Odd Lots - Ryan Petersen on How Global Supply Chains Have Gotten Even Worse

Episode Date: October 14, 2021

We've been covering global supply chain pressures almost since the beginning of the year on Odd Lots. And with each episode the question is "ok, so when will things normalize?" But basically, not only have things not normalized, things have gotten much worse. So why can't the system stabilize? On this episode, we speak again with Ryan Petersen, the CEO of the logistics firm Flexport, on how supply chain pressures have gotten even worse since the last time we spoke with him in the spring.See omnystudio.com/listener for privacy information.

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show live on the Bloomberg business app, or listen to the podcast. 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. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. So Tracy, we've been talking about supply chain disruptions, shortages, et cetera, for so long now, it seems that we're now sort of at the point where we need to start getting updates, I think, from the first people that we spoke to.

about the problem many months ago. We've come full circle by not really improving at all. Yeah, I think that's right. I mean, I think, so we started looking into these issues. Well, if you include semiconductors and the sort of squeeze we've seen in semiconductor production, we started looking into this in 2019. And then, of course, we had the global pandemic in early 2020, and that just kicked off all sorts of additional supply chain and transportation

gridlock issues. We've been examining those one by one by one, and we've had a lot of people come on the show, well, maybe not a lot, but a few people come on the show who have predicted that at some point, you know, hopefully it gets better. And yet here we are more than a year later. And it seems like things are not only not getting better, they're actually getting worse. Yeah, that's kind of the wild part. So, like, we've actually been the logistical aspects of,

the pandemic were kind of the way we started. But then since the global economies have really like sort of reopened, like really in the spring. And suddenly that's when all these things started piling up. And we talked about, you know, tanker rates and freight rates and what's going on at the ports. We're like, all right, yeah, but okay, it's going to ease when? What's it going to take to ease? And when will we see so-called normalization? And here we are early October. And I think the verdict is that not only has there not been any sort of, quote, normalization, unquote, and supply chains, it seems to be getting worse. Like, almost every measure, like if you were to just look at, like, how many ports are docked outside the port of Los Angeles, it's more today than when we did, like, a Port of Los Angeles episode back early in the summer. Yes, that's exactly what I just said, I thought.

But this is, I mean, look, we love. talking about supply chain issues, and this also gives us a chance to revisit one of my favorite economic concepts, which is the bullwhip effect and the idea that a small fluctuation in supply and demand can reverberate across supply chains and just get worse and worse and worse. So I think this is going to be a good episode, and it's always good to revisit these topics. So we are, as noted in the beginning, we're at the point where we now have to go back to guest that we talked about to get their perspective of how things have gotten worse. So I'm very excited to welcome back on the show, Ryan Peterson.

He is the founder and CEO of the firm Flexport, which helps companies deal with their logistical and shipping issues. So, Ryan, thank you so much for coming back on Odd Lots. Yeah, it was great to be back. I wish we were back to celebrate our success in fixing the world's logistical problems, but we're not there yet. Well, we'll have you back on, you know, in like 2025 when we achieved the true normalization. But, you know, I just looked it up.

So it's October, early October. We had you on in May. So it's actually five months now since we've spoken. So why don't you just sort of give us your very, like, sort of brief description of what's happened in the last five months since we talked to? Yeah. So what Flexport does, by the way, is we help companies ship cargo all over the world. and we have a technology platform to make this really easy

to connect importers with exporters and with all the world's asset owners that ship stuff. So we're like, I sometimes call us a backstage pass to the world's economy. We see everything.

We're in there and we're fighting through all the friction. So what we've seen in the last five months, in the last more than a year, really, is I think the way you might call it, the best analogy might be a traffic jam. Or one of my engineers said it's like a distributed denial of service,

a DDoS, attack on global trade is you started with just too many containers being shipped. And a DDoS attack in the world of websites is when too many bots hit a server, hit a computer, and the computer just overloads and shuts down. And you kind of almost have that at the ports where the volume of containers, the amount of cargo being shipped, shipped went up. We're looking at about a 20 percent, depends on the month, but about a 20 percent and on the port, but about a 20 percent increase.

