00:00:07
Speaker 1: Hire one to Welcome to Bloomberg Intelligence Talking Transport Podcast. I'm your host, Lee Klascw, Senior freight transportation logistics analysts at Bloomberg Intelligence, Bloomberg's in house research arm. Before diving in a little public service announcement, your support is instrumental to keep bringing great guests on the podcast, like the one we have today. If you haven't already, please do take a moment to follow, rate and share the Talking Transport Podcast. We appreciate your support. I'm very excited to have Ryan Peterson, the founder and CEO of Flex Sport. Ryan started Flexsport back in twenty thirteen. He holds an MBA from Columbia Business School and ANBA from UC Berkeley. Welcome to Talking Transports Podcast.
00:00:46
Speaker 2: Ryan, Yeah, it's great to be on here talking transport. That's my favorite thing to do sometimes.
00:00:50
Speaker 1: So yeah, sometimes we get to talk about it more than other times.
00:00:53
Speaker 2: You know, when there's a.
00:00:54
Speaker 1: Big problem the supply chain, that's when I see you on TV all the time.
00:00:59
Speaker 2: It's one of those times right now too. Actually, all of a sudden, the ocean freight world has gone on turn turned back on fire.
00:01:06
Speaker 1: So well, before we get into the markets, I want to for people that are listening in to learn a little bit about flex Work, Can you just talk about the company.
00:01:14
Speaker 2: Yeah, Flexports a global logistics provider built on a modern technology stack. So we make it easy to ship cargo anywhere in the world and gets you visibility control like where where's the cargo, when is it going to arrive? Ship any quantity of goods in any mode of transport, so air, ocean, trucking, rail, clear through customs, get it delivered. The fundamental problem that we solve is goods need to move all around the world, and any given asset owner doesn't can't move those goods door to door. You know, you think about a ship, it goes from port to port, but the container has to go from door to door. And I ultimately really care about the products inside that container moving from the factory all the way to the consumer's doors or into the into the retail store network. And so you need this coordinating layer that sits on top of all the asset owners. We call this industry freight forwarding, right. I often joke it should be called freight email forwarding because there's a lot of coordination that happens of like Excel attachments and PDFs and just email unstructured messages. So bringing software to bearrow that problem so that you're connecting all the different parties in the chain, finding the best price, best best routing, and getting people, you know, good visibility, communication, compliance. It's a hard problem to solve.
00:02:28
Speaker 1: And you guys help with all modes of transportation ocean, air, road, rail.
00:02:32
Speaker 2: Yeah, and so we've grown to were I think we're the third largest freight provider for ocean freight in the United States, similar in air the top five right and top ten globally for both. For ocean, I think we're a little bit smaller on their for it. If you were to look at our you know, all of the freight forwarders in the world, there's we once tried to estimate this. It was like twenty thousand different companies. It's sort of you have a lot of mom and pop slat small business doing this. But if you look at the list of the top one hundred, let's say, by volume, there's only one that was founded after nineteen ninety four, when Netscape was invented, when a web browser came out, and that's Flexport. There's a lot of great companies in this industry a lot with capabilities and knowledge that you know, we admire and look up to. But from a tech standpoint, it's just hard to kind of reinvent an old legacy bureau business and have it become a built on a modern tech stack. So that's that's been our big advantage being found. We're lucky, we're just founded in more recent period when we can use the cloud, you can use AI, you can use all them modern tools and build our own software to make it easy for everybody to do this.
00:03:39
Speaker 1: Yeah, and you mentioned it's a very fragmented market, and you know, the freight forwarders that don't embrace technology, even the legacy players, if they're not embracing technology, you know, in a couple of years, it seems like they're going to be left out in the cold.
00:03:51
Speaker 2: We're and that's really accelerating. Like we've had a lot of breakthroughs with AI in the last few months. The building just literally in the last few months, the ability to apply opeen AI and other large language models to some of these unstructured data problems and get get remarkable results.
00:04:13
Speaker 1: Could you talk about what you guys use AI to do and to make your people more productive?
00:04:18
Speaker 2: Yeah, well, there's there's a bunch of different use cases that we've and some of this we've been doing for a long time. We're build our own machine learning models. So for that, for example, pricing, we have we optimize pricing that we charge for spot market. It's very volatile and it's hard for to stitch together all the rates and then how much should you what markup should you apply doing kind of conversion rate optimization. Uh, we've actually managed to increase our net revenue per transaction and the conversion rate with the AI, which is like you know, usually you would think I'll accept the lower conversion rate if I make more money per transaction, but when they should be that result, I couldn't even believe it. It was like, no, you can't make the conversion rate go up and make more money. That's not possible, But it did. It does. A more interesting example is in actually, and it's related when you have a container that you need to allocate and which ship should I put this container on? Picking amongst all the world sailings of what's the best route it will actually get this on time to where the customer's warehouse is where they're shipping it to. That's a problem that you know, humans can solve that problem. They're they're reasonably good at it. It's not that hard to pick. But what becomes very difficult is, on average we're getting something like two thousand containers canceled by our customers each week. Because they're none acts. He canceled, it's wrong word reschedule it. Their production gets you know, production is chaotic, and so if the cargo is not ready when they thought it was going to be ready, they have to cancel the booking they have with you and do it for a week later or whatever. So that's a hard problem. Because I've already got this ship, this container alley cater to this sailing. You cancel on me. I don't want to go back to the carrier, the ocean carrier who owns the ship and cancel the sailing. They don't like that. They lose money if the ship doesn't sail full. And so it was very hard for humans to do this. What software does is what the AI does is ten times a day, it looks at all every cancelation I have, and it finds another container that was meant to go at a later date and pulls it forward. And now I'm actually helping that customer get there faster and reducing my cancelations, and it's selecting for the cheapest option. So it's it's improving our transit time, lowering our cancelation to our carrier, and it saved us two percent of our freight costs. So there's all kinds of things like this that machine learn. We've been building machine learning models for a long time. The large language model AI. We've worked with open ai, a company called a Debt, which is actually the CEO of a Debut used to be the head of engineering for open Ai. This is all startup they were. We're having a lot of success with these, with things like getting statuses for a container from a carrier website, something that if I don't have an integration, and we don't have integrations with every port terminal in the world or every ocean carrier on the world, there's hundreds of small carriers, we would have to send a human there to check the status and update it tell the customer what's happening. We're finding that the AI is actually quite good at going to find that data. Before we would build webscrapers and the software would we would just write software and it would be hard coded. Go to this website, look in this corner of the website, grab this status, return it here. That does break all the time because the website slight change to the website in your software breaks. So webscrape being is a really good example. We haven't started doing it except in Hacketon, but Voice Agents and actually open Eyes just put out their newest model that has a really good voice agent technology. So this is a It sounds like human calling you, and in our hackathon we have it where a human actually in my voice will call a vendor and negotiate cheaper freight rates. It was kind of a dumb idea, but it was a cute idea for Hacketon. I don't think it's a good business idea. But what I think will actually work is having this human call you don't need to pretend to be me. It'd be weird if I, the CEO of the company called and asked you the status of a shipman. But being able to call out there and make a business call and check, hey, what's going on with this shipman and talk to a human at it. Because there's not enough APIs, there's not enough web connectivity, especially at truckers and warehouses. You know, you're waiting for someone to to you have to call and find out what's going on, and so having voice agents that can call and I think you're gonna end up in a world where voice agents talk to voice agents on the other side, right, which will be kind of fun. Interesting.
00:08:56
Speaker 1: Yeah, I heard a crazy stat the other day. It's something like twenty five twenty percent of truckers still have a flip phone.
00:09:02
Speaker 2: Oh, that's pretty interesting. Yeah, that's that's probably changing pretty fast. We have about we have about four hundred thousand truck drivers on our mobile app that we can just dispatch loads to. So they are you know, they use Android phones mostly. You'll see a lot of that, right.
00:09:17
Speaker 1: So where do you think AI? So you mentioned the voice.
00:09:23
Speaker 2: Aspect of it, and.
00:09:26
Speaker 1: In terms of where AI could go, where do you see AI going beyond that for flex, foroard and the broader transportation markets.
