Odd Lots - Attacks in the Red Sea Are Reconfiguring Global Trade Again

Episode Date: January 4, 2024

A string of recent attacks by Yemen-based Houthi rebels on commercial vessels transiting the Red Sea to the Suez Canal have forced global shippers to once again shift how they transport goods. It's just the latest in a multi-year string of disruptions to global supply chains. It also comes just as pandemic-era supply chain stress seemed to be in the rearview mirror. So what is the geopolitical and economic impact of this latest disruption? In this episode, we speak with Craig Fuller, founder and CEO of FreightWaves, about the impact of the attacks. We also talk about the broader logistics landscape, including the rise and fall of digital freight brokerages, and the 2023 "bloodbath" for trucking firms.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the podcast, Odd Lots on Amazon Music. Hello and welcome to another episode of the Odd Lots podcast. I'm Jill Wisenthal. And I'm Tracy Allaway. Tracy, it's time to return to our favorite topic of supply chains and freight. 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 2020. 23 in terms of disruptions, but towards the end of the year. Yes. And now into 2024, 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 in Yemen, the Houthi rebels, disrupting trade through the Red Sea. We're beginning to see the return of those maps that we see where this. This is where the ships were a month ago, and this is what the shipping lanes looked like today. Not unlike, what was it in the Suez two years ago? But, yes, supply chain disruptions, at least on 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, 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, 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. They're like, do you have any furniture stuck on a container ship somewhere? It's either that or questions about the coal in Tracy's basement. Yeah. 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. Well, yeah, and we talked to Brad Jacobs recently, and we talked all about your

building supply needs for your 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, bloodbath, choose your preferred noun there, coming to freight and shipping. And the idea was that, But 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 2023 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 weird moment in time where we're waiting to see whether or not there's a recovery. Yeah, you know, it's funny, even without disruptions, as you mentioned, 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 cyclical. So you had this already pretty crazy cycle for the U.S. economy between 2020 and 2023 or maybe now, and it was even crazier for freight.

You know, another thing that happened last year, too, 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, oh, 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.

Yeah, 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 in-studio. We're going to be speaking with Craig Fuller, founder and CEO of Freight, wave. So, Craig, thank you so much for coming back on odd lots. Joe Tracy, great to be here again. There 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 at 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. 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, you know, 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 and consumer goods that are largely dependent on 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. The Suez Canal has cut out an enormous amount of distance that geographically the ships have historically had to go around. With the Suez, it was able to sort of expedite trade flow from Asia, in particular 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 U.S. Navy in sort of securing or protecting some of these routes? And what are we seeing from U.S. defense officials now at this 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 II. So if you think about it, the United States has the largest navy in the world. It's also one of the only blue water navies that can go anywhere to fend any place on the planet. And that's really the call of fame.

So what does it mean blue water? It means that they can go into deep oceans. They can be anywhere. Basically, there's no place 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. That is one of the primary calls of the U.S. Navy is. is its role is to protect commerce and ensure global trade. And really, the world and China has mostly benefited from that,

the U.S. Navy's role of protecting the sea, from things like pirates and state sponsors that want to attack global trade. And the question now is in a host, 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 U.S. policy. and really to be able to defend the, you know, the role of the U.S. 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 mention them, they're somewhat common. They're in the news.

But what's different about this is that it's missiles being fired. These are, it's not pirates. They're not trying to steal the cargo. This is, these are military attacks on private corporate. These are military techniques. We've seen helicopters actually land on tops of ships and actually take, take cruise hostage by way of helicopter. It looks like a SWAT. You probably have seen the video floating around where it looks like a SWAT video.

Yeah. 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 a terrorist, and look, we can argue whether the 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? Because I think the U.S. has the capabilities to largely defend every ship or the ships that we have decided to defend.

But at what cost? I mean, you're looking at a missile, you know, anti-missile technologies, a million dollars. We're firing these defense missiles off at a million dollars apiece. And you're fighting a drone that costs a couple thousand dollars. I mean, at some point, there is a mass attack on U.S. consumers and the U.S. 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 Mersk said it wasn't going to go through the Red Sea anymore after this missile 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 U.S. with all over 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're 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 20,000 T.EU ship. And then you have the insurance companies which are saying, hey, we're not going to insure 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 crews 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. Captain Phillips? It's 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 insure these ships that go through these contested channels. And I think the 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 crews in harm's way, if something were catastrophic to happen, would be very, I think, demonstrative to these brands and 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 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 interest of the different countries that are in the region. 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 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 dependent upon, were 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. 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 guess I find this framing to be very interesting that, you know, arguably, we don't, we is in the U.S. don't get a ton of benefit from the resources that we invest in patrolling this, that a lot of the benefit goes to China. China benefits, in theory, by the sort of distraction to the U.S. Navy, pulling assets out of East Asia and towards the Middle East.

