Hello, and welcome to another episode of the Odd Lots podcast.
I'm Jill Wisenthal and I'm Tracy Alloway.
Tracy, it's time to return to our favorite topic of supply chains and.
Free There's no escape. No, you can't escape the supply chain. Yes, you're absolutely right. We had I feel like a relatively quiet year in twenty twenty three in terms of disruptions, but towards the end of the year, yes, and now into twenty twenty four, supply chain disruptions are back. They're everywhere, everyone's talking about them.
There is indeed a new acute source of supply chain stress, and that, of course, are the attacks from the rebels and Yemen the Hoo, the rebels disrupting trade through the Red Sea. We're beginning to see the return of those maps where this is where the ships were a month ago, and this is what the shipping lanes look like today, not unlike what was it in the Suez two years ago. But yes, supply chain disruptions at least at some level are back.
A little bit.
Yeah, you know it's bad when people are breaking out the maps with the ships and also the container rate charts.
Yes, container rate charts those.
Are making the rounds again, so we've seen some container rates start to jump, and we can get more into that in a few minutes. For the record, Joe, yes, I am not shipping anything at the moment, nothing from China to Europe, so I am unaffected by this particular development so far.
It's only a matter of time. Also, our listeners should know that every time we're in public and people come to us, one of the first questions they always ask Tracy is usually about that, like do you have any furniture stuck at a container ship somewhere? It's either that or questions about the coal and Tracy's basement yea fifty.
Yeah.
Sometimes I feel like my life is actually a logistics company and it's just dealing with commodities like coal and lumber and moving furniture.
Yeah, and we talked to Brad Jacobs recently and we talked all about your building supply needsphere House.
But even before the Red Sea developments, we actually wanted to do another Shipping slash Freight episode because if you remember this time last year, we did quite a few episodes.
I think about the coming difficulties challenges blood Bath, who's your preferred noun there coming to freight and shipping, And the idea was that after the big boom during the pandemic, when container rates, trucking rates, basically everything exploded and became very, very profitable, that we were now going to see the sort of downturn. And I think that has come to fruition. I think twenty twenty three was an extremely bad year
for a lot of shippers and truckers. But we're going to get into that as well, because in addition to the disruptions, we're at this sort of like weird moment in time where we're waiting to see whether or not there's a recovery.
Yeah, you know, it's funny even with out disruptions. As you mentioned, No, One of the first things that we learned when we started getting interested in this topic is that freight trucking in particular is like hyper cyclical. So you had this already pretty crazy cycle for the US economy between twenty twenty and twenty twenty three or maybe now,
and it was even crazier for freight. You know, another thing that happened last year or two is we saw the demise to varying degrees of various freight tech companies because like ourselves, we got interested in freight. I think a lot of vcs did, and you see a lot of there must be a way to, like, you know, solve all of these problems with software and AI, and I think a lot of these problems continue to persist. So there's just a lot of freight stuff we got to catch up on.
Yep, let's do it. Well.
I'm very excited because a multi time guest, I think the first guest we had who talked about trucking, we have them back and in studio we're gonna be speaking with Craig Fuller, founder and CEO of Freightwave. So Craig, thank you so much for coming back on odd lots.
Joe Tracy, great to be here again.
It really is a lot to talk about. But why don't we start off with the disruptions in the Red Sea. What do you characterize, as you see it, the situation right now?
So I think there's the short term, you know, anxiety that exists in terms of the safety of the cruise, the dependability of the global supply chain. Yeah, it's a lot of short term concern, but I think the bigger story is going to play out over the next couple of years. Is we're now reaching a point in history where global trade and global shipping is no longer as dependable or as predictable as it has been really since
the post Cold War period. Civilian ships are being fired upon and this is an unusual development that we haven't seen for really many decades. Wow.
So walk us through the importance of the Red Sea route, Like, what kind of ships are actually going up and down? Yeah? Where are they going? What are they carrying? My understanding is, you know, there's containers, there's also tankers, so.
A lot of oil and gas. Obviously, being in the Middle East, it has a lot of exposure to oil and gas and the derivative products that come out of that portion of the world. But it's also one of the major trade lanes for container flows. And so think of what moves in container. It's largely manufactured in consumer goods that are largely dependent upon containers. A lot of these products are coming from Asia and particularly China into Europe.
Some products going to the United States East Coast, but the predominance of the products that move through the Suez in the container freight is largely related to products out of Asia. Going to Europe for European consumption.
What other routes are available for that kind of trade.
Well, you have to go around South Africa, and so you're really adding thousands of miles of additional distance when you aren't able to cut through the shortcut that is the Suez. I mean, Suez Canal has caught out an enormous amount of distance that geographically the ships have historic had to go around. With the Siuez, it was able to sort of expedite trade flow from Asia and particularly
to Europe. We do benefit from it in North America, but a much smaller percent of the freight that we depend on in the United States is dependent upon the Suez.
What is the historical role of the US Navy in sort of securing or protecting these some of these routes, and what do we see from US defense officials now the sort of acute moment.