00:09:34
Speaker 2: Yeah, Well, if you look at the freight forwarding industry, which is again this like kind of coordinating layer on top of the asset owners that's moving the cargo between you know, between many asset owners on a single transaction. If you look at the p and L of a freight forwarder. So like, for every one hundred dollars in revenue typically on average across these companies, about seventy five dollars seventy five to eighty dollars of that is being paid to the asset owners, right to the trucking companies, the carriers, the ocean carriers, whoever, and then twenty to twenty five dollars they get to keep as their effectively their net revenue. There, that's their revenue. Within that twenty five dollars, ten dollars of it is variable cost operating labor to coordinate the transactions, and you'll get five to ten dollars of sales and general other costs, rent and everything else, and five dollars of profit. That's kind of how to think about the p and L well of that ten dollars of operating costs variable cost. We our team thinks we can probably in the next five years cut that by eighty percent. And then you have a choice, do you are are you going to be eight percent cheaper than everybody else or at eight percent of profit margin to your you know, your bottom line, or or hey, maybe competitors come along and everybody they're just the price of transport goes down eight percent. You don't know, you don't get to keep it right. We haven't built our business model on that. We kind of see that as a gravy and upside like that. We're We're not. It's been more it's been harder over the last decade to automated processes than I would have expected. But we're having more breakthroughs in the last three to six months with AI than we you know, all of a sudden, I'm becoming quite optimistic that we will in fact be able to realize some of those gains. So that's a huge impact. If you can lower the cost of shipping anything internationally by five to ten, you know, five or eight percent, that's massive.
00:11:27
Speaker 1: Right, and so flexport from my vantage point, you know, I would consider like a technology first freight forward or where you know the other ones are you know, the legacy ones are are are human first, not being that they treat humans first, but you know they they were before technology came out, kind of to what you were saying earlier. So I'm assuming you guys have freight brokers, you have people that deal with customs in your organization. How has AI increased their productivity. Can you give us some examples of like like loads per day that they've been able to do, uh with AI.
00:12:04
Speaker 2: Yeah, we've are so we we do, we have and we're still we still believe that this is a relationships based business at the end of the day. Sure. And I you know, when I hear relationships based business, I often think it's kind of a code word for mediocrity. Like if we have, if we do great work for you, you will have a good relationship. It's not like some good old boys club, like we've got to be really good at our job. But it does very much matter that you can pick up the phone and call I talked about voice agents. We'll never do that towards our customers. Like you need to call your customer and help them out and solve their problem. They need to be able to call us and have us solve their problem. But yeah, we can make our operators a lot more efficient in the processing of things that we do. On the custom side, we were about double the number of customs entries per month that uh that a traditional freight customs broker was and that we were a few years ago. Uh. Through automation, not just AI, but just writing good software to make them efficient to process data, optical character recognition, so being able to because a lot of customs that data comes in on documents, excel files, PDFs. Whatever we do ingest that structure it handed off to customs. So building models that can go and extract that data and make the operator very efficient. And then on the forwarding side, I think what we've the work that we've done is taken us. We really started in earnest on the operator productivity piece in twenty nineteen. Before that, almost everything we've built was kind of make the user experience amazing of shipped with flexport really great, and we didn't spend enough time. In hindsight, we should have done it earlier on just like really hardcore focused on productivity. Twenty nineteen is what we got really serious about. It's about five years ago. It's been a journey. We built workflow software so the operator, if you want to ship a container from door to door, we now have it as a hundred and eight screens like a workflow like with custom web form that how to do it, and then software then automates aspects of that process of each of those screens. And then this is where we're seeing the best. Some other breakthroughs from AI, from from these large language models is that because we've made the screen so simple, so simple, even I could do it. You know, we probably train youly in half an hour to become a freight forwarder. It'll take you longer than that. But for some of these pasts, they're not that hard, right, so they kind of turnout taxi like make it simple. You can follow them, follow along, and then it's it's now simple enough to day I can complete some of the tasks, like those things of like where is this container? Track it? Track it for me, get the status, or extract the data from this bill of lading, or place this booking with this uh carrier, those things. If you asked me a couple of years ago, I'd be like, yeah, we're not better than everybody else did this, yet we should be, and it's it's a because of ours Now we're starting to see, Okay, the software is making our operators a lot more efficient and higher quality. And most of the inefficiencies and logistics come from bad quality. Like if you make a mistake and you have to undo it, that'll wipe out any efficiency you've gained from people typing really fast right for the month.
00:15:19
Speaker 1: So you guys are a private company, you know, I'm assuming you're still in growth mode. Some of that growth or organic, some through M and A. You guys spent some interesting M and as in the last I guess twelve months.
00:15:32
Speaker 2: Can you talk about that and how those.
00:15:34
Speaker 1: Businesses complement the legacy business, the Flexport of being a forwarder.
00:15:40
Speaker 2: Yeah. So yeah, we started as in a very much our roots is in this praight forwarding world. We acquired two companies last year. We acquire Shopify Logistics, which is a fulfillment business. Both e commerce fulfillment, so you're likely if you're buying on a Shopify site website, you're likely to have a package delivered by Flexport. You'll see Lexport on the shipping label coming out of our fulfillment centers. And then we also acquired Convoy, which is a trucking brokerage software platform. And that's where I mentioned we had these four Hunite thousand drivers on a mobile app. That's it. Through an acquisition, we acquired Convoy, and that's allowing us to do full truckload so shipping domestic in the United States. Both of those businesses are just us focused today, and the way to think about how it all ties together is really well. On the one hand, it is a one stop shop, like you can ship anything and now a small including small package with the Shop of Vile logistics acquisition or full truckload with the convoy acquisition, and then from factory all the way to customers doors as well as into retail stores. So we delivered to all the major big box retailers in a nice automated way, so we can store your product in our sites and then distribute it out to your retail network.
00:16:55
Speaker 1: In the Shop of five fulfilment. Do you have fulfillment centers all over the United States? Is it North America?
00:17:01
Speaker 2: Is it global? It's just it's just the US for today. We want to take it global. We're focused on really emphasizing the quality, getting that it wasn't a profitable business when we required it, so we're sort of dialing the unit economics and growing it to get it to be profitable. Aim is by the end of the year and then we'll start taking it global. We do we have five massive fulfillment centers, so that gives us coverage to ship to the US like eighty five or ninety percent of the US population within two days out of one of these sites. They're they're really massive. I was, they're kind of blowed. They're they're a little terrifying if you're the guy paying the rent. They're very big. The one point two million square foot is it is the typical of the of the five that's like kind of typical context. That's half a mile long. The Pentagon is only point two miles long. So it's like they're really big, big to big building.
00:17:58
Speaker 1: And are the customers like small to medium sized shippers or are there retail names that most people would know.
00:18:05
Speaker 2: We really run the gamuts and were We started with being the best way for small business to ship things. That's my background to run small business and importing stuff, and I was very frustrated with the freight forwarding and the lack of technology and the fulfillment piece. So that's where we started, but we've really grown up. We worked for some of the biggest companies in the world Fortune tens that use us for various things, and yeah, really any size company can can use something. There's something for everybody. Between our ocean freight software and for managing contracts, customs clearance, fulfillment, trucking, and these things can be purchased separately or you know, the goal is to make it. The idea is to make them. They work much better when you buy them all together. But that is very much up to the individual customer. How do we create value for you? And we think we can generally create a solution by combining ocean freight plus customs plus trucking into the fulfillment network.
00:18:59
Speaker 1: Except or right, So you are a private company, so you know your financials are your own. But you know you mentioned you know the Shopify business. I want to break it to profitability. Do you have any sort of targets for the the company as a whole in terms of any any financial targets you could share.
00:19:17
Speaker 2: Well, definitely aiming to get profitable again, we've been profitable in the past. We're we're all hands on deck. It's a big focus for us right now and a lot of it's basically through growth. Will be profitable in twenty twenty five next year.
00:19:31
Speaker 1: Okay, so it's about scale, but.
00:19:33
Speaker 2: That's not automatic. That's through like everybody apples for working super hard doing their job. Some of it's scale. Some of its new technologies that are unlocking some cost savings and revenue improvements, a lot of it. You know, we've got some new products, the Shopify one. We have a great new product that helps companies manage their contracts when they sign directly ocean carrier contracts directly with the ocean carriers. So we have to go grow these new products and new product clients.
00:20:02
Speaker 1: So you're taking a step back, you know, from from the company. You know, you started talking about the freight markets as a whole. Can you talk about what you're seeing in the ocean markets.
