Speaker 1: Hello, and welcome to another episode of the Odd Loves Podcast.
Speaker 1: I'm Joe wasn't All and I'm Tracy Alloway. So, Tracy,
Speaker 1: it seems it seems you're going to jinx it. Know,
Speaker 1: it seems like the supply chain. It seems like the
Speaker 1: supply chain, the crisis that people it kind of feels
Speaker 1: like that's over in my opinion. I mean, I definitely
Speaker 1: think we're seeing some of the bottlenecks that we spent
Speaker 1: the better part of one talking about those are starting
Speaker 1: to ease. Some of the import boom into the US
Speaker 1: seems to be easing. There is this general shift from
Speaker 1: consumer goods to services. But things are still relatively busy.
Speaker 1: But I think I think they've settled down enough that
Speaker 1: we can start to talk about what we have learned
Speaker 1: from this whole saga. Absolutely, I think so too. I mean,
Speaker 1: they're really you know, you still see like occasionally specific
Speaker 1: products will be in shortage. UM, there are certain types
Speaker 1: of equipment and if you read the surveys of like
Speaker 1: the s M or p m I surveys, you still
Speaker 1: see manufacturers talk about difficulty getting certain things. Electrical equipment
Speaker 1: seems to be up there, but there's sort of like
Speaker 1: generalized shortage of everything, those like crazy lines we were
Speaker 1: seeing a boat the ports and trucks at the ports
Speaker 1: and all that stuff. I kind of think that story
Speaker 1: is over right. And one of the few good things
Speaker 1: that that tends to come out of crises in general
Speaker 1: is that they offer you this opportunity to look at
Speaker 1: what exactly went wrong and why we're things designed poorly?
Speaker 1: Is there stuff that we can do better in the future,
Speaker 1: And so now that some of these supply chain issues
Speaker 1: and transportation and shipping and logistical issues are starting to ease,
Speaker 1: we can go back and and think about what we've learned,
Speaker 1: what we can do differently. And you raise a really
Speaker 1: good point, which is that you know, you have some crisis,
Speaker 1: and there's always like, Okay, what should we fix? What
Speaker 1: could be done better? But on the other hand, you know,
Speaker 1: what about maybe not fix anything because you know, once
Speaker 1: in a century pandemic. Is that a good reason to
Speaker 1: completely up end the way the world does business? To me,
Speaker 1: it's like, let's just put this way. It's not obvious
Speaker 1: to me that like we won't eventually just return to Well,
Speaker 1: this is the other question I have, because the industry
Speaker 1: that we've been talking about the shipping and logistical industry.
Speaker 1: This is already incredibly cyclical, right, so do they just
Speaker 1: look at one and say like, well that was a
Speaker 1: crazy cycle. Now we can get back to our normal
Speaker 1: cycles and just do what we were doing before. And well,
Speaker 1: you know, we most of talk about the pandemic and
Speaker 1: the COVID disruptions. You know, there are other developments globally.
Speaker 1: There's the ongoing war in Europe. There's a heightening tensions
Speaker 1: between US and China politically. Um, there's the energy cost
Speaker 1: surge in Europe which may not you know, ease for
Speaker 1: a long time. So there are other things going on anyway,
Speaker 1: throughout the crazies. We've talked to Guess multiple times, so
Speaker 1: perfect time to get him back in. We're gonna be
Speaker 1: speaking with Ryan Peterson. He is the founder and co
Speaker 1: CEO of Flex Sports. So Ryan, thanks for coming back
Speaker 1: on odd lots and also are we right, Like, is
Speaker 1: the crisis phase of this over? Well, it depends who
Speaker 1: you are, I think for the average consumer and business, yeah,
Speaker 1: more or less past now. If you own ships or planes,
Speaker 1: the crisis might just be started. Right, the crisis of
Speaker 1: downy Sand. They were all making a lot of money,
Speaker 1: and now we're gonna speed ran through one of those
Speaker 1: cycles that you're talking about. They usually take twenty years,
Speaker 1: and we did it in too um two or three,
Speaker 1: and so right now I think we're looking at the
Speaker 1: opposite problem of excess capacity. There's too many there's gonna
Speaker 1: be too many ships and and perhaps too many planes
Speaker 1: relative to the demand to ship things. And so Tracy
Speaker 1: and I have been joking that maybe our odd losses
Speaker 1: for three, it's just gonna take all the episodes we
Speaker 1: did in two about how there's a shortage is and
Speaker 1: then just flip the signal to negative so plunging prices
Speaker 1: over capacity, We'll just do all the episodes over again
Speaker 1: and change the direction. Era. I've seeing glass that don't
Speaker 1: lead to a shortage, but I've never seen a shortage
Speaker 1: that doesn't lead to it. So so Ryan, you mentioned
Speaker 1: um that the crisis might just be beginning if you
Speaker 1: are actually, you know, a shipping company and you see
Speaker 1: your freight rates start to plunge. And this kind of
Speaker 1: brings me to something I wanted to ask you, which is,
Speaker 1: we have seen a lot of these shippers make absolutely
Speaker 1: insane amounts of profit for the past two or three years.
