Flexport's CEO on Amazon & Shopify, Red Sea Shipping Problems, and Inflation — With Ryan Petersen

0:00The CEO of Flexport is here to talk about his company's challenge to Amazon, shipping through the Red Sea, and the state of inflation along with plenty more. All that coming up right after this. Welcome to Big Technology Podcast, a show for cool-headed, nuanced conversation of the tech world and beyond. Ryan Peterson is here. He's the CEO and the founder of Flexport, which is a supply chain management and logistics technology company. We have so much to talk about, a lot of interesting news since we spoke last, including the exit of Ryan and the return of Ryan. We'll get to that in a moment. But first, I want to welcome Ryan to the show.

0:34Ryan, welcome. Hi, thanks for having me on. Thanks for being here. over the past few months it's really crystallized to me that you're competing with amazon now like beforehand it was like okay you're doing supply chain and logistics and you're already giving me a weird face i'm excited to hear you sort of take on this argument and now you have acquired shopify's logistics business and this seems like it's going to become a big part of your mix you know you don't give away i think it's 13 of your company unless you're planning to go big on logistics. And for Amazon, as much as we talk about the selection in their stores, it's the logistics that's made a huge difference in terms of their ability to get merchant products in front of people.

1:18And not only that, you just raised another 200 plus million dollars from Shopify a couple of months ago. So also I point to you being Amazon's upstart and pretty interesting competitor on the logistics front. What do you have to say to that? well i i haven't really thought of it that way in terms of competing with amazon we enable brands to thrive i think that i think we want to live in a world where any any brand you know because customers can buy from brands and not have to buy everything from the same marketplace so maybe in that sense you could say it's like we're allowing brands to own their own destiny create you know shopify really um is the best for that to let you run your own website have own your brand presence to have customers come to you and your website rather than going onto a marketplace like Amazon.

2:04But you need to have good logistics to do that. So I think to that extent, perhaps, you could say we're competing with Amazon. Then they were never going to run our own marketplace. If you take the Shopify Flexport combination, right? Storefront logistics versus the marketplace logistics that Amazon offers, that's the only competitor in the market for them. Well, I think we partner with Amazon a lot too. I mean, we probably like almost 10 % of our deliveries go to Amazon. I think we want to be, today you can't do, we can't do Prime fulfilled from our sites. But I don't think there's any reason that we couldn't do that someday.

2:42I think brands want to be able to sell through Amazon. Amazon is incredibly powerful for our customers that use it to drive demand. They want to be able to sell through their own website too. And so we'd like to be more agnostic that like, hey, we're providing neutral infrastructure to ship things, regardless whether you're selling on Amazon, Walmart, Target, Costco, Shopify, wherever else. So, yeah, I mean, there's an element of competition there. Logistics is pretty interesting. Everybody kind of competes with each other while also cooperating with each other. It's a strange world, you know, where, for example, like we partner with all the major ocean carriers, but some of them also own freight forwarders that compete with us.

3:22And like the ocean carriers are the ones that own the ships. We're more comfortable with that. And I don't, yeah, you could say we compete with them, but it's not really that important of what we're doing. It's like, how do you solve problems for the end customer at the end of the day? I don't know. I mean, you're the CEO and you're seeing these things, but I think you might be underestimating this. It does seem to me like there's a certain amount of packages that are out there to be shipped and a certain amount of channels that are out there to be bought. It is zero sum, isn't it? Man, I never think of it that way, zero sum.

3:58I don't know that it's fixed, like the number of packages. It's a very interesting philosophical question, I guess. We think that you can help brands grow and it doesn't have to be zero sum, that they can do more volume, more demand. Maybe at the end of the day. no i don't believe fundamentally that the economy is zero sum i think that's a really important distinction so let's just okay i won't beat a dead horse on this but i do want to talk about it so let's say you're you're a brand you're deciding where to go for where to sell your products to to let's say you sell you sell sneakers right so you could have and you're you're you know maybe you're a boutique maker of sneakers you're all birds in the first year so you could sell through Amazon, but a lot of these companies have had trouble with knockoffs and stuff like that, or you could sell through Shopify.