00:20:14
Speaker 2: Yeah, So the ocean market is it's a boom and bus cycle, and I guess that's the way it's been probably since the invention of the shipping container. You have a long term secular growth. But it's the fundamental problem in ocean phrase is that that the ships last for thirty years, and so the supply side has to make this projection for thirty years of how many you know, how many seys you need, and just nobody can predict anything more than eighteen months in the future, is what we're finding out. Actually, predicting three months in the future is hardy enough. So it's a booming bus cycle, like anything that's asset heavy. You either have too many ships or not enough and the price can go crazy. And what's happened you know, we saw this in COVID, where the price of a container went to like twenty thousand dollars when there was congestion at the ports and not enough not enough ships keep up with the consumer demand. That was a consumer demand led cycle that then created supply crunch as ships got congested at the ports. What we're seeing right now with the Red Sea is a demand side, but the ships having to go around the Cape of Good Hope around Africa is really eating into the supply side. So you have a lot of new capacity. The carriers made a lot of money during COVID, that's no secret. They bought a lot more ships, so everyone thought there was going to be plenty of excess capacity and the price of ocean free would be low, everyone including me. Then all of a sudden, you have these missile strikes in the Red Sea and ships going around. Well, if you might have twenty percent more ships, but if it takes them twenty percent longer, you're at no extra capacity. And it's really down to the trade lane level. Do you have enough containers enough chassis. Those are the trailers that you move, and right now we have a supply crunch. There's not enough capacity to keep up. The price of freight in the spot market has gone almost we're looking at five to six thousand dollars or more contracts. People the carriers have imposed what we call peak season surcharge that usually takes place like ahead of Christmas shipping, you know, ahead of the later in the year. Uh, they've imposed that now already. So we're getting even the contracted rates that they're prices are spiking. There's not enough capacity. People are having trouble getting their cargo in. So we'll see, we'll see if this last month's are or through the end of the year. It's very hard to predict.
00:22:41
Speaker 1: Yeah, uh, you know, given the longer term supply issues facing the industry, it doesn't seem like it's it's it's long term sustainable in terms of the price.
00:22:51
Speaker 2: And there's there's a lot that's that's my view too. There's a lot even with going around the Red seat, there's a lot of ships have been ordered will be delivered throughout this year and in the next year, and so probably there's that we're looking at excess capacity for again for next year. The long run kind of rule of thumb is it costs a little bit less than two thousand dollars to ship a container from China to the US, And so right now it's you're going five to six thousand, and during COVID it was at peak twenty thousand. And by the way, five or six thousands, if you can get loaded, you might have to pay ten thousand to get loaded. So it's really about the margin, right It's like the average price is lower than that, but if you have one extra container you need to get loaded and you need it now, you're probably paying ten thousand bucks.
00:23:32
Speaker 1: So do you think the air market is better right now?
00:23:36
Speaker 2: The air market is also really interesting right now because of the rise of e commerce out of especially at these Chinese e commerce providers. They're now somewhere depending on the week, thirty to fifty percent of all the air freight is parcels. All the air freight in the world is parcel volume being flown direct to consumer out of mostly out of China, and so that's a huge amount of demand for air capacity. Similar problem. Actually, the air market's really weird because fifty percent of all air freight has flown in the belly of passenger planes, so that market. Not only do you have the supply and demand, it's hard to predict how many planes you need, but the number of planes that you need is actually not driven by how much cargoes being shipped, but also by how many passengers want to travel, and so that can be you know, and we've had all of a sudden the resurgence of international travel as people couldn't travel for a couple of years during the pandemic, so it's coming. There's a lot of demand for package volume that air freight prices are high this year after being pretty low last year.
00:24:45
Speaker 1: Yeah, I got a package machine like once a month for my fourteen year old daughter, not for me. So when you're booking capacity in the air side, are you doing it typically through a commercial air fleet or are there like freighter specific carriers that you also contract.
00:25:07
Speaker 2: With Both there's both. We do. We work with all the major airlines the and in fact the major airlines will run their own cargo flights as well, because if you think about what the benefit of an airline having broad network that they can serve on their passenger planes. The small legs out to you know, take uh an airline based in let's say in Taiwan, and they'll have flights that go all over Asia that can bring cargo in the belly. These are passenger flights. Then you can bring it all to taype A and then you have a cargo plane connecting or several many connecting from Taibei out to the international legs. All of a sudden you get you can ship anything from any of these countries into the US or into Europe. And so it uh the cargo line. The cargo flights tend to fly on the big trunk lanes between the big the shag his Taibei, Soul, Hong Kong, Singapore, and then passenger planes tends to be to think might call it a feed or in the ocean world that uh so, you know, it will really depend on where the cargo is going, who's got the best rates and service quality, the best timeliness and capacity available. So it's very much an old kind of an ultiple industry. What we can do to make it better is digitize this data about who's flying where connect you know, what is the schedules that being able to track the things get rates into the system be bet faster at quoting, et cetera, getting getting you uplift. But at the end of the day, you got to have relationships with all these different vendors and then ideally you're integrating and getting data connected directly. But not all of the airlines are as modern as you know some of them, some of them have invested a lot more in tech than others.
00:26:55
Speaker 1: Yeah, I mean going back to AI. You know, there's some people question like, are people just talking about AI to get another turn in their multiples? If you're a company, you know, obviously the benefits are there. Machine learning has been around for a long time, but it seems like there's so much a focus on it, where maybe five six years ago, maybe longer than that. Seven years ago, we started talking about blockchain at nauseum and that didn't really go anywhere. Yeah, do you think this is Do you think this is different the discussion about AI versus blockchain.
00:27:29
Speaker 2: Yeah, I think it's different. In these cases are way more obvious. Some of them are live now. One of the things about AI is about large language models in particular, is that their performance can be predicted into the future based on the amount of compute that you are able to apply and you're gonna have emergent phenomenon and can do things that surprises you. But we know that if you apply a million times more commute compute, you're gonna get way it's actually predicted. It's almost as this has been explained to me by people much smarter than me. It were really deep in the space, and there's there's very few things as predictable in what returns you're gonna get from applying more compute than this. It's it's almost like Newton's laws in terms of how predictable it is. Like you are, you know that if you apply a million times more compute you will get way more results, way better results. So I think it's going to keep surprising us and the bottleneck will be compute for a long period of time. Now what it means for any given company, and how do you what is a competitive advantage? Who wins in that space? It's like that doesn't make it easy to predict at all. You know, the Internet was you had all these dot com boom startups. It wasn't obvious at all that Amazon or Google or somebody else would be the winner, and just investing in AI could be like investing in the air and that I don't know that you necessarily win by doing it, but certainly need to have a strategy around the internet. If you're in two thousands and you didn't, you know, your company's probably been disrupted pretty heavily by now, so you.
00:29:01
Speaker 1: Know, disruptions are never a good thing. There's you know, it seems like there's more and more black swan events over the last five years. I'm assuming you know disruptions are good for your business because shippers need alternatives and they need help. Do you see a surgeon volume not necessarily in rates, but like in volume, when we see disruptions.
00:29:22
Speaker 2: Not necessarily in volume, that's that tends to be just driven by the macroeconomy, consumer demand trends. You know, you saw a lot with COVID where people couldn't go out to restaurants and travel and spend money on services, so they just bought. They shifted consumption, they shifted the dollars they're spend onto goods, so that I don't really call that disruption. It led to supply chain disruptions because of the economy. The supply side of the economy couldn't keep up with all that demand. But yeah, we are sort of in the volatility business. I'd like to think we're anti fragile. Things go wrong and tend to find that's when you tend to need someone to help you solve these problems. You know, if the world's just static and always the same, you could probably actually just contract directly with an ocean carrier and a trucker and a customs broker and just set the network up and forget about it. But in a world that's volatile and always changing and getting disrupted in this you know, the Panama Canal is only operating at two thirds capacity right now because of a drought, the lack of water in system. The Baltimore Bridge cut off the port to Baltimore for over a month. Like that's when you need someone with solutions to help you route around it and find alternatives and better prices and stuff.
00:30:36
Speaker 1: So you could you give an example of what you guys said for customers when the Baltimore when the Friends of Scott Key Bridge fell down.
00:30:45
Speaker 2: Yeah, well, the first thing we had containers on that We still have containers that are on that ship, so we had insurance claims to file. Was the very first thing we had to do for the customers who were on there right the what we've we've had we had about two twelve hundred containers that were routed to the Port of Baltimore that we're going to arrive within two weeks of that, So we had to get all new routings for all of those. UH immediately informed the customer, Hey, you're you know, it's not gonna arrive in Baltimore. It's not gonna arrive on time. It's gonna be a different time after arrange trucking. It's gonna cost you more. You have to pay for a longer trucking leg that's not free. So a big part of his communication like getting in front of the customer explaining what's happening, What does this mean for you? What does it mean for your your customers? If you have cargo with an ETA, when is it gonna arrive? You need to know that. So a lot of it is around communication. Baltimore is a major port for the mid Atlantic region of the US. It's not a major port in the global scheme of things, all right, It's nothing like when the Ever Given got stuck in the SEUs Canal. That ship that got stuck. We had you know, forty five containers or so on that ship and another several thousand lined up behind it, or even just now with the Suez getting disrupted again, being able to go communicate to everybody what is happening, When is your cargo going to arrive, what does this mean, what is it going to cost, et cetera. These are it's hard to do without the databases. Like I don't know how traditional freight forwarders do this. We get in an hour, find all the shipment's affected and send everybody an email and then have a plan for you know, a call down plan to go call everybody and let them know what's happening.