China itself obviously has expanded its Navy quite a bit in recent years, and the estimates is 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 U.S. 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 playing these war games that 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 it if, Global trade gets obstructed, particularly manufactured 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 Xi, 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. Yeah. 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, 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 or, 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 2023, 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 suaz 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 that were 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 rejigger their operations to make sure that they didn't have to worry about the types of disruptions or congestions that we had between 2020 and call it 2022. 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 sort of stages of domestic remanufacturing and nearshoring. 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 a 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 U.S. and China are never going to sever trade ties. But what we've seen is when she shut down his economy during COVID, sort of the late stages of COVID, that really changed the calculus for Western decision makers that realized that China was no longer going to do things to promote exports at all cost 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 seems to be an inevitable course to some level of conflict between the China and 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 what we're seeing take place in the Middle East, and it's quite effective. 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 Malacca or other parts of the globe where it's not just Europe that's being impacted, but it's also trade into the United States. news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Ruffini. We'll bring you the latest headlines, in-depth analysis, and big interviews, all the stories that hit home on your days off. And I'm Lisa Mateo. Watch and listen to Bloomberg this weekend for thoughtful, enlightening conversations about business, lifestyle, people,

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That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. I want to pivot a little bit. So the last time we spoke to you was in May of last year. You and your colleague, Rachel Premack, the title of that episode,

We're in the midst of trucking bloodbath 2.0. Sometimes we do episodes about something at the bottom and then it bounces. 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 rest of the year in freight? And then where are we in the cycle now? Joe, I think you've done at least 10 episodes related to some level of the freight cycle. So somewhere we're going to get one right.

So no, but what's amazing about this is I've known you guys since 2020. Yeah. I think we've gone through at least three cycles. Since 2020. That's so crazy. And so we love it. This is why we keep coming back because the line is always moving in some direction. It 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 bearish 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 years ago, when we first started talking in 2020 and 2021, is the market was sort of at the super peak.

There was massive supply chain, disruptions caused by a lack of capacity, driver issues, and so forth. Now in 2023, we've sort of hit the bottom. And I would argue that the worst is already 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 2023, 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 odd lots, 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 bloodbath, they oftentimes assume that that means that the broader economy is struggling. Yeah, I think the big question was whether or not that indicates that the consumer demand isn't there. So one of the interesting things is we now have, we bookended 2023, we're able to actually look at the entire year in sort of context. And what we've seen is that actually 2023 was a good year related to freight volumes. It actually, if you took out the COVID extremes of 2000, sort of late 2020, 20, and 21, and even parts of 22, what you've seen in the freight market is that the 23 was actually a really solid year. It continued to build most. 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 23, 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 2019 to the peak of capacity build, which really did not end. So the freight

recession started in March of 2022. It wasn't until October of 22 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 2022 until really the third, until the fourth quarter. And now what we're looking at is a situation where we've had this, all this excess capacity that's built out. And that's why like, 2020, was such a miserable year for the trucking industry is that we had,

you know, we're talking 60,000 more trucking companies in the freight market today than what we had prior to cope. Wow. And these aren't 60,000 trucks. We're talking 60,000 independent companies that are in the trucking industry,

that have entered the trucking industry, that are outtaking freight. And so what you have in the trucking market, we've talked about it a few times, all aspects of freight work this way where you constantly have this demand that's driving supply. 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 overcorrected. 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 entrants. It's a classic commodity boom and bus cycle. And that is what happened in 2022 that brought us to a really miserable 2020. And what's happened over the last couple of months that we started to see a number of bankruptcies, Yalo being the, you know, Yallow 8 historical LTL carrier, filed bank.

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. Government bail out. Unions at one point had bailed 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-ran company. And it is out of business. And you mentioned the UT's that earlier, Joe, is that we've seen some freight tech companies

that raise lots of capital that also went under. 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 know it was bad for a lot of companies in 2023. But, you know, going back to 2021, 2022, you know,

we got interested in freight, obviously, on the AdLod's 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 can solve all of these problems. We saw some really huge fundraising, but then also in 2023, 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 flex port. 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 that like we can 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 to sort of if i could disrupt the taxi industry the way uber did that can 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 of investors. I mean, you had Bill Gates,

Chip Bezos, you had Pete Hoffman. 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 you 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 cyclical this industry is and how fungible the capacity is.

