A string of recent attacks by Yemen-based Houthi rebels on commercial vessels transiting the Red Sea to the Suez Canal have forced global shippers to once again shift how they transport goods. It's just the latest in a multi-year string of disruptions to global supply chains. It also comes just as pandemic-era supply chain stress seemed to be in the rearview mirror. So what is the geopolitical and economic impact of this latest disruption? In this episode, we speak with Craig Fuller, founder and CEO of FreightWaves, about the impact of the attacks. We also talk about the broader logistics landscape, including the rise and fall of digital freight brokerages, and the 2023 "bloodbath" for trucking firms
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Key insights from the pod
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What's happening now in the Red Sea? — 4:10
What alternative routes are there for container shippers? — 5:40
What is the Navy’s role in securing global trade? — 6:29
What is China's view on shipping lane safety? — 10:52
Will this disrupt China's economy? — 15:21
Where are we in the freight cycle? — 23:03
The challenges facing freight-tech — 29:47
The role of humans in freight brokerage — 37:35
The 2024 freight outlook — 44:27
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Joe Weisenthal (00:10):
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway (00:15):
And I'm Tracy Alloway.
Joe (00:16):
Tracy, it's time to return to our favorite topic of supply chains and freight.
Tracy (00:21):
There's no escape. You can't escape the supply chain. Yes, you're absolutely right. We had I feel like a relatively quiet year in 2023 in terms of disruptions. But towards the end of the year and now into 2024, supply chain disruptions are back. They're everywhere. Everyone's talking about them.
Joe (00:42):
There is indeed a new acute source of supply chain stress, and that, of course, are the attacks from the rebels in Yemen, the Houthis rebels disrupting trade through the Red Sea. We're beginning to see the return of those maps that we see, where this is where the ships were a month ago, and this is what the shipping lanes look like today. Not unlike what was it in the Suez [Canal] two years ago. But yes, supply chain disruptions, at least on some level, are back a little bit.
Tracy (01:12):
Yeah, it's bad when people are breaking out the maps with the ships and also the container rate charts.
Joe (01:17):
Yes. Container rate charts.
Tracy (01:18):
Those are making the rounds again. So we've seen some container rates start to jump and we can get more into that in a few minutes. For the record, Joe, I am not shipping anything at the moment. Nothing from China to Europe. So I am unaffected by this particular development, so far.
Joe (01:35):
Well, it's only a matter of time. Also, listeners should know that every time we're in public and people come up to us, one of the first questions they always ask Tracy is usually about that. They're like ‘Do you have any furniture stuck on a container ship somewhere?’ It's either that or questions about the coal in Tracy's basement. It’s about 50/50.
Tracy (01:52):
Yeah. Sometimes I feel like my life is actually a logistics company and it's just dealing with commodities like coal and lumber and moving furniture.
Joe (01:59):
Well, yeah. And we talked to Brad Jacobs recently and we talked all about your building supply and needs for your house.
Tracy (02:05):
But even before the Red Sea developments, we actually wanted to do another shipping/freight episode because if you remember this time last year, we did quite a few episodes, I think, about the coming difficulties, challenges, bloodbath, choose your preferred noun there, coming to freight and shipping.
And the idea was that after the big boom, during the pandemic when container rates, trucking rates, basically everything exploded and became very, very profitable, that we were now going to see this sort of downturn. And I think that has come to fruition. I think 2023 was an extremely bad year for a lot of shippers and truckers, but we're going to get into that as well because in addition to the disruptions, we're at this weird moment in time where we're waiting to see whether or not there's a recovery.
Joe (02:57):
Yeah. It's funny. Even without disruptions, as you mentioned, one of the first things that we learned when we started getting interested in this topic is that freight trucking in particular is hyper cyclical.
Tracy (03:09):
So cyclical!
Joe (03:10):
So, you had this already pretty crazy cycle for the US economy between 2020 and 2023 maybe now. And it was even crazier for freight. Another thing that happened last year too is we saw the demise to varying degrees of various freight tech companies, because like ourselves, we got interested in freight, I think a lot of VCs did. And you see a lot of ‘Oh, there must be a way solve all of these problems with software and AI.’ And I think a lot of these problems continue to persist. So there's just a lot of freight stuff we have got to catch up on.
Tracy (03:42):
Yeah, let’s do it.
Joe (03:43):
Well, I'm very excited because a multi-time guest, I think the first guest we had who talked about trucking, we have him back and in studio we're going to be speaking with Craig Fuller, founder and CEO of FreightWaves. So Craig, thank you so much for coming back on Odd Lots.
Craig Fuller (03:58):
Joe, Tracy, great to be here again.
Joe (04:00):
There really is a lot to talk about, but why don't we start off with the disruptions in the Red Sea. Why don't you characterize, as you see it, the situation right now?
Craig (04:10):
So, I think there's the short term anxiety that exists in terms of the safety of the crews, the dependability of the global supply chain. A lot of short-term concern, but I think the bigger story [that] is going to play out over the next couple of years is we're now reaching a point in history where global trade and global shipping is no longer as dependable or as predictable as it has been really since the post Cold War period. Civilian ships are being fired upon. And this is an unusual development that we haven't seen for really many decades.
Joe (04:45)
Wow.
Tracy (04:46):
So walk us through the importance of the Red Sea route. What kind of ships are actually going up and down?
Joe (04:53):
Where are they going?
Tracy (04:54):
Yeah. Where are they going? What are they carrying? My understanding is, there's containers, there's also tankers.
