The Exchanges

Q of the output of that facility goes way down. I mean, are, you know, are you hearing about more of that stuff happening, particularly during this kind of Omicron wave? Where the real effect of that hasn't really hit the supply chain system yet. And we're still kind of seeing a buildup of, you know, of demand, and we don't, you know, we haven't really kind of hit the problems.

A So for the last 18 months, China had this total zero tolerance policy and was very successful in keeping COVID out of out of their country. And so manufacturing just kept running as if not no problem in China, which is the majority of this manufacturing. With Omicron, you're starting to see that it is still taking hold and a zero tolerance policy. We haven't yet seen like major shutdowns and waves of shutdowns, but a little bit, you're seeing that here and there. The zero tolerance policy has shown up, for example, uh, at least twice where one long, one port worker in a Chinese port got COVID and they shut the whole port down for like three weeks.

AI assessment note: “We haven't yet seen like major shutdowns and waves of shutdowns, but a little bit”

Q Ryan, what is the state now? Should we be worried about the supply chain? Is it getting better? Is it getting worse? What's 2022 going to look like?

A Yeah. I mean, I think the supply chain means a lot of things, and it'll depend on what your industry is, what's really happening. But, you know, it goes for everything from manufacturing products, which means sourcing all the subcomponents like semiconductors through logistics and final delivery all the way to a customer store. And where Flexport focuses on is sort of picking goods up from factories around the world and delivering them into fulfillment centers all over the world. So kind of that global mile is what we sometimes call it. There you're seeing real disruption. Um, and it starts really with the pandemic shift in consumer behavior where people started buying more goods because they couldn't go to restaurants and travel and things. And so a lot of spend shifted onto goods and imports are up almost 20% imported container volumes. So that's the start of it all. Uh, and then what we learned is our infrastructure is dilapidated and unable to handle a 20% increase. And by infrastructure, I mean the number of ships in the world The capacity of throughput of the ports, the number of trucks and availability of trucks and chassis, which is the trailers that haul containers around. We just didn't have enough of these things or the port capacity, you know, like look at, uh, American ports operate this. I just learned the statistic pretty recently and I keep saying it cause it ap…

AI assessment note: “There you're seeing real disruption. Um, and it starts really with the pandemic shift”

Q pace to be generous. Major indices are down seven to 10%. Obviously, this trade war and tariffs, the yield on the, the yield on the tenure, eh, it's down about 40 basis points. There's a lot going on. Let's go around the horn. Ryan, uh, Aaron, you're our guest. What's your take on the first hundred days? Is it what you expected? Good, bad, and otherwise? Wins and fails, everything.

A I'll go first. I think it's a whirlwind. I mean, if you look at the, uh, the John Boyd, the fighter pilot, has this concept of the OODA loop. Which is observe, orient, decide, and act. And the concept is that if you're in dogfighting, if you're able to maneuver through those OODA loops at a faster pace than your, than your competition, they get disoriented and don't know what to do. And I, I think that that's gotta be how Democrats in Washington and maybe mainstream Republicans in Washington, certainly journalists are all feeling this, like there's the, the Trump, Trump administration takes action and And before anybody can respond to that, they have already done like four more things and you're like, wait, I forgot to actually follow up on the other thing that they did that I didn't like. Uh, and so it's, yeah, it's pretty disorienting if you're, if you're trying to, they can't find a line to fall back to and go, Hey, we're going to push back against this policy because they're already moving on to the next one, the next one. Um, so that, that's like my high level interpretation. Obviously I come at it from a trade angle. I think everybody knew that Trump was going to be, he told us during the campaign that the most beautiful word in the English language is tariff. Don't tell them it's an Arabic word, but the most beautiful word in the English language. And so we knew that was…

AI assessment note: “I think that the, the, the suddenness of it all caught people by surprise.”

Q Is that a technology issue or do you think that's a regulatory capture and union issue? Like a labor issue, like a labor?

A The tech is there, you know, it's existed for a long, long time. It's really about labor, getting together with management, negotiating these things and allowing it to happen. And the way that our ports are run is, it's pretty crazy when you look at it. They treat labor as a fungible commodity, as in the, the port terminal operators will say, I need this many workers tomorrow, and the union provisions that many workers, but there's different people every day. Doing operating complex, you know, heavy machinery that you can't like the number one thing in business is like, what did we learn today? And how are we going to do better tomorrow every day with your team? But if it's a new team every day, like that's not even possible. So I don't know how you can drive a productivity improvement when it's different workers every single day of the week. Right.

