Hello, and welcome to another episode of the Odd Thoughts Podcast. I'm Tracy Hallaway and I'm Joe. Wasn't Joe remember that ever Given? Yeah? That was. That was a great story. It's not over yet, is it? So? Possibly my favorite sort of finance eco story of all time. It's still going.
Uh 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, right, So it wasn't actually stuck like sort
of blocking the canal for that long. I think it was like about a week maybe or something wrong 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 like some issue with like the boat, the vessel not being allowed to actually continue on its journey until the owners paid up for the the rescue operation, and then I started lost track of it after that. 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 semi conductors, and the logistics snarls really play into that because if you already have a short things like semiconductors, plus you can't actually move them to where they need to be,
then everything just gets compounded, right. I was just about to use that word compounding, because that's really what it feels like that Like the ever Given story was like 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 like the perfect emblem of this moment because they are just so many issues recently.
Did that episode about with the lumber trader, and so that after that episode, I was like reading about or I was like following like one of the big sawmill companies. I read their earnings report and they missed a man about this. Oh you did, Joe. You've read this from my post, Yes, you published it. That was the thing about the sawmill company. Yeah, yeah, they couldn't get enough truckey right, should have been minting money, but it wasn't. Sorry,
of course, because they couldn't actually move the wood. Okay, so we're all on the same page. So anyway, all these things are piling up on top of each other, 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 on the way, 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 l A for months now, and I cannot get room on a ship for lover money. So you know, I've been trying to do this for the purposes of journalism slash science, so I personally know how bad it is, and the guests that we're about to speak to on
all thoughts. 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 forty containers still stuck on the ever given so he can talk about that situation as well. Well. I'm
really looking forward to this. I'm hoping to learn something and hopefully you get some some advice on making your making your ship all right. Our guest for today is Ryan Peterson. He's the CEO of Flex Support. Ryan, thanks so much for coming on. Great to have great to be here. Thank you for having me so Ryan. Hopefully, Joe and I kind of described the extremity of the logistics log jam correctly in the intro. How bad is it right now? Um? And it depends where you sit.
If you 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. 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 in every industry, I think lumber, the lumber one you describe 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. So my little container is when you feet long for the record, but it only has one thing in it. How does a flex port sit within the logistics ecosystem? And who are your clients and all this? Yeah, so we work with about six thousand great companies around the world that
regularly ship. We actually have more than ten thousand customers, but six thousands of them are shipping constantly like every day, like medium sized, big, big companies, household names, some of the most important brands in the world as well as like we have almost all of the directed consumer e commerce businesses that are these up and coming companies, So
we have all of those customers. They contract Flexport to manage the full end to end from shipping everything once it leaves a factory loading dock all the way into their downstream network for distribution into the u S and we handle air ocean freight, UH customs and the delivery both pickup and delivery for trucking. So talk to us a little bit about the containers on the ever given then what was your role there in the logistics and
what's their current status. Yeah, we do have we have forty three 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 you've seen the pictures of the ship. They're stuck. The name of the game here is second order effects, Like you just couldn't predict what was going to happen.