Craig (04:59):
There's a lot of oil and gas, obviously being in the Middle East, it has a lot of exposure to oil and gas and the derivative products that come out of that portion of the world. But it's also one of the major trade lanes for container flows. And so, think of what moves in container. It's largely manufactured and consumer goods that are largely dependent upon containers. A lot of these products are coming from Asia, and particularly China into Europe, some products going to the United States East Coast. But the predominance of the products that move through the Suez in the container freight is largely related to products out of Asia, going to Europe for European consumption.
Tracy (05:36):
What other routes are available for that kind of trade?
Craig (05:40):
Well, you have to go around South Africa, and so you're really adding thousands of miles of additional distance when you aren't able to cut through the shortcut that is the Suez. I mean, [the] Suez Canal has cut out an enormous amount of distance that geographically the ships have historically had to go around with the Suez. It was able to sort of expedite trade flow from Asia, in particularly to Europe. We do benefit from it in North America, but a much smaller percent of the freight that we depend on in the United States is dependent upon the Suez.
Joe (06:16):
What is the historical role of the US Navy in securing or protecting some of these routes, and what are we seeing from US defense officials now at this acute moment?
Craig (06:29):
There's a lot of conversation in geopolitical circles about whether the Navy's role has changed or shifted or is no longer effective in the role that it was believed to be played for the last, really since World War II. So if you think about it, the United States has the largest navy in the world. It's also a one of the only Blue Water navies that can go anywhere to defend any place on the planet. And that's really the call to fame.
Joe (06:57):
Sorry, what does it mean “Blue Water?”
Craig (06:58):
It means that they can go into deep oceans.
Joe (07:00):
Oh, okay.
Craig (07:01):
They can be anywhere. Basically, there's no place on the planet that the Navy and the Marines can't actually reach. And so, the whole purpose of that is to protect trade lanes. That is one of the primary calls of the US Navy is its role is to protect commerce and ensure global trade and really the world. And China has mostly benefited from that, [the] US Navy's role of protecting sea from things like pirates and state sponsors that want to attack global trade.
And the question now is in a post-, we're now in this sort of new generation of trade, what does it mean? There's a lot more protectionism that happens with US policy. And really to be able to defend the role of the US Navy being able to protect all aspects of it with geopolitical tensions in East Asia means that we may not have the resources to actually protect all aspects of trade the way that we did at one point in time.
Joe (08:02):
Just real quickly, pirates and pirate attacks, and you mentioned them, they're somewhat common. They're in the news, but what's different about this is that it's missiles being fired. They're not trying to steal the cargo. These are military attacks on private corporation.
Craig (08:23):
These are military techniques.
Joe (08:25):
Techniques, yeah.
Craig (08:26):
We've seen helicopters actually land on tops of ships and actually take cruise hostage by way of helicopter. It looks like a SWAT. You probably have seen the video floating around where it looks like a SWAT video. Where they're flying in and they're basically taking over a ship through use of a helicopter. We're seeing situations where, as you mentioned, they're using missile technology, military grade technologies, which is an unusual development. And then with the proliferation of drones, you now have a low cost way to actually avoid some of the defenses that are set up to protect these ships that they're able to reach them without, without obstruction.
And I think that has changed the game. And look, we can argue whether these are truly state sponsored or not, but at the end of the day they have access to military grade technology and they are using this to attack civilian vessels. And their goal is to disrupt global trade.
Tracy (09:23):
This was going to be my next question, which is, even if the Navy said, yes, absolutely, we're going to go in, we're going to protect all the ships. How much can they actually do in the face of that kind of threat, which has new technology that they're clearly using, but is also very, very flexible in terms of what it can do?
Craig (09:45):
I think the question is at what cost? Because, I think the US has the capabilities to largely defend every ship or the ships that we have decided to defend. But at what cost? I mean, you're looking at a missile, anti-missile technologies, a million dollars. We're firing these defense missiles off at a million dollars apiece, and you're fighting a drone that cost a couple thousand dollars. I mean, at some point there is a massive tax on US consumers and the US economy for us to do this. And the question is what is our appetite to continue to fund this type of defense technology when the United States is not the primary beneficiary of that type of trade.
Tracy (10:25):
And on a similar note, I'm always curious about the decision-making process to not go through a certain route. So, Maersk said it wasn't going to go through the Red Sea anymore after the missile was fired. What are the factors that go into making that type of decision? And then if the Navy were to say tomorrow that “We’re going to escort all of these ships”, would that completely address their concerns? Would they [say], “Okay, yes, we're going to resume this route”?
Craig (10:52):
It's a great question because, I don't know that the US with all of our other geopolitical commitments, particularly around China and what's happening around Taiwan. I mean, the Chinese want our Navies in the Middle East. That's where they want them because [that] enables them to have an enormous amount of power over East Asia. They want us moving our assets and being distracted in the Middle East. So they actually win geopolitically in terms of their power over their region by moving, forcing us to be distracted in the Middle East. But I don't know that we have all the resources to defend every single ship from these attacks. And ultimately, what the container lines have to really think about is what's the cost of a ship? You're talking hundreds of millions of dollars. What's the cost of a cargo, again, measured in probably billions of dollars when we a look at a 20,000 TEU (Twenty-foot equivalent unit) ship. And then you have the insurance companies which are saying, “Hey, we're not going to insure these ships that go through these channels.” And that means that ultimately Maersk and others have to look at alternative routes. They will obviously protect their crews. The crews do understand that, the nature of their jobs is on occasion they put themselves in harm's way. And we've seen that with the movie with Tom Hanks plays as the Captain.
Tracy (12:11):
Captain Phillips?
Craig (12:13):
It is Captain Phillips.
Tracy 12:13:
Yeah. Captain Phillips.