in container volumes over 2019 levels, over pre-pandemic levels, which is really extraordinary. Like people who work in the software industry, that is no problem. Your systems can easily grow 20% in a week if it needs to. A port, we just don't have the added throughput. There's a lot of manual work involved or physical assets that need to move. Growing 20% in such a short time frame, our infrastructure is just not made for that. And by the way, the reason that volumes went up so much, what looks like is pretty clear in the data that consumers shifted their spend from going out and buying services and restaurants to

to buy more stuff. And we joked about that last time that you can be a patriot by going to a bar tonight, try to fix this problem. So what happened with this traffic jam is you got now so many containers flowing through that you get literal traffic jams. Trucks trying to get to the port are waiting for hours and hours. It's taking truck drivers, you know, many, many hours to get to the container to pick up their goods. And it's now happened is that it used to be a truck driver could do two truck loads per day. But now because of the traffic, they can only do one. And so now you don't have enough trucks. The same number of trucks, but you're not getting the capacity. And actually, some truck drivers are saying, hey, I can make more money doing something else

than wait here because they get paid per load, right? So they make more money doing something else. So that's caused the problem on the trucking. Then if the containers don't get cleared out of the port, there's not enough space to unload containers from the ships because the containers have to get unloaded and put in the yard somewhere at the port, and those are overflowing. If you drive by a port, you'll see the stacks of containers are just sky high.

And so then the containers' ships are being docked offshore, waiting for their turn to unload. And it's a complex system. It's hard to point it to one problem, but it just cascades through the supply chain. You're seeing now loading docks in China where if they can't get cargo shipped out,

out, then the loading dock, it sits on the loading dock. And so wherever you try to solve the bottleneck, it seems to just kind of move it back one into this kind of bullwhip effect problem that you're seeing. One thing you mentioned just on the demand side. So, you know, during the pandemic, we had a bunch of people who were stuck at home and ordering things online, ordering stuff from Amazon or whatever. But in the current environment, just fast forwarding to now, what's your sense of how much of the demand, how much of what's actually getting shipped is caused by companies trying to,

a hoard might not be the right word, but trying to boost their inventories in anticipation that stuff will be more difficult to get. It's hard to say exactly. What we are seeing is that inventory levels are at all times lows right now. The considerably inventory to sales ratio is the one to track there. And it's lower than, I don't know if it's all-time low, but it's certainly lower than the last, than pre-pandemic levels. So, you know, it's like, yeah, they're trying to replenish inventory. I don't know if that's over-ordering or not, but that is one of my big fears is that everyone, you know, you get scarcity for a long time. It creates this scarcity mindset, and then you over-order and you do get that bullwip effect.

What we've done at Flexport, we have a research team, an economics team, and the fascinating stuff that they're doing. And they created this thing called the post-COVID indicator. And what they're doing is looking at all of the data that we have. We ship probably, we're now more than 1% of the containers entering the U.S. on the West Coast. And, you know, significant amount on the East Coast. And they're doing a decent job of trying to strip out, like, sample biases that exist in, you know, relatively small data set, even though it's a lot of containers. But they're studying this data to now try to understand what are the goods that being shipped. And can the types of categories, because we have to classify everything.

to clear it through customs. And so we get really interesting data about what's being shipped. And they've actually been able to predict the personal consumption expenditure of the economy. So the U.S. government publishes this data, I think, every quarter that says what percentage of goods are being, what percentage of spending by consumers is on goods versus services. And our data, through this work of this economics team, we're able to predict it about 90 days in advance of like are people going back to buying services or are they still spending on goods? And what we're seeing is that we predict, or at least for the next 90 days, which is as far

forward as we look, the goods are just increasing. And it's not shifting back towards people buying services. Companies are, the consumers are buying goods, therefore companies are, you know, buying, are getting those goods in advance. I don't think that's going to let up until Christmas at least. And then we'll kind of see what happens after we get through Christmas season. That alone is super interesting and I guess a little surprising because I guess from a just a strictly virus standpoint, it does feel like things are more normalized in some respect. You know, the restaurants in New York, they're all currently open for both outdoor and indoor dining. Unlike last year in which the sort of public schools openness was very spotty and inconsistent, schools are open. And, you know, I guess to me raises some questions of whether there's going to be like some permanent shifts in consumption patterns.

If we have this sort of like kind of normalization of virus patterns and yet you're not seeing a real big shift in spending patterns in the data. Yeah, I mean, that's what our data is showing right now. And it's been, you know, we've been pretty good. We haven't been doing this for that long. We've been doing it since earlier this year, back testing. Our model is pretty decent at predicting this thing thus far. And we show it for the next 90 days that people are still buying more goods. Of course, remember, Christmas season is right now, so people are buying lots of goods for Christmas.