00:32:22
Speaker 1: Right, this might be getting too much into the weeds. But what happens to the containers that are stuck on that ship by the bridge in Baltimore.
00:32:29
Speaker 2: It's still TBD. They're going to be stuck in litigation for for many years. What fundamentally, you have this rule in maritime law called general average ancient law which says that the damage is shared. If cargoes damage had shared across everybody's all the customers, all the containers to share that Parada Parada. So like some of the containers in the front were damaged. There's perishable goods on there that bad that are damaged, So those people will be made whole by everybody else on the ship, and then it's all gonna get tied up in litigation. So you know, we advise the customer, hey, you should just forget about those containers. We pay you use the insurance claim. Just pretend they never you know, you hopefully they show up. Both of them. Sadly, they were both exports for nonprofits. We had this scrip called flexport dot org that does humanitarian shipping, right they were. One of them was the playground being shipped to in school in Africa. Yeah goodness. Uh, they got paid in full for the values of their shipping. Another one out there, but I forget the other one was it was also goods headed to Africa. Forget the exact contents of it, but there. Yeah, you sort of advised them, Hey, you know, hopefully we get a free playground out of this. In a few years. When you got an insurance claim, I guess it gets handed over to the insurance company and they liquidated or something. We'll see.
00:33:55
Speaker 1: So you know, you started this company, how did you get into transports? Because a lot of people. They're either born into it or they kind of stumbled into it. How did you get into the freight transportation logistics world?
00:34:12
Speaker 2: So I was I was a customer of freight forwarders. I ran this business. My brother actually ran the business. I worked for him and then eventually became a partners in a business with him and another guy named Michael Kanko. We ran this business buying products in Asia, mostly motorcycles and motorsports products and selling them on the internet in the early two thousands. They started in the late nineties when I was in selling college and joined them, and so we would import products from China and I was very frustrated. We're a software team, like we built software for the business, and so we didn't call ourselves a software company, but we built software. It was pre shopify. So we made our own website to sell stuff on the internet e commerce, checkout solutions, payments, inventory management, and we had software. In the early two thousand, my brother wrote the software that could check the rates for shipping a product a motorcycle to a customer. It would go on the carrier, the trucking carriers websites and log in as us as our account find the cheapest option, check multiple sites, book it, print the bill of landing, print the shipping label, and a truck would show up and we'd be able to ship it without having a law even go on to their website and do anything. And that was in the early two thousands when we try to do similar stuff with the import side customs, and it was just nowhere, you got no where, You couldn't even get a company to help us on the phone almost and so eventually we decided today this is probably Aventually. There's a lot of other companies that have this problem like customs and customs really complicated clear knowing what paperwork you need, what the regulations are there should be The original idea was like kind of turbo attacks for customs. There should be a simple way to understand what you need to clear customs and get the paperwork handled and then we'll tell you freight solutions and other stuff. And that's basically been the journey that we started over ten years ago, my brother.
00:36:04
Speaker 1: And I and you know, how would you describe your kind of your management style as an entrepreneur and as as someone that's leading a business that's growing.
00:36:16
Speaker 2: Well, It's evolved a lot you know, I think in the beginning, early days, I was really growth oriented and really just tried to hire great people and get out of their way. And I think now I'm much more down into details, and I don't believe in getting out of the way.
00:36:34
Speaker 3: I'm I'm I'm learning everything that's going on and try to be a ball of energy, showing up at everybody's meetings and reading all the documents and the reports and asking questions and challenging.
00:36:45
Speaker 2: And much more hands on than I was in the past. And I you know Toby Toby from Shopify as a friend of mine and our big investor, and I've heard him say that one of the worst most pernicious cliches ever was that or the idea is that micro management is bad. It's just like a terrible lesson that everybody's been taught, and that actually you need a lot of micromanagement. You should really be involved in what's going on in your company. And I sort of took that to heart, and I get good results from me.
00:37:18
Speaker 1: So, you know, you mentioned Shopify as an investor. Are you mostly or most of your investors private.
00:37:23
Speaker 2: Equity funds like bet your capital funds?
00:37:26
Speaker 1: Yeah, So is there a book that you've read about the transportation, space or leadership that kind of left to Mark and you that you would recommend to anyone listening to us today, Oh too many.
00:37:38
Speaker 2: I mean, we're very lucky that most of the world's smartest humans who ever lived well at least in the last five hundred years, like, took the time to write down their ideas and you get to read them. So I think that the difference between who you are now and who you'll be in five years is almost entirely made up of the books that you read and the podcast that you listen to. And yeah, actually, one of my best tricks is that if you don't no one has enough time to read all the books. And I have one of those bad habits of buying more books than I can read. But if you search YouTube for almost any book author and nonfiction, you'll find an interview with the author in twenty minutes. You could get eighty percent of the ideas in twenty minutes. You know, you can listen to it on two XP if you don't have times. I do a lot of audio books and a lot of listening on YouTube to smart people, but I do I do read a ton of books as well transportation. The classic is The Box by Mark Limenson.
00:38:36
Speaker 3: If you haven't had it on your podcast, you should get him.
00:38:39
Speaker 2: For management style, I really like this book called Certain to Win by Chet Richards and he was an acolyte of John Boyd, who was the probably the greatest military strategist of the twentieth century of the United States. He was the architect of the Gulf War One strategy. He also designed the F fifteen like prototypes. Like he's a a true military genius, and Certain to Win is the application of his ideas to business, which is always a very interesting as a history I like history a lot, so being able to see, like, okay, how do I take lessons from the military who they deal with, a lot of complexity, a lot of chaos, a lot of uncertainty. That's pretty applicable in global logistics and transportation.
00:39:32
Speaker 1: And so so being a leader of a company and an entrepreneur. You know, before I let you go, is what keeps you up at night related to work?
00:39:43
Speaker 2: We keep other people up at night. No, I'm just kidding. That's a that's a that's a military line as well. No, you know what, it's a very hard business because we are. We're very dependent on our on our vendors to do a good job for our customers, and there's a lot of volatility and getting enough For example, in the current world, can I get enough space. We did a great job this year of winning business from new customers and we if we can get enough space on the ships, I think we might double the size of our business in one year, which would be crazy. I don't think we can get enough space to serve all the demand that we have, so going around making sure, going to work with all the vendors. It's a very global business. We have two thousand employees. We ship cargo to and from one hundred countries, so that's kind of hard to be everywhere. I can answer the question literally what keeps me up and now is that every time zone of the world. But yeah, it's kind ofel It can feel unwieldy, right, Like how do you keep a handle on such a big, complex organization that's so global finding out what's happening. We do a lot of document writing in part it helps with the time zones. But people write monthly business reviews patres about their business unit and keeping track of it all. Knowing if everybody's doing a good job, and you have the best people empowered fighting bureaucracy on their behalf. The hatred of bureaucracy is not enough to make buiocracy go away. So you have to live in reality the fact that we do have bureaucracy and some of it's good and some of it's bad. Trying to understand how you can break down the friction that our employees face every day so they can do a great job.
00:41:27
Speaker 1: All right, great, thanks Ryan, and I really appreciate your time today. It was a great learning more about flex sport and here in front of you. So thanks again for the time.
00:41:37
Speaker 2: Yeah, well, thanks for the opportunity to big fans of Bloomberg over here, so we appreciate.
00:41:40
Speaker 1: It, okay, and hopefully the Talking Transports podcasts as.
00:41:43
Speaker 2: Well obviously, yes, yeah, yeah.
00:41:45
Speaker 1: Well, I also want to thank everyone for tuning in. If you like the episode, please subscribe and leave a review. We've lined up a number of great guests for the podcast. Check back to hear conversations with C suite executives, shippers, regulators, and decision makers within the frank transportation markets. Also, if you have an idea for a future episode, please hit me.
00:42:04
Speaker 2: Up on the Bloomberg terminal.
00:42:06
Speaker 1: We're on Twitter at Logistics late. Thanks everyone, and take care.