4:42The problem with Shopify has always been people don't, when they're on those independent storefronts, they don't trust those people, the stores to get them their products on time. And in fact, I think Shopify acknowledges this because they've recently started allowing some of these stores to allow their customers to buy products that have been fulfilled by Amazon with that FBA product. So if you're thinking about like how to get the stuff to people, how to make people trust a brand, like a brand, you know, can either decide, go through Amazon, go through, go through their independent shop. It's usually going to be that one pair of sneakers that someone's going to buy and they have to find the decision where they're comfortable with.

5:25So how does this stuff really work in conjunction where like you can have one thrive and the other thrive? Yeah. Well, the benefit of using Flexport in that situation is that you can have a single pool of inventory that you can fulfill, whether it's your sale on Amazon, your sale on your Shopify website, your sale on Walmart, Target, or any other e-com site, as well as over 15 physical retailers. So we can distribute out into those. So if you want to say we compete with Amazon, I think we're a strictly better proposition other than the fact that we don't own amazon.com and have all the demand that that drives.

5:59But we're upstream of Amazon, how we can distribute to FBA, distribute to Walmart, and keep that single pool of inventory and then replenish out to the edges to these other networks. So yeah, I mean, look, I'm not afraid of competition. We'd rather avoid it because it's not that important. The main thing is what can you do for these customers? We think we have a really valuable proposition that lets them move the goods also all the way from factories wherever they're made in over 100 countries, deliver into this network of fulfillment centers and onward to the final customer and give you a true end-to-end platform.

6:34Yep. So if I'm a merchant, I'm basically keeping track of my inventory within Flexport software and can basically distribute it to Flexport fulfillment, Amazon fulfillment, keep track of it, and then have it sent out to customers. And get it replenished. So as you start to sell through those stocks, figure out, okay, when should you order more goods and place those orders out to the factory network that you have on Flexport. Totally. So Shopify owns 17 % of Flexport now, according to reports that I've seen. Something like that. Yeah. Might be slightly, yeah, 17, 18%. Yeah. Right. So talk a little bit, I mean, okay, we talked a lot about the semantics of competition, but what makes you and Shopify such an interesting partnership is again, that logistics part where you get to help those smaller companies fulfill their orders to people.

7:20So talk a little bit about why Shopify has become such a natural partner to you. Physical world logistics is really hard. And I think Shopify recognized that and recognized that we're a great partner for them because that's what we do all day is physical world plus tag. And there's also a recognition that came around during the pandemic of what a disadvantaged small business was at when their supply chain logistics crunches. that when there's not enough capacity in the market, big companies tend to be much better at securing that capacity. And it was a real disadvantage for Shopify merchants if they can't get access to space on ships, on access to space on planes or fulfillment center capacity that, yeah, that if you're not able to access that, then you're in some level not, you're not competitive.

8:17And we saw that a lot during the pandemic, during when there was just not enough space, that the biggest companies in the world would then go lock up the space. If they had to pay extra, they'd pay extra, throw their weight around and get it done. And so I think Shopify recognized that their brands were at a disadvantage in their partner with someone like Flexport that through the aggregation of scale across our customer base brings that scale and that expertise where we're the third largest American freight forwarding company, top 10 globally. And so we have collectively the capacity to help these companies access good competitive price, access to capacity, and with world-leading technology.

9:00So sort of bring technology that very few, even the biggest companies in the world really don't have tech to be able to manage this like we've built. And so being able to bring that into small business sector is very, I think Shopify saw the promise for that and what it can do for their customer base. do you talk about a potential merger like it seems like it would be a natural combination of the two companies um never talked too seriously about i mean frankly i told them like i didn't think we'd it would work my view of these things is like the company flex4 sells a lot to build like a huge amount of our values our potential things that we have to go and do and what i've seen most M &A, it's very hard for the company to keep building the thing.

9:46The founders and a lot of the key people kind of tend to move on. So I was pretty upfront about that. We never discussed, I think I brought it up proactively that I didn't think it would be a good idea. We really want to be an independent company. I think a social network for global trade, if you want to call ourselves that. It's a pretty big and valuable idea. It can definitely be an independent company. The largest freight forwarders in the world are worth$30 to$50 billion, depending on the year of what Wall Street's have, Wall Street's valuing them. And the biggest one has 3 % or 4 % market share.

10:26And that's just in freight forwarding. That doesn't include things that we're doing in fulfillment now with the acquisition of shop logistics. Doesn't include all the business that we're building, trade finance, insurance. So once you look at like the aggregate of all of that, it could be a massive, massive company. So we rather, yeah, we're not really, we're not interested in being acquired. Now talking about the size of the company is interesting because there was this moment like in the sort of thick of COVID where shipping rates were getting, you know, in the range of 15 to$20 ,000 per container.