Craig (12:14):
It was a true story. So these things do happen with pirates. But we're talking about military grade technology and we're talking about an escalation. And because of it, I think the insurance companies have said, “Hey, we're not willing to ensure these ships that go through these contested channels.” And I think the container lines also don't want to put their crews at risk. They don't want to put their substantial investments at risk. And also politically and optically putting crews in harm's way if something were catastrophic to happen would be very, I think, demonstrative to these brands, these organizations that really want to stay out of the spotlight.
Tracy (12:52):
So Joe mentioned the maps of the ships, and again, you know something's going on in the world when people start breaking out those maps, showing the ships diverting. But I thought it was interesting. So if you look at a map of the Red Sea, the container ships are moving, but they're still tankers. What are the decisions being made by the tankers that are different to the container lines?
Craig (13:16):
The tankers have been largely unobstructed. So, a lot of the attacks that we've seen have actually been on civilian container vessels and other types of cargo vessels, not on bulk tankers. And a lot of that has to do with the economic interests of the different countries that are in the region.
These are countries that largely depend on oil and gas exports and the derivative commodities that come out of those to fund their economies. I don't think that it's in their interest to do that. And then also, China is dependent upon energy supplies from the Middle East. And, I don't think that the rebels want to invite the Chinese into this conflict, and that would certainly do it if they felt like their energy supplies, which they are dependent upon were obstructed. So I think what we're seeing is this is largely a container story and it's really the West that is consuming these products. Mostly Europe, but certainly the United States to a degree. And I think that's where we're seeing a lot of the pressure I think.
Tracy (14:14):
It's like they've enacted sanctions on Europe.
Craig (14:16):
Well, they're certainly obstructing it. And you could argue they're acting sanctions because their goal is to obstruct trade and to cut off the flow of product and really create pain on consumers and businesses that depend upon these containers.
Joe (14:29):
There's so many directions we could take this conversation in, so many questions. But I find this framing to be very interesting that, arguably we don't, we as in the US don't get a ton of benefit from the resources that we invest in patrolling this, that a lot of the benefit goes to China. China benefits in theory by the sort of distraction to the US Navy pulling assets out of East Asia and towards the Middle East. China itself obviously has expanded its navy quite a bit in recent years in the estimates it's going to continue to do so. At some point, is the expectation that China itself will play a more active role in patrolling the region? Or is that in the US interest for China to grow, sort of police more parts of the world?
Craig (15:21):
It's a great question and I think it's one that's probably on the minds of folks playing these war game scenarios out. One of the big questions is if China is a big loser, and you could argue why it would lose, is that if global trade gets obstructed, particularly manufactured goods, which China's economy is largely dependent upon, if it gets obstructed, then China may be the biggest loser in this. And the question is, why are they standing down? When you talk to military experts that are far more versed in this topic than I am, what they have told me is that China wants the United States to be focused in terms of military focus on the Middle East and get stuck there, if you will, pulling its attention away from Asia.
So, if you look at the Chinese construct and look at [President] Xi, for years China was focused on economic growth at all costs. And they were willing to sort of put all of their other interests aside to allow their economy to thrive and ultimately provide some level of prosperity to their people. We have seen in the last, really the last five years that it's no longer the case and the orientation of China is more politically driven and more power driven. And it suggests that China's goal is to create enough havoc on the United States and its allies that we are sort of forced into these situations. And there's a playbook for this. I mean, we've seen some of the world's conflicts over the last a hundred years have been caused by American allies and going out to protect its allies, getting involved in these military conflicts that really don't directly impact our goal or strategic goals. And so it is an interesting play and it's an interesting card.
I think the question is why does this impact China? Most importantly, and I think from a supply chain question, supply chain professionals are focused on mitigating risk, right? These are jobs that are all in risk management. That's ultimately what a supply chain professional does, it thinks about cost and it thinks about risk management. And for the last couple of years they had been fending off an enormous amount of risks in their supply chain. And as Tracy mentioned in 2023, we sort of had a level of room to breathe because all of those Covid related disruptions were largely dissipated. We're now in a sort of a new generation of issues that are quite different than what we saw during Covid. And now as a supply chain professional that's already dealing with questions about China's orientation to its economy, to its commitment to manufacturing, to its commitment to exports, the question then becomes, I now have to calculate this geopolitical risk or military risk that did not exist before.
I used to as a professional be able to depend on trade out of China that was unobstructed to, if I have dependencies in Europe or have customers in Europe, I could largely depend on the Suez [Canal] as a dependable trade lane, knowing that it was not going to get obstructed. And now I have new sets of risks that exist that did not exist before. I mean, the reality is the ships can go around South Africa, they can make it, it adds time. We're talking a couple of weeks potentially. It adds a lot of cost to it, but there are ways that products can still flow, but it increases the cost to do so and increases the lead times required. And I think supply chain professionals are going to start making different calculations of where to source products that they don't have to contend with that issue.
Tracy (18:48):
So one of the things that came out of the pandemic related supply chain disruptions was this idea of reshoring, building more resilient supply chains. Everyone was going to sort of rejigger their operations to make sure that they didn't have to worry about the types of disruptions or congestions that we had between 2020 and call it 2022.
So I guess my first question is, one, did that actually happen? And then secondly, given this new bout of disruption, this new geopolitical risk, as you put it, are we going to see the same types of decisions being made? The idea that well we really need to think of alternatives to sourcing things from China or transporting things along that route.
Craig (19:30):
It is happening, but let's just keep in mind moving a supply chain is not an overnight decision. This stuff takes decades potentially, more advanced products which have more advanced dependabilities because I can't just uproot my supply chain, I have to think about my supplier supply chains. If I have machinery or equipment that is very specialized, I have to think about all the technicians that can support that equipment. So I can't just uproot my supply chain. It has to be a gradual process.