Speaker 1: Hire one to Welcome to Bloomberg Intelligence Talking Transport Podcast. I'm your host, Lee Klascw, Senior freight transportation logistics analysts at Bloomberg Intelligence, Bloomberg's in house research arm. Before diving in a little public service announcement, your support is instrumental to keep bringing great guests on the podcast, like the one we have today. If you haven't already, please do take a moment to follow, rate and share the Talking Transport Podcast. We appreciate your support. I'm very excited to have Ryan Peterson, the founder and CEO of Flex Sport. Ryan started Flexsport back in twenty thirteen. He holds an MBA from Columbia Business School and ANBA from UC Berkeley. Welcome to Talking Transports Podcast.
00:00:46
Speaker 2: Ryan, Yeah, it's great to be on here talking transport. That's my favorite thing to do sometimes.
00:00:50
Speaker 1: So yeah, sometimes we get to talk about it more than other times.
00:00:53
Speaker 2: You know, when there's a.
00:00:54
Speaker 1: Big problem the supply chain, that's when I see you on TV all the time.
00:00:59
Speaker 2: It's one of those times right now too. Actually, all of a sudden, the ocean freight world has gone on turn turned back on fire.
00:01:06
Speaker 1: So well, before we get into the markets, I want to for people that are listening in to learn a little bit about flex Work, Can you just talk about the company.
00:01:14
Speaker 2: Yeah, Flexports a global logistics provider built on a modern technology stack. So we make it easy to ship cargo anywhere in the world and gets you visibility control like where where's the cargo, when is it going to arrive? Ship any quantity of goods in any mode of transport, so air, ocean, trucking, rail, clear through customs, get it delivered. The fundamental problem that we solve is goods need to move all around the world, and any given asset owner doesn't can't move those goods door to door. You know, you think about a ship, it goes from port to port, but the container has to go from door to door. And I ultimately really care about the products inside that container moving from the factory all the way to the consumer's doors or into the into the retail store network. And so you need this coordinating layer that sits on top of all the asset owners. We call this industry freight forwarding, right. I often joke it should be called freight email forwarding because there's a lot of coordination that happens of like Excel attachments and PDFs and just email unstructured messages. So bringing software to bearrow that problem so that you're connecting all the different parties in the chain, finding the best price, best best routing, and getting people, you know, good visibility, communication, compliance. It's a hard problem to solve.
00:02:28
Speaker 1: And you guys help with all modes of transportation ocean, air, road, rail.
00:02:32
Speaker 2: Yeah, and so we've grown to were I think we're the third largest freight provider for ocean freight in the United States, similar in air the top five right and top ten globally for both. For ocean, I think we're a little bit smaller on their for it. If you were to look at our you know, all of the freight forwarders in the world, there's we once tried to estimate this. It was like twenty thousand different companies. It's sort of you have a lot of mom and pop slat small business doing this. But if you look at the list of the top one hundred, let's say, by volume, there's only one that was founded after nineteen ninety four, when Netscape was invented, when a web browser came out, and that's Flexport. There's a lot of great companies in this industry a lot with capabilities and knowledge that you know, we admire and look up to. But from a tech standpoint, it's just hard to kind of reinvent an old legacy bureau business and have it become a built on a modern tech stack. So that's that's been our big advantage being found. We're lucky, we're just founded in more recent period when we can use the cloud, you can use AI, you can use all them modern tools and build our own software to make it easy for everybody to do this.
00:03:39
Speaker 1: Yeah, and you mentioned it's a very fragmented market, and you know, the freight forwarders that don't embrace technology, even the legacy players, if they're not embracing technology, you know, in a couple of years, it seems like they're going to be left out in the cold.
00:03:51
Speaker 2: We're and that's really accelerating. Like we've had a lot of breakthroughs with AI in the last few months. The building just literally in the last few months, the ability to apply opeen AI and other large language models to some of these unstructured data problems and get get remarkable results.
00:04:13
Speaker 1: Could you talk about what you guys use AI to do and to make your people more productive?
00:04:18
Speaker 2: Yeah, well, there's there's a bunch of different use cases that we've and some of this we've been doing for a long time. We're build our own machine learning models. So for that, for example, pricing, we have we optimize pricing that we charge for spot market. It's very volatile and it's hard for to stitch together all the rates and then how much should you what markup should you apply doing kind of conversion rate optimization. Uh, we've actually managed to increase our net revenue per transaction and the conversion rate with the AI, which is like you know, usually you would think I'll accept the lower conversion rate if I make more money per transaction, but when they should be that result, I couldn't even believe it. It was like, no, you can't make the conversion rate go up and make more money. That's not possible, But it did. It does. A more interesting example is in actually, and it's related when you have a container that you need to allocate and which ship should I put this container on? Picking amongst all the world sailings of what's the best route it will actually get this on time to where the customer's warehouse is where they're shipping it to. That's a problem that you know, humans can solve that problem. They're they're reasonably good at it. It's not that hard to pick. But what becomes very difficult is, on average we're getting something like two thousand containers canceled by our customers each week. Because they're none acts. He canceled, it's wrong word reschedule it. Their production gets you know, production is chaotic, and so if the cargo is not ready when they thought it was going to be ready, they have to cancel the booking they have with you and do it for a week later or whatever. So that's a hard problem. Because I've already got this ship, this container alley cater to this sailing. You cancel on me. I don't want to go back to the carrier, the ocean carrier who owns the ship and cancel the sailing. They don't like that. They lose money if the ship doesn't sail full. And so it was very hard for humans to do this. What software does is what the AI does is ten times a day, it looks at all every cancelation I have, and it finds another container that was meant to go at a later date and pulls it forward. And now I'm actually helping that customer get there faster and reducing my cancelations, and it's selecting for the cheapest option. So it's it's improving our transit time, lowering our cancelation to our carrier, and it saved us two percent of our freight costs. So there's all kinds of things like this that machine learn. We've been building machine learning models for a long time. The large language model AI. We've worked with open ai, a company called a Debt, which is actually the CEO of a Debut used to be the head of engineering for open Ai. This is all startup they were. We're having a lot of success with these, with things like getting statuses for a container from a carrier website, something that if I don't have an integration, and we don't have integrations with every port terminal in the world or every ocean carrier on the world, there's hundreds of small carriers, we would have to send a human there to check the status and update it tell the customer what's happening. We're finding that the AI is actually quite good at going to find that data. Before we would build webscrapers and the software would we would just write software and it would be hard coded. Go to this website, look in this corner of the website, grab this status, return it here. That does break all the time because the website slight change to the website in your software breaks. So webscrape being is a really good example. We haven't started doing it except in Hacketon, but Voice Agents and actually open Eyes just put out their newest model that has a really good voice agent technology. So this is a It sounds like human calling you, and in our hackathon we have it where a human actually in my voice will call a vendor and negotiate cheaper freight rates. It was kind of a dumb idea, but it was a cute idea for Hacketon. I don't think it's a good business idea. But what I think will actually work is having this human call you don't need to pretend to be me. It'd be weird if I, the CEO of the company called and asked you the status of a shipman. But being able to call out there and make a business call and check, hey, what's going on with this shipman and talk to a human at it. Because there's not enough APIs, there's not enough web connectivity, especially at truckers and warehouses. You know, you're waiting for someone to to you have to call and find out what's going on, and so having voice agents that can call and I think you're gonna end up in a world where voice agents talk to voice agents on the other side, right, which will be kind of fun. Interesting.
00:08:56
Speaker 1: Yeah, I heard a crazy stat the other day. It's something like twenty five twenty percent of truckers still have a flip phone.
00:09:02
Speaker 2: Oh, that's pretty interesting. Yeah, that's that's probably changing pretty fast. We have about we have about four hundred thousand truck drivers on our mobile app that we can just dispatch loads to. So they are you know, they use Android phones mostly. You'll see a lot of that, right.
00:09:17
Speaker 1: So where do you think AI? So you mentioned the voice.
00:09:23
Speaker 2: Aspect of it, and.
00:09:26
Speaker 1: In terms of where AI could go, where do you see AI going beyond that for flex, foroard and the broader transportation markets.