You know, there's a lot of conversation in geopolitical circles about whether the Navy's role has changed or shifted or is no longer effective in the role that it was believed to be played for the last really since World War Two. So, if you think about it, the United States has the largest navy in the world. It's also one of the only bluewater navies that can go anywhere to find any place on the planet. And that's really the call of fan.
So what does it mean blue water.
It means that they can go into deep oceans that can be anywhere. Basically the name there's no place on the on the planet that the Navy and the Marines can't actually reach. And so the whole purpose of that
is to protect trade lanes. Yeah, that that is the one of the primary calls of the US Navy is its roles to protect commerce uh and ensure global trade and really the world and China has mostly benefited from that, the US Navy's role of protecting sea from things like pirates and state sponsors that want to attack global trade.
And the question now is in a post you know, we're now in this sort of new generation of trade, what does it mean there's a lot more protectionism that happens with US policy and really to be able to defend the you know, the role of the US Navy being able to protect all aspects of it. With geopolitical tensions in East Asia means that we may not have the resources to actually protect all aspects of trade the way that we did at one point in time.
Just real quickly, you said this is a sort of novel. I mean pirates and pirate attacks, and you mentioned them. There's somewhat common, they're in the news. But what's different about this is that it's missiles being fired. These are these are It's not pirates, they're not trying to steal the cargo. This is these are military attacks on private corporations.
These are military techniques. Techniques we've seen helicopters actually land on tops of ships and actually take take cruise hostage. By the way, a helicopter it looks like a squat. You probably have seen the video of floating around where it looks like a swat video where they're flying in and they're basically taking over a ship through use of
a helicopter. We're seeing situations where as you mentioned, they're using missile technology, military grade technologies, which is an unusual development. And then with the proliferation of drones, you now have a low cost way to actually avoid some of the defenses that are set up to protect these ships that they're able to reach them without obstruction, and I think
that has changed the game is now terrorist. And look, we can argue whether these are truly state sponsored or not, but at the end of the day, they have access to military grade technology and they are using this to attack civilian vessels and their goal is to disrupt global trade.
This was going to be my next question, which is, you know, even if the Navy said, like, yes, absolutely, we're going to go in, We're going to protect all the ships, Like, how much can they actually do in the face of that kind of threat, which you know has new technology that they're clearly using, but is also very very flexible in terms of what it can do.
I think the question is at what cost? Yeah, because I think the US has the capabilities to largely defend every ship or the ships that we have decided to defend, But at what cost. I when you're looking at a missile, you know, anti missile technol these a million dollars, We're firing these these defense missiles off at a million dollars apiece, and you're fighting a drone that cost a couple of
thousand dollars. I mean, at some point there is a mass attacks on US consumers and the US economy for US to do this, And the question is for what is our appetite to continue to fund this type of defense technology when the United States is not the primary beneficiary of that type of trade.
And on a similar note, I'm always curious about the decision making process to you know, not go through a certain route. So MASK said it wasn't going to go through the Red Sea anymore after dismissile was fired. What are the factors that go into making that type of decision. And then if the Navy were to say, you know, tomorrow that we're going to escort all of these ships, would that completely address their concerns? Would they be like, Okay, yes, we're going to resume this route.
You know, it's a great question because I don't know that the US with all of our other geopolitical commitments, particularly around China and what's happened around Taiwan. I mean, the Chinese want our navies in the Middle East. That's where they want them because they enables them to have
an enormous amount of power over East Asia. They want us moving our assets and being distracted in the Middle East, so they actually win geopolitically in terms of their power over the region by moving forcing us to be distracted in the Middle East. But I don't know that we have all the resources to defend every single ship from these attacks. And ultimately, what the container lines have to really think about is what's the cost of a ship.
You're talking hundreds of millions of dollars? What's the cost of a cargo again measured in probably billions of dollars when we took a look at a twenty thousand TEU ship. And then you have the insurance companies which are saying, hey, we're not going to ensure these ships that go through these channels, and that means that ultimately Marisk and others have to look at alternative routes. They will obviously protect
their crews. The cruise do understand that, you know, the nature of their jobs is on occasion they put themselves in harm's way. And we've seen that with you know, the movie with Tom Hanks plays.
As the Captain Phillips.
Captain Phillips, you know, it was a true story. So these things do happen with pirates. But we're talking about military grade technology and we're talking about an escalation, and because of it, I think the insurance companies have said, hey, we're not willing to ensure these ships that go through these contested channels, and I think they container lines also
don't want to put their crews at risk. They don't want to put their you know, substantial investments at risk, and also politically and optically putting cruise in harm's way if something were catastrophic to happen would be very I think demonstrative to these brands and these these organizations that really want to stay out of the spotlight.
So Joe mentioned the maps of the ships, and again, you know something's going on in the world when when people start breaking out those maps showing the ships diverting. But I thought it was interesting. So if you look at a map of the Red Sea, the container ships are moving, but they're still tankers. What are the decisions being made by the tankers that are different to the container lines.
The tankers have been largely unobstructed, So a lot of the attacks that we've seen have actually been on civilian container vessels and other types of cargo vessels, not on bulk tankers. And a lot of that has to do with the economic interests of the different countries that are in the region. You know, these are countries that largely depend on oil and gas exports and the derivative commodities that come out of those to fund their economies. I don't think that it's in their interest to do that.