So you've got the forty three that are stuck on that ship, but actually a hundred and twenty other ships containing twelve hundred flex sport containers were stuck behind that ship or ahead of it which way they're going, and
also couldn't be delivered. How 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 gonna be a lot of lawsuits. It's not just the cost of the rescue operation, the dredging of the canal and everything else. It's like all these people who had their cargo delayed,
and what's the how do you quantify that? It's like, is it the lost profits that they would have aid from delivering those goods. It starts to be a really hard exercise that we'll get settled in the court of law or or many um and it's gonna take a long time to shake out. I don't know if there's like 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? Yeah, there is a
lot of confidentiality. But I know that one of our customers has is a relatively famous company that make and I can't show that, but make keyboards, keyboards and mice, uh, the entire like many container loads of that. Um. By the way of the forty three 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 we're gonna have to
work through 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 that whose cargo owns the cargo the products on there is liable when something like this happens. Yeah, and and the real 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. And the reason that that was true is that in a in a storm or an accident at sea, you don't want people to stop and argue about whose cargo they're gonna throw overboard, and do you want the mariners. 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 sort it out later is everybody agrees that we will share equally and 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 um and it could be billions of dollars in aggregate and it and it gets divided pro rata based on the commercial invoice value of your goods. That when you do get this your goods put on that ship, you should pay for cargo insurance because if that ship gets something terrible happens all of a sudden, You're little Bloomberg research project,
could you know, bring bring you all. You've got to make sure that you don't get a bankrupted 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. It's not that expensive. 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. Um, that's all on us as as a logistics industry. That
it's really tough. The analogy 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, you know, and it's like, well, every you better be warning your customers about what's going on. Tell them that, hey, we're
not able. The thirty percent of ships are being are not making their schedule right now, seven percent of containers are getting rolled, which is like what it calls when you get bumped in an airline, when you get when you get bumped to the next plane that's getting rolled. In ocean containership industry standard industry average before the pandemic
was eight percent. So it's just like a huge spike in in failure, service delivery failure, and it's a ton of second order effects because right when when that and then this was the ever Given is a really good example. Like that ship. Okay, it's six days late, the ships behind it were six days late. I mean they ever given is gonna be months late, but the ones behind
it were six days late. We're arriving, but now they were supposed to go to the next port and the next sport, they're gonna be delayed there and there, and all those other bookings that were supposed to get put on get rolled and have to find a new you know what, what ship do they go on? It's a mad scramble. That was just like adding you know, 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. See, I explained that, like ever given a side, what have been the main factors that explain why the system is basically buckling? Like where where are the big pain points
coming from? The first thing and the most the easiest thing to point to is just like way more demand, way more volume is being shipped, and my own working I thought this is for this, and I didn't predict this in advance, so I'm not claiming to be smart and I just sort of looked at the data x post and rationalize it, which we're all capable of doing. I don't know if it's true or not, 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've got to get your dopamine somewhere. And so you just buy stuff on the internet, and 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 building, um.
And so that's that's the first thing. It's 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 the ocean carriers actually pulled back capacity. Um. A lot of companies pulled back orders and their factories made other plans and then all of
a sudden goot new orders. So you've got a log jam at the factory where right now it's taking I talked to one bicycle producer, pretty big brand, last two weeks ago, and it's taking them three hundred days when they place a purchase order with their factory, three days before it's ready to get picked up, which normally this is like a thirty day process. Um, 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. US exports are down 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 of US of containers leaving the United States are empty. Uh, it's it's running around
right now. But for a while they didn't, 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 a as an industry, as a society, five hundred thousand shipping containers short in China. Sorry sorry, could you just explain that. Why is the shipment back of empty containers a problem? Because normally you have you
have full stuff going. Yeah, but US exports fell off a cliff, right, and nobody thought, hey, I still need the container even if I'm not exporting the goods. So the ships were going back to China but leaving empty containers, and 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 is not made to like change this fast, this physical goods type of stuff happening in the real world that it's not software. Can you go into that in detail, because this is something that we spoke about with a previous gust 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? Yeah, I mean it's it's my personal obsession is to try to make this industry more agile and 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 four hundred more times than I
ever want to hear again in my life. That's like an an operating system built by IBM as a predecessor to OS two. Like we're talking about early early eighties technology that's still running and and it's hard to switch out a system that runs such vital systems and your you know, running your company. And so some of it is technology and lack of tech to be agile. Some process I don't know, like I send some bureaucracy. So for example, with these empty containers, we saw this problem
coming like six months ago. We're like, hey, the exports aren't happening, there's gonna 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, will 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.