AI assessment note: “The tech is there, you know, it's existed for a long, long time. It's really about labor”

Q reasonably achievable, and they're past it. And so it seems like the bigger companies who have influence were able to manage through it. These smaller companies, to your point, who really do rely on many actors in the supply chain have been really thrown left and right. They probably don't know where demand really is. So is that sort of the more nuanced actual, the way that it's running out?

A Yeah. And it's sort of, it's very interesting to see this flip. So pre pandemic, the biggest companies paid the least for freight because they buy the most freight. So they negotiate good rates. Now they're paying the most. And they're the biggest companies for a reason. They have the best businesses. They either have the best margins, the best, you know, they just built something that people want at scale to be huge. Well, when times are tough and you need to spend extra to prioritize your freight, To get loaded, to sign a contract and make sure that these ship owners and airlines honor their commitments and serve up, step up. It's the big companies that can afford it. And so they're not paying extra for freight, but they're getting around these problems. And freight is a really interesting market because it's pretty inelastic. Like you're either going to ship the thing or you're not the, whatever the price is, you probably still shipping it. And so like you, I haven't ever looked at an Apple, Uh, at this level, but I'm sure that if you did, you'd see that it's a, the percent they spend on freight is just negligible. So if they doubled it, it wouldn't matter.

AI assessment note: “It's the big companies that can afford it.”

Q Got it. If you could wave your magic wand as we wrap up here and change two or three things, uh, that to you seem like layups, and I think you've kind of hinted at them. In order, what would be the changes just based on your intuition and your knowledge of the supply chain? What two or three things are the layups? We got to do right now.

A I think first off, it's got to start with some, uh, with metrics, like what, if you care about something, measure it. The metric that the government's been using for ocean freight delays has been how many ships are waiting offshore at the port of Long Beach. And this is like one of the most mischievous, I don't know if it was just like outright fraud or incompetence, but one of the worst things I've seen from government in terms of PR is They, they passed this rule that the ships have to wait a 150 miles offshore so that the carbon, so that the pollution wouldn't hit LA, like reasonable, good. But then they kept using the same metric for how many ships are waiting right outside the port. And, and, and it went way down and they started celebrating that success. So like, let's actually use the right metric, which is how long is it taking cargo to transport? You can't just hide the ships and celebrate that there's no ships there.

AI assessment note: “first off, it's got to start with some, uh, with metrics”

Q existing demand for the foreseeable future. That's an enormous capital problem that these companies now all of a sudden will face, right? So like the next step beyond all of the supply chain issues could be, um, and I think Saks has been talking about this a lot, like a, a pretty bad recession if these companies have all this inventory and they don't know how to get working capital.

A Yeah, it can be real ugly. And the other factor is the price has gone crazy. So the price of shipping a container, long run, like I've been in this business and been a customer of this business for 20 years, and you're, you can just rule of thumb, it costs you 2000 bucks to ship a container from China to the West Coast. During, um, 2016, that price collapsed. So you have these boom and bust cycles of an asset market. 2016, it was 550 bucks. Last year was 20,000 dollars. So it's up 10 X over normal. It's up 40 X over or more right over just a few years ago. And what, what that's done is create a real barrier to entry. Like for a DTC e-com business, you used to be able to just go to China, find some product, put your, slap your label on it, and go sell it on Amazon, and you were in business. And there's like a huge number of people doing this. Right now, you have to come up, if you want to ship 10 containers, it used to be you needed 20 grand, now you need 200 grand. That's like, That's a real barrier to entry. So actually, I've talked to some companies in this space. We're really happy. Like, if you have an established business, you're like, great. Now it's much harder for Joe Schmo to show up in China and start competing with me. So I was really surprised to hear that. I thought that was, I guess, pretty sophisticated take.

AI assessment note: “Yeah, it can be real ugly. And the other factor is the price has gone crazy.”

Q Does it impact America as much as it impacts Europe?