And then also China is dependent upon energy supplies from the Middle East, and you know, I don't think that the rebels want to invite the Chinese into this conflict, and that would certainly do it if they felt like their energy supplies, which they are to deed upon, we're obstructed.
So I think what we're seeing is this is largely a container story, and it's really the West that is consuming these products, mostly Europe, but certainly the United States to a degree, and I think that's where we're seeing a lot of the pressure.
I think it's like they've enacted sanctions on Europe.
Well, they're certainly obstructing it. And you could argue their acting sanctions because their goal is to obstruct trade and to cut off the flow of product and really create pain on consumers and businesses that depend upon these containers.
There's so many directions we could take this conversation in so many questions, but you know, I find this framing to be very interesting that you know, arguably we don't we is in the US don't get a ton of benefit from the resources that we invest in patrolling those that a lot of the benefit goes to China. China benefits in theory by the sort of distraction to the US Navy pulling assets out of East Asia and towards
the Middle East. China itself obviously has expanded it's navy quite a bit in recent years, and the estimates it's going to continue to do so. Do people at some point is the expectation that China itself will play a more active role in patrolling the region or is that in the US interest for China to grow, you know, sort of police more parts of the world.
It's a great question, and I think it's one that's probably on the minds of folks that playing these war games that it is out is why, you know, one of the big questions is if China is a big loser, and you could argue why it would lose is that if global trade gets obstructed, particularly manufacture goods, which China's economy is largely dependent upon, if it gets obstructed, then
China may be the biggest loser in this. And the question is why are they standing down when you talk to military experts that are far more versed in this topic than I am. What they have told me is that China wants the United States to be focused in terms of military focus on the Middle East and get stuck there, if you will, pulling its attention away from Asia. So you know, if you look at the Chinese construct
and look at she she has. You know, for years, China was focused on economic growth at all cost, and they were willing to sort of put all of their other interests beside to allow their economy to thrive and
ultimately provide some level of prosperity to their people. We have seen in the last really the last five years, that's no longer the case, and the orientation of China is more politically driven and more power driven, and it suggests that China's goal is to create enough havoc on the United States and its allies that we are sort of forced into these situations. And there's a playbook for this.
I mean mean, we've seen some of the world's conflicts of the last hundred years have been caused by American allies and going out to protect its allies getting involved in these military conflicts that really don't directly impact our goal strategic goals, and so it is an interesting play and it's an interesting card. I think the question is why does this impact China most importantly? And I think from a supply chain question, supply chain professionals are focused
on mitigating risk. These are jobs that are all in risk management. That's ultimately what a supply chain professional does. It thinks about cost and it thinks about risk management. And for the last couple of years, they had been fending off an enormous amount of risks in their supply chain. And as Tracy mentioned in twenty twenty three, we sort of had a level of room to breathe because all
of those COVID related disruptions were largely dissipated. We're now in a sort of a new generation of issues that are quite different than what we saw during COVID. And now, as a supply chain professional that's already dealing with questions about China's orientation to its economy, to its commitment to manufacturing, to its commitment to exports, the question then becomes, I now have to calculate this geopolitical risk or military risk
that did not exist before. I used to as a professional be able to depend on trade out of China that was unobstructed to if I have dependencies in Europe or have customers in Europe, I could largely depend on the su AS as a dependable trade lane, knowing that it was not going to get obstructed. And now I have new sets of risks that exist that did not exist before. I mean, the reality is the ships can
go around South Africa. They can make it. It adds time, we're talking, you know, a couple of weeks potentially, it adds a lot of cost to it. But there are ways that products can still flow, but it increases the cost to do so and increases the lead times required. And I think supply chain professionals are going to start making different calculations of where the source products that they don't have to contend with that issue.
So one of the things that came out of the pandemic related supply chain disruptions was this idea of reshoring, building more resilient supply chains. Everyone was going to sort of reach their operations to make sure that they didn't have to worry about the types of disruptions or congestions that we had between twenty twenty and call it twenty twenty two. So I guess my first question is one,
did that actually happen? And then secondly, given this new bout of disruption, this new geopolitical risk, as you put it, are we going to see the same types of decisions being made the idea that well, we really need to think of alternatives to sourcing things from China or transporting things along that route.
It is happening, but let's just keep in mind. Moving a supply chain is not an overnight decision. This stuff takes decades, potentially more advanced products which have more advanced dependabilities. Because I can't just uproot my supply chain. I have to think about my supplier supply chains. If I have machinery or equipment that is very specialized, I have to think about all the technicians that can support that equipment. So I can't just uproot my supply chain. It has
to be a gradual process. But we have seen that take place. Some of this is supported by government funding with the Inflation Reduction Act and the Build Back Better Plan by Biden. Is actually encouraging domestic manufacturing, probably most obvious in the semiconductor area and in the electric vehicle area.