So we'll have to see how it plays out after that. So one thing we haven't talked about just yet is also the energy crisis that we're seeing in Europe and probably most significantly for this conversation in China. And, you know, I've seen some headlines that it's already hitting production of things like iPhones and cardboard weirdly and things like that. What's your take on how that is going to flow into global supply chains? And would you expect it to also impact container shipping and other forms of transportation? It's very real in China.

So we've had a lot of customers had to cancel shipments, hundreds of containers and a single customer where the factories just closed. I met with a customer yesterday, in fact, whose factory can only work two days a week during the daytime. and they've had to shift to nighttime production because of energy rationing in China. So that's very real. I mean, I haven't gotten good details like how to predict from here, but I've definitely heard anecdotes from our customers that, yes, their factories are being rationed on energy and not able to work full cycles. It will cut volumes.

So that's another force here that it's just these things are such complex systems. It's very hard to point to a single thing. It'd be like, this is the solution or this is the cause of the problem. Yeah. So, I mean, I think actually, and I just saw a chart this morning, some of the lines from China to the U.S., some of these indices that try to track and aggregate with the price of shipping a container from, say, China to Los Angeles, they have come down, but it doesn't seem like a good reason. Like if the reason is that some of these factories have literally had to go dark because now the exports are just being turned off, that may on the service look like a normalization of some sort of from a price stand. point, but certainly not a normalization from a sort of like, we want the system to be working standpoint.

Yeah, I mean, it might normalize logistics prices, and logistics prices are going to, are flowing through to higher prices. Like, the customer I met with yesterday said that because of the high price of freight, they were having to raise the price of their goods, which are sort of like home improvement goods, there are things that are sold through Home Depot. And they had to raise their prices 15%. That was the impact of the high prices on freight that was passing through to the end consumer of 15%. That's just the freight.

But there's a second piece, which is if you're the only person that managed to get your product, the only company that managed to get your products through, or there's just less products coming through. There's scarcity. And that will naturally raise the prices on its own, not just passing through the logistics costs, but just, hey, you're the only person that has this product. You can raise the price. And so if less things are coming out of China because factories are shutting down, those that do

come out are going to be worth more and you'll see inflation from that. So you mentioned people passing on higher costs onto customers. And I'm wondering what else can companies or, you know, importers actually do to try to offset some of these issues. So, you know, when we spoke to you initially earlier this year, these were still kind of newish issues. Everyone was trying to wrap their heads around it. And now we've had, you know, almost a year of this. It feels like companies maybe should be getting better at managing some of these risks and maybe transportation companies should be getting better at managing some of these risks. And yet it feels like we're still struggling. There's a few things you can do to offset risk, but there's no silver bullets and

there's no like, no way to forecast where prices go. I mean, what will you see the number one and the simplest thing that we recommend is go sit with your factory. You probably can't go there in person, but make sure you get them, really go deep with them, and make sure that they're loading your container to the brim. Cross our customer base, we look and we use machine learning to digitize the packing list. So this is the document that tells you what's in the container. And it has the dimensions of every carton in there. And so it'd be a really slow process if you did it by hand going through,

and doing the geometry of how full these containers are. But with our software, it's trivial. And what we find is that actually, on average, they're only 70% full. That's just a huge opportunity, a huge amount of waste. We're shipping air in a moment where you can't get more containers on the ship. We can't get more containers through the ports, but we can put more stuff inside the containers. That's simple.

And that's the very first step is like really go. And we have people who are re-engineering their packaging to kind of optimize the dimensions, make stuff ship smaller, like your cartons, themselves. There's often wasted space inside the carton. You've seen companies have gotten much better at this, like your iPhone or, you know, these boxes now getting smaller and smaller and smaller. And that's a big reason why it saves a lot on logistics costs when you do that. Second, you're starting to see the first long-term deals in global logistics where the first, I think in history, I mean, typically freight is purchased on an annual cycle where you,

every May, every April May timeframe, these companies run an annual bid. And they, They choose their freight provider for the next year. And they do a one-year contract. And now you're starting to see for the first time people signing two and three-year deals. And that's never happened before. It's pretty interesting. You're really, you are taking some real risk. What you're basically doing is saying, hey, we'll pay, we'll guarantee, we'll do a three-year contract.

And we want lower prices this year. And then we'll pay you above historical market rates for the year two and three. it's very hard to know what the price goes to. And the other big trend here is enforceable contracts. So logistics contracts have never really been contracts the way I understand a contract, which is like you must do the thing that you said you were going to do. And that's not really how it works in global logistics where you sign a contract and sort of like an agreement, a handshake. And if you don't follow through, so like someone says they're going to ship a thousand containers and pay $5,000 per container.