Speaker 1: I think the last number I saw was for the
Speaker 1: the third quarter of this year. It was net income
Speaker 1: of fifty nine billion dollars for the global shipping industry,
Speaker 1: which is more than the forty eight billion they made
Speaker 1: the year before, and up from like a fraction of
Speaker 1: that pre crisis. Yeah, from zero or negative. So, I mean,
Speaker 1: what what do they do with all that money? Is
Speaker 1: my first question? Do they just buy a bunch of
Speaker 1: new ships, do they start to put in like efficiency
Speaker 1: improvements or right do they return it all to their
Speaker 1: long suffering shareholders? Um, I think you've seen a little
Speaker 1: bit of each of those things, and it depends on
Speaker 1: the company which ones emphasized the most. So some have
Speaker 1: a few of the ocean carriers have gone been pretty
Speaker 1: aggressive in buying freight forwarding businesses or e commerce kind
Speaker 1: of fulfillment, trying to go more end to end owned
Speaker 1: assets on land that can kind of connect their ships
Speaker 1: and be able to really provide that full factory to
Speaker 1: consumers door experience. So you see that from h C,
Speaker 1: M A and MERSK in particular. Cima is the big
Speaker 1: French ocean carrier, um them is the large actually they're
Speaker 1: kind of small, but all these companies are big. That's
Speaker 1: an Israeli carrier, and they've been pretty aggressive in doing
Speaker 1: uh dividends, returning cash to the share out to the owners.
Speaker 1: UM and MSc, which is now the world's largest carrier,
Speaker 1: has that a little bit of all these things as well.
Speaker 1: But they also invested a lot in ships, and so
Speaker 1: they've become the largest carrier in the world by really
Speaker 1: investing in the fleet. So UM, all those strategies are
Speaker 1: being done. A lot of these companies are private, so
Speaker 1: you don't really get to see everything that's happening. UM.
Speaker 1: But and I think it's by nature because Wall Street
Speaker 1: really can't handle the sickly coal. They want quarterly consistency,
Speaker 1: they don't. They're just kind of they can't handle these
Speaker 1: ten years of losing money and then two years of
Speaker 1: printing money. It's just UM not something that sits well
Speaker 1: with public investors. So they tend to be private companies
Speaker 1: or in some cases stayed owned or kind of quasi
Speaker 1: stay owned UM and where there's sort of sort of
Speaker 1: some national interest in having ocean carrier capacity. So you know,
Speaker 1: obviously the big story, you know, the pandemic disruptions, the
Speaker 1: insane amount of demand for sort of like pure goods
Speaker 1: and the filling warehouses and filling ports, etcetera. But as
Speaker 1: I mentioned in the intro, there are some other pretty
Speaker 1: big things that have happened in the last two years,
Speaker 1: particularly the war in Ukraine which remains ongoing, and just
Speaker 1: like the clear ratcheting up of tensions with China, and
Speaker 1: you see these companies start to wonder like, well, what
Speaker 1: is the long term future of trading between China and
Speaker 1: the US. And also you know related I guess too,
Speaker 1: but all of this is the surgeon cost of energy
Speaker 1: in Europe. Can you talk a little bit more about
Speaker 1: these other sort of like non pandemic macro factors and
Speaker 1: like how much you see them like staying with us
Speaker 1: right now? Like how much are like businesses that you
Speaker 1: speak with every day? Sort of like thinking about whether
Speaker 1: these are sort of deeper long term trends. Well, the
Speaker 1: the manufacturing in China has been a long term trend.
Speaker 1: As China has gotten richer, their labor costs have gone up.
Speaker 1: It's probably a good thing for the Chinese people, um,
Speaker 1: but manufacturers are kind of always seeking out that lower
Speaker 1: cost labor. So that's a that's a trend's gone for
Speaker 1: a decade or more, and the trade wars sort of
Speaker 1: brought more attention to it, and uh, you know, the
Speaker 1: increasing terrorists probably caused some companies to re evaluate, and
Speaker 1: then the inconsistency of skipping and then kind of COVID
Speaker 1: where there's different If your factory is closing down, it
Speaker 1: makes a little bit less reliable. So that's probably probably
Speaker 1: had some marginal acceleration, but I think it's a long
Speaker 1: term trend driven mostly by labor costs. Um. Now it's uh,
Speaker 1: it's really the most important where labor is the limiting
Speaker 1: reagent or the hardest thing to find to execute these
Speaker 1: manufacturing jobs. So that tends to be kind of lower skilled,
Speaker 1: simpler stuff like a peril which is largely shifted out
Speaker 1: towards Southeast Asia and Sri Lanka. But some of the
Speaker 1: stuff like consumer electronics, it's just this this whole ecosystem
Speaker 1: there that's in change in and around that's very hard
Speaker 1: to move those factories. So I think, um, it's kind
Speaker 1: of overblown some of the heat on the sholf. Like
Speaker 1: we've traded traded more with China the last couple of
Speaker 1: years than ever. Um, So it's like a nice narrative,
Speaker 1: but I don't know that it bears out of the data.
Speaker 1: Can I ask a really basic question before we go
Speaker 1: any further, But when when we talk about spot rates
Speaker 1: in shipping, and you know, we mentioned that they went
Speaker 1: up a lot during the pandemic and now they're starting
Speaker 1: to come back down, how much do those actually matter
Speaker 1: for global trade? Because my understanding is that if you're
Speaker 1: a big, you know, manufacturer, which is someone who ships
Speaker 1: a lot of goods, you're probably going to have a
Speaker 1: contract in place that might be different to the spot rate,
Speaker 1: and you're also going to be renewing that that contract
Speaker 1: on maybe maybe a yearly basis. So it seems like
Speaker 1: there's perhaps a lag in how long it takes the
Speaker 1: decrease in spot rates to feed through to actual shipping rates. Yeah,
Speaker 1: that's exactly right. I don't have to stand in front
Speaker 1: of me, but I want to say it's like about
Speaker 1: sixty or seventy freight container ice rate moves on annual
Speaker 1: contracts and thirty or forty on the spot market. I'm
Speaker 1: not I'm not a hund su sure, but that's like
Speaker 1: where my brain settles in on it um and so
Speaker 1: that that spot rate isn't Yeah, it doesn't float through
Speaker 1: immediately to the p and L of the carriers. Sometimes
Speaker 1: people don't honor to the contract um and a lot
Speaker 1: of people if they you know, if they see these
Speaker 1: contracts are kind of gentlemen's agreements handshake. It's a repeat game.