A Absolutely not. Um, now this is the, the fastest route for many parts of Asia to the east coast of the United States. And especially with the Panama canals also congested at the same moment right now. Uh, because of, they say it's because of a drought, but actually they built a bigger canal and it's just draining the lake faster. And that's my hypothesis, but I'd like to look into it a little further, but, uh, the Panama Canal is only going at about two thirds capacity. So if you're going Asia to the east coast, those are your options, but to go around the southern tip of Africa around the Cape of good hope to get to the east coast, it's like an eight percent increase in transit time versus 20 to Europe. And there's alternatives. So definitely impacts Europe much more. It impacts China. Like the reason I think. That this, there, there's so many people aligned up here. Like this is not good for China. China wants to be able to ship stuff quickly to Europe and get it to market. Um, so to the extent that they have any impact, I think they're going to be clearly on the same side as the United States here. Europe obviously has a thing. And the other thing that I haven't heard anyone talk about is like, if you look at that map, they're blockading, not just the Suez, but they're blockading Saudi Arabia, the Saudi's biggest port is in Jeddah right up there. Well, I don't think they're …

AI assessment note: “eight percent increase in transit time versus 20 to Europe”

Q Well, uh, no easy solutions here, Ryan. Thanks for jumping on the pod with us once again. One question. How, how much more resilient post-COVID, if at all, are supply chains? Because you, you talked about wanting to make them more resilient, and that was a major focus for Flexport. How, is it better now post-COVID? Have we done anymore?

A No, I think at the physical infrastructure layer, nothing's really changed. Uh, I don't think, you know, the, the bottlenecks have gone away just because demand went back down. The U.S. had like a 20% increase in container volume. It created all these bottlenecks. We couldn't process that many containers in our ports. Uh, and then the containers now are back at 2019 levels and everything's flowing normally, but I wouldn't say that makes us more resilient. It's the same as before. Um, and situations like this, you learn just how amazing and resilient the global trading network is, the global logistics infrastructure, but also it's pretty fragile if a small group of rebels can fire missiles and you go, well, even the U S Navy, what are we going to do? I mean, this kind of an asymmetric warfare type thing. They, they shoot, they shoot a 20,000 dollar drone and we, we need a two million dollar missile to shoot it down. Like it's not a, it's not a great setup. Uh, and it's not clear that firing missiles back is going to open it back up. Um, and so, yeah, I think, I think it's much more fragile than we realize as civilization always has been, you know, it takes, takes a hundred years to develop a civilization and an afternoon to go back to barbarisms.

AI assessment note: “No, I think at the physical infrastructure layer, nothing's really changed.”

Q and let's say the U.S. Gets in a war there, but isn't really able to bring it to a decisive conclusion. Um, and let's say that this blockade of the Red Sea continues for all of 2024. What does that do to global prices? Because I think right now the market is pricing in rate cuts next year on the theory that inflation is coming down as a solved problem.

A It's the right question. It'll be a big impact. Um, and if you listen to like retailer earning call earnings calls, They're all talking about, Hey, we've had six, 12 months of deflationary environment. Prices are coming down. A lot of what they cite is the lower ocean freight prices. And if, and if that goes back and it, if it goes back anywhere near, I mean, we're already seeing a three X, but even that three X is sort of, well, is this going to last? Do I need to price it all in? Do I need to, uh, and it hasn't really taken hold of like, that's not a true market dynamic of what is the supply and what is the demand? Freight is very inelastic. Like you're going to ship the product regardless of the price of freight. You know, unless your business model has the tiniest of margins, the price of freight goes up. It doesn't impact how many products you ship. You're going to go sell as many products as you can.

AI assessment note: “It'll be a big impact. Um, and if you listen to like retailer earning call”

Q So is there a role for presidential leadership in sorting out these union issues or just sorting out the issues with the port more generally or avoiding a strike in July?