It's our container and we're like, okay, well I'm not gonna pay you to ship an empty like so we didn't do it, and then fast forward a couple of months and they didn't have the empties. Were like, ah, 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, hey, 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 need to just pick on any particular industry. We've seen this with healthcare distribution, We've seen it across the board of the Pandemics really exposed a lot of our institutions, and I think it's a wake up callegs. You're not stupid people. They're like, oh wow, okay, we
really have to invest in upgrade our technology systems. So we're seeing um, good partnership there, but in the midst of a pandemic, it's hard and mistakes are made, for
sure from the companies that you work with. Obviously I assume in normal times has already complicated stuff, but you know, like what's sort of going on inside at the corporate level as they sort of have to like pivot too, this kind of thing that I don't know, maybe I don't know if it normally runs an autopilot, but it's sort of smooth to this becoming a major strategic focus
for their ability to conduct business. We're talking about brands like companies that need to get their products in stock, and yeah, it is logistics team has been I sometimes call it like the offensive lineman of business, Like you don't really get noticed until you commit a penalty. Every everybody's piste off with you, and the rest of the time you just say, yeah, he blocked somebody. That's his job.
And I think we're finally seeing the opportunity for 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. Um. And they need they need technology, they need answers. They can show them, Hey, show me on a satellite where this ship is, and show me used 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's there? When's their couch going to arrive? Um? And that's an age old problem. No one can tell
you when your couch is gonna arrive. But it's been compounded in a lot a 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 weight time is, and I can tell you what current throughput levels at that port terminal are etcetera. Uh, and that's what that's what the Flex Moore technology platform is built for. So
we've we've found this whole thing. You know. The silver lining in US is like we're all of a sudden. Normally we just ship 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 talking to board levels and really getting in there and trying to solve real problems for people. 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 know, 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. Yeah, and I'll tell the way it's worked traditionally in the industry, and then I'll tell you what where I think innovations, but there are opportunities are for innovation on top of that. It's like traditionally it works by who has the best relationship with this person probably named large 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 to 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 an imp 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 is retailer and they finally agreed to give him twenty containers and the because the company and they paid extra to make sure that they got loaded, and then his company just rolled all twenty 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 that those containers and be like, we need to prioritize these. Look, at some point, if the ship is well, you do have to decide who gets on and who doesn't. And what we're building towards is the world where you prioritize people based on their own past reliability of because it goes two ways in that 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 eight percent roll rate in a world where ships were only at capacity or so before the pandemic. So how are you at percent, Well, they have to overbook. Uh, if you have a seventy percent book to show ratio or at PC cancelation ratio, you're gonna you can't. You can't make money selling a seventy percent full ship. So you overbooked your container ship, and then people cancel on you and you sort it out,
and on the average people are getting rolled. So it's kind of like a commercial flight that way, a pass where they might over they just assume some people aren't going to show up, and then if everyone does show up, then they have to bump. It's exactly like that. But the airline industry on the passenger side has like been really early adopters of technology and computer you know, and data science, and they've done pretty I mean, I don't get bumped very like almost ever. Anyone to hear those
announcements on the loudspeakers anymore. Wait, so is a book to show? Is that like a term that you got work to show? Is it's the opposite of cancelation. So we learned in terms of book to show what was the other one? General? General average your roll rate, I've already learned. If we stopped it here, I would have already learned plenty of I haven't even gotten into all the Viking English that still predominates in global trade. There's
a lot of there's us. The word for chucking is called drege, which is I guess too is as an old word for dragging. Something like when you add horses dragging, you have a bill of lading. Yeah, well that lading is an old English word for loading, and the bill of lading. This is to show you how ancient this
industry is. Like the bill of lading is a is a piece of paper that serves as title to the merchandise by default in global trade in this 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 not it's crazy. I just realized I've been pronouncing
all of these words wrong. In my head. I always thought it was bill of latting and dryedge. So thank you for clarifying that. Thanks for having me on. Look, if some one has to get rolled from your ship, you know your ship is overpooked, 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 gonna ship and what you ship, and and then I'm gonna look at how accurate you are in your forecast and how good you are at maintaining that book to show ratio that you actually ship
what you booked, and then I will reward you. When when someone needs to get rolled, it won't be you, It will be someone else who's way in 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, which is like and one of my dreams is to like send the person who makes 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, no one that 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 like an industry award show is what you're near. Yeah, I don't know that anyone would care, but I think their finance apartment would celebrate him for an after him or her for