Speaker 1: So if you if you don't honor your contract this year,
Speaker 1: people are going to really hesitate to sign a good
Speaker 1: contract with you next year or you know, so it's
Speaker 1: it's it's not something that is not necessarily legally enforced.
Speaker 1: People aren't really seeing each other very often over these things.
Speaker 1: Although with the with the level of price, you know,
Speaker 1: you've seen more probably lawsuits against carriers and freight forwarders
Speaker 1: in the last couple of years than than ever because
Speaker 1: people are upset about how things played out. Um. But
Speaker 1: in general, people do onto their contracts even when the
Speaker 1: spot market drops below but not always, and in any
Speaker 1: case it is a lag, so it's putting a lot
Speaker 1: of pressure. Contract renewal season and ocean freight for the
Speaker 1: United States is going to be in April or May
Speaker 1: each year kind of marks through May, and that's coming
Speaker 1: around the corner. And people are looking at these spot
Speaker 1: markets and say, you know, that's clearly going to be
Speaker 1: the driving price of where the where the contract market
Speaker 1: settles in. So the pain for the carriers probably comes
Speaker 1: after this contract season, and it's gonna be there's really
Speaker 1: interesting kind of economic theory in practice to get to
Speaker 1: watch and see what plays out. Yeah, I believe. You know.
Speaker 1: We've talked to Craig Fuller from Freight Waves a few times.
Speaker 1: I think he at least in trucking specifically. He sort
Speaker 1: of likened it to, uh, you know, the deal you
Speaker 1: have with your babysitter where it's like, Okay, i'll pay
Speaker 1: you this every you know, a hundred and fifty every
Speaker 1: Friday or whatever, but if you change, it's not like
Speaker 1: anyone's gonna sue. You just sort of like expect that
Speaker 1: that it's like the arrangement and so you just yeah,
Speaker 1: I'll keep it. But it doesn't necessarily mean that's some
Speaker 1: you know, the babysitter doesn't show up one day and
Speaker 1: she says, oh, it doesn't mean you're gonna like see
Speaker 1: your babysitter. Yeah, there's there's just a lot more babysitters
Speaker 1: in the world than there are ocean carriers. So you
Speaker 1: don't want to burn bridges, you know. The Tanner Tanner Cross.
Speaker 1: Don't know, you know, there aren't you know, even babysitters
Speaker 1: right now, at least as a former babysitter, are not
Speaker 1: of breaking contract. There are a lot of parents in
Speaker 1: New York City who have a hard time finding a
Speaker 1: babysitter right now, I think you really want to be
Speaker 1: careful about burning that relationship with Yeah, okay, okay, maybe
Speaker 1: there's more similarity there, but yeah, it is. There's only
Speaker 1: ten or twelve motion carriers that matter that have any
Speaker 1: real scale and to represent containers moved in the world.
Speaker 1: And so it's you know, you don't want to be
Speaker 1: breaking your contract because you do that once and yeah,
Speaker 1: you know you're not. You're down to nine and there
Speaker 1: are there are a number of these big companies that
Speaker 1: come around and basically, when when you get to be
Speaker 1: above about five thousand containers a year that you're shipping,
Speaker 1: it makes sense for a company to contract directly with
Speaker 1: that ocean carrier rather than working with the freight forwarder
Speaker 1: to buy the freight. Uh. And but there are some
Speaker 1: big companies that buy from freight boarders and when you
Speaker 1: dig in, you find out it's because they like dishonored
Speaker 1: all their contracts and don't carry a lot to work
Speaker 1: with them anymore. Well, I mean, this is something I
Speaker 1: want to ask you because I think, UM, one of
Speaker 1: the things we learned from our very first episode with you,
Speaker 1: which was you were basically walking us through why I
Speaker 1: was having so much trouble getting half a container from
Speaker 1: Hong Kong um to Los Angeles as an EXPERIMENTUM in
Speaker 1: shipping congestion. But one of the things we learned was
Speaker 1: that a lot of this business is relationship driven, UM.
Speaker 1: And we used to joke about like Sven in Sweden, right,
Speaker 1: you know, the Sven who like operates sports somewhere and
Speaker 1: you can maybe cut some extra room. But for the
Speaker 1: past couple of years, has the industry become more relationship driven?
Speaker 1: Is it more important to have these direct relationships with
Speaker 1: the shippers themselves, or has the crisis sort of opened
Speaker 1: up opportunity for that behavior to begin to change. I
Speaker 1: think the last two years, relationships will probably matter more
Speaker 1: than ever because when capacity is tight and there's no
Speaker 1: space on the ship, it's who who's been the best
Speaker 1: customer for these people over the long term, who plays
Speaker 1: golf with It's not Spann in Sweden, by the way,
Speaker 1: It's it's lar. Sorry, sorry, I'm getting my nory up.
Speaker 1: I'm just okay. You know, So I think the when
Speaker 1: in capacity is tight, very little else matters in the world.
Speaker 1: Then what's your relationship? How are you a profitable customer?
Speaker 1: How long have you been a profitable customer? What's your consistency?
Speaker 1: So being being able to bring freight every single week
Speaker 1: and not cancel. Um that those things start to matter
Speaker 1: a lot more when when space is wide open, if
Speaker 1: there's excess capacity, sort of like, hey, you know, you
Speaker 1: don't need a relationship, We need to sell some more cargo.
