Today on Bloomberg TV, they interviewed Ryan Petersen CEO of flexport (https://www.flexport.com). I saw it as a great opportunity to use the mosaic method.
The mosaic method, for those not familiar with it, is basically piecing investment information together by gathering various sources of information that is non-material and deriving insights from it. Mosaic comes from the art world where little bits of glass, stone or other materials are assembled to build a work of art.
Flexport generally markets itself as managing the logistics function for a company's supply chain. They appear to be a technology company from a quick view of their website.
A couple of points I drew today from Ryan's interview today were:
- Flexport is seeing companies shifting their supply chains to other locations from China given the tariffs
My theory has always been that smart management in most firms would immediately start looking for ways to avoid the risks of tariffs. Because no one wanted to be “called out”, I believe that this was being pursued behind the scenes as soon as there was even a whiff of tariffs. Anyone in the import/export business worth their salt would be looking for ways to avoid potential future cost increases.
For a long while, the stock market seemed to be discounting the potential deleterious effects, but it seems as though the market is beginning to “wake up and smell the coffee.”
- Import costs have increased from 2% to about 7%.
I would expect this to be on an increasing trajectory as the tariffs slowly, but steadily increase those costs. The costs will eventually show up in either reduced profits for the firm or increased costs to the importer/exporter’s customers. It will be a function of the elasticity of demand (Take yourself way back to Econ 101. Hopefully, you were not sleeping in class!).
This means reduced profits or higher inflation depending on the economic makeup of the type of business.
- This is another example tech industry encroaching on traditional businesses. Businesses no longer just compete within their businesses but with other industries as well.
The auto industry is going through this right now and it is why they are racing to get up to a high level of technology to compete effectively in the electric vehicle, self-driving vehicle and ride-sharing businesses. He who possesses the ability to get fast accurate information is in a strong competitive position.
Import/export businesses must be doing the same as the auto industry. When competing WITHIN an “asset heavy” business such as import and export, the amount of capital available affects their competitive strategy since it creates barriers to entry. “Asset light” industries, such as tech, have a significant “special sauce” (great management is also one of the special sauces) that gives them power in the market.
- Another key point Ryan made is that with the consumer/businesses demand for shorter and shorter delivery times, warehouse facilities are becoming more decentralized.
Whereas the older model of warehousing was a large centrally located warehouse, the need for smaller and more geographically dispersed warehousing will be essential to competing effectively.
This change will increase the shipping costs and shift the responsibility of maintaining inventory to other points/vendors in the supply chain. It will also have an effect upon the final cost of goods to the ultimate consumer. Again, it will be a function of elasticity of demand.
I also see this as effecting the “balance of power” between the “bricks and mortars” and the internet vendors as the cost advantages are neutralized somewhat.
As the warehouse logistical locations fracture into smaller more geographically dispersed locations, the challenges will need to be met with more sophisticated and granular inventory tracking systems. Product can’t be shipped in the time frames demanded by customers unless that merchandise is staged where it can be shipped quickly. Also, more safety stock will be required to deal with variability in demand or businesses will risk customer defections
I don’t always find a lot of information from Bloomberg TV. Usually, there is a plethora of differing investment opinions from different parties, but if you listen, every now and then, you can find some real pieces to complete a nice mosaic masterpiece!
