2019 has been a “pivotal year” for Flexport, according to Ryan Petersen, its chief executive officer, with the freight forwarder launching a new version of its customer-facing computer platform, which it calls an “operating system for global trade.”
It also rolled out a number of new services and locations and raised $1 billion from an investor group led by Softbank Vision Fund.
Sanne Manders, Flexport’s chief operating officer, spoke about some of the highlights of the year during an interview with FreightWaves at the company’s San Francisco headquarters.
To create Flexport Platform 2.0, Manders said the company interviewed about 100 shippers to find out what they want. The shippers stated that visibility, control and ease of use were paramount.
Visibility, said Manders, “doesn’t mean ‘where is my container on the map?’ It goes much deeper, it goes to a SKU level.”
Shipments can be “tagged” in the system so that all shipments related to a product launch or retail campaign can be tracked.
So a buyer for a clothing company, for example, has “control over whether the fall campaign is going to deliver on time,” said Manders.
In designing its platform, Flexport spent a great deal of time on shipper documentation. Manders said the company takes care to “structure the data as early as possible, including commercial invoices, packing lists and all the documents needed from the shipper.”
For example, he said a shipper may receive documents like commercial invoices and packing lists in several different ways — directly from a factory through an order management system or via an Excel file or PDF document.
“There are no standards on these things — whatever the factory thinks is the format is the format,” he said. It can be “extremely costly to structure all that data.”
Flexport uses technology such as optical character recognition, machine learning and artificial intelligence that interprets unstructured data and puts it into structured form, interprets it and makes sure it is correct.
Manders emphasized the need to obtain information from multiple sources, saying, “No data source is perfect, but by reconciling all the data sources you can actually get close to perfect.”
After switching to Flexport’s platform, the average customer can spend two and a half hours less per day doing the same work of coordinating shipments and making sure import flows are moving smoothly, he said. The time gained can be used to analyze the supply chain and finding ways to improve it.
Obtaining data from shippers upstream provides a number of benefits, Manders said. With the use of a supply-demand planning program, Flexport can do a better job of adjusting container allocation to vessels. So that if it has an allocation of 50 container slots on a ship, it can better react to a situation in which it has 54 or 46 containers showing up at the export terminal.
This leads to a much lower percentage of cargo being “rolled” to later voyages. He estimates roll percentages in the container shipping industry run between 5% and 7%.
“We can say we are comfortably below 3%,” he said.
While Flexport has worked a bit with the New York Shipping Exchange, which seeks to reduce rolled shipments and shippers that fail to show up with cargo by making enforceable contracts, Manders said, “Our fundamental belief is that enforceable contracts should be between the forwarder and the shipper.”
Obtaining information from shippers early and with improved accuracy also pays dividends when filing entries with U.S. Customs and Border Protection (CBP).
“Over the last two years we reduced exam rates by 72% while CBP penalties at the same time increased by 49%,” he said. “Our exam rates are far below 1% as a result.”
Manders explained that Flexport does customs filing with its own staff in the U.S., Canada and a number of European countries, and in countries where it does not have its own customs license uses third-party brokers that utilize Flexport software.
The company’s focus on data has also allowed it to offer new products for less-than-container load (LCL) shippers. Flexport offers global LCL coverage and in-house consolidation on more than 300 lanes.
While the company has offered LCL shipping for some time, this past spring Flexport rolled out its OceanMatch product that uses data from commercial invoices and packing lists to calculate the volume and weight of cargo within a container.
If there is empty space in the container and the ability to add cargo without exceeding weight limits, Flexport can help match shippers with excess capacity and other LCL shippers.
“If we co-load somebody else with you, the transit time will go up a little bit because there is the co-load and we have to deconsolidate again,” Manders explained. “But we’re doing that under our own control so that is relatively modest, like two to four days extra. But we can give you quite a bit of money back because we’re basically buying the empty space from you and then we sell that empty space to somebody else.”
The work is done at either Flexport’s own container freight stations or those of certified partners.
Flexport moves LCL shipments from China, Hong Kong, India, South Korea, Taiwan and Vietnam into the U.S.; from China into Canada; and from China and Hong Kong into Belgium, Germany, Luxemburg, the Netherlands and the U.K. OceanMatch is available from China, Hong Kong, India, South Korea, Taiwan and Vietnam into the U.S.
Flexport sees opportunities for more movement of LCL cargo. Its “analysis of PIERS and ImportGenius data for all full container loads (FCLs) imported into the U.S. in 2018, accounting for both volume and weight parameters, showed that containers on average were only 64.6% utilized.”
Manders stated, “A lot of customers don’t like LCL. LCL is error prone, it always gets stuck in customs.” Often that is because LCL attracts new or small shippers that are more prone to making mistakes or submitting data late. These issues could result in a shipment being flagged by customs and delayed.