an afternoon. That 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? Yeah,
and and similar problem. I mean, you have all the ships are sailing, all of them are sailing completely full. We still use like nineteen seventies technology to unload these ships. I mean we all like look at those containers and think they're kind of cool, but like that's the nineteen seventies 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 a
group of longshoreman um stevendors. They're called the warehouse, the workers on the at the port. Obviously, COVID has had impacts on work, on staffing, and the union has told them, I understand that they don't if they don't feel safe, they cannot come to work. So they've had a lot
of time getting enough people. There are brave people going to work throughout the pandemic um and they have been hit pretty hard by COVID in these in various poor 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 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 that so that it
can be dragged around by a truck. And we haven't had enough chassis. You know, all these second order efacts that are really hard to predict. Bullwhip effect. It's called in supply change. One thing I noticed, so by the
way recording this may third. So the latest I s M 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 because they're compensating for supply uncertainty by actually amping up their orders, because then presumably that they view that as increasing the chance that they're actually going to get uh. But then I have to imagine that that only further exacerbates the shortages, because if everybody is fear of shortages, and everybody increases their orders,
and then you actually sort of manifest shorter 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. 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 happened. So because when we first started into the pandemic, a lot of almost every business was staring at the abyss and said, hey, we gotta cut all of it. They didn't order anything. I mean, you probably heard that from your I didn't have to listen yet to your lumber podcast pack yeaheah, it's the same thing. They sold everything to the yeah, exactly. And then that's
had to happen with a lot of industries. And then all of a sudden and 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 the 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, and now it's whoever is going to pay the most gets on the ship, and the furniture people will have like kind
of low margins. We're sitting this out and they're going, hey, I'm not gonna ship when the price is that high. I'll just wait and I'll sell down my inventory in the US. And so now all of a sudden they're going, wait a minute, I'm like out of inventory and I'm just gonna have to pay this price. And so they're the furniture imports are only up year over year, but volumes in Q one are up to 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 it can lead to all these second order effects that are really hard to predict. I don't know, it's 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 if that there's a concept of equilibrium, but it's a something along those lines. Here's a dumb question on that point. But do you see the logistics narls 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 are bad? 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's it depends where you sit, you know, And like I do think it's kind of good that we're shipping more stuff.
That seems like a positive economic indicator that people are feeling comfortable and right if if if shipping it 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. 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 and that you know that it's kind of like you're just seeing this mix shift now. You will see it if it stays high long term. If like goods stay high, that seems good and you will see assets. People will invest in ships. I'm sure people are doing it right now.
Is if they had certainty that that was gonna happen, they'd be placing orders for more ships. But it's years for a new ship to come online. Went from that the moment you order it from where I said, 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 we're here to solve problems,
So I don't think we're not complaining about it. A flexport we become more useful than we were in the past. I want to go back to the point you made about the furniture importers and the low margins that they have. I mean, this was again very similar themes to our discussion about lumber. But you know, there's the sawmills were sort of shocked by it. Didn't really believe that the lumber prices we're gonna stay high, so like no one really ever invested to increase the capacity. How much are
the issue? You know, we've just seen the 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 of course and then having to scramble further to pay up more because they've delayed so long in they're shipping.
I think that's I think that's pretty common and so right now, the world's ocean freight industry about I think it's sixty or seventy percent 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 this is gonna be I'm gonna pay this rate for the year, and they go and contract that with ocean carriers or with Freight forward and Company, or a platform like Flex Sports.
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 is 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 talked to, sorry,
I can't give you capacity. Your company is not going to grow, you're not gonna hit through 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 have 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 gonna get any space unless I pay the rates.
Companies are sort of having that moment of opening their eyes and go, Okay, I guess we have to make a decision. We're gonna do this or not. In your experience, our companies absorbing the costs of higher shipping rates themselves or are those costs getting passed onto consumers. I think
it's going to get passed through by good. Good companies can raise their prices and um and people will pay for the product if if that's 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.
