As 2021 comes to a close, how will typical, yearly events like peak season and holiday shopping be impacted by what's being observed today? Karl Francisco, Senior Vice President of Global Ocean covers past events and lessons learned from previous shortages, delays, and contract negotiations.
Chris Parker: Hello everyone and welcome to the Expeditors Podcast where you can hear about front-of-mind topics in the logistics and freight forwarding industry through the lens of a global logistics provider. I'm your host Chris Parker and today it's time for the great big ocean market update. I can't tell you how many times I see mention of container ships backed up at ports and cost of containers at sky-high prices. I myself am an avid hobby board gamer and even in a niche space like that everyone seems to be buzzing about slowed-down supply chains, late deliveries of the hottest releases, and game publishers making hard decisions to pay to move or stay and lose. This is an incredibly tough time and with some key events ahead, what is going on out there, and what else is impacting this market that hasn't gotten enough spotlight? To help us understand the situation is our Senior Vice President of Global Ocean, Karl Francisco. Karl, welcome to the Expeditors Podcast.
Karl Francisco: Thank you, Chris, thanks for having me.
Chris Parker: Absolutely. Why don't you tell us a little bit about yourself before we get started here? How long have you been with Expeditors and where has your career taken you?
Karl Francisco: Sure. I've been with the company now, Chris, for about 37 years. I started in the Los Angeles office where I spent most of my career and I moved to our corporate office in Seattle about five years ago to take over the global ocean product.
Chris Parker: What would you say excites you the most about this job? What gets you fired up every day?
Karl Francisco: Well, I think right now everyone will agree that you can't turn on the news in the morning without seeing what's going on in our industry, especially on the ocean side, with all of the supply chain congestion. So what's exciting is being able to help customers manage through the challenges right now.
Chris Parker: And for right now, how have things been looking for you lately? Yeah, what's the day-to-day been like?
Karl Francisco: It's a little hectic, we have video conference calls from 6:00 in the morning sometimes, till nine o'clock at night. But again, it's all in good fun because here we are trying to deal with the most difficult issue that we've ever faced over, boy, in forever, and being able to help customers maneuver this is actually exciting for us.
Chris Parker: Before we get started I want to call out one thing, you're kind of a rockstar from what I've heard. Could you just share with the audience just a little bit about your really cool past?
Karl Francisco: Yeah. Well, I went to a music school and my dream was to be a musician and I lived it for about three to four years then realized that I needed to get serious and get a job that pays well so that's when I entered the logistics industry and started with Expeditors back in 1984.
Chris Parker: Very Cool. All right. So let's talk about the crazy times that we're seeing today, global supply chain shortages and delays continue to make headlines. What are some aspects to think about when looking at what we're seeing today?
Karl Francisco: Well, if you think about what's going on in the ocean industry it all started back in 2020 in about Q2 when COVID happened. When the world went to sleep and everyone shut down, a lot of retail stores were closed, ships were parked, a lot of ships were parked because not a lot of goods were moving. And then what we saw was as things started to get back online in Q2, mainly in Q3, then things started to take off and get crazy and it hasn't stopped since, right? So we've been in this now for about, oh, going on a full year, maybe slightly over a year, with no end in sight in terms of how much longer this will continue. As long as we continue to see ships on anchor and a lot of congestion at the terminal ports, it's going to be a big struggle for a lot of customers.
Chris Parker: One thing I noticed actually early on in the pandemic was an exceedingly high demand for very specific products. When ships were parked, how did the ocean market kind of respond to these needs and random demands that kind of went all over the place?
Karl Francisco: Yeah. I think when that happened, obviously what was on everyone's mind was, in the healthcare industry, how do we get the PPE equipment into the countries? How do we help a lot of countries get the necessary goods that they needed to help fight COVID and what have you? And it was all about protecting people. Because a lot of the retail stores were closed, there wasn't a lot of retail good shipping. High tech was extremely heavy because as people started working at home and they needed a lot of equipment so we saw a lot of high-tech goods being shipped at that time.
Chris Parker: Okay. So that's early on in the pandemic. Kind of has the situation changed at all? What are the real stressors right now?