Speaker 1: So I think, um that that that dynamic is going
Speaker 1: to shift. And then you know, we went through a
Speaker 1: real long period from until twenty nine, really at the
Speaker 1: beginning of pandemic when it kicked in, of just excess
Speaker 1: capacity and ocean freight, and then we had two years
Speaker 1: of extremely tight capacity. And it looks like we're right
Speaker 1: in the midst of a real um a great recession
Speaker 1: call it um where there's less less containership being than
Speaker 1: really even before the Oh wow, okay, that's there. There's
Speaker 1: our title this episode, the Great Recession that's coming to containership.
Speaker 1: Thank you container ship, And yeah, now it might be
Speaker 1: great news for people who have to ship containers, Like
Speaker 1: all of a sudden, the prices way down and you
Speaker 1: can get space and you can you know, have some
Speaker 1: sanity about it. All that. Okay, So we went from
Speaker 1: glut to extreme scarcity to glut again and not just
Speaker 1: glood but also like a sort of like very like
Speaker 1: poor demand. Can you talk about the energy component like
Speaker 1: this is like a fascinating thing, like the gaps, say
Speaker 1: between how much it costs to manufacture goods in Europe
Speaker 1: for the US due to the gap in electricity prices.
Speaker 1: Do you see that reshaping trade flows or has this
Speaker 1: become another one of these things where it's like it's
Speaker 1: kind of a fun story and we talked about it
Speaker 1: in the media, but in the end, like it's hard,
Speaker 1: you know, kind of like a the world doesn't reorient
Speaker 1: that fast and ultimately finds a way to sort of
Speaker 1: go back to the old normal. Yeah, I mean, I
Speaker 1: think it's a little too early to say. It seems
Speaker 1: obvious just looking at the numbers that like manufacturing in
Speaker 1: Germany doesn't make sense at these energy prices. Does the
Speaker 1: government come in and subsidize the energy to allow them
Speaker 1: to maintain the manufacturing which has employed so many people
Speaker 1: and kind of been the the engine of the European
Speaker 1: Union as a whole, Like I think they probably will,
Speaker 1: and so then it starts to be really hard to
Speaker 1: predict how things play out, because once you have government
Speaker 1: coming in and intervening in the market, then you know
Speaker 1: a lot of the market um theory that kind of
Speaker 1: breaks down. And I don't really know what will happen.
Speaker 1: But with those prices, like manufacturing in Germany just doesn't
Speaker 1: make kind of sense. The US has such an advantage
Speaker 1: on energy right now. So just going back to the
Speaker 1: past couple of years, I'm curious whether or not you
Speaker 1: saw either shippers or people related to the shipping industry
Speaker 1: and transportation and logistics more generally, whether you saw them
Speaker 1: do things that made the whole process more efficient. And
Speaker 1: I remember in our various discussions on this topic, there
Speaker 1: there seemed to be a lot of low hanging fruit
Speaker 1: for the industry. And I think you had one um
Speaker 1: one figure when we first talked to you, talking about
Speaker 1: how most container ships on average are only se full,
Speaker 1: so it would seem like just put more containers on
Speaker 1: the ship and we could maybe fix some of the backlog,
Speaker 1: But did stuff like that actually happen? Because all of
Speaker 1: these things they seem so simple, but then when when
Speaker 1: you actually go and try to fix them, it often
Speaker 1: ends up My impression is it often ends up being
Speaker 1: more complicated than you expected. Right. Well, actually that stad
Speaker 1: is that the containers themselves are only ships are full,
Speaker 1: but the inside of the containers are not optimized. Did
Speaker 1: the containers get more full? Did they? Did they get
Speaker 1: better at talking them? Surprisingly? No, and if anything, you
Speaker 1: might have gotten worse because which is a really interesting
Speaker 1: counterintuitive thing, but but it sort of makes sense when
Speaker 1: you think about the psychology of it. Always like, Okay,
Speaker 1: you're having a hard time getting a space on a ship.
Speaker 1: You finally get one, just you're not going to sit
Speaker 1: there and try to optimize the inside of entertainer. Just
Speaker 1: like just whatever you got now, just throw it in
Speaker 1: there and let's go. Um, Which you know, it's sort
Speaker 1: of kind of intuitive because you think like, oh, this
Speaker 1: thing is really scarce, We've got to really optimize our capacity.
Speaker 1: But you may not have that luxury because you're you know,
Speaker 1: you're just scrambling to get space on a ship. Um.
Speaker 1: So no, we haven't seen a lot of progress on
Speaker 1: that metric. Um, it's we're not seeing I can't say
Speaker 1: that I saw material changes in the infrastructure in our
Speaker 1: ports to enable them to like handle a surge and
Speaker 1: capacity if that ever happens again. Um, the appointment systems
Speaker 1: haven't improved. The technology for getting um for for picking
Speaker 1: up trucks, you know, for for picking up containers, for
Speaker 1: getting trucks in and out of there hasn't improved. Um.
Speaker 1: We've got the West Coast Union, it's called the i
Speaker 1: l WU International Ngenterment Warehousing Unions. UM, they're operating without
Speaker 1: a contract right now. So their contract expired the summer. Uh,
Speaker 1: those negotiations are ongoing, and how many Intel was happening there.