So if I want 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 idled 90% 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 this with their search pricing. Yeah. You know, they will send out messages to their drivers and say, hey, there's a football game in town or there's a, you know, a big event in town. Please come out and get three to four, 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, and 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 XPO and C.H. Robinson,

but you also had all these tech vendors, companies that provide software, they 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 at the late part of the cycle,

a late part of their business, is that freight is commodity. It's highly fungible. The capacity is highly fungible. fungible. And no matter how much money I spent 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 can talk about like new technology to make this whole process more efficient. But if there are like 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 gas. 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 we're, our technology has made it more efficient for us to deliver gallons. Now, you and I both know that 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. Right. At the end of the day, all we've actually done is arbitrage of the market, provided 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 money on everything. We have to be a full Full-service gas station in New Jersey. You've got to make that clear. That's true. It is full-service. We're using technology robots are 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 for it. The volume. Okay. I'll lose money on every transaction, but I'll make it up in volume. It's the same idea here, is that they were. effectively subsidizing early on a lot of their capacity. Yeah.

And what they realized really late in this, so they did change. Ultimately, Convoy realized about 2018, 2019 that that model just didn't work. That really all of the money that they had spent in subsidizing capacity and acquired in 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 platforms. that is really what happened. And at the same time, using our gasoline analogy,

is that not only to convoy have a gas station, or we have this gas station in New Jersey, but now Joe opens up a rival gas station down the street, and he's charging 99 cents. And so now all of those gallons that we've sold... Gosh, darn it, Joe. 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. But what ended up happening is they learned pretty quickly that those commitments were not binding. There was no such thing as contract freight. So this is really interesting because, you know, when I I think the Uber analogy, I mean, there 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 or unless you have some guaranteed capacity. Or 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 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, it's 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 arrive logistics de facto trading floor. We've talked about it. I see with your community of, you know, Ratewaves 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 is talking to a carrier. But Brad was like, no, there's a lot of it's getting on it. What is the truth? Like, why are there still so many just setting 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 this industry, 10 years ago, it was.

largely humans and then over time it had digitized. And I think the statement was he had 97% of its freight was electronic. That very well may be the case for his business. Think of XPO's role in the business. It's a big, really predominantly, you know, in its focus on LTL, which means it has 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 Knight Swift's operation, look at Schneider, operator's operation, go look at Old Dominion. So that is like placing an order on a thing and it just ought to 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 probably represents 20% of the business. It's the cream of the crop business.

It's the business that every company wants because it's the high volume shippers, dependable volume and standardized lane, standardized shipping, standardized carriers. Exactly. Over and over real. 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 and day out. That's what the larger companies focus on.

And if you ask the CEO of Knight Swift, you would probably get a similar answer about how much of its freight is electronically tendered. C.H. Robinson, the largest freight broker in the country, publishes. that 78% of its freight doesn't have a human touch. Okay. But the reality is, Joe, is that hundreds of thousands of freight broker people that are out there making up at least, you know, the numbers are as high as registered freight brokers in the 60 to 80,000 numbers, we track and think there's about 5,000 high-scale freight brokers

that do more than about $10 million 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 95% of its freight and sends it over to the XBOs and the C.H. Robinsons and the, you know, the Knight Swifts. And so they get all of the electronic stuff dispatched. What's left over is the really hard to manage. It's either a lane 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 freight that's left over. What's an example of a type of freight that no one wants to deal with? Grocery. Oh, okay. Drives you have to have like a cold, 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 miserable 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 dot to unload me or the driver has to unload themselves. They can take eight to 10 hours to load at a, like a farm. They go into a farm facility or distribution center. It could take eight to, because they're all hand-loaded. Think of like a crate of tomatoes or oranges or something. A lot of it's like loaded, not on pallets, but actually sort of flow-loaded.

So this is undesirable freight for a lot of these guys. It has really tight transit times. So that's a type of undesirable 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 predominance 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. The sort of. Makes sense. So much of this reminds me of the move to electronic trading in the corporate bond market. That's a great idea.

Like it takes a long time. And like the stuff that starts being electronified first is like the standardized trades, the easier ones. But again, like incentives play a role there too. It took 20 years before consumers had access to effectively trade at very low cost without a broker, right? Yeah. You saw early in the 90s, you know, sort of happened in the early 90s to sort of late 90s. 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 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, is freight at the end of the day is a commodity. It is price sensitive and it will move at its, in the 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 the stuff that can't be easily electronically.