Manders argues that reliable LCL service can actually be superior to moving FCL shipments in many instances. Instead of having to “batch” cargo — accumulate enough cargo for a full container load — shippers can instead move small, continuous amounts of product. That ability can be particularly useful for a manufacturer or retailer if it has trade lanes with small volumes.
Flexport has also partnered with the Carbonfund.org Foundation to offer its LCL clients a carbon footprint offset program.
In July, Flexport launched a trade finance product that it had been offering in beta form for two years.
“We are very strong in what we call the mid-market, modern companies, fast-growing brands, and what you see with a lot of these companies is they are cash-strapped. They are successful and therefore always in search of cash,” said Manders. “They don’t have, let’s say, the Walmart payment terms. So cash is for all those businesses an issue.”
Flexport decided to assist companies by providing loans through its Flexport Capital unit. It said the product is particularly timely since it estimates that more than 60% of its clients have had products affected by U.S.-China tariffs.
Flexport feels it has unique advantages with potential borrowers, said Manders.
“We already have the customer relationship; we know they are successful,” he said, adding that according to maritime law, a lender has a lien against goods.
“It’s been a big success. A lot of those customers that we intended it for are very excited,” said Manders.
Of course, Flexport is not a bank, and while Manders did not want to go into specifics about how the service is financed, he said “there are different ways to finance this and our current operating model is not necessarily the same as our future operating model.”
For example, Flexport could work with a bank as it scales up the product.
Using the information moving through its platform, he said Flexport can help “de-risk the bank. We are interesting for the bank and also for the shipper.”
Flexport also offers insurance for shippers through a relationship with Marsh.
Flexport would seem to be flush with cash, having secured $1 billion in a February funding round led by the SoftBank Vision Fund with participation from existing investors Founders Fund, DST Global, Cherubic Ventures, Susa Ventures and SF Express.
Michael Ronen, managing partner at SoftBank Investment Advisers and a Flexport board member, said at the time, “Flexport’s pioneering use of technology and its data advantage position the company for exceptional growth in this multitrillion dollar industry.”
However, the failed IPO of another SoftBank-backed company, WeWork, may have taken some of the bloom off the rose of SoftBank’s endorsement.
Manders was circumspect in providing much additional information about the size of Flexport.
On the November 19, 2019 edition of the “Something Ventured” podcast Flexport’s Petersen said that the company is now the seventh-largest forwarder on the Asia-to-U.S. trade lane. The company now has more than 1,000 employees in the United States and over 600 internationally, including about 400 in Asia. Most of the company’s engineering and corporate services teams are located in the U.S.
Petersen said the company has grown annual sales from $2 million in 2014 to $441 million in 2018 in a “furious pursuit of scale.” Without scale, he explained, it’s difficult to get good pricing from ocean carriers and airlines, and without good pricing it is difficult to attract shippers.
The company is now more focused on how to become profitable. Petersen said during the podcast that ancillary services such as cargo insurance and trade finance are the “core engine of profitability” and that “ocean freight is kind of a commodity.”
Flexport is shifting more attention to new business lines, “taking data and structuring and using it to create rich products for your customers. It is much more defensible and higher value,” Petersen added. “The core ocean freight, let’s automate it, let’s make it run like a pipeline and you don’t have to worry about it. We’ve made good strides there.”
“Pure container yard to container yard movements, the gross margins are very low. Air gateway to air gateway movements are pretty low,” said Evan Armstrong, president of Armstrong & Associates Inc., a leading analyst of the forwarding and logistics industry.
In freight forwarding, Armstrong said, “the top tier and where you can make the best margins is to do true international supply chain management, where you are managing shipments for a customer from some origin point, you are handling inland transportation and then you are handling the international transportation component, and doing some consolidation and deconsolidation as part of that, and you may do some warehousing.
“It’s really about the value-added services and how much of supply chain you can manage,” he said.
Flexport has been growing rapidly, but according to an investor presentation by the Danish forwarder DSV Panalpina, Flexport’s 2018 revenue of $441 million was far below the revenue of the world’s largest freight forwarders. The DSV presentation shows the 20 largest as having revenues ranging from $33.4 billion for DHL Logistics to $4.4 billion for Rhenus & Co. and Hub Group.
“Their tech is very good. It’s very user friendly,” said Armstrong. It has “a nice user interface and good reporting capabilities.” He added that Flexport’s platform offers ease of use, good functionality and good shipment visibility.
“Does it get you anything more than DHL’s Resilience360 (another platform)? Probably not,” Armstrong said.
“In terms of the underlying service, though, it’s a traditional freight-forwarding service. It’s not as differentiated as their tech is,” he said.
“Does that justify a $3.2 billion valuation? That is really up to the investors to decide,” said Armstrong.
“If you are viewed as a tech company, your valuation is going to be three times or up to 10 times your revenue. Whereas if you are a freight forwarder — and we are talking about some very big deals — your average multiple 11.4 times EBITDA. There is a lot of distance between that. Investors are viewing Flexport as a tech company and not a freight forwarder for it to have this kind of valuation.”