We're seeing substantial amount of industrial expansion in those parts of the economy, and so we are seeing the early stages of domestic remanufacturing and near shoring, and so it is certainly happening across all aspects and all product classes. And the reason is that China. You know, even when Donald Trump was attacking global trade, most supply chain professionals took that as at tax. They thought of it as an economic I'll pay the tax, it's still cheaper. I
don't have to make tough decisions. The US and China are never going to sever trade ties. But what we've seen is when she shut down his economy during COVID, the late stages of COVID, that really changed the calculus for Western decision makers that realize that China was no longer going to do things to promote exports at all costs and was willing to do things that could destroy parts of its economy just to gain and maintain control. And I think that calculation scared a lot of executives.
And then you look at the geopolitical tensions with Russia and the Ukraine, and you look at the fact that there is seems to be an inevitable course to some level of conflict between the China the United States related to Taiwan. It's obvious that supply chains can no longer look at China as a absolute, dependable source of products. This is one but a continuation of a process. We talk about the Suez disruptions and the geopolitical issues that
exist there. This is just another reason for supply chain professionals to get a wake up call because we're seeing to take place in the Middle East and it's quite effective. Yeah, this could easily take place in other parts of the world, which is probably the bigger concern is what happens when this breaks out in the Strait of Malaca or other parts of the globe where it's not just Europe it's being impacted, but it's also trade in the United States.
I want to pivot a little bit. So the last time we spoke to was in May of last year. You and your colleague got Rachel Premak the title of that episode. We're in the midst of trucking Bloodbath two point zero. Sometimes we do episodes about something at the bottom and then it bounce is Sometimes we do something at the top of the falls that one I think was very well timed and I think vindicated. But what happened with the of the year in free and then where are we in the cycle on now?
So I think you've done at least ten episodes related to some level of the side.
So somewhere we're going to get one right.
So no, But what's amazing about this is I've known you guys since twenty twenty. Yeah, I think we've gone through at least three cycles since times it's so crazy and so it is, this is why we keep.
Coming back, because the line is always moving in some direction.
Is the most volatile and fragmented market we're talking trucking specifically on the planet, and because of its fragmentation and the fact that there are no bears to entry, it suffers from this really violent boom and bus cycle that got incredibly exaggerated during COVID. So if we go back to where we were a couple of years ago, when we first started talking in twenty twenty and twenty twenty one, is the market was sort of at the super peak.
There was massive supply chain disruptions caused by a lock of capacity, driver issues and so forth. Now we're in twenty twenty three, we've sort of hit the bottom, and I would argue that the worst is our in the market for trucking, and we are not necessarily on our way back. But I don't think we're going to see things get worse as it relates to the trucking industry.
Wait, I think Joe is being a little bit modest because at the beginning of twenty twenty three, we did have a couple episodes and I think we did publish a couple articles as well about how bad the year could be for the trucking and also the shipping industry. And it did turn out to be an absolute terrible, no good, horrible year or whatever the title of that movie was. But can you maybe put some numbers around it for us, like how bad did things actually get last year?
So it's an interesting conversation because think about the listeners to odds mostly focused on macro stories for the economy. When they're listening to freight stories and they're hearing me talk about a freight recession or the blood bath, they oftentimes assume that that means that the broader economy is struggling.
Yeah, I think the big question was whether or not that indicates the consumer demand isn't there.
Sort of making interesting things? Is we now have we bookended twenty twenty three, we're able to actually look at the entire year in sort of context, and what we've seen is that actually twenty twenty three was a good year related to freight volumes. It actually if you took out the COVID extremes of two thousand, sort of late twenty twenty twenty and twenty one, and even parts of twenty two, what you've seen in the freight market is that the twenty three was actually a really solid year.
It continued to build momentum in terms of volume throughout the year. But it seems like we're contradicting ourselves in the sense that we're talking about how bad it was in twenty three, but we're talking about a relatively strong consumer and a relatively strong freight market. But the reason is that we had this massive expansion of capacity that took place during COVID. You know, we saw if you take twenty nineteen to the peak of capacity build, which
really did not end. So the freight recession started in March of two thousand and two, twenty two. It wasn't until October of twenty two before we started to see the market in terms of new capacity entrance plateau. So we're still seeing new entrants come in the market throughout twenty twenty two until really the third until the fourth quarter. And now what we're looking at as a situation where we've had this all this excess capacity that's built up.
And that's why twenty twenty three was such a miserable year for the trucking industry is that we had. You know, we're talking sixty thousand more trucking companies in the freight market today than what we had prior to Covido. And these aren't sixty thousand trucks. We're talking sixty thousand independent companies that are in the trucking industry that have entered the trucking industry, that are out taking freight. And so what you have in the trucking market, we've talked about
it a few times. All aspects of freightwork this way, where you constantly have this demand that's driving soply. So what happens is the providers of supply are constantly trying to catch up to demand because they see the inputs in their business, they see demand in their business, they see high rates, and so they're constantly trying to add new pieces of equipment to sort of soak up that demand. And what ends up happening is, because of the fragmented
nature of the market, they end up overcorrecting. So everybody is doing the same thing. The big carriers are adding trucks, the small carriers are adding trucks, New entrants are in the market, and we just get flooded with total number of infants. It's a classic commodity boom and bus cycle. And that is what happened in twenty twenty two that brought us to a really miserable twenty twenty three. And what's happened over the last couple of months, so we
started to see a number of bankruptcies. Yallow being the you know, Yallowy historical LTL carrier file bankruptcy. It actually went out of business. And it felt like this is a company that for many years felt like a cockroach that just wouldn't die. Yeah out. Unions at one point had build them out. It constantly just stayed in business, and everybody assumed that it would continue to survive in spite of the fact that it was not a well
run company. And it is out of business, and you mentioned teas that earlier, Joe, is that we've seen some freight tech companies that raised lot capital. That also another and this is a function of a lot of excesses that got added to the market that the market just has to bleed out.