Karl Francisco: So here we are a year later and it appears that we are still having a very difficult time trying to get ships offloaded in the US and also in Europe because of all the congestion and I think the primary reason for that is a strong demand of goods being shipped right now. If you look at inventory levels are extremely low on the retail sector and companies are just really, really busy right now trying to get products into the countries. All of this is creating a huge, huge stress on the port situation, there's a lack of truck drivers, there's a lack of chassis and equipment, and an overall lack of laborers, right? So we think that until we see a slowness in demand, things will be somewhat challenging I would say for some time.
Chris Parker: You can't go a single day without seeing headlines about the Great Resignation. Is the labor force at the ports being affected by that or are there other conditions happening?
Karl Francisco: I would say with the terminal operators I think they're doing really well from a labor standpoint, I would say the shortage would be in the ability to find truck drivers and also equipment for the truck drivers, that seems to be the biggest struggle right now. In addition to that what we're finding is, a lot of shippers as far as the actual goods being stored in their facilities, that they're quite full, they've run out of space, they have a hard time taking on more goods. And that's what we're seeing, we're seeing a lot of containers that are fully loaded sitting on chassis in a container yard waiting to be offloaded. And that seems to be one of the biggest challenges right now, we're trying to get more velocity in and out of the terminals with equipment.
Chris Parker: So there's not enough equipment to get things out, there's not enough space to hold anything to offload the boats when they come in and so everyone is just waiting in line for space.
Karl Francisco: That's correct.
Chris Parker: So then kind of for the rest of 2021, I mentioned in the intro that there's a couple of key events that are happening or coming up, what are some of the important milestones that people should be aware of?
Karl Francisco: Sure. Here we are in November, we're in the heart of peak season right now and also the holiday season. Peak traditionally happens around the August timeframe and some will say that we never really got out of peak, right? And when you think about when the country started to get back online and shipping started to happen again back in Q3 of 2020, it hasn't really stopped, so peak never really stopped. But here we are, we're in holiday season, there's a lot of goods right now that's being shipped right now. And I think a lot of customers right now their primary focus is the rest of the year, right? Let's finish off this year, let's make sure that we get our goods off the ships, get it into our warehouses so we can have a strong holiday season. That would be the first thing, is just to get through the year.
Karl Francisco: The second thing on a lot of customers' minds is, what's going to happen next year with the ILWU contract negotiation? As a lot of people know it's coming up for renewal, it expires on July 1st, 2022, right? And typically looking back over the years the two parties that negotiate the contract, the Pacific Maritime Association which is the employer of the ILWU, they usually start their negotiations in May. We're not really sure when that's going to happen next year but looking back historically, that's usually the timeframe when they start to talk.
Chris Parker: Now, things weren't any better last year during the holiday season in peak of 2020, were there any lessons learned that people are kind of taking forward into this year?
Karl Francisco: Well, again, we're really not out of the COVID environment in terms of shipping so we're seeing a lot of congestion because of that so it hasn't really slowed down. And again, if we don't come out of this COVID environment I would say within the first part of next year then it could be a very difficult year next year for a lot of customers. Knowing that there's the negotiation for the ILWU, a new contract along with dealing with the COVID environment, that'll bring some challenges to a lot of shippers.
Chris Parker: Yeah. Let's take a closer look at this ILWU situation here. Could you educate me a little bit more on, looking back, what can we expect with these negotiations?
Karl Francisco: Sure. So looking back say 20 years ago, back in 2002, that was the first really big, I would say, challenge between the two parties as far as negotiating the contract. It took about seven months for the contract to be resolved, they settled on a six-year agreement back in 2002. But during that negotiation period, there were some tense moments where there was a slow down period with the ILWU where they were struggling with finding workers and they felt that it was unsafe to work in the environment they were in so it got to a point where the employer actually locked the ILWU out from coming to work. There was a 10 day period where the ILWU was not working at all and because of those 10 days, the ports were really backed up.