00:09:34
Speaker 2: Yeah, Well, if you look at the freight forwarding industry, which is again this like kind of coordinating layer on top of the asset owners that's moving the cargo between you know, between many asset owners on a single transaction. If you look at the p and L of a freight forwarder. So like, for every one hundred dollars in revenue typically on average across these companies, about seventy five dollars seventy five to eighty dollars of that is being paid to the asset owners, right to the trucking companies, the carriers, the ocean carriers, whoever, and then twenty to twenty five dollars they get to keep as their effectively their net revenue. There, that's their revenue. Within that twenty five dollars, ten dollars of it is variable cost operating labor to coordinate the transactions, and you'll get five to ten dollars of sales and general other costs, rent and everything else, and five dollars of profit. That's kind of how to think about the p and L well of that ten dollars of operating costs variable cost. We our team thinks we can probably in the next five years cut that by eighty percent. And then you have a choice, do you are are you going to be eight percent cheaper than everybody else or at eight percent of profit margin to your you know, your bottom line, or or hey, maybe competitors come along and everybody they're just the price of transport goes down eight percent. You don't know, you don't get to keep it right. We haven't built our business model on that. We kind of see that as a gravy and upside like that. We're We're not. It's been more it's been harder over the last decade to automated processes than I would have expected. But we're having more breakthroughs in the last three to six months with AI than we you know, all of a sudden, I'm becoming quite optimistic that we will in fact be able to realize some of those gains. So that's a huge impact. If you can lower the cost of shipping anything internationally by five to ten, you know, five or eight percent, that's massive.
00:11:27
Speaker 1: Right, and so flexport from my vantage point, you know, I would consider like a technology first freight forward or where you know the other ones are you know, the legacy ones are are are human first, not being that they treat humans first, but you know they they were before technology came out, kind of to what you were saying earlier. So I'm assuming you guys have freight brokers, you have people that deal with customs in your organization. How has AI increased their productivity. Can you give us some examples of like like loads per day that they've been able to do, uh with AI.
00:12:04
Speaker 2: Yeah, we've are so we we do, we have and we're still we still believe that this is a relationships based business at the end of the day. Sure. And I you know, when I hear relationships based business, I often think it's kind of a code word for mediocrity. Like if we have, if we do great work for you, you will have a good relationship. It's not like some good old boys club, like we've got to be really good at our job. But it does very much matter that you can pick up the phone and call I talked about voice agents. We'll never do that towards our customers. Like you need to call your customer and help them out and solve their problem. They need to be able to call us and have us solve their problem. But yeah, we can make our operators a lot more efficient in the processing of things that we do. On the custom side, we were about double the number of customs entries per month that uh that a traditional freight customs broker was and that we were a few years ago. Uh. Through automation, not just AI, but just writing good software to make them efficient to process data, optical character recognition, so being able to because a lot of customs that data comes in on documents, excel files, PDFs. Whatever we do ingest that structure it handed off to customs. So building models that can go and extract that data and make the operator very efficient. And then on the forwarding side, I think what we've the work that we've done is taken us. We really started in earnest on the operator productivity piece in twenty nineteen. Before that, almost everything we've built was kind of make the user experience amazing of shipped with flexport really great, and we didn't spend enough time. In hindsight, we should have done it earlier on just like really hardcore focused on productivity. Twenty nineteen is what we got really serious about. It's about five years ago. It's been a journey. We built workflow software so the operator, if you want to ship a container from door to door, we now have it as a hundred and eight screens like a workflow like with custom web form that how to do it, and then software then automates aspects of that process of each of those screens. And then this is where we're seeing the best. Some other breakthroughs from AI, from from these large language models is that because we've made the screen so simple, so simple, even I could do it. You know, we probably train youly in half an hour to become a freight forwarder. It'll take you longer than that. But for some of these pasts, they're not that hard, right, so they kind of turnout taxi like make it simple. You can follow them, follow along, and then it's it's now simple enough to day I can complete some of the tasks, like those things of like where is this container? Track it? Track it for me, get the status, or extract the data from this bill of lading, or place this booking with this uh carrier, those things. If you asked me a couple of years ago, I'd be like, yeah, we're not better than everybody else did this, yet we should be, and it's it's a because of ours Now we're starting to see, Okay, the software is making our operators a lot more efficient and higher quality. And most of the inefficiencies and logistics come from bad quality. Like if you make a mistake and you have to undo it, that'll wipe out any efficiency you've gained from people typing really fast right for the month.
00:15:19
Speaker 1: So you guys are a private company, you know, I'm assuming you're still in growth mode. Some of that growth or organic, some through M and A. You guys spent some interesting M and as in the last I guess twelve months.
00:15:32
Speaker 2: Can you talk about that and how those.
00:15:34
Speaker 1: Businesses complement the legacy business, the Flexport of being a forwarder.
00:15:40
Speaker 2: Yeah. So yeah, we started as in a very much our roots is in this praight forwarding world. We acquired two companies last year. We acquire Shopify Logistics, which is a fulfillment business. Both e commerce fulfillment, so you're likely if you're buying on a Shopify site website, you're likely to have a package delivered by Flexport. You'll see Lexport on the shipping label coming out of our fulfillment centers. And then we also acquired Convoy, which is a trucking brokerage software platform. And that's where I mentioned we had these four Hunite thousand drivers on a mobile app. That's it. Through an acquisition, we acquired Convoy, and that's allowing us to do full truckload so shipping domestic in the United States. Both of those businesses are just us focused today, and the way to think about how it all ties together is really well. On the one hand, it is a one stop shop, like you can ship anything and now a small including small package with the Shop of Vile logistics acquisition or full truckload with the convoy acquisition, and then from factory all the way to customers doors as well as into retail stores. So we delivered to all the major big box retailers in a nice automated way, so we can store your product in our sites and then distribute it out to your retail network.
00:16:55
Speaker 1: In the Shop of five fulfilment. Do you have fulfillment centers all over the United States? Is it North America?
00:17:01
Speaker 2: Is it global? It's just it's just the US for today. We want to take it global. We're focused on really emphasizing the quality, getting that it wasn't a profitable business when we required it, so we're sort of dialing the unit economics and growing it to get it to be profitable. Aim is by the end of the year and then we'll start taking it global. We do we have five massive fulfillment centers, so that gives us coverage to ship to the US like eighty five or ninety percent of the US population within two days out of one of these sites. They're they're really massive. I was, they're kind of blowed. They're they're a little terrifying if you're the guy paying the rent. They're very big. The one point two million square foot is it is the typical of the of the five that's like kind of typical context. That's half a mile long. The Pentagon is only point two miles long. So it's like they're really big, big to big building.
00:17:58
Speaker 1: And are the customers like small to medium sized shippers or are there retail names that most people would know.
00:18:05
Speaker 2: We really run the gamuts and were We started with being the best way for small business to ship things. That's my background to run small business and importing stuff, and I was very frustrated with the freight forwarding and the lack of technology and the fulfillment piece. So that's where we started, but we've really grown up. We worked for some of the biggest companies in the world Fortune tens that use us for various things, and yeah, really any size company can can use something. There's something for everybody. Between our ocean freight software and for managing contracts, customs clearance, fulfillment, trucking, and these things can be purchased separately or you know, the goal is to make it. The idea is to make them. They work much better when you buy them all together. But that is very much up to the individual customer. How do we create value for you? And we think we can generally create a solution by combining ocean freight plus customs plus trucking into the fulfillment network.
00:18:59
Speaker 1: Except or right, So you are a private company, so you know your financials are your own. But you know you mentioned you know the Shopify business. I want to break it to profitability. Do you have any sort of targets for the the company as a whole in terms of any any financial targets you could share.
00:19:17
Speaker 2: Well, definitely aiming to get profitable again, we've been profitable in the past. We're we're all hands on deck. It's a big focus for us right now and a lot of it's basically through growth. Will be profitable in twenty twenty five next year.
00:19:31
Speaker 1: Okay, so it's about scale, but.
00:19:33
Speaker 2: That's not automatic. That's through like everybody apples for working super hard doing their job. Some of it's scale. Some of its new technologies that are unlocking some cost savings and revenue improvements, a lot of it. You know, we've got some new products, the Shopify one. We have a great new product that helps companies manage their contracts when they sign directly ocean carrier contracts directly with the ocean carriers. So we have to go grow these new products and new product clients.
00:20:02
Speaker 1: So you're taking a step back, you know, from from the company. You know, you started talking about the freight markets as a whole. Can you talk about what you're seeing in the ocean markets.
00:20:14
Speaker 2: Yeah, So the ocean market is it's a boom and bus cycle, and I guess that's the way it's been probably since the invention of the shipping container. You have a long term secular growth. But it's the fundamental problem in ocean phrase is that that the ships last for thirty years, and so the supply side has to make this projection for thirty years of how many you know, how many seys you need, and just nobody can predict anything more than eighteen months in the future, is what we're finding out. Actually, predicting three months in the future is hardy enough. So it's a booming bus cycle, like anything that's asset heavy. You either have too many ships or not enough and the price can go crazy. And what's happened you know, we saw this in COVID, where the price of a container went to like twenty thousand dollars when there was congestion at the ports and not enough not enough ships keep up with the consumer demand. That was a consumer demand led cycle that then created supply crunch as ships got congested at the ports. What we're seeing right now with the Red Sea is a demand side, but the ships having to go around the Cape of Good Hope around Africa is really eating into the supply side. So you have a lot of new capacity. The carriers made a lot of money during COVID, that's no secret. They bought a lot more ships, so everyone thought there was going to be plenty of excess capacity and the price of ocean free would be low, everyone including me. Then all of a sudden, you have these missile strikes in the Red Sea and ships going around. Well, if you might have twenty percent more ships, but if it takes them twenty percent longer, you're at no extra capacity. And it's really down to the trade lane level. Do you have enough containers enough chassis. Those are the trailers that you move, and right now we have a supply crunch. There's not enough capacity to keep up. The price of freight in the spot market has gone almost we're looking at five to six thousand dollars or more contracts. People the carriers have imposed what we call peak season surcharge that usually takes place like ahead of Christmas shipping, you know, ahead of the later in the year. Uh, they've imposed that now already. So we're getting even the contracted rates that they're prices are spiking. There's not enough capacity. People are having trouble getting their cargo in. So we'll see, we'll see if this last month's are or through the end of the year. It's very hard to predict.
00:22:41
Speaker 1: Yeah, uh, you know, given the longer term supply issues facing the industry, it doesn't seem like it's it's it's long term sustainable in terms of the price.
00:22:51
Speaker 2: And there's there's a lot that's that's my view too. There's a lot even with going around the Red seat, there's a lot of ships have been ordered will be delivered throughout this year and in the next year, and so probably there's that we're looking at excess capacity for again for next year. The long run kind of rule of thumb is it costs a little bit less than two thousand dollars to ship a container from China to the US, And so right now it's you're going five to six thousand, and during COVID it was at peak twenty thousand. And by the way, five or six thousands, if you can get loaded, you might have to pay ten thousand to get loaded. So it's really about the margin, right It's like the average price is lower than that, but if you have one extra container you need to get loaded and you need it now, you're probably paying ten thousand bucks.
00:23:32
Speaker 1: So do you think the air market is better right now?
00:23:36
Speaker 2: The air market is also really interesting right now because of the rise of e commerce out of especially at these Chinese e commerce providers. They're now somewhere depending on the week, thirty to fifty percent of all the air freight is parcels. All the air freight in the world is parcel volume being flown direct to consumer out of mostly out of China, and so that's a huge amount of demand for air capacity. Similar problem. Actually, the air market's really weird because fifty percent of all air freight has flown in the belly of passenger planes, so that market. Not only do you have the supply and demand, it's hard to predict how many planes you need, but the number of planes that you need is actually not driven by how much cargoes being shipped, but also by how many passengers want to travel, and so that can be you know, and we've had all of a sudden the resurgence of international travel as people couldn't travel for a couple of years during the pandemic, so it's coming. There's a lot of demand for package volume that air freight prices are high this year after being pretty low last year.
00:24:45
Speaker 1: Yeah, I got a package machine like once a month for my fourteen year old daughter, not for me. So when you're booking capacity in the air side, are you doing it typically through a commercial air fleet or are there like freighter specific carriers that you also contract.
00:25:07
Speaker 2: With Both there's both. We do. We work with all the major airlines the and in fact the major airlines will run their own cargo flights as well, because if you think about what the benefit of an airline having broad network that they can serve on their passenger planes. The small legs out to you know, take uh an airline based in let's say in Taiwan, and they'll have flights that go all over Asia that can bring cargo in the belly. These are passenger flights. Then you can bring it all to taype A and then you have a cargo plane connecting or several many connecting from Taibei out to the international legs. All of a sudden you get you can ship anything from any of these countries into the US or into Europe. And so it uh the cargo line. The cargo flights tend to fly on the big trunk lanes between the big the shag his Taibei, Soul, Hong Kong, Singapore, and then passenger planes tends to be to think might call it a feed or in the ocean world that uh so, you know, it will really depend on where the cargo is going, who's got the best rates and service quality, the best timeliness and capacity available. So it's very much an old kind of an ultiple industry. What we can do to make it better is digitize this data about who's flying where connect you know, what is the schedules that being able to track the things get rates into the system be bet faster at quoting, et cetera, getting getting you uplift. But at the end of the day, you got to have relationships with all these different vendors and then ideally you're integrating and getting data connected directly. But not all of the airlines are as modern as you know some of them, some of them have invested a lot more in tech than others.
00:26:55
Speaker 1: Yeah, I mean going back to AI. You know, there's some people question like, are people just talking about AI to get another turn in their multiples? If you're a company, you know, obviously the benefits are there. Machine learning has been around for a long time, but it seems like there's so much a focus on it, where maybe five six years ago, maybe longer than that. Seven years ago, we started talking about blockchain at nauseum and that didn't really go anywhere. Yeah, do you think this is Do you think this is different the discussion about AI versus blockchain.
00:27:29
Speaker 2: Yeah, I think it's different. In these cases are way more obvious. Some of them are live now. One of the things about AI is about large language models in particular, is that their performance can be predicted into the future based on the amount of compute that you are able to apply and you're gonna have emergent phenomenon and can do things that surprises you. But we know that if you apply a million times more commute compute, you're gonna get way it's actually predicted. It's almost as this has been explained to me by people much smarter than me. It were really deep in the space, and there's there's very few things as predictable in what returns you're gonna get from applying more compute than this. It's it's almost like Newton's laws in terms of how predictable it is. Like you are, you know that if you apply a million times more compute you will get way more results, way better results. So I think it's going to keep surprising us and the bottleneck will be compute for a long period of time. Now what it means for any given company, and how do you what is a competitive advantage? Who wins in that space? It's like that doesn't make it easy to predict at all. You know, the Internet was you had all these dot com boom startups. It wasn't obvious at all that Amazon or Google or somebody else would be the winner, and just investing in AI could be like investing in the air and that I don't know that you necessarily win by doing it, but certainly need to have a strategy around the internet. If you're in two thousands and you didn't, you know, your company's probably been disrupted pretty heavily by now, so you.
00:29:01
Speaker 1: Know, disruptions are never a good thing. There's you know, it seems like there's more and more black swan events over the last five years. I'm assuming you know disruptions are good for your business because shippers need alternatives and they need help. Do you see a surgeon volume not necessarily in rates, but like in volume, when we see disruptions.
00:29:22
Speaker 2: Not necessarily in volume, that's that tends to be just driven by the macroeconomy, consumer demand trends. You know, you saw a lot with COVID where people couldn't go out to restaurants and travel and spend money on services, so they just bought. They shifted consumption, they shifted the dollars they're spend onto goods, so that I don't really call that disruption. It led to supply chain disruptions because of the economy. The supply side of the economy couldn't keep up with all that demand. But yeah, we are sort of in the volatility business. I'd like to think we're anti fragile. Things go wrong and tend to find that's when you tend to need someone to help you solve these problems. You know, if the world's just static and always the same, you could probably actually just contract directly with an ocean carrier and a trucker and a customs broker and just set the network up and forget about it. But in a world that's volatile and always changing and getting disrupted in this you know, the Panama Canal is only operating at two thirds capacity right now because of a drought, the lack of water in system. The Baltimore Bridge cut off the port to Baltimore for over a month. Like that's when you need someone with solutions to help you route around it and find alternatives and better prices and stuff.
00:30:36
Speaker 1: So you could you give an example of what you guys said for customers when the Baltimore when the Friends of Scott Key Bridge fell down.
00:30:45
Speaker 2: Yeah, well, the first thing we had containers on that We still have containers that are on that ship, so we had insurance claims to file. Was the very first thing we had to do for the customers who were on there right the what we've we've had we had about two twelve hundred containers that were routed to the Port of Baltimore that we're going to arrive within two weeks of that, So we had to get all new routings for all of those. UH immediately informed the customer, Hey, you're you know, it's not gonna arrive in Baltimore. It's not gonna arrive on time. It's gonna be a different time after arrange trucking. It's gonna cost you more. You have to pay for a longer trucking leg that's not free. So a big part of his communication like getting in front of the customer explaining what's happening, What does this mean for you? What does it mean for your your customers? If you have cargo with an ETA, when is it gonna arrive? You need to know that. So a lot of it is around communication. Baltimore is a major port for the mid Atlantic region of the US. It's not a major port in the global scheme of things, all right, It's nothing like when the Ever Given got stuck in the SEUs Canal. That ship that got stuck. We had you know, forty five containers or so on that ship and another several thousand lined up behind it, or even just now with the Suez getting disrupted again, being able to go communicate to everybody what is happening, When is your cargo going to arrive, what does this mean, what is it going to cost, et cetera. These are it's hard to do without the databases. Like I don't know how traditional freight forwarders do this. We get in an hour, find all the shipment's affected and send everybody an email and then have a plan for you know, a call down plan to go call everybody and let them know what's happening.