Are we gonna see some of these like once? I mean, some of these uh DTC companies that were probably growing really fast and have huge demand face the situation which they could have grown really fast and one but their top line just didn't grow by that much because they just couldn't move product. I think you'll see that they still grew, I mean sort of like the market has grown and that's what's happened. But but you won't be
able to see that. Hey, they might have been able to grow even faster if they could have got more product to market. And some of 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 doing there. They're shifting some capacity over the
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 blucks extra, but guarantee it. And so you're seeing a lot of people like pre pandemic flexport Abo eleven of the containers that we shipped, we're on these premium products and now it's uh I think it passed. It was eight percent a couple of weeks ago. It's got to be above by now. We've been getting more
and more demand for that. 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, because I imagine, you know, maybe repurposing some old passenger planes is probably
a lot easier than trying to source new ships. Of the world's air cargo lies 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 Cafe. Those planes are all grounded, which is uh to cut off fifty percent of capacity on the airside from the start of the pandemic and hasn't come basically hasn't come back online. So that's the first thing we exper this first hand.
So last year, at the start of the pandemic, we recognized pretty early on that their hospitals didn't have enough PPE to get enough mass for their front line healthcare workers. And that was true all over the world. UM, and we I just sort of our flexpoort team just stepped up and we actually chartered seventy seven passenger planes and filled the cargo holds but also the seats and the
overhead compartments. We just stuffed mass everywhere. UM ended up shipping about five million units of pp FO units of PPE two to five continents healthcare workers, so we were able to do it, but the break even price um was pretty high. So passenger planes only make money, I want to say, above ten bucks a quilo, and air freight prices are normally about that's asia to us. Air freight prices are normally like four bucks a quilo U.
Right now they've gone back up above ten. So we were in the range where you might see some passenger planes come back on and be used. 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 are have reached that state very much yet. Um old seven forty sevens are mostly gonna end up keep flying now that they've retired the seven forty seven. 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 in the overhead compartments. If you, if you are so desperate as we were last year, what is the state of the trucking market right now, and how much of a bottleneck or how much is uh for your clients. How much are the sort of after get after the uh the container has taken off the port and goes on to a truck. How jammed up
is that? Yeah? And there says there's a few different chucking markets that are yeah, loosely related with someone independent. And so the one that we play in is called dredge. That's ocean port trucking where you're hauling a container out of a port. UH. And then we call it cartage. I don't know what that term came from Old English. I'm sure cartagees airport shark when you're picking up a shipment at an airport. UM. And that's where Flexiboard operates,
and I have the most inside of expertise there. Rather than full truck load domestic trucking like point to point within the country or or the other one is called less than truck load shipping a palette 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. Flexbord has a big advantage. We build
technology for these truckers. So we have a suite that we've had about a hundred and forty trucking companies that run our software and mope with a mobile app and a hardware device that plugs into the engine. And so about thirty five percent of all the dreades trucks in America have flexiboard 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, assigned that driver aload, and we're now doing it of our shipments,
no human intervention. We just assigned the load and the driver goes and picks it up. UM. So it's running fairly smoothly for us. But we've seen the trucking companies that come on board use flexport are struggling to get enough drivers. And and that's a long term trend. You've got a driver shortage. Turns out young people don't really want to drive trucks. UM. So the average age of truck drivers in this country keeps getting older and older
every single year. 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. Well, I think this problem is going to get solved with vaccines and a return to normalcy is our best hope is that people start spending money in bars and restaurants and hotels and travel plane tickets and don't have as much money to buy stuff online and buy goods, and that will sort of be that. That's what a literal
return to normalcy is. We used to economy used to look more like that. On what timeline does that happen? It's your because it is much better than mine. I don't know. But are you seeing any easing yet? No, not really. We're still still seeing similar levels of ordering and and like to your point earlier, like if I can't get my stuff, maybe I should order twice as much stuff and um, And you're seeing that kind of
behavior more than more than a return to normalcy. At some point, are people going to have massive inventories and then maybe they'll stop shipping things so much? That's possible, Yeah, And I think that's that's the downside of all of this, is like we're all trying to predict the future, and like 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, ordering, ordering, and then at some point your customers have shifted and they stop buying your cool new products and they started spending money in the bar like they used to, and you're stuck with all this inventory. So yeah, that can that's the bull whip effect where
it just oscillates back and forth. Flex Port is a technology company, and I feel like, you know, in in normal times, everybody wants to I assume wants to optimize their inventory and having you know, extra days of inventory that they're not selling is a liability. And you want to just into the dream scenario, get the ship right, you know, a minute before you're gonna sell it. Everything is 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 sort of like 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 change? Will there be any changes to uh behavior? Yeah, and it's got to be cased by industry by industry, like some industry insteadives absurd to have no inventory of ppe and stock like
that is almost criminally negligent. It's like, how we do you know we 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 fashion fast fashion? Like is it going out of style in two weeks, maybe you get maybe you revisit, maybe it could last a month or something. I do think you're definitely gonna see a reconciling there. And this is, by the way,
a longer term trend. It's like in the old world, but I grew up in my mom bottle are closing the series catalog and you just have one distribution center in the middle of the country, and you could provide a three week or seven days shipping time from one site.