A I mean, it seems to me that if Biden wants to get reelected, this inflation supply chain issues are pretty top of mind and in the news and are going to be on people's, you know, you want to be seen doing things. And I do think there are things that can be done. So yeah, there's a role. And as far as union negotiations, Biden's probably pretty as equipped as any president's ever been to negotiate with a union and get them to play nice and not screw up his reelection with a, with a strike. He's known as a union friendly president and go sit down and do a deal with them where Trump would probably never be able to do a deal with the union because they know that there's sort of natural adversaries. So there's something there. There's a lot more to be done. And I, you know, I got into some arguments with people that are like, you know, that's not in the president's power to do such and such. I'm like, yeah, but he's the president of the United States to pick up the phone. Like you can do things that aren't legally in your power just by asking for favors and other people do them. And you negotiate when unions, a good idea, a good example, convincing to change the zoning laws in LA so you can stack containers higher would be another. Yeah. That's not the president of the United States jurisdiction. But if he calls the mayor of LA or the city council.

AI assessment note: “So yeah, there's a role. And as far as union negotiations, Biden's probably pretty as equipped”

Q Like instead of paying the China tariff, now you pay a Mexico tariff, which should be less. Is that the idea?

A Well, you can move it into a bonded warehouse in Mexico even and not pay Mexican tariffs either. And you just wait until it imports. But I mean, what's the department of commerce or the customs to do? It's sort of, you just delayed importing the goods. You imported them in the future. And you know, it doesn't, I wouldn't even call it a hack. It's just sort of like people, people are going to get creative here. You know what I mean? Like that's the job. Actually, the government should set the rules and the rest of us got to figure out, all right, how are we going to compete and make money in this environment that they've created?

AI assessment note: “you can move it into a bonded warehouse in Mexico even and not pay Mexican tariffs”

Q of them, and they can't repurpose workers and have them work a different line. So that's why Elon has always resisted being a union shop, not the wages, not mistreatment, Purely inflexibility. And it seems like that's what you're seeing in, in the ports as well is we can't drive changes and improvements because everything's so highly contractually negotiated. That's my editorial comment. Ryan, what do you think about that?

A No, I mean, it's, it's kind of, it's worth studying a little history here is that like, you know, we went through the container revolution in the sixties and seventies and the union agreed to it. And they, that dramatically transformed the waterfront of these guys. Like you see photographs from that era, they would put it on their back, like burlap sacks full of stuff, like hauling it on and off these, these ships and kind of load them by hand. It was a real art and it was, A massive employment driver. And by the way, we've still barely recovered from this. Like the West Side Highway in New York is finally like a nice park, but it sat there for 50 years, like dilapidated piers and ugly ass buildings. And some of those are still there. San Francisco waterfront still mostly like that south of the Bay Bridge. It's still like these old dilapidated buildings. So it's kind of funny to see how long it takes like that infrastructure to change. But there, there was a, and I don't know, I'm not like the world's expert on this history, but Somehow they convinced the union to adopt containerization, which is about, it's far more radical than anything we would be proposing now in how you would change their workflow or change their work. Like that was complete change where it's really these giant automated or these giant cranes that replace the worker.

AI assessment note: “they convinced the union to adopt containerization, which is about, it's far more radical”

Q When you do a deep research to your point, David, you're firing off maybe 200 queries and it's asking, the AI is saying, hey, what query should I ask on behalf of the user? And then you go down that rabbit hole. It's basically like doing 200 of them at once. Ryan, uh, your thoughts here on AI first companies and agentic computing?

A Well, the one that I really wanted to tie back to is actually our earlier conversation on tariffs and There's a real use case of LLMs is how do you classify a product? And you'd like to get to what we see today when we did our first machine learning based natural language classification of a product, you take a product URL listing page, a Shopify page or Amazon page and say, Hey, what pro what classification code is this? What duty is owed? Six years ago in a hackathon, we got to like, 70% accuracy. We're now in high nineties accuracy versus what a human trained expert will get to. But you actually get to it, which is not good enough. You know, you're wrong. Three percent of the time. You know, you might've committed a violation of the law for sure, but actually what is truth in that regard? It's there's a lot of gray area in this and truth ultimately is what does custom say? What does the CBP determine is correct? And those guys are using software, right? That's pretty, that's a very simple algorithm and it's a decision tree. That's going, okay. Is it a shoe? Yes. Is the top made of leather? Yes. You know, is the bottom made of rubber? And they just go through a very simple and that outputs it. So on some level, if you convince the government to use your LLM, it becomes true, whether it's true or not. I think there's going to be some interesting cases like that, that we haven'…

AI assessment note: “the one that I really wanted to tie back to is actually our earlier conversation”