00:32:22
Speaker 1: Right, this might be getting too much into the weeds. But what happens to the containers that are stuck on that ship by the bridge in Baltimore.
00:32:29
Speaker 2: It's still TBD. They're going to be stuck in litigation for for many years. What fundamentally, you have this rule in maritime law called general average ancient law which says that the damage is shared. If cargoes damage had shared across everybody's all the customers, all the containers to share that Parada Parada. So like some of the containers in the front were damaged. There's perishable goods on there that bad that are damaged, So those people will be made whole by everybody else on the ship, and then it's all gonna get tied up in litigation. So you know, we advise the customer, hey, you should just forget about those containers. We pay you use the insurance claim. Just pretend they never you know, you hopefully they show up. Both of them. Sadly, they were both exports for nonprofits. We had this scrip called flexport dot org that does humanitarian shipping, right they were. One of them was the playground being shipped to in school in Africa. Yeah goodness. Uh, they got paid in full for the values of their shipping. Another one out there, but I forget the other one was it was also goods headed to Africa. Forget the exact contents of it, but there. Yeah, you sort of advised them, Hey, you know, hopefully we get a free playground out of this. In a few years. When you got an insurance claim, I guess it gets handed over to the insurance company and they liquidated or something. We'll see.
00:33:55
Speaker 1: So you know, you started this company, how did you get into transports? Because a lot of people. They're either born into it or they kind of stumbled into it. How did you get into the freight transportation logistics world?
00:34:12
Speaker 2: So I was I was a customer of freight forwarders. I ran this business. My brother actually ran the business. I worked for him and then eventually became a partners in a business with him and another guy named Michael Kanko. We ran this business buying products in Asia, mostly motorcycles and motorsports products and selling them on the internet in the early two thousands. They started in the late nineties when I was in selling college and joined them, and so we would import products from China and I was very frustrated. We're a software team, like we built software for the business, and so we didn't call ourselves a software company, but we built software. It was pre shopify. So we made our own website to sell stuff on the internet e commerce, checkout solutions, payments, inventory management, and we had software. In the early two thousand, my brother wrote the software that could check the rates for shipping a product a motorcycle to a customer. It would go on the carrier, the trucking carriers websites and log in as us as our account find the cheapest option, check multiple sites, book it, print the bill of landing, print the shipping label, and a truck would show up and we'd be able to ship it without having a law even go on to their website and do anything. And that was in the early two thousands when we try to do similar stuff with the import side customs, and it was just nowhere, you got no where, You couldn't even get a company to help us on the phone almost and so eventually we decided today this is probably Aventually. There's a lot of other companies that have this problem like customs and customs really complicated clear knowing what paperwork you need, what the regulations are there should be The original idea was like kind of turbo attacks for customs. There should be a simple way to understand what you need to clear customs and get the paperwork handled and then we'll tell you freight solutions and other stuff. And that's basically been the journey that we started over ten years ago, my brother.
00:36:04
Speaker 1: And I and you know, how would you describe your kind of your management style as an entrepreneur and as as someone that's leading a business that's growing.
00:36:16
Speaker 2: Well, It's evolved a lot you know, I think in the beginning, early days, I was really growth oriented and really just tried to hire great people and get out of their way. And I think now I'm much more down into details, and I don't believe in getting out of the way.
00:36:34
Speaker 3: I'm I'm I'm learning everything that's going on and try to be a ball of energy, showing up at everybody's meetings and reading all the documents and the reports and asking questions and challenging.
00:36:45
Speaker 2: And much more hands on than I was in the past. And I you know Toby Toby from Shopify as a friend of mine and our big investor, and I've heard him say that one of the worst most pernicious cliches ever was that or the idea is that micro management is bad. It's just like a terrible lesson that everybody's been taught, and that actually you need a lot of micromanagement. You should really be involved in what's going on in your company. And I sort of took that to heart, and I get good results from me.
00:37:18
Speaker 1: So, you know, you mentioned Shopify as an investor. Are you mostly or most of your investors private.
00:37:23
Speaker 2: Equity funds like bet your capital funds?
00:37:26
Speaker 1: Yeah, So is there a book that you've read about the transportation, space or leadership that kind of left to Mark and you that you would recommend to anyone listening to us today, Oh too many.
00:37:38
Speaker 2: I mean, we're very lucky that most of the world's smartest humans who ever lived well at least in the last five hundred years, like, took the time to write down their ideas and you get to read them. So I think that the difference between who you are now and who you'll be in five years is almost entirely made up of the books that you read and the podcast that you listen to. And yeah, actually, one of my best tricks is that if you don't no one has enough time to read all the books. And I have one of those bad habits of buying more books than I can read. But if you search YouTube for almost any book author and nonfiction, you'll find an interview with the author in twenty minutes. You could get eighty percent of the ideas in twenty minutes. You know, you can listen to it on two XP if you don't have times. I do a lot of audio books and a lot of listening on YouTube to smart people, but I do I do read a ton of books as well transportation. The classic is The Box by Mark Limenson.
00:38:36
Speaker 3: If you haven't had it on your podcast, you should get him.
00:38:39
Speaker 2: For management style, I really like this book called Certain to Win by Chet Richards and he was an acolyte of John Boyd, who was the probably the greatest military strategist of the twentieth century of the United States. He was the architect of the Gulf War One strategy. He also designed the F fifteen like prototypes. Like he's a a true military genius, and Certain to Win is the application of his ideas to business, which is always a very interesting as a history I like history a lot, so being able to see, like, okay, how do I take lessons from the military who they deal with, a lot of complexity, a lot of chaos, a lot of uncertainty. That's pretty applicable in global logistics and transportation.
00:39:32
Speaker 1: And so so being a leader of a company and an entrepreneur. You know, before I let you go, is what keeps you up at night related to work?
00:39:43
Speaker 2: We keep other people up at night. No, I'm just kidding. That's a that's a that's a military line as well. No, you know what, it's a very hard business because we are. We're very dependent on our on our vendors to do a good job for our customers, and there's a lot of volatility and getting enough For example, in the current world, can I get enough space. We did a great job this year of winning business from new customers and we if we can get enough space on the ships, I think we might double the size of our business in one year, which would be crazy. I don't think we can get enough space to serve all the demand that we have, so going around making sure, going to work with all the vendors. It's a very global business. We have two thousand employees. We ship cargo to and from one hundred countries, so that's kind of hard to be everywhere. I can answer the question literally what keeps me up and now is that every time zone of the world. But yeah, it's kind ofel It can feel unwieldy, right, Like how do you keep a handle on such a big, complex organization that's so global finding out what's happening. We do a lot of document writing in part it helps with the time zones. But people write monthly business reviews patres about their business unit and keeping track of it all. Knowing if everybody's doing a good job, and you have the best people empowered fighting bureaucracy on their behalf. The hatred of bureaucracy is not enough to make buiocracy go away. So you have to live in reality the fact that we do have bureaucracy and some of it's good and some of it's bad. Trying to understand how you can break down the friction that our employees face every day so they can do a great job.
00:41:27
Speaker 1: All right, great, thanks Ryan, and I really appreciate your time today. It was a great learning more about flex sport and here in front of you. So thanks again for the time.
00:41:37
Speaker 2: Yeah, well, thanks for the opportunity to big fans of Bloomberg over here, so we appreciate.
00:41:40
Speaker 1: It, okay, and hopefully the Talking Transports podcasts as.
00:41:43
Speaker 2: Well obviously, yes, yeah, yeah.
00:41:45
Speaker 1: Well, I also want to thank everyone for tuning in. If you like the episode, please subscribe and leave a review. We've lined up a number of great guests for the podcast. Check back to hear conversations with C suite executives, shippers, regulators, and decision makers within the frank transportation markets. Also, if you have an idea for a future episode, please hit me.
00:42:04
Speaker 2: Up on the Bloomberg terminal.
00:42:06
Speaker 1: We're on Twitter at Logistics late. Thanks everyone, and take care.