You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this from a variety of news organizations, but they usually rerun their radio newscasts throughout the day. That's not what we do. We create customized episodes that can only be heard on Bloomberg News Now. And we

don't wait an hour to publish breaking news. When news breaks, we'll have an episode up in your podcast feed within minutes. So you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. I have just one more question, which is, again, I think the last time we spoke to you in In 2023, you were talking about a coming bloodbath or the bloodbath in trucking. Looking out to 2024, 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. And they've been doing this for probably 14 to 18 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 as 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 nearshoring 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 hill and sort of will enter a new cycle. And we'll have more capacity. One could argue. Well, this is the advantage, 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, we're first. freight rates going up, but you also had extremely low cost of financing. You could get it for almost nothing. You could borrow money for almost nothing. And small banks were, 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 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, 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 in Chattanooga, I'll run into people or even at the airport in other cities and people who know, have recognized me or know of me have talked about their small trucking incomes. I had a guy, he said, he had a bank deal that fell apart because the banker reads freight waves. And

he was like, you're doing my deal. He's like, I have a good business, but because you're talking about this freight recession, do you have to continue to do that. I said, well, my job is to inform them. I said, you should thank me because had you borrowed that money, you wouldn't have paid a bad. 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 going to 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 going to pivot. We, you know, founder and CEO of 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 in the United States?

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 airports, so most people think of airports and thinking of like JFK and LaGuardia and Nurek, the predominance, the vast majority of airports in the United States are actually privately owned airports or community-owned airports, places that have very small runways of 1,000 to 2,000, 3,000 feet. It can accommodate even a jet, they're accommodating small aircraft. Yeah. There's 19,000 of those, and I think the number on McDonald's is like 16,000. Amazing. Well, there are more smaller. 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 radius. There's at least three airports. One of them is for sale, and I've been thinking about it. You should buy an airport. I got to check this out. That episode, then we know what the next episode is going to be. But one of the people think that private airports is all about jets. And they always think it's like really rich people. But the predominance of the folks that use these small airports are farmers. And their agriculture. And our entire ag ecosystem is dependent upon airplanes and bees, but airplanes to do things like compost. 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 the people get. They are very unassuming. Some of them are just fields. They're literally most of them. The predominous of them are grass fields that pilots fly into. Frankly, these are farmers that keep an airplane in the barn and they fly it out. Craig, we can talk to you for another hour, but there's just me and just Google a lot.

Have you back before too long. Thank you so much for coming on all. Thanks, Tracy. 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 Ruff. running an airport or how much that cost? I am 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 into. 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 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, just starting off the sort of some of the geopolitical considerations in the U.S. about the degree to which we want to make sense for the U.S. 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 pathway for container shipping at least. That's really interesting. I'm also thinking back, do you remember when the Suez Canal was last closed, not during the ever-given thing, but during the, what's it called, the Six Days War?

Is that what it was called? The Six Day War? 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 got to do, we got to 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. that there's like a ton of brokers. And I also, you know, Brad Jacob saying, no, we do it.

It's so electronic. So hearing that explanation of like, okay, you can't 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 talking to Chris. Well, also just the insight that freight is ultimately a commodity. Yes. 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 air 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 Allotts podcast. I'm Tracy Allaway. You can follow me at Tracy Allo. And I'm Joe Wisenthal. You can follow me at the stalwart. Follow our guest, Craig Fuller. He's at Freight Alley. our producers, Carmen Rodriguez at Carmen Armin, Dashel Bennett at Dashbot, and Kel Brooks at Kell Brooks. And I thank you to our producer, Moses Ondum. For more Oddlots content, go to Bloomberg.com slash Oddlots, where we have transcripts, a blog, and a newsletter. And you can chat about this episode with fellow listeners 24-7 in the Odd Lots, Discord. We have a transport section in there. There will be a lot of interest in this. We also have a defense section in there, too. So discord.g.

And if you enjoy odd lots, if you want to pool all our money together to buy a small rural airport in Connecticut, then please leave us a positive review on your favorite podcast platform. Thanks for listening. I'm Francine Lacqua, an award-winning journalist, and I've got a new podcast, leaders with Francine Lacqua from Bloomberg Podcasts. I've interviewed everyone from heads of state to fashion icons about the news of the moment. But I've always been curious, who are these people as leaders? I think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday.

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