But we have seen that take place. Some of this is supported by government funding with the Inflation Reduction Act. And the Build Back Better plan by Biden is actually encouraging domestic manufacturing. Probably most obvious in the semiconductor area and in the electric vehicle area. We're seeing substantial amount of industrial expansion in those parts of the economy. And so we are seeing the early sort of stages of domestic remanufacturing and nearshoring.
And so it is certainly happening across all aspects in all product classes. And the reason is that China, even when Donald Trump was attacking global trade, most supply chain professionals took that as a tax. They thought of it as an economic, I'll pay the tax, it's still cheaper. I don't have to make tough decisions. The US and China are never going to sever trade ties. But what we've seen is when [President] Xi shut down his economy during Covid, sort of the late stages of Covid, that really changed the calculus for Western decision makers that realized that China was no longer going to do things to promote exports at all costs and was willing to do things that could destroy parts of its economy just to gain and maintain control. And I think that calculation scared a lot of executives. And then you look at the geopolitical tensions with Russia and the Ukraine and you look at the fact that there is seems to be an inevitable course to some level of conflict between the China and the United States related to Taiwan.
It's obvious that supply chains can no longer look at China as a absolute dependable source of products. This is one but a continuation of a process. We talk about the Suez [Canal] disruptions and the geopolitical issues that exist there. This is just another reason for supply chain professionals to get a wake up call because what we're seeing take place in the Middle East and it's quite effective. This could easily take place in other parts of the world, which is probably the bigger concern is what happens when this breaks out in the Strait of Malacca or other parts of the globe where it's not just Europe that's being impacted, but it's also trade in the United States.
Joe (22:34):
I want to pivot a little bit. So, the last time we spoke to you was in May of last year, you and your colleague Rachel Premack, the title of that episode “We're in the midst of trucking Bloodbath 2.0”. Sometimes we do episodes about something at the bottom and then it bounces. Sometimes we do something at the top and then it falls. That one I think was very well timed and I think vindicated. But what happened with the rest of the year in freight and then where are we in the cycle now?
Craig (23:03):
So I think you've done at least 10 episodes related to the some level of the freight cycle.
Joe (23:07):
So somewhere we're going to get one right.
Craig (23:10):
But what's amazing about this is I've known you guys since 2020. Yeah. I think we've gone through at least three cycles.
Joe (23:18):
Since 2020. That's so crazy. I love that. This is why we keep coming back, because the line is always moving in some direction.
Craig (23:23):
It is the most volatile and fragmented market. We're talking trucking specifically? On the planet. And because of its fragmentation and the fact that there are no barriers to entry, it suffers from this really violent boom and bust cycle. That got incredibly exaggerated during Covid.
So if we go back to where we were a couple years ago when we first started talking in 2020 and 2021 is the market was sort of at the super peak. Yeah. There was massive supply chain disruptions caused by a lack of capacity, driver issues and so forth. Now we're in 2023, we've sort of hit the bottom. And I would argue that the worst is already in the market for trucking. And we are not necessarily on our way back, but I don't think we're going to see things get worse as it relates to the trucking industry.
Tracy (24:10):
Wait, I think Joe is being a little bit modest because at the beginning of 2023 we did have a couple episodes and I think we did publish a couple articles as well about how bad the year could be for the trucking and also the shipping industry. And it did turn out to be an absolute terrible, no good, horrible year, whatever the title of that movie was. But can you maybe put some numbers around it for us? How bad did things actually get last year?
Craig (24:38):
So it's an interesting conversation because, think about the listeners to Odd Lots, mostly focused on macro stories for the economy. When they're listening to freight stories and they're hearing me talk about a freight recession or the bloodbath, they oftentimes assume that that means that the broader economy is struggling.
Tracy (24:54):
Yeah. I think the big question was whether or not that indicates that the consumer demand isn't there and people were sort mixing that up.
Craig (25:01):
So one of the interesting things is we now have, we book ended 2023, we're able to actually look at the entire year in sort of context. And what we've seen is that actually 2023 was a good year related to freight volumes. It actually, if you took out the Covid extremes of late 2020 and ‘21 and even parts of ‘22, what you've seen in the freight market is that the ‘23 was actually a really solid year. It continued to build momentum in terms of volume throughout the year.
But it seems like we're contradicting ourselves in the sense that we're talking about how bad it was in ‘23. But we're talking about a relatively strong consumer and a relatively strong freight market. But the reason is that we had this massive expansion of capacity that took place during Covid. You know, we saw, if you take 2019 to the peak of capacity build, which really did not end — so the freight recession started in March of 2022. It wasn't until October of ‘22 before we started to see the market in terms of new capacity entrants plateau.
So, we're still seeing new entrants come in the market throughout 2022 until the fourth quarter. And now what we're looking at is a situation where we've had this all this excess capacity that's built up. And that's why 2023 was such a miserable year for the trucking industry, is that we had, you know, we're talking 60,000 more trucking companies in the freight market today than what we had prior to Covid.
Tracy (26:39):
Wow.
Craig (26:40):
And these aren't 60,000 trucks. We're talking 60,000 independent companies that are in the trucking industry that have entered the trucking industry that are out taking freight. And so what you have in the trucking market, we've talked about it a few times, all aspects of freight work this way, where you constantly have this demand that's driving supply.
So what happens is the providers of supply are constantly trying to catch up to demand because they see the inputs in their business, they see demand in their business, they see high rates. And so they're constantly trying to add new pieces of equipment to soak up that demand. And what ends up happening is because of the fragmented nature of the market, they end up overcorrecting. So everybody is doing the same thing.
The big carriers are adding trucks, the small carriers are adding trucks, new entrants are in the market. And we just get flooded with total number of entrants. It's a classic commodity boom and bust cycle. And that is what happened in 2022 that brought us to a really miserable 2023.
And what's happened over the last couple of months [is] that we started to see a number of bankruptcies, Yellow, the historical LTL [less-than-load] carrier filed for bankruptcy. It actually went out of business and it felt like this is a company that for many years felt like a cockroach that just wouldn't die. Government bailouts, unions at one point had bailed them out. It constantly just stayed in business and everybody assumed that it would continue to survive in spite of the fact that it was not a well-ran company. And it is out of business.
And you mentioned, you teased it earlier, Joe, is that we've seen some freight tech companies that raise lots of capital that also went under. And this is a function of a lot of excesses that got added to the market that the market just has to bleed out.
Joe (28:26):
Well, I'm glad you mentioned the freight tech companies because that's where I was going to go next. So we already said, we already know it was bad for a lot of companies in 2023. But, going back to 2021, 2022, we got interested in freight, obviously on the Odd Lots podcast, that was also a big year for tech and tech investing.
A lot of VCs suddenly probably woke up to this idea, this world we're like ‘Oh, the freight industry looks like a mess. I'm sure if we just apply our software magic, we can solve all of these problems.’ We saw some really huge fundraising, but then also in 2023, we saw the reversal of it. So we saw the freight brokerage, Convoy, just basically completely go out of business. I think we saw a pretty big downturn at Flexport. We've had their CEO Ryan Peterson on the show a couple of times.
What happened with freight tech? What were the theses maybe of the investors who were going in, they're [thinking] ‘Oh we can solve this.’ And what reality did they run into that maybe it's a bit harder to solve some of these problems then they may have assumed?
Craig (29:31):
You know, they were playing the Uber, Lyft, even Airbnb playbooks, which is, ‘Hey, I have this capacity and I can go out and create a digital app. If I could disrupt the taxi industry the way Uber did. Then I could also disrupt the trucking industry.”
Joe (29:45):
It seems like it should be doable.
Craig (29:47):
Here's the problem, is that the investors that really drove the high valuations didn't understand freight. They didn't understand the boom and bust cycle. Convoy arguably had the best roster. Like, it had a dream team of investors. I mean, you had Bill Gates, Jeff Bezos, you had Reid Hoffman, you had the who's who of sort of Silicon Valley and legacy tech that were investors. I mean, it was the best lineup of investors of probably any company in supply chain you could possibly have. And yet that did not help them survive.
And the reason is that really the investors and the management team, when it first raised money and got into this business, did not understand how cyclical this industry is and how fungible the capacity is. So if I want to disrupt the taxi industry, the reason that that works is I have all of these consumers sitting at home with their cars that are idle 90% of the time.
That can create incremental capacity in and out of a market. So as the market surges, you can have, and Uber has piloted this with their search pricing, they will send out messages to their drivers and say, ‘Hey, there' a football game in town, or there's a big event in town, please come out and get three to four or five X your normal rate.’ And they've created this sort of surge flexible capacity model that works really well in a business like Uber and personal transportation.
The problem in trucking is there is none of that excess capacity sitting against the fence that can flex in and out of a market. And so what ultimately happened is that they were able to apply some digitization to the dispatch process and to the driver management process. But that was incremental. And one would argue, and Brad Jacobs has argued that the incumbents were doing the same thing, is that effectively all of these companies were spending billions of dollars to build technology that everyone else was also building. And not just existing companies like XPO and CH Robinson, but you also had all these tech vendors, companies that provide software that were also building technology that they could sell to hundreds of companies.
All this was happening at the same time. And effectively what Convoy did not understand early on, which I think they certainly understood at the late part of the cycle, a late part of their business is that freight is commodity, it's highly fungible. The capacity is highly fungible. And no matter how much money I spend acquiring the capacity, there is nothing to keep that capacity from going to the next highest bidder. And because of that, all of the money that they wasted in acquisition costs to acquire capacity was effectively meaningless at the end of the day because that capacity could be found elsewhere.
Tracy (32:41):
How much of it comes down to incentives as well? So I take the point about fungibility of capacity, but I also get the sense that there are industries out there that make money from their role as middlemen. They make money from a lack of transparency or opacity. And so we can talk about like new technology to make this whole process more efficient. But if there are well-defined losers from doing that, they might not really be incentivized to change.
Craig (33:11):
So Tracy, let's imagine that we wanted to disrupt the gasoline industry. And we're going to create a gas station and in this gas station we're going to charge a dollar a gallon. Okay? We're going to open it up. We could build the largest gas station in the world in a matter of potentially weeks, a dollar a gallon we're going to charge, and we are disrupting the industry. Now we have some neat technology to do this. That is what we've told our investors is we're able to disrupt the gasoline industry because our technology has made it more efficient for us to deliver gallons. Now you and I both know at the end of the day, that gasoline is a commodity.
Tracy (33:50):
Yes.
Craig (33:51):
And it doesn't matter what we end up creating technology to solve for. At the end of the day, all we've actually done is arbitrage the market, provided consumers an arbitrage. In other words, consumers are buying gasoline at a dollar a gallon we've built this billion dollar gas station in middle of New Jersey that is the most successful gas station in the world. And we're doing tens of billions of dollars, but we are losing money.
Tracy (34:12):
Right. We're subsidizing the consumers.
Joe (34:13):
It has to be a full service gas station, full service in New Jersey. Just [have to] make that clear.
Craig (34:17):
That's true. It is full service. We're using technology, robots are doing this. Okay. But effectively that was the thesis that they thought the investors thought that if they could increase the throughput of gallons that their buying rate would be cheaper.
Tracy (34:33):
Oh, I see. So the volume would make up for it?
Craig (34:35):
Volume. I'll lose money on every transaction, right? But I'll make it up in volume. It's the same, it's the same idea here is that they were effectively subsidizing early on, a lot of their capacity. And what they realized really late, so they did change, ultimately. Convoy realized about 2018, 2019, that that model just didn't work. That really, all of the money that they had spent in subsidizing capacity and acquiring the capacity was meaningless at the end of the day because it didn't provide any long-term resilience or sort of commitments among the shippers and among the carriers to stay with their platform. That is really what happened.
And at the same time, using our gasoline analogy, is that not only did Convoy have a gas station or we have this gas station in New Jersey, but now Joe opens up a rival gas station down the street and he is charging 99 cents. And so now all of those gallons that we've sold…
Tracy (35:32):
Gosh darn it, Joe!
Craig (35:33):
… go to Joe's gas station, which is now cheaper. And that is the reason that trucking cannot strictly be disrupted through these technology apps is that they were trying to disrupt it by lowering the price, buying market share and effectively subsidizing the customers. The customers were benefiting from this, the shippers benefited massively from it because they were getting cheaper cost. And that's how they were able to grow so fast. But what ended up happening is they learned pretty quickly that those commitments were not binding. That there was no such thing as contract freight.
Joe (36:08):
This is really interesting because, and I think the Uber analogy, I mean there really feels like there's two elements here. One is just, okay, you can't be the Uber of trucking unless you have some capacity, or unless you have some guaranteed capacity.
Tracy (36:28):
Or ability to turn on capacity when you need it.
Joe (36:31):
Right, the ability get that guaranteed ability to turn on capacity. But then the other question is, why do we need humans as part of the freight brokerage process and why can't it be all computers like Uber is? And I want you to weigh in, we recently talked to Brad Jacobs, who is onto his new building supply distribution business, but also founded a freight brokerage. And there seems to be some dispute because I asked the question, I was like ‘Why are there still humans in this business?’
And I know there's humans, lots of humans because I went to the Arrive Logistics’ de facto trading floor. We've talked about it, I see with your community of FreightWaves fans, they're always posting freight brokerage memes. So I know there are a lot of people in offices who have [to] phone up where they're talking to a shipper and someone else is talking to a carrier. But Brad was like ‘No, there's a lot of it getting [automated].’ What is the truth? Why are there still so many just setting aside the capacity aspect or are there so many humans or how many humans in this process?
Craig (37:35):
So it's interesting because Brad talked about the fact that when he got in this industry 10 years ago it was largely humans and then over time it had digitized. And I think the statement was he had 97% of its freight was electronic. That very well may be the case for his business. Think of XPO’s role in the business. It's a big really predominantly, in its focus on LTL, which means it has very large enterprise shippers, big commitments. It's able to digitize a lot of the transactions. And most of the bigger trucking companies are digital. Like if you go look at Knight-Swift's operation, okay, look at Schneider's operation, go look at Old Dominion.
Joe (38:13):
And so that is like placing an order on a thing and it automatically…
Craig (38:15):
That’s right. Okay. And that's what the big companies want to do. Okay. Is they actually want to eliminate human contact as much as possible. Yeah. Because that's how they're able to optimize the, the model. They use technology to do electronic transactions and that is, that probably represents 20% of the business. It's the cream of the crop business. It's the business that every company wants because it's the high volume shippers, dependable volume and…
Joe (38:41):
Standardized lanes, standardized shippers, standardized carriers. Over and over.
Craig (38:45):
Exactly. Highly predictable. Yeah. Highly consistent business. And if you're building a network, then that's what you want. Because I can depend on it day in, day out. That's what the larger companies focus on. I see. And if, if you ask the CEO of Knight-Swift, you would probably get a similar answer about how much of its freight is electronically tendered. CH Robinson the largest freight broker in the country publishes that 78% of its freight doesn't have a human touch. But the reality is, Joe, is that the hundreds of thousands of freight broker people that are out there making up, at least, the numbers are as high as registered freight brokers in the 60 to 80,000 numbers. We track and think there's about 5,000 high scale freight brokers that do more than about $10 million in revenue a year. They're still predominantly human-based and what they're dealing with are the exceptions.
Joe (39:37):
Got it.
Craig (39:39):
So what happens is, a large volume shipper takes 95% of its freight and sends it over to the XPOs and the CH Robinsons and the Knight-Swifts. And so they get all of the electronic stuff dispatched. What's left over is the really hard to manage. It's either a lane that nobody wants, it's somebody who literally chop shops price on every single load. It's a commodity that nobody wants. And you'll see in the meme, if you go on Twitter or on X, you see all the memes and freight making fun of the kinds of freight that nobody wants. This is the type of freight that's left over.
Joe (40:13):
What's an example of a type of freight that no one wants to deal with?
Craig (40:16):
Grocery. Driver unload.
Joe (40:18):
Because you have to have a cold [storage], you have to have a special truck?
Craig (40:21):
Well, it's typically going to a grocery store. It takes a long time to unload it. They're miserable because they're in a cold trailer, in a refrigerated trailer, they have to use something called a Lumper. A Lumper is, I pay somebody at the dock to unload me, or the driver has to unload themselves. They can take eight to 10 hours to load at a farm. They go into a farm facility or distribution center because they're all hand loaded. Think of like a crate of tomatoes or oranges or something. A lot of it's loaded not on pallets, but actually sort of flow loaded. So this is undesirable freight for a lot of these guys. It has really tight transit times. So that's a type of undesirable freight.