Well, I'm glad you mentioned the freight tech companies because that's where I was going to go next. So we already we already know it was bad for a lot of companies in twenty twenty three. You know, going back to twenty twenty one, twenty twenty two, you know we got interested in freight obviously on the Odd Launch podcast. That was also a big year for like tech and tech investing. A lot of vcs suddenly probably woke up to this idea of this world. We're like, oh, the
freight industry looks like a mess. I'm sure if we just apply our software magic, we could solve all of these problems. We saw some really huge fundraising, but then also at twenty twenty three, we saw the reversal of it. So we saw the freight brokerage Convoy just to basically completely go out of business. I think we saw a pretty big downturn at a Flexport. We've had their CEO, Ryan Peterson on the show a couple of times. What
happened with freight Tech? What were the theses maybe of the investors who are going in, we could solve this and sort of like what reality did they run into that? Maybe it's a bit harder to solve some of these problems than they may have assumed.
You know, they were playing the Uber lift. Yeah, even Airbnb playbooks, which is, hey, I have this capacity and I can go out and create a digital app sort of just if I could disrupt the taxi industry the way Uber did, that could also disrupt.
The It seems like it should be doable.
Here's the problem is that the investors that really drove the high valuations didn't understand freight They didn't understand the boom and bus cycle. Convoy arguably had the best roster. It had a dream team investors. I mean you had Bill Gates, Jeff Bezos, you had pried Hoffmann, you had the who's who of sort of Silicon Valley and sort of legacy tech that were investors. I mean it was the best lineup of investors of probably any company in supply chain possibly have. And yet that did not help
them survive. And the reason is that really the investors and the management team when it first raised money and got into this business, did not understand how psychical this industry is and how fungible the capacity is. So if I wanted to disrupt the taxi industry, the reason that that works is I have all of these consumers sitting at home with their cars that are idle ninety percent of the time. That can create incremental capacity in that
of a market. So as the market surges, you can have and Uber has you know, has piloted us with their search pricing. You know, they will send out messages to their drivers and say, hey, there's a a football game in town, or there's a you know, a big event in town, please come out and get three to four or five x your normal rate. And they've created this sort of surge flexible capacity model that works really
well in a business like Uber and personal transportation. The problem in trucking is there is none of that excess capacity sitting against the fence that can flex in and out of a market. And so what ultimately happened is that they were able to apply some digitization to the dispatch process and to the driver management process, but that was incremental, and one would argue in Brad Jacobs has
argued that the incumbents were doing the same thing. Is that effectively, all of these companies were spending billions of dollars to build technology that everyone else was also building. And not just existing companies like XBO and H Robinson, but you also had all these tech vendors, companies that provide software, that were also building technology that they could sell to hundreds of companies. All this was happening at
the same time and effectively. What Convoy did not understand early on, which I think they certainly understood that the late part of the cycle, a late part of their business, is that freightst commodity it's highly fungible. The capacity is highly fungible, and no matter how much money I spend acquiring the capacity, there is nothing to keep that capacity
from going to the next highest bidder. And because of that, all of the money that they wasted in acquisition costs to acquire capacity was effectively meaningless at the end of the day because that capacity could be found elsewhere.
How much of it comes down to incentives as well. So I take the point about fungibility of capacity. But like I also get the sense that there are industries out there that make money from their role as middlemen. They make money from a lack of transparency or opacity. And so we talk about new technology to make this whole process more efficient, but if there are well defined losers from doing that, they might not really be incentivized to change.
So, Tracy, let's imagine that we wanted to disrupt the gasoline industry, Okay, and we're going to create a gas station, and in this gas station, we're going to charge a dollar a gallon. We're going to open it up. We could build the largest gas station in the world in a matter of potentially weeks. A dollar a gallon we're going to charge, and we're disrupting the industry. Now, we
have some neat technology to do this. That's our That is what we've told our investors is we're able to disrupt the gasoline industry because our technology has made it more efficient for us to deliver gallons. Now, you and I both know at the end of the day that gasoline is a commodity, yes, and doesn't matter what we end up creating technology to solve for. At the end of the day. All we've actually done is arbitrage. Is the market provide consumers an arbitrage. In other words, consumers
are buying gasoline at a dollar a gallon. We've built this billion dollar gas station in middle of New Jersey that is the most successful gas station in the world, and we're doing tens of billions of dollars, but we are losing.
Right, we're subsidizing full service gas station.
That's true, it is full service. Well, you're using technology, robots, I'm doing this okay. But effectively, that was the thesis that they thought. The investors thought that if they could increase the throughput of gallons, that their buying rate would be cheaper. Oh I see.
So it was like the volume would make up the volume.