That was like a kind of a pretty awesome contract if you signed it last year or if you signed it earlier this year because, of course, the spot rate went to 15 to 20,000 and you have this $5,000 contract to ship that container or ship those containers. But if the ocean carrier can just sort of say, hey, I'm not going to load you at this price.

So yeah, you have this contract, but I don't have to load your container on this day. And so you had all these contracts that were broken this year. And I mean, if that was me and I signed that contract as an importer, I would probably not sign the contract again if you broke it. And so people are starting for the first time to do what the ocean carriers have always wanted but never been able to make happen, which is make these contracts enforceable.

Because, of course, it often goes the other way where you sign the contract at $5,000 and then the price went to four. And then the importer says, yeah, you know what? I know I have that contract, but I'm not going to, I'll just ship with some else who's offering me for. It actually probably is progress to make these things enforceable and say, like, no, you have to ship. If you don't ship a container, you owe us money anyways. And that's not how the industry has worked. So I think that's the lasting sustainable change that you're going to see from this is a real move towards enforceable contracts, which to my view is a good thing.

Like, I never, when I first, I've been in this industry almost a decade now, and when I realized that contracts weren't enforceable, I just don't understand. Like, what is a contract that's not enforceable? Well, no, I was just, as, I just going to say, like, this is kind of the thing that I think, Ryan, I first learned from you in the spring and has informed a lot of the thinking that's helped. And subsequent episodes on this is just how loose the industry has all seemed. And it's like, do you know a guy and do you know, like, you know, do you know someone in Copenhagen who can get your, get your box on the ship or do you not, et cetera? And I think that really surprised me. And even like in some of our other discussions, like trucking, et cetera, how sort of informal a lot of these arrangements are, how many of these deals are like, oh, someone goes on a message board or like a WhatsApp group and says, like, is there someone who can pick up this in this city and get it to this city?

Overall, I've been sort of surprised by how like sort of loose and informal are sort of this highly fragile global shipping, global logistics systems is. I think we all imagine, like, you know, go to your nearest light switch and flip it on. Yeah. And it's just so reliable. And what you're actually doing when you flip that light switch is there's a power plant somewhere that's actually getting a little bit more power just for you. Like you're actually controlling an enormous machine somewhere. And there's this incredibly complex automated electrical grid that's providing you that power. And I think we imagine that when we buy something, there's the same sort of thing that must be happening.

It's like this automated system that's all connected. and orders automatically place back to the factory. But in fact, it's like a bunch of people on phones and shipping pieces of paper around the world, duct taping, forwarding emails. And I often joke, it should, we call our industry freight forwarding, but I'm like, it should be called freight email forwarding

because you're just kind of shuffling PDFs around the world trying to make things happen. Yeah, that's one thing I learned from when I was trying to send that teddy bear by container ship is just like the amount of emails that you have to send and then you get c ced into some responses and it's just like one person in the logistics chain talking to another person in the logistics chain and it just goes on and on and on. But just going back to what companies can do to handle this, have you seen anyone sort of reshuffling their product offerings in order to

incorporate these higher costs or greater headaches of transport? So for instance, is anyone just cutting back on big, bulky stuff that doesn't necessarily have a high profit margin given current costs? Absolutely. So people are shifting what if they, if they're scarcity of what they can ship, they're shipping what we call the head skews. So these are just the best products, the ones that either sell the most or the highest margin. So you're seeing a big shift towards that. Taking more time to prioritize which products do you ship. So we're seeing a lot of companies cut back on the number of skews in their catalog and prioritizing the ones where they make the most money, the best economics. You're also seeing companies opt out. And you have a classic sort of

deadweight loss problem right now where the price of freight has gone so high. Actually, the ships are not all full anymore because you've priced it at a level where certain companies, especially in furniture industry where you have these, like you said, big bulky stuff that's not super high margin. And that's the first category we've seen where people are like, you know what, I'm not, I'm just not going to ship it until prices come down to that. Economics don't make sense for me. So, yes, you've seen some of that. Very interesting to see that dead weight loss problem in real life,

really explicitly. Like, look, that container ship is not totally full right there. And yet there's lots of people who need to ship stuff. But at that price, it doesn't make sense for a lot of businesses. It's literally that restaurant is so popular and nobody goes there anymore. That shipping route is so popular and nobody uses it anymore. You know, the other thing that we've seen, And I think these are sort of some new developments.