Flatbed, which is hauled to project sites. You're not going to a warehouse, but you're going to a construction site that has to be manually unloaded. It can take sometimes hours or longer where the truck's got to sit. And so there's a lot of freight that's just undesired. And that's where a lot of the freight brokers, the humans still take and manage a lot of these sort of long tail transactions. That isn't the world that an XBO plays in. That is the world that the predominance of your freight brokerage. The folks that are on freight Twitter that are doing the brokerage job. That's where they, that's a large percent of their freight is managing the…
Joe (41:35):
Light bulb moment for me, that sort of just makes sense.
Tracy (41:37):
Well, so much of this reminds me of the move to electronic trading in the corporate bond market.
Craig Fuller (41:42)
That's a great analogy.
Tracy (41:43)
It takes a long time and like the stuff that starts being electronified first, is the standardized traits. The easier ones. But again, incentives play a role there too.
Craig (41:54):
And it took 20 years before consumers had access to effectively trade at very low cost without a broker, right? So you saw this, you saw early in the 90s, sort of happened in the early 90s to sort of late 90s, the internet was born and all of a sudden I could trade for myself, I could execute my trades. And then all of a sudden you got into low cost trading and then now we're in sort of zero cost trading as consumers.
But you still have the finance industry. High frequency trading has not gone away. You still have, you know, these large trading floors that are, people are involved in these transaction, involved in these services that extend beyond just executing a trade. I mean, I can't remember the last time I called a broker to execute a standard stock trade, but I may go to a broker if I have something that is unusual that I want to do or perhaps the product or that I'm not familiar with or something specialized. And that's really where we see the freight brokerage industry, those humans are really helping solve those problems.
Tracy (42:50):
Sure.
Craig (42:51):
But you make an interesting point, and I use this analogy a lot. Because freight at the end of the day is a commodity. It is price sensitive and it will move at its, you know best, to the lowest cost provider. Ultimately. That is what it's trying to search for. Most of the transactions can be digitized and electronically, but everyone is investing in the same technology. They're all trying to digitize it.
And because they're all trying to digitize it, no one actually has an advantage. There is no equivalent to a New York Stock Exchange where I can put my servers right next to the clearing engine and get nanoseconds because this is a market that is not centrally cleared or exchanged. And so there is no time advantage that I can get in terms of being closer in terms of executing.
So really what we see is companies try to take the highly commoditized freight, the big companies that have the balance sheets and are asset-based are picking off the really highly desirable freight that can be electronically managed. And the freight brokers which continue to proliferate and grow are taking care of the stuff that can't be easily electronically managed.
Tracy (44:13):
I have just one more question, which is again, I think the last time we spoke to you in 2023 you were talking about a coming bloodbath or the bloodbath in trucking. Looking out to 2024. How would you characterize it?
Craig (44:27):
I think we're going to trade at the bottom for a while. I don't think it's getting worse. I don't see a situation where things are quote on quote ‘deteriorating further.’ Now to an individual player that's in the market, they may feel differently because their balance sheets are probably wrecked at this point.
They're taking freight that they're not making money on. They've been doing this for probably 14 to 18 months. And so to them it may feel like they're at the end of the line and there will be a number of trucking companies that fail over the next couple of months. But I think market-wide, I think we're in many ways on the way back up. And so I think it will take a long time to turn out this capacity. But I think we'll see improving conditions for carriers as capacity bleeds off and as demand looks like it's going to stay persistent.
The consumer has stayed strong, miraculously strong in this cycle. It looks like, you know, going back to the conversation we had very early on about nearshoring and reshoring, it looks like that is starting to take place. And because that stuff has a long lead cycle, as we're starting to benefit from some of that now, and as a manufacturing reshoring really take place in our economy that will drive additional freight demand. And so as we continue to bleed off carriers and we see improving economic conditions in manufacturing and inventories have bled off that will help promote higher rates but also higher demand. And ultimately the industry will heal and sort of will enter a new cycle and one could argue…
Tracy (45:56):
And then we'll have more capacity?
Craig (45:57):
One could argue, well, this is the advantage I think this time around is that we do see tightening credit, which is the only thing that's going to stop the growth of trucking.
Tracy (46:10):
Oh, interesting. Because I guess the last cycle, not only were freight rates going up, but you also had extremely low cost of financing?
Joe (46:17):
Oh yeah.
Craig (46:19):
You could get it for almost nothing. Right. You could borrow money for almost nothing and small banks, they were fueled with so much cash and the government was putting pressure for them to deploy it. That is no longer the case. And it's really the community bank model. It's the community banks and the folks that are in that sort of small business lending are the folks that really control the outcome of the market. They've tightened up, they started to look at trucking as a riskier business because chances are almost every community bank in America has some trucking asset in its portfolio.
And because of that, I think they're starting to say “Hey, this may not be a desirable industry to invest in or to, to lend money to the way it was before.” And that tightening credit standards will make it more difficult for small businesses to borrow money and thus make it harder for new expansion to take place. In Chattanooga I'll run into people or even at the airport in other cities and people who know, have recognized me or know of me have talked about their small trucking companies. I had a guy, he said he had a bank deal that fell apart because the banker reads FreightWaves.
Tracy (47:25):
Did you say sorry?
Craig (47:26):
He's like, I have a good business, but because you're talking about this freight recession, do you have to continue to do that? I said, “Well my job is to inform them”. And I said, “You should thank me because had you borrowed that money…
Joe (47:39):
You wouldn't have paid it back.
Craig (47:41)
You may not, you may be in a different financial situation.” So I think there is more awareness about the issues in trucking and that will probably keep the capacity growth at least at bay. But we will be back. Like this will be a really boom market once again. We will see higher freight rates at some point the vibes will be really strong on Twitter where everyone's super excited about higher freight rates and there will be an argument that this time is different because that's what they'll say. This time is different. It's not going to roll over. This is different for all the sorts of reasons. And we will talk about that on this show we'll have. And we will predict when it will fall apart again. because it will.
Joe (48:18):
One last quick question. I'm going to pivot. Founder and CEO of FreightWaves. We always talk to you about freight. You also have this whole other business and aviation media and other aviation assets. I want to do like an hour with you at some point. Talk about that. But just real quickly, is it really true that there's more airports than McDonald's in United States?
Craig (48:36):
This is an insane stat that no one, I think everyone finds it hard to believe. So if you take the total amount of private, this includes private airports and public airports. So most people think of airports, I'm thinking of like JFK and LaGuardia and Newark. The predominance, the vast majority of airports in the United States are actually privately owned airports or community owned airports. Places that have very small runways of a thousand to 2000, 3000 feet can't accommodate even a jet. They're accommodating small aircraft. Yeah. There's 19,000 of those. And I think the number on McDonald's is like 16,000.
Joe (49:07):
Amazing.
Tracy (49:08):
This does not surprise me at all.
Joe (49:15):
Really?
Tracy (49:16):
Yeah, because just where our place is in Connecticut, there are two McDonald's within a one hour radius. There are at least three airports. One of them is for sale. And I've been thinking about it.
Craig (49:20):
You should buy an airport.
Joe (49:23):
Then we know what the next episode on this is going to be.
Craig (49:26):
People think that private airports is all about jets. And they always think it's like really rich people. But the predominance of the folks that use these small airports are farmers and their agriculture. And our entire [agriculture] ecosystem is dependent upon airplanes and bees, but airplanes to do things. And so a lot of the airports are used in places out in the heartland for farming. They're also used for things like mining extraction and stuff. And so the vast majority of those airports are very small airports that most people will never see, will never notice unless they get in a small airplane.
Tracy (50:03):
They are very unassuming. Some of them are just fields.
Craig (50:06):
Literally, most of them, the predominance of them are grass fields that that pilots fly into. Frankly, these are farmers that keep an airplane in the barn and they fly it out.
Joe (50:17):
Craig, we can talk to you for another hour, but that just means we will have you back before too long. Thank you so much for coming on.
Tracy. I can't believe you didn't tell me that there's an airport for sale by you and now it seems obvious that we have to do an episode on the business of running an airport or how much that costs.
Tracy (50:49):
I'm definitely up for doing an episode. One thing I learned from being an aviation correspondent is I would not personally, as an investor, put much money into [the space], we talk about like cyclical industries. Aviation is also one of those that just goes up and down, up and down, up and down.
Joe (51:07):
Well, yes, but I think the publicly-traded airport stocks, I mean we're really getting off topic from where we started the episode. I think actually publicly-traded airport stocks have done really well. Even if the carriers haven't done so great.
Tracy (51:20):
I can't remember. There was this amazing chart and I think it was like everything attached to air travel does reasonably well, like the aerospace manufacturers — although this was before the Boeing scandal, so I'm sure it's changed. But like the aerospace and the airports do well and then the airlines, the airlines are just constantly cycling like in and out of bankruptcy. But anyway, I severely doubt my ability to run a rural airport.
Joe (51:46):
On the main area that we talked about. That was such a good conversation. I love talking to Craig and I feel like we touched on a bunch of things. It's particularly interesting, just starting off the sort of some of the geopolitical considerations in the US about the degree to which we want to make sense for the US to invest resources in patrolling the Red Sea.
Tracy (52:07):
Yeah, I mean that seems to be a huge topic of conversation at the moment. The idea that maybe we could get to a place where the Red Sea just isn't considered a viable pathway for container shipping at least. That's really interesting.
I'm also thinking back, do you remember when the Suez Canal was last closed? Not during the Ever Given thing, but during the, what's it called? The Six Days War? Is that what it was called?
Joe (52:35):
The Six Day War? Yeah.
Tracy (52:37):
Do you remember that? I mean, not like, of course not actually remember, because we weren't alive. But I think there were a few ships that got stuck there during that time and they were stuck for like years. And there's some really interesting accounts from people who were on those ships. I think they started their own trading system and postal service where they had little like postage stamps.
Joe (52:56):
Oh, we [have] got to a find a historian to talk about that.
Tracy (52:59):
Yeah. I can't remember why or how I know that, but it seems like a fun topic, anyway.
Joe (53:05):
So many good things. Also freight tech. I thought that was really interesting. And that explained so much because I know that there's a ton of brokers and also Brad Jacobs saying ‘No, we do it. It's so electronic.’ So hearing that explanation of okay, you can electronify the high volume commodity lanes and lines and products versus the long tail of weird places and undesirable goods. Anyway, so much good stuff talking to Craig.
Tracy (53:29):
Well, also just the insight that freight is ultimately a commodity. And you have to think of it that way. And it's funny that we landed on air travel in the end as well. Because I remember one of the first things I learned when I became an aviation correspondent was that air travel was basically a commodity as well. You have a set capacity that is leaving at a certain time. You either have those seats filled or not. And that was always the way that I was taught to sort of think about it. Anyway, shall we leave it there?
Joe (53:57):
Let's leave it there.
You can follow Craig Fuller at
@freightalley
.