Speaker 1: But but I have heard that they're main Um, the
Speaker 1: main thing that they want is to not have more
Speaker 1: automation in the ports. So I don't see that kind
Speaker 1: of like upcoming that we're going to get a lot
Speaker 1: more automation to be able to handle a surge in
Speaker 1: these in the area. UM. So in general, I would
Speaker 1: say the infrastructure is the same, it's not gotten any better. Wait,
Speaker 1: didn't you You famously went to Long Beach and I
Speaker 1: think you rented like a boat so that you could
Speaker 1: observe how things were actually being loaded and unloaded at
Speaker 1: the port. And wasn't there a change as a result
Speaker 1: of that trip. Weren't they like stacking I think two
Speaker 1: containers on top of each other and you you made
Speaker 1: it or you suggested that they start stacking them higher
Speaker 1: and they ended up doing that. Yeah. Yeah, So, um,
Speaker 1: we I went down there to explore, like, what's really
Speaker 1: happening here in the ports? Why is this backlog of
Speaker 1: a hundred chips going out here? People are like, oh
Speaker 1: you so, you know, like so, I don't know what
Speaker 1: the words they use, but really in creative or something,
Speaker 1: go down there and like do them, Like it's kind
Speaker 1: of my job. I got all my summers cargo stuff there.
Speaker 1: I got throughout the happening, you know. Um. And so
Speaker 1: what we figured out was that the the trucking yards
Speaker 1: around the port were only allowed to stack containers too high,
Speaker 1: and then after that they had to just leave the
Speaker 1: containers on the chassis that's the trailer that holds the
Speaker 1: containers around. So then we ran out of trailers, ran
Speaker 1: out of chassis to go pick up more containers, and
Speaker 1: so you have to change backlog that that created so
Speaker 1: the City of Long Beach I tweet, I did a
Speaker 1: tweet storm about that. At six am, three pm, the
Speaker 1: City of Long Beach changed the z owning law to
Speaker 1: allow stacking up to four high. That's pretty impactful. It's
Speaker 1: I'm told it's the fastest response to a citizen action
Speaker 1: in the history of government on all human civilization. That was. Yeah.
Speaker 1: The week prior, we brought the labor union Tacos to
Speaker 1: try to interview these guys and learn what was happening.
Speaker 1: That's where we found out that the truckers are missing
Speaker 1: their appointments. And then we found out the reason the
Speaker 1: truckers are missing the appointments is because they don't have
Speaker 1: any chassis. They don't have the trailers to go pick
Speaker 1: them up. So that that zone wall did have an impact. However,
Speaker 1: it was only the city of Long Beach and Los
Speaker 1: Angeles didn't follow suit, right, All the other southern California
Speaker 1: cities didn't follow suit, and and Long bag doesn't have
Speaker 1: that many trucking yards in it, so it kind of
Speaker 1: had a marginal benefit but not not dramatic um And
Speaker 1: I think it was kind of around the edges in
Speaker 1: the first place, Like what we really need is why
Speaker 1: does it Why do these truckers need appointments in the
Speaker 1: first place, like they should There should be a system
Speaker 1: where they just show up and we give them the
Speaker 1: container and then the mobile app tells them where to go.
Speaker 1: Um So Flexport has implemented that in a couple of
Speaker 1: terminals for our own cargo, but for the wider industry
Speaker 1: they haven't done anything like that. All right, I'm not
Speaker 1: trying to blow up any future Ryan Peterson presidential ambitions
Speaker 1: with this question. You know, down there at the ports,
Speaker 1: giving tacos to the workers, all things of a future.
Speaker 1: You know, it could be a career in public service
Speaker 1: one day. But you're honest, take in terms of the
Speaker 1: difference between unionized first automated ports, what you've seen around
Speaker 1: the world, Uh, how in your view, like, how costly
Speaker 1: is it from a sort of economic perspective, if at all,
Speaker 1: to have this sort of level of unionization that we
Speaker 1: have at the u S Ports versus what I believe
Speaker 1: are more automated ports elsewhere. You know, it's it's hard
Speaker 1: to unpack the effect of the union, whether it's automation
Speaker 1: or just like management style and the adversarial relationship between
Speaker 1: the union and the and the employers UM, and the
Speaker 1: managers like it's it's a very strange. Um. You know,
Speaker 1: my company is not unionized, and it wouldn't work if
Speaker 1: it was, because this idea that a person who manages
Speaker 1: people is like a different person. It's like you can't
Speaker 1: can't relate to each other and um. And so very specifically,
Speaker 1: what happens at the ports in the when the West
Speaker 1: Coast at least, is that UM, the management the companies
Speaker 1: have to say, the terminals say every day how many employees?
Speaker 1: How many workers do they need the next day? And
Speaker 1: then the union furnished is that many workers? But there's
Speaker 1: different people every time. UM, they move around between the
Speaker 1: different terminals, so there's not And then the team has
Speaker 1: to reform every day and you're operating heavy equipment with
Speaker 1: new people doing new jobs without adequate training in many cases. UM.
Speaker 1: And it's just kind of a crazy way to work
Speaker 1: if you think about it. Like the kind of the
Speaker 1: core element of running a company and running an operation
Speaker 1: is that you take the team and you go, what
Speaker 1: did we learn yesterday and what are we going to
Speaker 1: do better today? And like you can't have those conversations
Speaker 1: because it's new people every day UM, and so it's
Speaker 1: hard to unpack, like how much of the US port
Speaker 1: inefficiency is from just like a weird structure that's put
Speaker 1: in in terms of how the workers work with the management.
Speaker 1: And I'm not blaming the union for that, by the way,
Speaker 1: it's like why the management. I don't know. It's just
Speaker 1: this adversarial relationship between management and union that that it
Speaker 1: needs to get worked through. UM. And now look, I'm
Speaker 1: an outsider, I don't I haven't worked in ports. I'm
Speaker 1: sure these guys will criticize me and tell me I
Speaker 1: have no idea what I'm talking about. But UM. But
Speaker 1: then the automation UM piece is like a money saved
Speaker 1: anything for the operators. I don't know how much efficiency
Speaker 1: gains come out of it versus just like, hey, the
Speaker 1: union workers are really well paid and you didn't have
Speaker 1: any of them that you can make more money running
Speaker 1: a port UM and lower the cost of shipping goods.
Speaker 1: For sure, it costs about the terminals charge about six
Speaker 1: to unload the container um that and I don't know,
Speaker 1: it's like takes thirty seconds for a crane to go
Speaker 1: like that. So it does seem like a pretty high
Speaker 1: tax to put on the world China is about a
Speaker 1: hundred buck and some of that is good to have
Speaker 1: lower labor costs, but a lot of this because they've
Speaker 1: got more automation. I was about to ask, can you
Speaker 1: talk to us about non US ports and what they're
Speaker 1: doing there, just to give us a sense of what
Speaker 1: is possible here. Yeah, and what is possible by the way,
Speaker 1: like Rotterdam has been a fully automated port for something
Speaker 1: like five years with self driving trucks like for years ago,
Speaker 1: because they don't need that much kind of just follow
Speaker 1: a white line on the tape. There's no people to
Speaker 1: run into. So it's it's a really it doesn't need
Speaker 1: like really advanced AI or anything. Um. And their work
Speaker 1: our friendly place. Like I don't think people are thinking like, oh,
Speaker 1: the Dutch or this like terrible you know, like fascist
Speaker 1: place where workers have no rights. Like I'm pretty sure
Speaker 1: that the workers in the porta ROTTERDAMU okay. Um. So
Speaker 1: it is. You know, there are other things that are
Speaker 1: other ways of working that are possible and people can
Speaker 1: get along with with investments in robotics, and I think
Speaker 1: it's really important for civilization that we like keep improving
Speaker 1: the efficiency of the way we ship stuff. Um globalization
Speaker 1: and was really powered by the shipping container. We lower
Speaker 1: the cost of shipping things by or more. We've lifted
Speaker 1: like something like a billion people out of poverty through
Speaker 1: largely in Asia. But the ability for anybody to trade
Speaker 1: with anybody's created a huge economic benefit. Uh, And we
Speaker 1: kind of like stop there, you guy, we don't need
Speaker 1: any more of that, just like have uh you know,
Speaker 1: We'll stop with the robotics thing and the containers flying.
Speaker 1: We don't need optimize the inside of the container or
Speaker 1: the way the containers are picked up. So it's it's
Speaker 1: disappointing to me as someone would like to see more
Speaker 1: growth in the world. I'm sort of a single issue
Speaker 1: voter on economic growth. I'd like to see so if
Speaker 1: we're all twice as rich, I feel like we'd be
Speaker 1: able to solve most of the other problems that are
Speaker 1: out there. Going back to, you know, the struggles that
Speaker 1: you believe container shippers are going to face, Like what
Speaker 1: are they gonna do? I mean, you we talked a
Speaker 1: little bit about what they're going to do with all
Speaker 1: the money that they made in the last two years,
Speaker 1: but like, what do you see are some of the
Speaker 1: ways they're going to navigate if we go through this
Speaker 1: sort of uh down, you know, it's is like kind
Speaker 1: of a bust for them. We're gonna see contation, Like
Speaker 1: what are we going to see out of that? I mean,
Speaker 1: it's a really fascinating thing to watch, Like I get
Speaker 1: to be kind of front row seated in the game
Speaker 1: a little bit. Um. They did make a lot of money. Uh,
Speaker 1: and yet nobody likes to lose money, no matter how
Speaker 1: much they have. You don't want to sit there and
Speaker 1: lose money. So they've returned and a lot of it
Speaker 1: to shareholders. Uh, they're investing in new business lines. But
Speaker 1: the end of the day, at the price goes down
Speaker 1: below the cost, you know, below their costs, they start
Speaker 1: bleeding cash. Like how long do you bleed cash? What happened?
Speaker 1: We've already had a huge amount of consolidation during the
Speaker 1: prior glut, Like when flex sports started there were twenty
Speaker 1: three major ocean carriers were down to ten or twelve
Speaker 1: depending how you count them today. So there's been a
Speaker 1: lot of consolidation. I don't know there's that much room
Speaker 1: for more consolidation. Two, as weak players go bankrupt, maybe
Speaker 1: some of them get bought up UM, and there might
Speaker 1: be some bankrupts. These people might walk away say hey,
Speaker 1: like we made tons of money, we don't, you know,
Speaker 1: let this thing go. But they also largely paid down
Speaker 1: their debts, so I don't know that they have a
Speaker 1: huge amount of debt to default on in the first place.
Speaker 1: So very interesting to see. UM. There are a couple
Speaker 1: of factors that might change this trajectory. UM. One is
Speaker 1: that the consumer is actually still pretty strong in the
Speaker 1: United States. Like container volumes are way down, but actually
Speaker 1: consumer spending is not gone down on even on goods
Speaker 1: um services has gone way up. It's a good spending
Speaker 1: has stayed elevated. UM. So maybe there's a world where
Speaker 1: the consumers continue to spend goods and those trade volumes
Speaker 1: will come back up. One reason to think about why
Speaker 1: why trade volumes have gone weight down in the last
Speaker 1: quarter is that trensit times improved, right, and so it
Speaker 1: was taking a hundred and twenty days to get a
Speaker 1: container from China to the US at peak. I mean
Speaker 1: it used to be forty We're back down to like
Speaker 1: fifty or sixty days. And so if all of a
Speaker 1: sudden you have your your ships go sixty days faster,
Speaker 1: than you thought they were gonna go. You're gonna have
Speaker 1: two months of extra inventory in stock in the United
Speaker 1: States and then you're like, hey, I don't need to
Speaker 1: order more stock, but you're gonna sell through that inventory
Speaker 1: if the consumers stay strong, and then you should have. So,
Speaker 1: you know, I think the carriers really hoping that January
Speaker 1: February April May you know, the next few months, people
Speaker 1: start reorder the factory, start producing more in the company,
Speaker 1: start ordering more goods to get to get them into
Speaker 1: the country. So there's some hope there that the consumers
Speaker 1: stay strong and that all the recession talk is overblown. UM.