Karl Francisco: I think back then there were about 100 ships on anchor in Los Angeles and it took about six months to recover, right? So it was a really tense moment and there was a lot of disruption in 2002. Six years later in 2008, there wasn't a lot of disruption, it was relatively a quiet year, very smooth operations, so both parties agreed to extend the agreement for an additional six years, right? So 2014, which was six years later, another tense period where they had some really sticking points on the negotiations. Once again, there was a slowdown in the operations at the terminal, there were a lot of vessels on anchor again, and it took the ports to clear up an additional four months so it was a very difficult time. They finally came to terms on the agreement and they agreed to extend it for three years. Fast forward to 2017, a quiet year.
Karl Francisco: They agreed to extend it for two additional years and 2019 came along. And then once again they agreed to extend it three years and here we are, July 1st, 2022 is the next negotiations. So in looking back over the last 20 years, I would say two periods were very difficult, a lot of customers were affected by the slowdowns, for sure there was a lot of disruptions, goods were on vessels for a long period of time. There was a case where carriers claimed forced majeure and when that happens they actually offloaded some of the cargo in non-ILWU ports like in Mexico or in Canada and decided to go back to Asia. So when that happens it creates a lot of problems.
Chris Parker: And so how does that impact shippers? How does that impact forwarders? What do those ripples look like?
Karl Francisco: Yeah. I mean, for the shippers there's really not much they can do, right? If you have your cargo on ships that are on anchor and they can't berth, there's really nothing you can do, right? It's a really, really difficult time. What a lot of customers tried to do was start avoiding the West Coast ports because the ILWU only covers the West Coast, not the East Coast. However, during that timeframe, there wasn't a lot of capacity going to the East Coast so it made it very difficult for shippers to transition freight from the West to the East. So really they sat and wait for a long time to get their cargo.
Chris Parker: Incredible. And then to recover from those lockouts, you said six months or so, is that how long-
Karl Francisco: Back in 2002, it took up to six months to fully get back to normal, in 2014 it took I think about four months to get back to normal.
Chris Parker: Oh wow, that's incredible. So then what would options be in past lockouts that shippers were able to exercise?
Karl Francisco: Yeah. So right now I think a lot of customers what they ought to be thinking about is, let's not wait until next year when they start negotiating, I believe planning needs to happen now in the fourth quarter of this year, okay? Knowing what we've been through for the last 12 months we should have a lot of experience to know how do we deal with these situations, okay? With COVID. We've done a lot of creative things in the industry, the industry has seen things that we've never seen before where you have a lot of companies chartering vessels to move cargo right now because it's so difficult.
Karl Francisco: So the right thing to do is to sit down with your provider and have these discussions. Are you looking at changing the way your ship goes next year? In the event there is a possible slowdown on the West Coast, right? Are you going to start diverting more cargo from the West to the East Coast? Will you start looking at offshore distribution points? Right? Will you start looking at maybe pulling orders up early, right, to avoid a possible slow down? So all of these things should be talked about, especially right now with your service provider.
Chris Parker: And it's all about increasing that supply chain resiliency.
Karl Francisco: Absolutely. And knowing what we know right now going through the COVID period should prepare us once again on how to deal with a difficult situation if it does occur. We're hoping that it'll be a smooth negotiation and that would make everyone's life a little bit more easier, especially while we're dealing with COVID right now.
Chris Parker: So going back to the shippers, what would you say are some of the biggest headaches right now? On top of this resiliency question that they're asking themselves, what else is kind of acting as a stressor and what can they do about it?
Karl Francisco: Yeah. I would say right now a lot of shippers in the ocean side they're having difficulties finding space in the marketplace, all trades are completely sold out, the space is finite, there's a lack of capacity right now, there's really more demand right now than capacity. So I would say the number one challenge is finding space to move cargo, okay? That would be the first challenge. The second challenge would be the cost associated with moving cargo right now. Because demand outweighs supply, right? It's a seller's market right now and these costs are extremely high, we've never seen costs like we're seeing right now in the marketplace and that's really got to hurt a lot of customers in the back pocket so that's a big struggle too.
Karl Francisco: And then finally, once the cargo gets to its final destination now we have to deal with the congestion issues at the terminals that we talked about earlier, how do we get it off the boats in a timely manner? How do we get it on a truck? How do we get it unloaded into our facility? These are all things that every company is struggling with right now. And again, until we start seeing a lot of these vessels no longer on anchor and they're starting to birth, right? This problem could go on for a little bit longer than we would like it to be.
Chris Parker: That's one of the things I wanted to ask next was, what are some signs that will tell us that things are getting better? How will we know that this situation is improving?
Karl Francisco: Sure. Great question. The first thing that we always see and hear and ask, demand needs to drop, right? Demand is extremely strong right now, shipments going from Asia to Europe, shipments going from Asia to the US, basically, every trade is very, very busy. If the demand slows down it allows the terminal operations to get caught up, right? And hopefully, things will clear up. Another good indicator would be once you start seeing ships no longer on anchor. What's normal is when you don't have ships on anchor, that they actually arrive into the port and they're actually worked on within a day or two days of arriving within the port. As long as you have ships that continue to be on anchor for a long period of time with the demands being the way they are right now, it'll be very difficult for things to get back to normal.
Chris Parker: I was wondering if you could share a little bit about what you've seen from successful companies, how have people figured things out for themselves? I can't get into specifics, I'm not an expert here, but have you seen anyone kind of figure it out?
Karl Francisco: Yeah. Everyone is looking for this silver bullet, unfortunately, it doesn't exist right now. Whether you are a large shipper or a medium or a small shipper, everyone is faced with the same challenges, it's very difficult. I would say some of the successful companies that seem to do a little bit better is the planning, planning is extremely crucial. What's planning? It's really providing a really good forecast, knowing what's coming at the steamship lines way in advance will put that company in a better position to protect space and have the right equipment available to them. And we know how difficult this is for companies to forecast or have a good plan, but now more than ever, it's extremely vital that they have a good plan, especially going into next year, right? Where we might continue to see what's happening this year leading into next year. So having a good plan, having a good forecast, will help everyone in supply chain.
Chris Parker: Yeah, for sure. To end on a high note because I think we kind of covered a lot of dour stuff here, what are some things that have kind of been exciting you as shipping powers through everything that we're seeing?
Karl Francisco: Yeah. It's really not on a high note in a very difficult year that we're still living right now, it's a little difficult to do. However, I would say that one of the things we've learned a lot during this whole COVID era and seeing the challenges in the industry is how come companies are creative and creative in looking at ways in moving products that have a hard time getting on the ships. We see companies chartering vessels, for example, just to move cargo, we see companies doing a lot of conversions from ocean to air freight. Now that's not anything new but in today's world where space is finite also on the air side, that is something that's very difficult to do that needs to be planned ahead.
Karl Francisco: Being very compliant-driven is extremely important as we see a lot of companies wanting to do different things like a possible offshore distribution in other countries before it goes to the intended country and getting your provider involved and understand all the compliance aspects is extremely important. So it's been very tough, it's tough for all of the players in the supply chain, from the ocean liners to the terminal operators, the shippers, their cost and needs, and also the employees of the logistics companies. It's been a very difficult year but hopefully, things will start to look up as we continue to move forward and do the best we can in the industry.
Chris Parker: Over your 37 years is there one bit of wisdom that you want to just get out there?
Karl Francisco: I would say in my role as far as a service provider, delivering news whether it's good or bad is really important and I think a lot of times because there's so much bad news going on right now, people are hesitant to deliver that bad news but not more than ever, I think that needs to be shared.
Chris Parker: Because you can take action on it.
Karl Francisco: You can take action with it.
Chris Parker: Good or bad.
Karl Francisco: Yeah. You put the customer in a situation where they can make a choice.
Chris Parker: Yeah, for sure. Well Karl, thank you so much for sharing your thoughts today. If people wanted to get in touch with you to talk more about Ocean, well, how can they reach you?
Karl Francisco: Absolutely. They can either email me at email@example.com or they can reach out to the corporate office in Seattle, Washington, and I'll be available anytime.
Chris Parker: Sure thing. Thank you so much, Karl.
Karl Francisco: Thank you.
Chris Parker: Thanks for listening to today's episode. If you've got any questions or want to learn more about today's topic, check out the show notes for more information. And before you go, make sure you're subscribed on whatever podcast app you're using so you won't miss the next episode. To learn more about Expeditors, you can find us on LinkedIn, Facebook, Instagram, and Twitter, or simply visit us at expeditors.com. Take care, and I'll see you next time.