I'll lose money on every transaction up and volume. It's the same, it's the same. Idea here is that they were effectively subsidizing early on a lot of their capacity, and what they realized really late and this so they did change. Ultimately, Convoy realized about twenty eighteen twenty nineteen
that that model just didn't work. That really all of the money that they had spent in subsidizing capacity and acquiring the capacity was meaningless at the end of the day because it didn't provide any long term resilience or sort of commitments among the shippers and among the carriers to stay with their platform. That is really what happened.
And at the same time, using our gasoline analogy, is that not only did Convoy have a gas station, or we have this gas station New Jersey, but now Joe opens up a rival gas station down the street and he's charging ninety nine cents, and so now all of those gallons that we've sold go to Joe's gas station, which is now cheaper. And that is the reason that trucking cannot strictly be disrupted through these technology apps is that they were trying to disrupt it by lowering the price,
buying market share, and effectively subsidizing the customers. The customers were benefiting from this, the shippers benefited massively from it because they were getting cheaper cost and that's how they were able to grow so fast. What ended up happening is they learned pretty quickly that those commitments were not finding that there was no such thing as contract right.
So this is really interesting because you know, and I think when you get the Uber analogy. I mean, there's really feels like there's two elements here. One is just okay, you can't be the Uber of trucking unless you have some capacity, unless you have some guaranteed for ability.
To turn on capacity when you need it.
But then the other, right, the ability to get that guaranteed ability to turn on capacity. But then the other question is why do we need humans as part of the freight brokerage process and why can't it be all computers like Uber is. And you know, I'm sure I want you to weigh in. We recently talked to Brad Jacobs, who is on to his new building supply distribution business but also founded a freight brokerage and there seems to be some dispute because I asked the question is like,
why are there still humans in this business? And I know there's humans, lots of humans because a you know, like I've been I went to the Arrival Logistics de facto trading floor. We've talked about it. I see your community of you know, freight waves fans. They're always posting freight brokerage memes. So I know there are a lot of people in offices who, you know, have one phone up where they're talking to a shipper and someone else's talking to a carrier. But Brad was like, you know,
there's a lot of it's getting on. What is the truth? Like why are there still so many just sitting aside the capacity aspect? Or are there so many humans or how many humans in this process?
So it's interesting because Brad talked about the fact that, you know, when he got in his industry yees ten years ago, it was largely humans and then over time it had digitized. And you know, I think the statement was he had ninety seven percent of its freight was electronic. That very well maybe the case for his business. Think of xbo's role in the business, it's a big really predominantly you know, in its focus on LTL, which means
it has very very large enterprise shippers, big commitments. It's able to digitize a lot of the transactions, and most of the bigger trucking companies are digital. Like if you go look at night Swift's operation, look at Schneider's operation, go look at old dominions.
So that is like placing an order on a thing, and it just.
That's right, and that's what the big companies want. To do. Is they actually want to eliminate human contact as much as possible, because that's how they're able to optimize the model. They use technology to do electronic transactions, and that is that probably represents twenty percent of the business. It's the cream of the crop business. It's the business every company wants because it's the high volume shippers, dependable volume.
And standardized lane, standardized ship or your standardized carrier.
Is it just exactly and highly predictable, highly consistent business. And if you're building a network, then that's what you want because I can depend on it day in day out. That's what the larger companies focus see. And if you ask the CEO of Swift, you would probably get a similar answer about how much of its freight is electronically tendered. H Robinson, the largest freight broker in the country, publishes that seventy eight percent of its freight doesn't have a
human touch. Okay, but the reality is, Joe, is that the hundreds of thousands of freight broker people that are out there making up at least you know, the numbers are as high as registered frate brokers in the sixty to eighty thousand numbers we track and think there's about five thousand high scale freight brokers that do more than about ten million dollars in revenue a year. They're still predominantly human based, and what they're dealing with are the exceptions.
So what happens is a large volume shipper takes ninety five percent of its freight and sends it over to the xbos and the h Robinson's and the you know, the the night swifts, and so they get all the electronics stuff dispatched. What's left over is the really hard to manage. It's either a laye that nobody wants. It's somebody who literally shops price on every single load. It's
a commodity that nobody wants. And you'll see in the meme if you go on Twitter or on x you see all the memes and freight making fun of the kinds of freight that nobody wants. This is the type of frit that's left over.
What's an example of a type of freight that no one wants to deal with? Grocery Okay, have to have like al you have to have a special truck.
Yeah, well you have to. It's typically going to a grocery store. It takes a long time to unload it. They're miseraboo because they're in a cold trailer and a refrigerator trailer. They have to use something called a lumper. A lumper is I pay somebody at the dock to unload me, or the driver has to unload themselves. They can take eight to ten hours to load at a like a farm. They go into a farm facility or distribution center, it could take eight because they're all handloaded.
Think of like a crate of tomatoes or oranges or something. A lot of it's like loaded, not on pallettes, but actually sort of full loaded. So this is undesirable freight for a lot of these guys. It has really tight transit times. So that's a type of undersers freight flatbed which is hauled to project sites. You're not going to a warehouse, but you're going to a construction site that
has to be manually unloaded. It can take sometimes hours or longer where the truck's got to sit, and so there's a lot of freight that's just undesired, and that's where a lot of the freight brokers, the humans still take and manage a lot of these sort of long tail transactions. That isn't the world that an XBO plays in. That is the world that the prejaminance of your freight brokerage. The folks that are on freight Twitter that are doing the brokerage job, that's where they that's a large.
Percent of their freight is managing the light bulb moment sense.
So much of this reminds me of the move to electronic trading in the corporate right, Like it takes a long time, and like the stuff that starts being electronified first is like the standardized trade. It's the easier ones. But again, like incentives play a role there.
You took twenty years before consumers had access to effectively trade at very low cost without a broker. Yeah, this you saw early in the nineties. You know, sort of happened in the early nineties to sort of late nineties. The Internet was born, and all of a sudden, I could trade for you know myself, I could execute my trades, and then all of a sudden you got into low cost trading. And then now we're in sort of zero cost trading as consumers. But you still have the finance industry.
High frequency trading has not gone away. You still have you know these large trading floors that are people are involved in this transaction, involved in these services that extend beyond just executing a trade. I mean, I can't remember the last time I called a broker to execute a standard stock trade. But I may go to a broker if I have something that is unusual that I want to do, or perhaps the product or that I'm not familiar with, or something specialized. And that's really where we
see the freight brokerage industry. All those humans are really helping solve those problems. But you make an interesting point, and I use this analogy a lot. It's freight at the end of the day, is a commodity. It is price sensitive, and it will move at its in a best to the lowest cost provider. Ultimately, that's what it's trying to search for. Most of the transactions can be digitized and electronically, but everyone is investing in the same technology.
They're all trying to digitize it. And because they're all trying to digitize it is no one actually has an advantage. There is no equivalent to a New York stock exchange where I can put my servers right next to the clearing engine and get nanoseconds because this is a market that is not centrally cleared or exchanged, and so there is no time advantage that I can get in terms of being closer in terms of executing. So really what we see is companies try to take the highly commoditized freight.
The big companies that have the balance sheets and are asset based are picking off the really highly desirable freight that can be electronically managed, and the freight brokers, which continue to proliferate and grow, are taking care of this stuff. I can't be easily electronically managed.
I have just one more question, which is again, I think the last time we spoke to you in twenty twenty three, you were talking about a coming blood bath or the bloodbath in trucking looking out to twenty twenty four, how would you characterize it.
I think we're going to trade at the bottom for a while. Like I don't think it's getting worse. I don't see a situation where things are quote unquote deteriorating further. Now to an individual player that's in the market, they may feel differently because their balance sheets are probably wrecked at this point. They're taking freight that they're not making
money on. They've been doing this for probably fourteen to eighteen months, and so to them it may feel like they're at the end of the line, and there will be a number of trucking companies that fail over the next couple of months. But I think it's the market wide. I think we're in many ways on the way back up, and so I think it will take a long time to turn out this capacity. But I think we'll see improving conditions for carriers as capacity bleeds off and as
demand looks like it's going to stay persistent. You know, the consumer has stayed strong for miraculously strong in this cycle. It looks like, you know, going back to the conversation we had very early on about near shoring and reshoring, it looks like that is starting to take place, and because that stuff has a long lead cycle, is we're starting to benefit from some of that now. And as a manufacturing reshoring really take place in our economy, that
will drive additional freight demand. And so as we continue to bleed off carriers and we see improving economic conditions in manufacturing and in inventories have bled off, that will help promote higher rates. But also higher demand and ultimately the industry will heal and sort of will enter a new cycle.
And one could.
Argue, well, this is the evand to which I think this time around is that you know, we do see tightening credit, which is the only thing that's going to stop the growth of trucking.
Oh interesting because I guess the last cycle it was not only were freight rates going up, but you also had extremely low cost of financing.
You could get it for almost nothing, to borrow money for almost nothing, and small banks they were you know, fueled with so much cash and the government was putting pressure for them to deploy it. That is no longer the case. I think, what and it's really the community bank model. It's the community banks and the folks that are in that sort of small business lending are the folks that really control the outcome of the market. They've
tightened up. They started to look at trucking as a riskier business because they chances are almost every community bank in America has some trucking asset in its portfolio. And because of that, I think they're starting to say, hey, these this may not be a desirable industry to invest in or to lend money. To the way it was before, and that tightening credit standards will make it more difficult for small businesses to borrow money and thus make it
harder for new expansion to take place. And I've talked to a number, you know, in Chattanooga. I'll run into people even at the airport and other cities, and people who know recognize me or know what of me have talked about their small trucking comps. At a guy said he had a bank deal that fell apart because the banker reads freightwaves and he was like, deal. He's like, I have a good business, but because you're talking about this freight recession, you have to continue to do that.
I said, well, my job is to inform, and I said you should thank me because had you borrow that money, you may not you may be in a different financial situation. So I think there is more awareness about the issues in trucking and that will probably keep the capacity growth at least at Bay. But we will be back like this will be a really boom market once again. We
will see higher freight rates at some point. The vibes will be really strong on Twitter, where everyone's super excited about high freight rates and there will be an argument that this time is different, because that's what they'll say, this time is different. It's not gonna roll over. This is different for all the sorts of reasons. And we will talk about that on this show, and we will predict when it will fall apart again because it will.
All right, one last quick question. I'm gonna pivot we you know, founder and see you a freight waves. We always talk to you about freight. You also have this whole other business and aviation media and other aviation assets. I want to do like an hour with you at some point talk about that. But just real quickly, is it really true that there's more airports than McDonald's.
This is an insane stat that no one, I think everyone finds it hard to believe. So if you take the total amount of private this includes private airport kayports. So most people think of airports and thinking of like JFK and Labordia Newark, the predominants. The vast majority of airports the United States are actually privately owned airports or community owned airports, places that have very small runways of one thousand to two thousand, three thousand feet can how
many even a jet accommodating small aircraft. Yeah, there's nineteen thousand of those, and I think the number on McDonald's is like sixteen thousand, so there are This.
Does not surprise me at all at all. Yeah, because just where our places in Connecticut there are two McDonald's within like a one hour radios. There's at least three airports. One of them is for sale. And I've been thinking about it.
An airport.
Okay, I got to check this out there that episode then we know what the next episode.
One of it.
But one of the people think that private airports is all about jets, and they always think it's like really much people. But the predominance of the folks that use these small airports are farmers in their agriculture, and our entire ag ecosystem is dependent upon airplanes and bees, but airplanes to do things like and so a lot of the airports are used in places out in the heartland
for farming. They're also used to things like mining, you know, extraction and stuff, and so the vast majority of those airports are very small airports that most people will never see, will never notice unless they get in a small airplane and see all will get.
They are very unassuming. Some of them are just fields.
They're literally most of them. The predominance of them are grass fields. Yeah, get pilots, buy into it. Frankly, these are farmers that keep an airplane in the barn and they fly it out.
So Craig, we could talk to you for another hour, but they're just meetings. Grublet have you back before too long? Thank you so much for coming on. Thanks, thank you, Tracy. I can't believe you didn't tell me that there's an airport for sale by you, and now it seems obvious that we have to do an episode on the business of running an airport. How much that costs.
I'm definitely up for doing an episode. One thing I learned from being an aviation correspondent is I would not personally, as an investor, put much money in. We talk about like cyclical industries, aviation is also one of those that just goes up and down, up and down, up and down.
Well, yes, but I think the publicly traded airport stocks, and we're really getting off topic from where we started the episode. I think actually publicly traded airport stocks have done really well, even if the plane, even if the carriers haven't done so great.
I can't remember. There was this amazing chart and I think it was like everything attached to air travel like does reasonably well, like the aerospace manufacturers, although this was before the Boeing scandal, so I'm sure it's changed, but like the aerospace and the airports do well, and then the airlines are just constantly cycling like in and out of bankruptcy. But anyway, I severely doubt my ability to run a rural airport.
On the main area that we talked about. That was such a good conversation. I love talking to Craig, and I feel like we touched on a bunch of things. It's particularly interesting, you know. It just started off the sort of some of the geopolitical considerations in the US, the degree to which we want to make sense for these to invest resources in patrolling the Red Sea.
Yeah, I mean that seems to be a huge topic of conversation at the moment. The idea that maybe we could get to a place where the Red Sea just isn't considered a viable halfway for container shipping at least, that's really interesting. I'm also thinking back, do you remember when the Suez Canal was like last closed, not during the ever given thing. But during the what's it called this Six Days War?
Is that what it was called the sixth Day were?
Yeah, do you remember that? I mean not like actually remember because we weren't alive. But I think there were a few ships that got stuck there during that time, and they were stuck for like years.
Wow.
And there's some really interesting accounts from people who were on those ships. I think they started their own trading system and postal service where they had little like postage stamps.
Oh, we gotta do we gotta find a historian to talk about that.
Yeah.
I can't remember why or how I know that, but it seems like a fun topic anyway.
So many good things also freight tech. I thought that was really interesting and that explained so much because I know that there's like a ton of brokers, and I also you know Brad Jacobs saying no, we do it. It's so electronic. So hearing that explanation of like, okay, you can electronify the high volume commodity lanes and lines and products versus the long tail of weird places and undesirable goods. Anyway, so much good stuff telling are well.
Also just the insight that freight is ultimately a commodity, and you have to think of it that way. And it's funny that we landed on air travel in the end as well, because I remember one of the first things I learned when I became an aviation correspondent was that error travel was basically a commodity as well. You know, you have a set capacity that is leaving at a certain time. You either have those seats filled or not. And that was always the way that I was taught
to sort of think about it. Anyway, Shall we leave it there, Let's leave it there. Okay, this has been another episode of the Adlots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
And I'm Joe Wisenthal. You can follow me at the Stalwart. Follow our guest Craig Fuller, he's at Freight Ali. Follow our producers Carman Rodriguez at Carman Arman, dash Ol Bennett at Dashbot and kel Brooks at kel Brooks. And thank you to our producer Moses On. For more odd Loots content, go to bloomberg dot com slash odd Lots, where we have transcripts of blog and a newsletter and you could chat about this episode with fellow listeners twenty four to seven.
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