Speaker 1: They have another thing on supply side that's coming down
Speaker 1: the pipeline meaning the supply side meaning the capacity for shipping,
Speaker 1: the number of ships that are out there, and they're um,
Speaker 1: you sort of the big factors are how many ships
Speaker 1: are there, what's their capacity, and the how fast do
Speaker 1: they go? UM. And under this thing UM, the International
Speaker 1: Maritime Organization that's the division of the United Nations that
Speaker 1: oversees it's kind of the governance body for ocean freight. UM.
Speaker 1: They have a rule that kicks in in two weeks
Speaker 1: on January one, that the ships, UH must reduce their
Speaker 1: carbon emissions by and the only way to do that
Speaker 1: for an internal combustion engine is to just go slower. UM.
Speaker 1: And so all these ships are going to start slow steaming.
Speaker 1: We estimate that if they have to go slower than
Speaker 1: their max speed in order to hit that target. UM.
Speaker 1: Now it turns out there a lot of them are
Speaker 1: already going slower in order to kind of rain in
Speaker 1: capacity and lower fuel costs. So our economist estimate this
Speaker 1: is gonna be a four to six reduction in capacity
Speaker 1: UM that that will start in January, so that may
Speaker 1: you know, that may rain in some of it as
Speaker 1: well on the counterside dough. During this boom and yours prior,
Speaker 1: these ocean carriers ordered a lot of ships. So over
Speaker 1: the next three years you're gonna see increase in container
Speaker 1: capacity as new ships come online, and those orders are
Speaker 1: already placed and the ships are in construction. So UM,
Speaker 1: from where I said, it looks like the price has
Speaker 1: to go down a lot and then the carriers will
Speaker 1: go back to the old world. And I think, you know,
Speaker 1: there's a lot of hate spewed at these outra carriers
Speaker 1: the last few years, but those of us have been
Speaker 1: an industry. I know, Hey, this was a ugly business.
Speaker 1: They lost money for a long time. They're gonna you know,
Speaker 1: they're gonna fail if they can't make money. They made money.
Speaker 1: It comes into aves as as it turns out they
Speaker 1: made a lot of money for a couple of years,
Speaker 1: they may lose money for a lot of a long
Speaker 1: time coming up and hopefully you know they're in it
Speaker 1: for the long run, as these kind of family businesses
Speaker 1: and national businesses that they're willing to ride out a
Speaker 1: downturn because they know the upsides can be so good
Speaker 1: when when they come. Tracey, I'm kind of fascinated by
Speaker 1: that point about environmental regulations as de facto capacity curbing mechanisms.
Speaker 1: It's like, if they're all the rules are imposed at once,
Speaker 1: then they sort of can solve the game theory of
Speaker 1: limiting capacity. Um, I just want to go back to
Speaker 1: that cyclical point um, because we know that shipping itself
Speaker 1: is a very cyclical industry and it's gone from basically
Speaker 1: bus to a massive, massive, like historical boom. But you've
Speaker 1: spoken about this before, the sort of like the pressures
Speaker 1: of short termism on the broader business cycle. So this
Speaker 1: idea that everyone's obsessed with making money with generating return
Speaker 1: on equity. Um. Everyone moved to just in time inventory
Speaker 1: and things like that, which kind of contributed to the
Speaker 1: bottle note because you don't have a lot of stuff
Speaker 1: on hand when suddenly demand starts to spike. Have you
Speaker 1: seen any progress from that perspective? Like, did anyone in
Speaker 1: business in manufacturing and retail learn from the experience of
Speaker 1: one that actually, maybe we want to move to some
Speaker 1: sort of more resilient model. It's um, I assume some
Speaker 1: people learn. A lot of companies have you know, more
Speaker 1: inventory than ever right now. I'm not sure how much
Speaker 1: of that planned versus like, hey, the transit time sped
Speaker 1: up and they're they're they've got more inventory than they
Speaker 1: want right now. Um. The there is a bit of
Speaker 1: a Darwinian function in economies, right the people who played
Speaker 1: over the long game. Uh, those people who do it
Speaker 1: right should come out ahead and win. Um. But it's
Speaker 1: difficult because you know, you in the meantime you have
Speaker 1: too many, too many assets. Uh, you running a return
Speaker 1: on assets? As the CEO you get you get canned
Speaker 1: um and and or you go bankrupt because assets are
Speaker 1: not free and so can you even you know. Actually,
Speaker 1: the great reminder here is Hunting, which is a Korean
Speaker 1: ocean carrier that went bankrupt. And if they would have
Speaker 1: just held on for six more years, somehow they would
Speaker 1: have made like dollars in front in the last two years.
Speaker 1: And uh. And so you know, they might have the
Speaker 1: right strategy, they had the right assets, they were ready,
Speaker 1: but they couldn't um they couldn't survive to see the
Speaker 1: strategy through. So it's really difficult to just stand from
Speaker 1: the outside and say, oh, everybody should have more assets
Speaker 1: on the balance sheet and yet uh, and yet there
Speaker 1: are there is a competitive advantage to doing that. Amazon
Speaker 1: has kind of proven this very interesting to see how
Speaker 1: eBay still thirty years later hasn't responded un to like
Speaker 1: Amazon opening up its own fulfillment centers and running a
Speaker 1: logistics network and kind of dominating an e commerce and
Speaker 1: you Bays still like, no, We've just like our market
Speaker 1: place for you, you know, John, But I don't know.
Speaker 1: It seems like there's an opportunity that that's missed in
Speaker 1: going to invest in assets that is many many companies
Speaker 1: are afraid to do all right, So the big lesson
Speaker 1: of the last two years is here comes another downturn,
Speaker 1: and no one actually learned any lessons, are going to
Speaker 1: do any business any differently. Everyone's gonna go back to
Speaker 1: just in time, manufacturer in China, manufacturer. It's all just
Speaker 1: the same world, same world. That's what it's kind of
Speaker 1: like my takeaway from all that. Can I word on
Speaker 1: this point. Words are going to get any more, but
Speaker 1: just on this point at a minimum. We've spent the
Speaker 1: past two years talking about supply issues and the sort
Speaker 1: of hidden like plumbing of the global economy. Has that
Speaker 1: not translated into anything tangible? I don't know, you know,
Speaker 1: I think never underestimate the ability of human beings to
Speaker 1: forget terrible. I think that's some good episodes out of
Speaker 1: it all. So I think there'll be more discussion of it. Um.
Speaker 1: It always not always like Washington has taken some action
Speaker 1: to do some things that actually are valuable. UM. Now,
Speaker 1: ocean carriers have to provide the date uh and when
Speaker 1: a container is made available uh, which seems like yeah,
Speaker 1: like that's a reasonable regulation to require that they could
Speaker 1: tell us exactly when this container was available, because you remember,
Speaker 1: you only have seven days to pick up the container
Speaker 1: after it's available, Before you start paying daily fine and
Speaker 1: if they can't tell you when it's available, it's precisely like,
Speaker 1: how are they gonna what ground truth do you have
Speaker 1: to base those fines on. So that was one of
Speaker 1: the things that came out of the Ocean Shipping Reform
Speaker 1: Act that Washington passed. That one seemed pretty sensible. The
Speaker 1: rest of it. I haven't seen a big impact, but
Speaker 1: that one. It's a good rule in my opinion. Um So,
Speaker 1: but sometimes you know Washington that wants to take action
Speaker 1: and action you get a group of people in the
Speaker 1: room and say you have to do something, you will
Speaker 1: definitely do something, but not whether that thing is bad
Speaker 1: or not is like a big, big question. Mark, Ryan Peterson,
Speaker 1: co CEO Flex Sport, thank you so much for coming
Speaker 1: back on odlines. My pleasure. Thanks for having me. I
Speaker 1: thought that last point, Tracy, never does it. Never underestimate
Speaker 1: humans ability to forget. It's kind of bad and good.
Speaker 1: I think I don't think it's like kind of a
Speaker 1: neutral thing like, Okay, we wish something's got fixed. But
Speaker 1: on the other hand, right, maybe just move on. I
Speaker 1: think it's kind of bad. Joe. I mean, I started
Speaker 1: this episode trying to be on an upbeat note that
Speaker 1: maybe we have learned something from this crisis, but I mean,
Speaker 1: I don't know. Ryan had some examples of stuff that
Speaker 1: had changed that he had actually affected change personally, like
Speaker 1: stacking containing one one day modest sized port. They did
Speaker 1: add an extra layer of stack. So some things are possible,
Speaker 1: it seems. But it does feel like the cyclical nature
Speaker 1: of shipping means that a lot of people are just
Speaker 1: going to look through the past couple of years and
Speaker 1: just be like, well, you know, it's kind of an
Speaker 1: abnormal It was an abnormal boom, but it's not unusual
Speaker 1: that we get these booms followed by these big bus
Speaker 1: and you know the fact that they only would out
Speaker 1: made these big orders, like did they start believing it
Speaker 1: to that something is gonna be fun to my change
Speaker 1: the permanent bus. And so it does seem like the
Speaker 1: overcapacity story is really like staring us in the face. Yeah,
Speaker 1: it seems like the thing that that would help would
Speaker 1: be if if there was some sort of floor put
Speaker 1: under some of these like you know, you want I mean,
Speaker 1: that's like when he said, like, okay, the environmental regulations
Speaker 1: kind of do have that effect, like okay, if you
Speaker 1: mandate if you put out some emissions mandate, and the
Speaker 1: only way to hit that emissions mandates for everyone to
Speaker 1: get slower. No one is going to sort of voluntarily
Speaker 1: get slower if there's no force. You could see how
Speaker 1: these sort of curbs might have an effect of like
Speaker 1: solving some of these capacity problems, solving some of the
Speaker 1: game theory that otherwise would automatically result in the race
Speaker 1: to the bottom. Yeah, alright, Well, we've done our our
Speaker 1: shipping bust episode. I guess maybe in two or three
Speaker 1: years we'll do another boom episode. Yeah, hopefully not under
Speaker 1: like global pandemic condition, hopefully something else. But we'll just
Speaker 1: keep marking all the turns in the cycle. Shall we
Speaker 1: leave it there? Let's leave it there? Okay, this has
Speaker 1: been another episode of the Odd Thoughts podcast. I'm Tracy Alloway.
Speaker 1: You can follow me on Twitter at Tracy Alloway and
Speaker 1: I'm Joe Wisntal. You could follow me on Twitter at
Speaker 1: the Stalwart. Follow our producer Kermen Rodriguez on Twitter at
Speaker 1: Kerman Arman. Follow our guest Ryan Peterson, He's at types Fast,
Speaker 1: and follow all of the Bloomberg podcasts on Twitter under
Speaker 1: the handle at podcasts and for more odd Lots content
Speaker 1: go to Bloomberg dot com slash odd Lots, where we
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