10:59If you're a freight forwarder, right, helping those get from point A to point B, like you can definitely make a good margin on numbers like that. But it seems like now that the containers have returned to around a$2 ,000, like back pre-COVID rate, the potential for the business, a lot of people say, is smaller. We built our business to be agnostic to what the price of shipping is. It's out of your control. It's going to go up and down. But even we raised a round from Shopify and others led by Andrews and Horowitz and Founders Fund, actually. But Shopify wrote the biggest check in the round. And we were very open with the investors at that time in the funding round.

11:34like, hey, we made projections that our revenue would come down, made the round kind of hard to get done. The investors are not used to seeing people projected declining revenue. I've done a fair amount of investing in private companies and every investor deck projections are up and to the right. But we're realistic about it. I don't think we ever believed that the price of shipping was going to stay at those very high levels. Even now, actually, the price of shipping went all the way back down and now it's up again thanks to the Red Sea disruptions. But we're modeling that as very temporary. I think the price of shipping is going to come back down to historical norms.

12:15And even below that, there's a lot of excess capacity of ocean freight in the market. A lot of extra ships are being deployed. So yeah, we build our business to be successful based on the long run trend of freight, not on any temporary spikes. Right. Now, that being said, like during COVID, I mean, this is, this kind of coincides with the Dave Clark story. So you bring in Dave Clark from Amazon to be the CEO. And I think at the time you told me that you realized that Flexport is like a business that really needs efficiencies and you're more of a big idea guy and you want growth. And so with Dave coming in, from my understanding, he like doubled infrastructure.

12:57So I'm just curious to hear your perspective. If it was always clear that the price was going to come down, I mean, Flexport ended up laying off 20 % of the company in time. Why the doubling the infrastructure? And did the company basically overextend on that? Like, it's surprising to me that the company would overextend that way if the calculation was that those$20 ,000 rates were going to come back down to two. I don't know how to think about doubling infrastructure per se. I mean, we made the acquisition of Shopify, so I guess on some level you could say that we acquired all this physical infrastructure because we do run our own fulfillment centers now.

13:34We've got four million square foot facilities, and that was an investment we did with Dave. I don't think any of that's related to the price of shipping. We did objectively overhired because then we ended up letting people go. we hired a lot of our engineering team. We grew our engineering team really fast. And I think we lost sight of the customer to some extent and recognizing that the freight forwarding is, it's really about customer relationships to a degree that I don't think it's very different from e-com in that sense. Like e-commerce, every transaction is relatively standard. I mean, you're shipping a box, it's got to get to the customer.

14:14There's not a lot of customization that can occur. In global logistics and B2B freight forwarding in particular, every business is really unique and different. And it requires, one, there's a lot of customer relationships from the top, like executives. The job of the CEO is to talk to customers all day. Several customers a day is my goal. And that has to run all the way through the leadership. And that's just from a cultural standpoint, you got to lead from the front on that. But two is each customer is pretty unique. The types of businesses we serve are so different from one another. And what they're trying to do with their supply chain is really different.

14:55And there's more people in there. It's not going to be this fully automated transaction, much as we would like that. And as much as we've invested to automate things, we have to live in reality that it's a long ways from that. And I think those are probably the areas that we drifted away was like not leadership, not spending enough time with customers and not being open to this idea that, hey, like customers don't want to just see a web form. They want to talk to people. They want to have a person that they can pick up the phone and call it, not an 800 number, not a call center. And so I think that's where we started.

15:28Our growth started to slow down while our costs were going up. And I don't mean our growth in revenue, that's inevitable, but our volume growth, like, you know, there's no reason you can't grow volume through any cycle. And so at the end of the day, the board decided, the board of which I'm a member, we decided that it was time to get back to our roots and go focus on customer obsession and run a leaner business. I think we actually, with fewer engineers now, we're shipping technology faster too, because we're more focused and more like, yeah, there's real value in just doing fewer things, but doing them.