But if you want to get to an e commerce world where it's two hour delivery, you've got to have inventory cash sort of the Internet term would be edge cashing, your edge cashing your inventory, keeping it close to the customer, and you've gotta have inventory and 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 week 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 Xcel operations class. You'll sell most those busines school crowds like saved that Excel filand 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 that's what technology enables today, is like we can show you what our actual lead times when you place the order with your factory, what's the actual transit time? Not like your fudge your fudge factor thirty day number that you put in your Excel model, but like, what are we seeing trailing ninety days? What's the distribution curve? Data?
Data will help with these problems, um but at the end of day, it's a trade off they have to make between growth and the cost of capital. 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? I do think it's I'm protecting yourself. You gotta you gotta make that company that's trying to shoot your cargo believe you're gonna be like this important long term customer
that's gonna be there for them in the future. Maybe maybe call the guys, call the team at Bloomberg that ships all your umbrellas and schwag and everything. Maybe maybe they got some hookups for you. And uh, all right, I'll give it a go with with Lars and cop again. But yeah, I mean, I think they have to prioritize and if and if I probably do the same thing. No offense to you, but I gotta, I gotta who's gonna be there for me next year in the year after.
If I'm if, I'm gonna choose which customer gets on the boat. And it was like a sort of a two way exchange that goes on in these in these negotiations of who gets on the boat and who doesn't. 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. Great guys, thank you all. It's great, 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. You took the words right out of my mouth, and
I think that's exactly right. Like everything is expectations and everything, like so many conversations like expectations about the future end up affecting the right now, and uh in all different kinds of ways. So whether it's expectations like, oh, shipping costs are gonna come down, so we're gonna like hold off and then we have to pay more, or even uh Ryan's points 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 in um Levinson and this sort of like the decline of globalization that leading to consolidation of capacity, Like everything about expectations ends up having an effect right now. And I just think that's such a fascinating thing that turns up like over and over again in our conversation.
And I gotta 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 dray edge, which I always I said it before, but I always thought it was ladding and dry edge. So the more you know and the general what was it? I can't remember general something liability, but actually I need
to look it up for this container. Now I'm worried what was the one ship to show was that we're going to have to start uh an All Thoughts glossary.
I think, no, oh yeah, that's a good idea. But also I thought that was like super interesting again because it's like, you know, how much of these businesses it's not just you know we think of like, oh, everything is just like a pure auction, right, It's like there's capacity and 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 pure price. I guess I would say end up determining somebody. Fascinating thing. Again, it kind of gets back to expectations, right, who do you expect will be a better customer over time? Totally? All? Right? Should we leave it there? Let's leave it there. This has been in another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at
Tracy Alloway and I'm Joe Wisn'tal. You can follow me on Twitter at the Stalwart. Follow our guest Ryan Peterson. Here's the CEO flex Port. His handle on Twitter is at types Fast. Follow our producer Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levi at Francesca Today, and check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening.