Supply chain crisis is ‘pain of 20 years of not investing in our infrastructure,’ Flexport CEO says
Flexport CEO Ryan Petersen breaks down the congestion U.S. ports are experiencing due to the supply chain crisis, with billions of dollars of merchadise stuck from the poor infrastructure maintenance.
JULIE HYMAN: We all know there is a shipping backup here in the United States. It's become such a part of the public conversation, the subject of a joke on SNL, at least one by the Trump impersonator this weekend. Ryan Petersen of Flexport is one of the folks who's also gone viral with respect to this shipping crisis. He is CEO of Flexport, which is a freight and logistics company.
And Ryan, of course, your tweet storm went viral a couple of weeks ago, in which you said you rented a ship, you went out off the coast of LA and Long Beach and took a look at what was going on there. And you had some recommendations for maybe what could help alleviate, at least in the short term, some of the congestion there. I believe the mayor of Long Beach took one of your suggestions, at least temporarily, and started to vertically stack containers or allow containers to be vertically stacked. What else is going on there? Has anything else been adopted that's going to help the situation in the short term?
RYAN PETERSEN: It's difficult to say if the things that are being adopted are going to help. The other big change that's happened is that the Port of Long Beach in Los Angeles, the port authorities in both places have announced a new fee that they're going to charge companies who don't pick up their containers on time. And that fee is going to escalate every single day until after 30 days, you would get charged $46,000 for not picking up your container if you left it at the port for 30 days too long.
I don't know if this is a good idea or not. I mean, I think the reality is the reason that the companies aren't picking up their containers is that there's a bottleneck at the gate. It's too hard to get an appointment. You can't get your container. Therefore, the fee is just punishing businesses that are already victims of this supply chain crisis.
Let's see how it plays out. Maybe there's people just using the port for cheap storage and so this new fee actually helps. But I'm quite skeptical.
BRIAN SOZZI: Ryan, don't we need an Operation Warp Speed to solve this? Where is that?
RYAN PETERSEN: Yeah, I don't know. I think it's an interesting idea. Certainly you want the government to pay a lot of attention and focus on this. I'm not convinced that everybody should work for one person who's in the government and follow their orders.
I think a free market with price-based system probably makes the most sense. It's worked for us for a couple of years to make America the most prosperous country in the world. To suddenly say, hey, we're going to put all supply chains and therefore all business under the reins of the government to fix these problems, it seems-- it seems like you're playing with fire.
EMILY MCCORMICK: Ryan, it's Emily here. You mentioned that ultimately this problem is, of course, fixable. And you laid out some recommendations. But how costly are some of these fixes going to be? And who ultimately has to pay them?
RYAN PETERSEN: Yes, right now what you're looking at, the big problem that we have is there's a huge backlog of ships waiting to unload at Long Beach. It's particularly a Long Beach LA problem. There's some other ports with some minor congestion, but really it's about the ports of LA, Long Beach, which is about 50%, 40% to 50% of all the containers coming into the United States pass through those two ports down in Southern California.
And so what's happening is you have this huge backlog. There's right now over 500,000 shipping containers with we estimate between $30 and $50 billion worth of merchandise sitting there. Much of it will not get in time into inventory, into warehouses and shops in time for the holiday shopping season, which has already kind of begun.
And so I think that's the big risk, is that brands who have imported all this merchandise don't get it in time to sell it. Much of it goes unsold in time for the holiday season. And you have to write it down. And you'll see huge losses taken. That's one problem. Business is suffering.
Two, prices are going to go through the roof. And they already have. You're seeing a lot of inflation. I think it's worse than it's getting reported. Ocean freight alone, at the prices that people are paying for ocean freight right now, adds between 5% and 10% to the cost of everything we buy. And remember, 90% of the stuff we buy is shipped on a container ship.
So huge inflation is going to be a big impact, businesses suffering, and just the ease of doing business globally. I think if it doesn't fix, we have to really question whether we can depend on globalized supply chains. The globalized supply chain and the shipping container have brought down the cost of shipping things and the cost of making things by like 90% over the last 50 years. And if we lose that, that is a huge source of economic prosperity that's going to go away. I don't think it'll be good for the country at all.
BRIAN SOZZI: Just hearing that right, Ryan, I mean, are we looking at the likelihood this holiday season where going to a mall or going to a large discount store will be very apocalyptic, meaning you go down the aisles and there just won't be things to buy?
RYAN PETERSEN: I don't think it's that bad. I think there's more cargo coming out of these ports than-- over the last year, volumes are actually up 20% over pre-pandemic levels. So there's a lot of cargo moving in.
Consumers are just buying more stuff than ever. I mean, a silver lining in all of this is the cause is consumers buying more stuff than ever before. And our infrastructure, frankly, isn't ready for it. And so we've definitely exposed that our infrastructure is going to be a governor on growth. It's going to prevent us from achieving the kind of recovery and opportunity that the consumers and the economy wants to do right now.
And it's getting held back by dilapidated port infrastructure, by congestion, traffic of non-automated ports and sort of bad rail connections to the port. We're just recognizing the pain of 20 years of not investing in our infrastructure. And we're feeling all that pain in one year right now.
JULIE HYMAN: Ryan, the scenario that you described before when you were talking about the big writedowns that these companies are going to have to take and the inflation that's going to happen ahead of that, doesn't that also suggest, though, that once that stuff gets in here and they're taking those writedowns, we're going to get stuff on sale? I mean, when the stuff finally gets in, if it's past the holidays and they got to move that merchandise, I'm getting a discount TV, no? I mean, isn't that sort of the implication?
RYAN PETERSEN: I don't know. Certainly I wouldn't count on it. But you could get-- I bet you can get some a great discount on some reindeer hats in January. But I don't know if anybody wants them.
So I think that's the big question, is if it's seasonal merchandise, that's where you're going to see the big writedowns. If it's not seasonal, I don't know that they need to write it down. As long as demand is still there, they'll be able to sell it.
JULIE HYMAN: And I guess the other thing I would ask is your company, you have a platform where you see all this stuff moving around the world and around the country. What has surprised you the most? I mean, a lot of what you're describing it seems like you could have seen it coming if you were in the logistics business to some degree. Is there anything that surprised you, any port or sort of tension point that's operated maybe better than you thought or anything else that surprised you?
RYAN PETERSEN: Yeah, so at Flexport, we've built a-- we're a technology platform for global logistics. And one of the things we've built is a full simulation of the global shipping world. So we have all the world's ships processing in at real time. We can predict when they're going to arrive. We're actually able to predict all this congestion. We've got all the world's ports modeled.
We're starting to model-- we have modeled the full railroads. We're starting to model the trucking moves of the container, of all the containers inland from the ports. That picture really lets you see where are the bottlenecks developing and be able to predict what's next.
So the reason I went down to Long Beach is I saw in our data that the port was moving much slower than in prior months. And the thing that really scares me, that scared me at that moment, it still has me pretty scared, is if you see a system, a complex system where the input is the same and the delay is getting longer, you may have signs of an impending collapse. We see this in the technology systems that we build.
And so what we saw in Long Beach that did-- that did surprise us was the delays keep getting longer, but the same number of containers are arriving at the port. And that's a sign that there's a negative feedback, a positive feedback loop, but a vicious cycle-- it's a negative thing-- developing somewhere. And so that was what set me off to go looking, what is the negative feedback loop? Why are delays getting longer for the same number of containers arriving at the port?
The containers are up over two years ago, but they're flat over the last six months. So why have the delays been getting longer? That's the big question we've been asking.
And we started to find that feedback loop in the inability to stack containers. Therefore, chassis are getting taken offline so that the more-- as time goes on, you're getting less and less throughput at these ports because we don't have chassis. That's the trailers with the wheels on it that haul the containers. There's a real shortage of those in Southern California right now. That's what we uncovered from our data.
JULIE HYMAN: Whew, all right. This does not sound like it's a situation that's getting better any time soon. Ryan, I would love to have you back soon to check in on how things are going. Ryan Petersen is the CEO of Flexport. Thank you so much.