16:02But those two words that you mentioned, customer obsession. I mean, it's the number one leadership principle inside Amazon, which is where not only Dave Clark came from, right, but a lot of Flexport leadership that was under him at the time. Yes, of course, it's a little different than e-commerce, but if customer obsession is the North Star and Amazon and now Flexport 2, right, it's sort of, is it surprising to you that it just didn't translate? A little bit. I would say it's quite different being obsessed with consumers and obsessed with businesses. Amazon is famously very customer obsessed when it comes to, I mean, it is one of their core leadership principles, but go ask one of their merchants if they treat them with that level of obsession.

16:44Amazon does not treat the seller on their platform as a tier one customer. Their job is to help the consumer at the end of the day. And I think it's a different thing to take care of businesses. B2B, how you behave towards serving customers that are businesses is going to be different fundamentally, a different set of behaviors, et cetera. So something that I heard recently, so you did flood the zone with Amazon folks coming into the company. And something that I heard recently was that Amazon's culture basically can take an average performer and turn them into a superstar inside Amazon, right?

17:19Which is all about becoming more efficient, eliminating errors, and making sure that if you do make a mistake that that'll never happen again. But then oftentimes Amazon employees will struggle in a different company because it's just a different, like you said, different problem set, different environment, different, different world, different industry. I'm kind of curious if you've had any time to think about that. And, you know, what do you think, what do you think is, what do you think is between Amazon employees and being able to thrive elsewhere? And, and, and I'm curious, like if you have any meditations on Amazon culture now that you've been so close to it in a way that sort of had mixed results.

17:59Well, we've hired awesome people from Amazon. We have had a few people that didn't work out, but look at our team. It's like a lot of people with great experience from Amazon. So I don't have anything negative to say about them. I think I really like some of their operating principles and we continue to use, like the narrative six pager, really focus on input metrics, like have a set of metrics and then understand if we're not achieving them, what are we doing about it? And have really good operating rhythms to check in on that. I think leading with the leadership principles, they're really strong.

18:32In my opinion, there's too many of them, so people can't remember them that well. But they're all pretty good, so I can't criticize it. Maybe people just need to work harder to remember them all. But to me, I still think it's the best company in the world probably.

18:50and full of great people. There have been cases where people didn't work out, but I think there's a lot of cases where people from Amazon went on to do really big, important work, including here at Flexport. I'm sure you've thought more and been more immersed in Amazon culture than most CEOs in the world, so I thought maybe you'd have some interesting reflections on it. Looks like you did. Yeah, I do. I think, you know, by the way, they have a really hard business like running these sites. these fulfillment centers we're running some ourselves now too and just recognizing it's hard you know it's to drive efficiency out of one of those things and like how do you get thousands of people to do kind of a it's not the most exciting job so you have to create a lot of career opportunity for people not the most exciting job meaning picking picking items off the warehouse and delivering it you have to really get them connected with you know what does this I mean, for them and their families, their ability to grow with the company, to get career advancement, ideally connect them to the brands that they're shipping for.

19:50I think that's something that Plexport's pretty good at is getting people to recognize like, hey, we're working on behalf, not just like new brands, which is always very exciting and easy to inspire people. Hey, you're helping this brand, this entrepreneur, this team realize their dreams and compete, but also to help legacy companies. The e-com has really wiped out. A lot of companies that couldn't make the transition, a lot of retailers have gone bankrupt and failed. I think we have that opportunity. It does inspire our team to say, hey, it's sad. If you look at the list of bankruptcies in the last five or six years of iconic brands that we grew up with that have gone bankrupt because they didn't successfully make the transition to e-com, um that's we we take great pride in you know helping legacy brands that make that transition and make it easier for them so i think there's a lot of reasons to get inspired but you have to lean into that and i think amazon's done a pretty good job it's like the of they get a lot of heat in the press but if you talk to people that work there they tend to actually really like amazon so i want to talk to you about uh the houthis and the red sea so over the fall and into the winter the Houthis in Yemen have basically disrupted trade through the Red Sea and leading to massive disruptions.

21:02And you've had like a real front row seat to that. Looking at, I mean, the graphs that you've tweeted in your technology, you can really see what's going on there. So can you just talk a little bit about the state of shipping in the Red Sea right now? I think it's basically returning to normal. Is that a crazy statement? Yeah, no, that's not right. I mean, All the container ships are still routing around the Red Sea. More than 90 % are routing around. You're seeing prices start to come down a little bit. There's this initial chaos that sets in when any kind of situation like this happens. And chaos creates high costs, is a simple way to put it.

21:42Now, where did that cost come from? First off, going the long way around the southern tip of Africa, it takes about 20 % longer, more fuel. a lot of complexity there. But actually a big piece of it is all the replanning that happens. So if you think about like every ship has like 10 ,000 containers on it, each of those containers has a journey of its own. It might be connecting to a different ship at a port. We call that a transshipment. It certainly is getting cleared through customs and picked up by a trucker. Those all have to get replanned. Everything, that's a huge amount of kind of overhead that the shipping companies have to absorb.

22:22And then it's just supply and demand. A 20 % longer journey reduces the effective supply by 20%, and the demand hasn't changed. So you reduce supply in the market, the price can go to the moon. So we saw the price of shipping from Asia to Europe went up about five times between December and now. Yeah. So can you tell us in dollar terms what that is yeah i mean it had gotten very cheap it was it was only costing like a thousand bucks to ship a container from asia to europe uh before until about mid-december i guess no early december uh now it's kind of five to seven thousand dollars depending on the origin and destination ports that are involved um and that'll i we are seeing so definitely not back to normal the prices are very high there's there's a couple of things that are it's there's there's some signs that this temporary.

23:15Not that the ships will continue to route around for the foreseeable future until, really likely until there's a resolution in Gaza. It's definitely a sign of the spreading of that conflict from being a very local or regional to a global conflict, or at least a conflict with global implications. So the ships are going to continue to route around. However, there's so much extra capacity of ocean container shipping that's already been deployed and that it's getting deployed throughout the balance of this year that you're going to see the price of freight come back down. That's my prediction, but that's also the prediction of the CEO of Maersk, which is one of the two or three largest container shipping lines in the world, said this on his earnings call last week or the week before that there's a lot of excess capacity and that the price of shipping will come back down.

24:10So I think brands out there can, it is painful at the moment, but I think we should start to see by Q3 that prices normalize and get back to where we were before, which was very historically low price of shipping. I mean, the idea that you can ship a container worth of goods from Asia to Europe for a thousand bucks is just like so unfathomably cheap. Me saying that it had gotten back to normal was me misreading one of your tweets, but luckily I wrote it down so we can talk about it. What did I say? Did I say it was good? You Suez transits are now down to just 7 % share. Oh, from 66%. Oh, it's not that.

24:45Yeah, yeah, yeah. Fallen just 7%. It's that it used to be 66 % of shipping. Now it's 7%. So that's a massive drop. Yeah, exactly. Massive drop. Basically, container ships are not going through there. A couple of companies still continue to transit, especially it's CMA, which is the French container shipping line. And they're being like escorted by the French Navy. is a very interesting phenomenon, actually, where the French Navy is kind of protecting French ships, but not other people's ships. I don't know how I feel about it. I did want to ask you about that. I wrote that one down as well. So you put a picture up and you said, you know, the French Navy just posted these photos as they escort a French container ship through the Red Sea before the American-led order that followed World War II.

25:31This is how trade was done with each nation protecting its own ships. Is this the future of globalization? so I don't think that the conflict in Gaza is the end of globalization but we have been breaking apart I think as a global society you could say so is that what you're talking about? Do you think that if we continue down the road that we're going that we're going to have the need for this? I think people take for granted how remarkable the time that we live in is how it's so easy for anybody to trade anywhere ships can go anywhere, it's so cheap I mean, the idea you can ship from China to Europe for a thousand bucks, it's like such a great value.

26:09It's so cheap. And it's easy to take these things for granted and forget how much they depend on peace. You know, civilization is ultimately built on peace. And if it breaks, it's very fragile, much more fragile than we realize. And yeah, I don't know, you know, I'm not like a historian, so I don't know how accurate my statement is. But I do know that ships used to have cannons on them, like trading merchant ships had cannons. And kind of it was a much more of a free for all three or 400 years ago. And pirates were much more common rival navies bleeding into pirates, you know. And so I think, yeah, it's it.

26:51What is is it? What should we expect from the future of globalization? I think, you know, we would like to see peace and prosperity, but have to remember that it depends on often depends on military force. And I don't think that the world wants the United States to be the world's global policeman. We get a bad rep when we do that. And yet, if you don't do it, you know, you get things like this where, well, someone, if no one does it, then you're just going to have less prosperity. So it's a really difficult question. One, I'm not really qualified to answer. I'm quite biased. I'd like to see more prosperity, more global trade.