns up over and over again in our conversations.
Tracy: And I got to say the bonus of all these episodes about logistics and lumber and actual things is that we’re really learning great new terms like stumpage fees, bill of lading and drayage, which I always — I said it before — but I always thought it was ‘lading’ and ‘drayage.’ So the more, you know.
Joe: fGeneral… what was it? General something?
Tracy: I can’t remember. But I actually need to look it up for this container. Now I’m worried.
Joe: What was the other one? Ship to show?
Tracy: We’re going to have to start an Odd Lots glossary, I think:
Joe: That’s a good idea. But also I thought that was like super interesting again, because it’s like how much of these businesses, it’s not just, you know, we think of like, oh everything is just like a pure auction, right? There’s capacity and it’s who pays the most. But of course from the perspective of the shipper, like they want to reward their good customers, and who’s going to be the customer a year from now. And who is the best ship to show? Like who actually shows up? Like all of these things that are beyond just like pure price, I guess I would say, end up determining so many fascinating things.
Tracy: Again, it kind of gets back to expectations. Right? Who do you expect will be a better customer over time?
Joe: Totally.
Tracy: All right. Should we leave it there?
Joe: Let’s leave it there.
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Source: BNN Bloomberg