Manders declined to give an estimate of sales, ocean container or air cargo volumes for 2019. The company has about 10,000 companies in its network.
However, he said from China carriers and forwarders are “being impacted quite a bit by the tariffs because trade volumes have gone down. This year they didn’t really have a peak season. The peak was in July before the tariffs and then it remained relatively flat. So it was a very soft peak — especially on the airfreight side. I’ve never seen a peak season with airfreight pricing being this low.”
In August, Neel Jones Shah, Flexport’s executive vice president and global head of air freight, told FreightWaves that the company is moving 6 million kilograms monthly in nonpeak season and expected to do 11 million to 12 million kilograms monthly in peak.
The company did not give an update on specific volumes actually handled, other than to confirm the peak season has been soft “plus we’re seeing more diversified global freight patterns, where clients are shipping from more locations in Asia to more locations in the US and Europe.”
Flexport has a private air service that uses a chartered Boeing 747-400 freighter painted with its logo. That service flies between Hong Kong and Los Angeles three times a week. One of those three weekly flights had gone from Hong Kong to Chicago earlier in the year, but the company dropped that in favor of block space agreements to Chicago and three flights a week to Los Angeles..
“If you look at the other markets south of China in Southeast Asia, basically you see the opposite — they have high growth and not necessarily always the capacity to absorb that,” said Manders. But he noted that exports from Vietnam are far smaller than those from China.
“We don’t comment on our volumes. I know this has been a big frustration for the industry, but we don’t care. We know the volumes are real and it’s hard to track us because only a smaller percentage of all our volumes are under our own SCAC codes [SCACs are standard carrier alpha codes used to identify transportation companies],” said Manders. “A lot of our volume is under the SCAC codes of our overseas agents.”
About 20% of the company’s employees are engineers and most are located in San Francisco or Shenzen, China, and the company is building a presence in Amsterdam as well. The company is constantly tweaking and upgrading its platform, making about 150 updates a day.
Flexport operates in 105 countries and maintains its own offices in about a dozen.
Manders said Flexport has a slightly different model than most forwarders.
“I think it’s interesting to talk about it a little bit. We have a software-first model instead of a people-first model. So we find local entrepreneurs that have the licenses and the same vision that we have and we give them our software, our platform to work on. That comes with a lot of requirements on quality, SLAs [service level agreements].
“The way they work, we want them even to organize their teams as we organize our teams. But then they’re basically Flexport’s offices run by a local entrepreneur — there are many cases where they even put a Flexport logo on it. So if you go to Vietnam you will find offices with Flexport on them. But they are not our own people there, they are ITL people,” he said. (ITL Corp. is one of the largest logistics companies in Vietnam.)
He added these deals are not official franchises or joint ventures but long-term contractual agreements and some companies continue to operate as traditional forwarders as well.
“We want to be a global forwarder active in all trades for all customers,” said Manders. “But the reality is we’re only 6 years old, so you’ve got to focus. So we focused initially on the trans-Pacific. We are now very focused on the Far East westbound, so Asia to Europe and the trans-Atlantic. And we see more and more the Latin America trade also coming on.”
Rather than focusing on particular vertical markets, Flexport has focused on moving FAK containers — containers with freight of all kinds.
“We are a player that goes for the larger volumes that are set up for automation instead of the specialist volumes.”
For all of Flexport’s emphasis on technology and its platform, Manders said, “A forwarder is an account manager and a problem solver — making sure that whenever things go wrong in your supply chain, they are helping you solve it.
“Technology is not replacing the human touch, it is enhancing it. But if you are looking into the human touch, there are a lot of things that are extremely repetitive. The amount of phone calls, ‘where is my container?’ should not be necessary. There is a lot of work that forwarders do essentially just sending emails to the next in the chain. We sometimes joke that forwarding should be called email forwarding,” he said.
“So there is a lot of human-to-human activity, human-to-human relay race and technology can make that a machine-to-machine relay race so that the humans can actually focus on improving supply chains and defining solutions instead of being active in the transactions,” said Manders. “That’s our whole game. We want to basically replace the transactional work through a machine-to-machine flow and focus the human on doing strategic account management.”
He noted that supply chains are getting more complex — in part because the tariff war has created the need for some companies to source from more countries instead of relying entirely on China but also because of the increase in e-commerce and demand by consumers for products to be delivered if not the same or next day in a very short period of time.
That means companies can no longer move all their cargo through southern California and have a single distribution center but must position inventory in many locations close to the customer.
“Complexity is exploding and your shipments are getting smaller,” he said. “You need 50 trade lanes instead of one. … You need much more visibility.
“In that world, NVOs will actually thrive, especially tech-enabled NVOs because they can help customer manage that complexity.”