I'm trying to remember, like, what's new since May. But I think one of the things we've seen is some of these big retailers in the U.S. seem to be going upstream in terms of getting more hands-on with their shipping directly. Or I don't totally get her chartering their own boats. I think Home Depot was early on in this trend. There was, I think, Costco in their recent earnings. call from about two weeks ago made some comments about taking control of their own boats. Can you talk to us about a little bit about size and the degree to which companies that I guess,

I would say have a high level of market power because they're huge. And retailers like a Home Depot or Costco are using their market strength to have a degree of control over the supply chain that smaller competitors may have a harder time. Yes, this is a real trend. It's something we're watching really closely and sort of kind of chewing on our popcorn here as we figure out. I don't know how it's going to play out, but it's fascinating. So you have seen those two companies, Hum Depot and Costco, both chartered their own boats. It's not to, they're not going full stack vertically integrated.

We ship everything ourselves. They're sort of augmenting their capacity, making sure that they have the extra enough capacity. I want to say we did someone did the math on it. was like maybe 5% of their total container volume for one of those companies that was going to be on their own ships. So the interesting thing here is first off, going to be fun to watch. Like, I think it's pretty hard to run one of these ocean carriers. It's not a trivial thing to like run your own ships and is if the freight doesn't ship, you still pay for it, right? The freight, the boat has to go. And so actually, it's one thing to ship a hundred thousand

containers a year. And so you get this ship that has capacity to move 100,000 containers. the math looks great on the spreadsheet. But that ship is going to leave like on Tuesday, October, you know, whatever the date is in October. And if you don't have 2,000 containers waiting at the port on that day, it leaves without your container. So there's a lot of devil in the detail in operational excellence to pull those things off. And so you're kind of doing a big startup within a company to be able to pull something like

that off. So that's going to be interesting to watch how they do it. The other interesting thing is you're kind of competing with your ventures. at that point. Like, you're the big ocean carriers. I don't know how they're going to react to that, but like, you know, like, wait a minute, that why are you doing my job? And so that ocean carrier, when it comes to their time to decide how do they allocate who gets space on their boat, are they going to prioritize Home Depot or Lowe's, right, next contract season? And so how it doesn't, these things have second order effects that are really hard to predict. So I'm very curious how it all plays out.

But I can't make predictions. It's more just eat some popcorn and watch. So this is kind of a related question, although maybe it's a weird one. But you know, you were talking about some containers going out when they're not completely full or some capacity not being completely taken up on ships just because of the higher prices. But is there like a secondary market for shipping capacity? Like, for instance, if I'm a company. an exporter who's sending a bunch of stuff.

And I happen to have some space in one of my containers or, I don't know, I suddenly don't need a certain amount of space on a ship. Can I sell that onwards to someone else? There's not like a super liquid secondary market that everybody can participate in. But freight forwarders themselves, so a company like Flexport is able to do that. So if one customer cancels and we've got a slot, we can reassign that. And so we actually have built up this pool of cargo.

We call this subject to roll. So getting rolled is like when you fly in a passenger plane, you get bumped. So being subject to roll means, hey, you've got a ticket, but you might get bumped. It's going to be a cheaper ticket because I can't get you the same service level promise. You may get in this market. You probably will get bumped. But you can get slightly cheaper freight. And then that way, if we have a cancellation, we have somebody who's like, we can always fill in.

So that's one product that's out there. Some of the big ocean carriers have been, have done pretty large deals with this type of thing where they'll have just this, that way the ship's never full. There's always some backup capacity that they can plug in. So that's the thing that exists.

And then just generally, there's, yeah, there's no real secondary market. There's also no futures market for this. So you can't like short the prices are really high. People are like, oh, the price has to come down. But there's no futures market where you could short the price of containers. Again, I think without enforceable,

contracts would be pretty hard to have a futures market. So one of the other things that I learned from you and others in this series, which again, I didn't know anything about at the beginning, was that, you know, like at the margins, at least the disruption in air travel has put more strain on ships because even on a sort of commercial passenger flight, there's some space reserved for commercial cargo. And without fewer planes flying around the world due to the virus, that's a diminished capacity. we do seem to have bounced back a bit on passenger, recreational, leisure travel, but definitely not business travel, which is a big part of the market.

And I think there's a lot of ambiguity about when, if ever, that will return to normal. How much is that still sort of, I guess, just crimping overall logistical supply right now? Actually, people know, I feel like Flexport's better known for ocean freight, but we're bigger in air freight than we are in ocean in terms of market share. And on the air side, what we're seeing is, yeah, there's customers, you know, passengers are coming back, but on very different lanes and different, it's not business travel and it's not going to Asia. And that's where the cargo capacity comes from. And the air cargo markets, one of the more fascinating markets from an economic standpoint, because your supply of air cargo is driven by passenger travel, which is like a whole different market. And, you know, so you don't have this normal supply and demand thing.

It's like, okay, demand is all-time high for cargo capacity, but the supply comes from a different market. It doesn't come from cargo. It comes riding in the belly of these passenger planes, 50% of all the air cargo before the pandemic flew in the belly of passenger planes. And those are, you know, you're not seeing flights to China. There's a handful of flights that are passenger flights going to China. The airlines tell us that they're not projecting to redeploy at pre-pandemic levels on the Trans-Pacific until 2020. on passenger side. So you're going to have supply severely constrained for air freight.

And what you're going to see, I hesitate to make predictions, but in all things. But next year on the ocean side, because these markets are intertwined, right, if air freight shipment is often a late ocean freight shipment and something went wrong and they got to fly it real quick. And what's going to happen next year in the ocean market, you have the international longshoremen and warehousing union. That's the West Coast dock workers, port workers union. They have a five-year contract that's up for renegotiation in the summer of 2022. And the last time they had a contract renegotiation, which was five years ago, it had a three-month strike on the West Coast and nothing

could be shipped into the West Coast ports of the United States for three months. A lot of companies missed Christmas that year, couldn't get any inventory into the, into the store. So I don't know if there's going to be a port strike, but it's a decent probability that you're going to see a strike next summer. And when that happens, the air freight prices will go nuts because it'll become the only, you have to either go through the Panama Canal or to the East Coast or fly it by air. And so, yeah, next year is going to be another wild one for logistics and supply chain. If the Union and the Pacific Maritime Association, that's the, the sort of coalition of port terminal operators and ocean carriers, if they can't come to terms,

you will likely see a strike. Wow. Something to look forward to, I guess. But, I mean, that kind of brings us to the big, big question. And I feel like Joe and I have probably asked this more than a dozen times this year. But what is it going to take in order to rectify some of these issues and normalize and get back to where we were pre-COVID. I take a long pause because I don't think about it.

It's a systemic problem. You're looking at a market failure. It's not that we just have this like perfect free market. I don't think you ever could when you're talking about ports and infrastructure. You don't want the wild west of like anybody who has a beachfront property can build their own port and start unloading container ships. Like you're not, of course it's not going to be a. If you don't have a free market in the first place, it's pretty hard to count on just free market

solutions. And so I do think there's going to be a role for government to come in when there's a market failure. In general, that's a reasonable principle. There's a big part of the role of government is to address market failures, which happen more often than we like to think. So I think there's going to be a role for government here to come in and say, okay, for example, the ports, the ports are not running on the West Coast 24-7. They're running Monday

through Friday, a little bit of operations on Saturdays. They're not running at night. There's a technology opportunity here where I'd like to see Flexport play a role. We have technology that can really work with these ports. So what happens with a truck driver is they go to the port and they have an appointment slot. They've got to show up at a certain time. She's like kind of almost impossible to hit if you have a four-hour traffic jam to get into the port. So they've got to hit this appointment slot, and then they go with a specific container number that they're going to pick up. And so the port, the reason for that appointment slot is to make sure that that container number is at the front when they show up. And I think that the solution is going to look like

government intervention that comes in and says, hey, we're throwing out this system. And let's use technology. Flexport has already built this technology. So if they want to work with us, that'd be amazing. But regardless, the technology needs to be that the drivers just show up. And we're just show up and there's no more appointments and there's no more showing up for a specific container number. Driver comes in, gets a container, it gets handed a container and then our mobile app or someone, you know, the ports mobile app, we have this tech, give me a call. We'll then tell them where to go. They've got any old container, grab it, go deliver it, and turn around and come back and see if, like, I think that you could really unblock some stuff if we just said, hey, stop. It's almost like

the way Southwest Airlines boards their planes, right? They're just much faster, just come I'm going to just grab a seat, people. Let's go. We've got to get this plane in the air. So this is kind of what I was going to say, and I was kind of going to like reframe Tracy's question. And because after, you know, half a year of us asking guests, when will things return to normal? Maybe the question should be more like, well, what is permanently going to change? And you talked about, okay, we're starting to see enforceable contracts in shipping. We're starting to see people taking the packing of the containers themselves more seriously. We've all had that experience where we buy something, say, on Amazon, and we get, like, a huge box in the mail,

and there's, like, four razor blades and a bunch of packing material on it or something like that, which, you know, does not seem like a great use of space. Do you foresee some of these things, like, say, more serious effort on the internal engineering of space within a container? having lasting changes on shipping, even if hopefully one day the pandemic is like a true distant memory. There's no doubt that you're going to see long-term changes here and more sophistication.

But there is a big doubt of like on what time frame did things happen. I mean, if you were like, the ports should, the port of Rotterdam, for example, has been fully automated for more than 30 years where they have self-driving trucks like 30 years ago Because why? Because it's a simple problem. There's no people around you do it right. And it doesn't need AI. It can just follow some lines on the ground. The truck can and like look at paint and just follow along. So it's actually a reasonably simple problem that we don't have. And the other thing is that the port of Rotterdam and Shenzhen, they're deep and they have bigger cranes. They're made to handle much bigger ships ever given the giant ship that we all know now. that ship could not come to a U.S. port fully loaded.

It would be too big. It would be too deep in the ports. Our ports are not deep enough. So these large ships can't come here. So we've got to invest in our infrastructure. There's got to be a role for robotics. Like right now, a big part of the problem is we can't run these ports on weekends. And at nights, the union doesn't have enough staff to go and man up and run these things 24-7.

And, you know, and so like a robot would be able to do that. The other big thing that I'm like science fiction-wide. why can't we do this? And I do think it's more of a political will thing than anything else. It's like, we bring these containers into the port of Long Beach in Los Angeles. And that's great, big city.

Then what happens is what is Los Angeles known for besides it's smog is it's traffic? And so you're like, have you ever been on the 405? It's a nightmare. And that's where our containers show up. And then they're like, all right, cool. We made it from China. We're here.

And you're like, okay, great, we're on the 405. And so you have the boring company, for example, like, let's build some tunnels from this port and skip the city of Los Angeles and, like, drop that container, you know, see if we can drive 100 miles an hour and you're in the desert 100 miles east before you know it. So I think there's going to be a role for those longer term infrastructure things that just has to happen. And hopefully people, our eyes are open right now to, wow, okay, we need technology. The fact that we still unload containerships one at a time really frustrates me. like the container ship was a massive innovation. We reduced the cost of shipping things by 95% or more since it was invented. And yet, if you look at how these ships are unloaded, it takes three days to unload the ship.

Well, why are we doing one container at a time? Isn't there a design 50 years since we first created the container crane that could, I don't know, I'm picturing like a ski lift type thing where you're a carousel and you're grabbing a container every three seconds instead of one a minute. And you just, just tie it. How do you 10x the throughput of the system? So that's going to be political. Well, I'm not sure it's there, but I think it's now on people's minds. And you see the problem if you don't get it right, the price, you have sort of economic, real national security level economic challenges from the lack of investment in our infrastructure. Some of it's simple, like let's dredge

these ports, make them deeper. Some of it's more futuristic and scientific or science fictiony, like the boring company tunnels. But I actually think it's all doable if there's political will. And it kind of has to be a role for government, the nature of these ports. Like, like I said before, you can't just have random people opening up a port in wherever they feel like it. So just going back to this idea of permanent changes, I mean, one of the most basic forecasts or predictions that we've seen since all this, you know, kind of started all these issues and problems that we've been discussing is the idea that, well, maybe people will just move production closer to their customer base. Maybe we'll see a bunch of manufacturing that gets resured to

markets like America. Is there any sign of that happening? And I guess how long would that take and how feasible is that entire process? Thus far, it's all anecdotal. And in fact, you see the opposite trend that we're importing more stuff from China than ever, even on a percentage basis. So it's really hard. That's a force that's been at work for a long time, not reshoring it to the United States, but shifting it to lower cost labor. And that's a natural trend that happens. You'll see lower complexity products have largely moved to places like Vietnam, Cambodia, Bangladesh. There's not a lot of subcomponents.

It's mostly human labor. It's kind of making clothes, making sort of where there's the thing in China is that there's this whole ecosystem of. of subcomponent suppliers. And you can't just pick up the whole thing. So even customer of ours makes ceiling fans. And, you know, there's just no way that they can get all the little motorized parts and everything. You can't move to Cambodia.

There's no other companies around you that sell you those parts. So it's just these things are really hard to move. Even the tariffs didn't really do it. People were able to pass through the higher costs. And so it'll depend by industry. That trend has been going on in textiles apparel and other kind of simpler, low complexity products for a long, long time. Coming back to the United States, Lesso, you're seeing a less up move to Mexico. Latin America is probably a big beneficiary of this in addition to Southeast Asia.

But it's more about labor cost trends. But anyway, if this lasts in perpetuity where it takes 60 days to ship stuff, yes, that'll have a big impact. And people start thinking, you know, let's put stuff in Latin America where we can get from Central America to the Gulf Coast in three or four days. That's going to be a big competitive advantage for Latam. Ryan, it's always great to speak with you. That was like the perfect update. And I guess we'll have you back on again in six months when things are even worse. As soon as I fix all this stuff, I'll give you guys a ring once we build that boring company tunnel straight to Las Vegas.

So all your containers can flow freely out of the port. We'll give you a call. Can't wait, Ryan. Thank you so much. All right. Have a great day, everybody. Thanks, Ryan. Talking to Ryan is always great.

I mean, obviously, you know, we've like sort of, you know, we hit all the these different subcomponents of the supply chain. I feel like from his perch and flex port, he just has like a really nice view on like what's going on with everything and just like these sort of like the compounding mess at every step of the way. Yeah, I mean, he kind of brings it all together and explains why one thing happening, you know, in one area of logistics like, say, what's going on with drivers, why that impacts another area of logistics like container shipping. But I got to say, Joe, I'm very proud. I have finished. my Christmas shopping already. I took the supply chain episodes to heart, and I've ordered

pretty much everything that I need to order. Look at you. I have, I'm just buying everyone NFTs this year, so I don't have to worry about that. No, I actually have to get on that. Thank you for the reminder. Oh, that's a good idea, actually. Everyone gets NFTs in their stocking. Yeah, exactly. Or a little hardware wallet that has a 12, 12 word seed phrase that gives them access to some NFTs. No, but in all seriousness, it's like, you know, I think there's like sort of two things that maybe are like, why

this is not as self-correcting as maybe one would hope. And one is, I think as just like the pure complexity of it all. And so like there's no like obvious self-correcting mechanism and it's just incredibly complex on its own. And it's interesting, you asked that sort of like reshoring question

at the end and I calls to mind like, you know, we did that semiconductor episode with Stacey Razkin recently and it's like, look, even a chip crosses like, what, 35 borders in the course of like getting from like, it's like, so like the idea of, even if you were to like resure like a few aspects of the production, what would that really get you? And then it's just like, okay, but then the whole thing is like it was not only is it incredibly complex. It's like all tied together with duct tape and like you know a guy, you know a guy who can get your like stuff

on the boat. So you have an incredibly complex system all kind of like held together with duct tape, and it starts to make more sense why this deep into the crisis, like the idea of normalization. Like, I'm getting why it's not self-correcting anytime soon. Yeah. Well, I also wonder if one of the more permanent outcomes of this is, and again, this is something that sort of came up with Stacey, is this idea that, you know, maybe we sort of move back to some analog products or we start stripping out certain features or products or materials that are, are just harder to get due to the supply chain issues. Like maybe the market actually has to adapt more to these problems. Yeah, no, I mean, it'll be interesting. Like, you know, one thing too is

on the financial side. And Ryan just now mentioned like the idea of, well, in addition to enforceable contracts, multi-year contracts. And one way to think about a multi-year contract is you're essentially like you're buying an option, right? Like you're buying a put option or something. You know, like you're buying insurance, which is so that such that you pay more now or you pay more, you promise to pay more for your 2022 or 2023 shipping such that it's guaranteed. So I wonder if another thing is we're going to see a little bit more of this system get financialized, maybe perhaps some more derivatives, et cetera. Should we start the, the futures market for shipping containers?

Sounds like they need one. So you know another person that we should get back actually on the show. is Craig Fuller of freightwaves. But he tried that once with trucks. He tried actually to get, to create a trucking futures market in the United States. And it was very difficult. So that might actually be another one

that we should probably rebook him and maybe dive more into that question of like, because that was like, I think one of his earlier entrepreneur ventures, he wanted to create the sort of like CME for trucks that didn't quite work out. But why some of this stuff is, actually seems to be pretty hard to create sort of like liquid futures market for this capacity.

Yeah, we should totally do that. Great. Let's book it. Okay. Shall we leave it there? Let's save it there. All right. This has been another episode of the Odd Lots podcast.

I'm Tracy Alloway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthall. You can follow me on Twitter at the stalwart. Follow our guest, Ryan Peterson. He's the CEO of Flexport. His handle is at Types Fast. Follow our producer, Laura Carlson.

She's at Laura M. Carlson. Follow the Bloomberg head of podcasts, Francesca Levy, at Francesca Today. And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening.