Why is the supply chain in a state of crisis?
Richard Reinsch (00:04):
Hello, and welcome to Liberty Law Talk, I’m your host Richard Reinsch. Liberty Law Talk is featured at the online journal Law & Liberty, which is available at lawliberty.org.
Richard Reinsch (00:18):
Hello, and welcome to Liberty Law Talk. I’m Richard Reinsch. Today we’re talking with Michael Rentz about all aspects of the supply chain crisis. Mr. Rentz is the chief revenue officer of Gnosis Freight, an international shipping company based in Charleston, South Carolina. He also previously worked for Maersk in their shipping operations, so he knows the industry really well, and has thought a lot about its problems in our current scenario where they stem from, and is here to talk about it with us today. And I think he brings both an interesting perspective, both economically, both theory, and also in the practical problems, and details that he has encountered working in this industry. Michael, welcome to the program.
Michael Rentz (01:03):
Thank you, Richard. I appreciate you having me. It’s an honor to be on the podcast, and I appreciate the opportunity. So thank you.
Richard Reinsch (01:10):
Great. So thinking about the supply chain crisis, this thing that has exploded in American life, and has affected everything from new cars, semiconductors, shelves at Target and Walmart, energy. And so we’ve got a lot of things happening that people don’t like and are experiencing, and a lot of fingers are being pointed, and there’s a lot there… As you and I were discussing offline, there are numerous causes contributing to this but maybe before we get into that, just to help us give us the context for the supply chain, international supply chain. I mean, as I was thinking about this, a small business owner has a supply chain. It may just be that all of his products are sourced locally, but he has some sort of supply chain he’s got to do to bring his business together. It’s just that the supply chain crisis we’re discussing is truly international, but help us understand what is the supply chain, and what has it become in American life over the past two decades?
Michael Rentz (02:10):
Great question. And that’s a great place to start to kind of frame up the fundamentals of what we’re dealing with regards to supply chain. The way I describe it is I tell people it’s a loose collection of a lot of different industries. It’s not one monolithic industry supply chain. Under that umbrella are huge industries in and of itself like ocean carrier industry, ports, warehousing, factories, trucking, air freight, as well as trains… Rail. So a tremendous amount of economic activity under the umbrella of the supply chain. And what that means is it’s a massive problem that deals with how they communicate with one another as they’re passing goods along through the chain. The one ubiquitous part of the entire industry is the container itself, the international shipping container, which revolutionized the industry in the 1950s. And so that’s ironically enough the perspective I take when analyzing the supply chain is that of the container as it goes intermodally, through the entire supply chain.
Richard Reinsch (03:15):
The container. I’ve read that this is an important factor. How did international shipping happen before the container, and what did it do in terms of volume speed, things like that?
Michael Rentz (03:29):
Right. So before the container, when it came to moving goods on boats, primarily, I mean, people literally picked them up in rope nets off the docks, and loaded it, floor loaded it onto the vessel. And you could… As many goods as you could fit on the deck of the vessel was about as much goods as you could transport. And it was just a massive bottleneck, and taking it from one mode of transportation to the next. And obviously, the throughput, the amount of goods you could fit through the entire system, was tiny. When they created the container, I think in 1955, it was a uniform point to which every different party involved in moving goods, adjusted to the trucks, the ocean carriers, the rail. And then, in addition, it made it much easier to store those goods on the vessels. So if you look at an image of a vessel, it’s not just the containers you see stacked up on top of the vessel itself. It’s stacked way below deck as well. So it really is almost unmeasurable or incalculable as far as the magnitude of difference that made.
Richard Reinsch (04:35):
Michael Rentz (04:35):
To moving goods and really international trades.
Richard Reinsch (04:38):
So you’re saying the container, it’s not just international shipping on these massive cargo vessels. It’s also, then you unload it, and it can be put on an 18-wheeler. It could be put on rail. Its goods can be easily dispensed with, and then reloaded. It can be shipped back to its point of origin, and then reloaded. It offers an array of uses that makes shipping quicker, stronger, faster, cheaper, all of those things.
Michael Rentz (05:05):
Exactly. It’s standardized, there’s only a handful of different container sizes and everybody adjusts accordingly.
Richard Reinsch (05:11):
Question. Just how big is a container. I mean, could you live in it?
Michael Rentz (05:14):
You could. People do. It’s very trendy right now. The most common size is what’s called a 40-foot container. It’s 40-foot by, I believe, eight foot by eight foot. The other unit, depending on the entity, measures them in 20-foot. But I would say an overwhelming majority of the goods are moved in 40-foot containers. They have, in addition to that, what’s called a 40-foot high cube, which is 45 feet long, and a bit more space you can utilize inside as well as what’s called a 53-foot container, which is oftentimes referred to in this country as a domestic container because the United States is the only country on earth that has the infrastructure large enough to move those 53-foot containers. So you won’t see those going around Europe or Asia. Ironically enough, they’re manufactured in Asia, the 53 footers. And so, a lot of retailers compete to get access to those 53-foot imports. They’ll ship the asset itself with goods inside of it. Then it will live here in the United States for the remaining time. The last point is if you see goods moving in a 20-foot container, it’s usually incredibly heavy stuff. It’s what’s called loaded-out, as opposed to cubed-out, you move light goods in 40-foot containers, and heavy goods in 20-foot containers.
Richard Reinsch (06:23):
And also, I remember being in a hotel room in Savannah, Georgia a couple of years ago, and I was on the water. And I remember looking out my window, and almost losing my breath as one of these massive cargo ships sailed by. I mean, this largest thing I’ve ever seen, give us a sense of how big these vessels are.
Michael Rentz (06:42):
The new ones, I think Maersk calls them the Triple E vessel are large enough to put the Empire State Building inside of them. They’re about 20,000-
Richard Reinsch (06:49):
Michael Rentz (06:50):
20-foot equivalent to these container ships, which are huge.
Richard Reinsch (06:54):
Michael Rentz (06:55):
And some of the largest vessels in the world, those don’t even call the east coast. The infrastructure is not even big enough. So the ones you saw in Savannah are pretty big, but not the biggest in the world. Funny enough.
Richard Reinsch (07:07):
So thinking about America’s ports, but before we get to that, let’s just think more about… So we talked about sort of the nuts and bolts of how these goods travel. Why did the supply chain come to be so… Such an important part of American commerce? I suppose part of that is the free trade globalism story of the last 20 years, but also, in the search for cheaper costs and the ability to deliver products at that cost to American consumers, there’s also something else which is, they seemed to really make it work and delivered high-quality goods and services that people wanted to buy.
Michael Rentz (07:38):
That’s right. And I spent a lot of time thinking very deeply about this, and what I can come up with is about 40 years ago, you really start to see offshoring, and the primary objective of that was cost. And the reason they utilized it for cost is because cash became king. Ultimately, I mean the largest export in the United States really today is cash. And that is where most companies make their money is lending their dollars. And so, they wanted to create as much working capital cash-on-hand so they could invest it in the markets to make more money. Walmart, for example, their business model is literally to sell their products on their shelves at a loss. They have incredible terms. They collect on those goods immediately and have 90 or 120-day terms before they have to pay. And they just invested in the markets and take seven, eight, nine percent return. That’s pretty much how they make a lot of their money. So I think that became a structural problem in the economics where everybody was optimizing for cost, as opposed to optimizing for efficiency. And that just kind of perpetuated itself decade over decade. And everybody assumed this is the way you do it.
Richard Reinsch (08:43):
So are you, and this is interesting, so you work in the international shipping industry, but you’re saying that there’s something structurally wrong with it?
Michael Rentz (08:50):
Fundamentally yes, I do think there’s something structurally wrong with it. I mean, it’s not just in our industry. If you look at the best and brightest minds are going into financial services, everybody’s trying to optimize cash… I think that’s not a sustainable way to do business ultimately.
Richard Reinsch (09:10):
Okay. So let’s maybe think more about the supply chain issue here. I mean, cause I guess part of that would be we’re the world’s reserve currency.
Michael Rentz (09:16):
Richard Reinsch (09:16):
And as the world’s reserve currency transactions are going to happen in dollars, they’re going to be pegged to dollars. So foreign companies, foreign investors want dollars in order to engage in those transactions. I mean, part of that’s understandable, and is that actually, most people say that’s actually a benefit to America globally. And also it seems that the search for or lower cost is understandable and also allows for comparative advantage and to develop highest-end uses and the most advanced-
Michael Rentz (09:43):
Richard Reinsch (09:43):
Technology to dominate the American economy. So I understand that, but the supply chain itself becomes sort of, a product of offshoring, but talk about more in depthly about what happens, and we just pick a company, how do they operate? How do they work? How does this come to be?
Michael Rentz (10:00):
Yeah, great question. So, I think one component to chat about is landed cost, which is actually pretty simple. It’s the cost to make, manufacture, plus the cost to import, your transportation costs. And when initially, globalization offshoring began that landed cost was very low. That’s why it was such a good business objective. But as of recently, for a multitude of reasons, that landed cost has gone up tremendously. And unfortunately, that’s being pushed a little bit to the consumer, and we can chat about that later. But most retailers, it’s a giant pareto distribution. About 10 to 15 companies import an overwhelming majority of the goods. And then there’s a long middle and smaller tail. And most of those companies are set up doing what their main objective is, take a garment importer or a clothing company that sells goods. They’re great at selling shirts. And so their expertise isn’t necessarily in moving goods or getting those goods in. They know what they want and they know who… How to sell it to their customers. So they outsource their logistics to a variety of different players. And here we go with the supply chain. So they have factories primarily in Asia, mainly in China, but some in Southeast Asia as well. And then once they are monitoring those inventory levels to try to sell as many T-shirts as possible, they cut purchase orders. They go to their factories that then start producing to make sure that they don’t stock out on the front end to the customers. The last thing they want is to not have any shirts to sell to their customers and miss out on that opportunity to collect the cash. So the factory will make it. And then those t-shirts that are made, let’s say, China for this example, need to get from the factory to the port. So they’ll dispatch an empty container from the port. A trucker will pick it up, take it to the factory, stuff the container, and then bring it back to the port. Then that container needs to get onto a vessel, traverse across the ocean. While it’s going across the ocean, it needs to clear US customs, which is a very burdensome process in a lot of regards, get off the vessel into a port, and then get from the port onto a truck to a distribution facility, probably from a distribution facility to a retailer. And that’s the simplest way to explain it. So they say on average, a container changes hands 20 times on its journey.
Richard Reinsch (12:17):
Okay. So talk about one part of this is this idea of the bullwhip effect. And that’s playing out right now in America, where I guess would be where the whip strikes, so to speak, but that’s being delayed. Talk about that.
Michael Rentz (12:33):
So the bullwhip looks like a bullwhip. It’s the small amplification at the beginning, but at the end of the tail, it’s massive. And so, in that chain, when that retailer cuts those purchase orders, the factory sees a huge order come in. And then that factory places another order to their suppliers for more goods because they’re anticipating that there’s all of a sudden going to be a long sustaining spike in demand. And that just amplifies throughout the entire process where everybody in the chain orders more, and then you get a massive amount of goods trying to flow through the system that may not necessarily truly match the actual demand. And then, from there, everybody’s playing catch-up, and that’s exactly what happened, I think, at the beginning of the pandemic.
Richard Reinsch (13:20):
So with the bullwhip, but also there’s this idea too, of like a delay results in a huge, huge delay on down the line.
Michael Rentz (13:27):
Right. Conceptually it’s the same thing. So, everybody’s pretty much operating on a weekly schedule, and maybe like a 10-minute delay, say, in Shanghai, could result in a 10-day delay in Denver, as those delays process through the system, the handovers miss, the windows miss for an opportunity to exchange the container, and it’s pushed off a week, or it’s pushed off a few days until they have the rhythm, the capacity to pick it back up and keep it moving. And, it just throws off the entire system, which is already brittle, to begin with. I mean, it’s really stretched out like a rubber band, again, optimized for cost, not necessarily optimized for efficiency.
Richard Reinsch (14:03):
Yeah. So efficiency here. That’s something I also want to discuss with you. So we know, I mean, COVID diminishes production across the globe for obvious reasons.
Michael Rentz (14:12):
Richard Reinsch (14:12):
A number of governments, particularly Western governments, the United States, print money, gives it to people in the form of stimulus payments, and then-
Michael Rentz (14:21):
Richard Reinsch (14:21):
People spend it, and we’ve got, the money supplies increased dramatically in this country, and people are spending money. And we’ve also got this strange effect no one I think counted on of the workforce diminishing, although that would seem to allow with the incentives of giving people money. And so we’ve got labor shortages, increased cash. And so we’ve got all sorts of problems, and we now have inflation. So we know all that. We know that’s a part of this problem. You and I are discussing on a micro level and tell me where… What you would add to that. But it’s also the case. When we think about these issues, there’s a lot of ways in which the government has interacted with the pieces of the international shipping supply chain industry that are not beneficial to a market. I mean, you said it’s price-for-cost. Well, that, duh, we know that, but it’s not priced for, or it’s not acting according to efficiency. Maybe we should talk more about that.
Michael Rentz (15:18):
Sure. There are… We do have good examples, both domestically in the United States and globally as like the premier operating model for certain legs or certain components of the supply chain, take ports, for example, whether it’s Rotterdam in Northern Europe or the Southeastern ports of the United States, the Virginia Ports Authority, South Carolina Ports Authority, Georgia Ports Authority, I think have the premier models, which is one governing managerial structure, the South Carolina Ports Authority, or the Georgia Ports Authority, for example, and a non-unionized competitive labor force that is a meritocracy fundamentally. And they are competing to be the best of their jobs because they get paid more to do so.
Richard Reinsch (16:00):
Michael Rentz (16:00):
Compare that to New York, New Jersey, or the ports on the west coast. It’s the opposite. There’s a tremendous amount of friction at the top. The port is really a landlord. And then there’s a lot of different entities that manage the port. So inherently, there’s a lot of friction and communication issues. And then, on the labor side, it’s completely unionized, and they’re not ultimately competing to be the most efficient. They’re trying to make the most money. And funny enough, they make the most money when they’re working overtime. So it’s… They’re disincentivized to work as efficiently as possible. And then in a moment like post-pandemic world where there’s a gluttony of goods flowing through the system, you absolutely need efficiency. And that is part of the problem.
Richard Reinsch (16:45):
So it’s interesting. You mentioned the ports, so just comparing American ports to ports around the globe, which is at a comparative disadvantage in how we receive goods, but ultimately the voracious demand of the American consumer overrides that, those problems to a great extent, I imagine. So, but then not to say that we shouldn’t fix it, but how do you… You mentioned the Rotterdam port, how does that operate?
Michael Rentz (17:09):
The Dutch have always been incredibly forward thinking and progressive with logistics or with water resources, and if you’ve ever been to Holland, you can see that firsthand.
Richard Reinsch (17:19):
Michael Rentz (17:19):
The terminal that I have firsthand exposure is the APM terminals. The APM is the Moller – Maersk company, the parent company of Maersk, and it’s completely automated. There are literally no human beings on the port. If you walk over a certain line, the entire port shuts down. The crane operators work virtually. They work in an office off the port, and they have a joystick. And I think it’s virtual reality, and they operate the cranes from there. And so it’s perfectly optimized. Now, would that work in the United States? Probably not. I think we need to give people good-paying jobs so they can take care of their families. But I think I read something. That’s how the Virginia Ports Authority apparently was able to withstand the most recent crisis was they had relied heavily on automation. Now that’s not the solution, but it’s certainly a factor.
Richard Reinsch (18:07):
Well, I mean, I would think that is the solution. I mean, it’s… This is creative destruction. This is how a capitalist economy advances, would be automation.
Michael Rentz (18:17):
Yeah. I mean, totally.
Richard Reinsch (18:17):
I would… I mean, I would disagree with the notion that we’re supposed to lock in these jobs to help people protect their… Care for their families. I mean, to me, that’s actually the recipe for decline. If we try to lock in the…
Michael Rentz (18:28):
Fair enough. Yeah.
Richard Reinsch (18:28):
Economy into one labor system. It’s funny listening to you I was thinking of that. I think it’s the second season of The Wire, maybe the third season of The Wire. Where we’re… We get to sort of look at the Baltimore port through the lens of this family, intergenerational family, that’s worked in the Baltimore port, and at the end of the season, they’re introduced to automation, and they’re sort of scratching their heads about it. This means to me, yeah, no, I was reading about the Virginia port. Semi-automated, and it’s been of what I’ve read, it’s been the only port in America free of backlogs. And that would seem to accord with what you are saying internationally, that this is just a more efficient way of doing it. And yet obviously there’s a lot of built-in invested interest who resist that. And that’s clearly what we’re seeing in California.
Michael Rentz (19:20):
Right. I would add the port of Charleston in there. I’m pretty sure they’d never-
Richard Reinsch (19:23):
Michael Rentz (19:24):
Sustained any type of backlog. And I’m from South Carolina, and any time I worked at Maersk, that seemed to be the sentiment globally. I would sit in the conference room, and they put a map at the United States up in South Carolina would be colored a different color, and it’d be for a good reason for the first time ever. And it was because it was the premier port, people globally recognize how good the South Carolina Ports Authority system is. I think we chatted about so Virginia relies heavily on automation. I know more about the South Carolina Ports Authority, and they rely on a competitive workforce. And as we also talked about, they also have the only recent CapEx infrastructure project, which started in 2009 to double the capacity of the port here in Charleston, in the entire country.
Richard Reinsch (20:06):
Well, now that’s interesting as well. So that would be South Carolina as a right-to-work state is free of, say, the longshoreman’s union-
Michael Rentz (20:14):
To a certain degree.
Richard Reinsch (20:15):
That dominates ports. So there is some unionization of the port?
Michael Rentz (20:18):
Right. But the overwhelming majority of the port’s staff are employees of the Ports Authority, and it’s a right-to-work state.
Richard Reinsch (20:27):
Michael Rentz (20:27):
For example, and this is a few years outdated, and my numbers may be slightly off, but the base salary of the crane operator for a year, $70,000, but the top-performing crane operator, I believe, took home somewhere around $170,000.
Richard Reinsch (20:39):
Michael Rentz (20:40):
That year, because they were paid per container to take off the vessel. And so at one point in the last few years, this may be off as of super recently, but the Port of Charleston was the most efficient port in North America, as well as the fastest growing and what they could turn a vessel over in one day, it would take people in LA Long Beach, seven days to do that vessel.
Richard Reinsch (21:02):
Michael Rentz (21:03):
That’s the comparative difference. And that I believe, is why elevating what I would call meritocracy at the labor level, so important to efficiency as opposed to call.
Richard Reinsch (21:13):
Oh yeah. So, but yeah, I mean, I was reading, just doing some research for our discussion here today, the longshoreman’s union at the ports in California, average worker there makes over $200,000 a year.
Michael Rentz (21:26):
Richard Reinsch (21:26):
Which that seems like a generous income, but also seems like one, that’s the result of a lot of protection, a lot of labor protection-
Michael Rentz (21:33):
Richard Reinsch (21:33):
A lot of insulation from competition to the detriment of a much broader group of people, namely the American consumer. And then, also thinking about our ports, dredging, which would be necessary for growing ports. I mean, so we think about…
Michael Rentz (21:48):
Richard Reinsch (21:49):
International shipping increasing in volume, which I assume is a pretty regular thing or was, and will be again, do the ports themselves, are they able to update the way you think they should? Or are they themselves hemmed in by a lot of regulation?
Michael Rentz (22:03):
Yes and no. I mean, I’m looking out the window at the Charleston Harbor right now, and there’s, there’s always going to be dredgers out there. So the key number is 52 or 54 feet. You don’t want to be tidally restricted to be able to handle the big vessels, and it’s the ocean. So you need to constantly dredge to do that. That project started in 2009. So it had to go through the Army Corps of Engineers. It’s just a very lengthy, clunky, and robust process that you got to have good leadership. You have to have good foresight and a good finger on the pulse of the macroeconomics of where the goods are going to go. And so, thankfully, the port of the South Carolina Ports Authority has probably the best leadership of all the ports in the country right now, contrast that maybe with some of the other ports who don’t necessarily have that vision in-
Richard Reinsch (22:49):
Michael Rentz (22:50):
Overly burdened with their regulatory environment per… By state.
Richard Reinsch (22:54):
Good. Just a question, the Charleston port, so you’re singing its praises. This is great. That’s what seems to compete with what I would think, but where does it rank in terms of volume of goods received routed to the other ports in North America?
Michael Rentz (23:06):
I think it’s eighth right now. It could be seventh or eighth or ninth, but it’s in the top 10.
Richard Reinsch (23:12):
Out of how many? How many ports do we have?
Michael Rentz (23:15):
It depends. I mean, there’s a lot of niche ports.
Richard Reinsch (23:17):
Michael Rentz (23:17):
But I mean probably 10 to 15. I could rattle them off.
Richard Reinsch (23:20):
Yeah. That’s okay. That’s okay.
Michael Rentz (23:21):
Yeah. Main ones. But I think it’s important for everyone to know, imports go to population centers, imports go to cities. So in the Southeast, they go to Atlanta, Charlotte, Raleigh, they go to New York, DC, Miami, LA, but exports come from the rural places of this country where land is cheap, and labor is cheap. So there’s an inherent problem of getting that equipment. The container specifically from where it was unloaded, say Atlanta, to a rural part of Georgia or South Carolina to where there’s a factory. If there’s a factory, to put goods in it, to export it to somewhere. Unfortunately, because of the trade imbalance in this country, and this goes back to what we were talking about initially, the largest containerized export in the United States of America today is air. It is empty containers. We send more empty containers back to China to put more stuff in and then to bring it back into the country than we do anything. And I think second and third in that is scrap paper, scrap metal, scrap cardboard, things like that. Again-
Richard Reinsch (24:21):
Michael Rentz (24:22):
To go back to those countries to make more stuff, to put it back in here.
Richard Reinsch (24:25):
Well, I mean, trade imbalance doesn’t really bother me. It doesn’t bother me one, just thinking about the dollar being the world’s reserve currency, but also because the people outside of America are investing American dollars into American equities, also into bonds, treasuries, things like that. So you can say it’s a trade imbalance, but I think what we actually have is probably an equity imbalance, and that doesn’t bother them. I think that works long term to the benefit of our economy. And I think we export air because we have a lot of hungry consumers. We have a lot of voracious demand, and we want a lot of goods delivered here that it may not make sense for us to produce ourselves. We could produce them, but what would be the cost that we would bear doing that? Thinking about the Jones Act, I’ve read just things that have made things worse. I mean, both preceding this crisis but have made it worse. The Jones Act entails American chartered vessels have to move goods between the ports. And that, of course, is a high cost, and that’s a regulatory cost and which would raise prices, et cetera, decrease of efficiency. What do you see there?
Michael Rentz (25:30):
Right. So American flagged to American made, and I think American owned and operated, which there are no American ocean carriers anymore. So inherently, that’s a problem. The Jones Act, I think, was created in 1920. North America. The United States has the most navigable river system, I believe in the world, and we don’t utilize it. So it’s a huge problem. And it’s not contemporary in the least.
Richard Reinsch (25:51):
And is that… And that’s because of the Jones Act? The navigable river problem.
Michael Rentz (25:55):
I believe in part, yes sir.
Richard Reinsch (25:57):
Michael Rentz (25:57):
So you can’t deliver goods, let’s say from New York to Miami via ocean, it’s got to go over land.
Richard Reinsch (26:03):
Well, yeah. That’s a problem.
Michael Rentz (26:03):
Richard Reinsch (26:04):
I-95 is a problem.
Michael Rentz (26:07):
Right? And so, it sucks up the capacity of trucks and trains to make these long haul moves when they could be put on what’s called a feeder vessel, which is not the giant vessels that you can put the Empire State Building in, but smaller vessels, which is common to Europe, Southeast Asia, the rest of the world to transport goods domestically, via water. And with that new capacity, that’s not being sucked up, to move these goods across the land, they could be used to do what’s called drayage, which is short haulage from the ports to the distribution centers, usually about 30 miles. And that’s where a lot of the congestion is, around LA, Long Beach, New York, New Jersey, Charleston, everywhere. Those trucks are taking the goods out of the port complex to a distribution center nearby and back. They try to make three or four runs a day. And a lot of that capacity, because there’s already a trucker shortage of 80,000 drivers in this country are doing long hauls, because we can’t use the navigable waterways. And because we’re not using domestic ocean moves. So the Jones Act certainly is antiquated and old, and definitely needs to be revisited. I don’t know if I have the answer myself, but if we get enough smart people around the table.
Richard Reinsch (27:15):
Well, I mean, you just delete the legislation, right? I mean, just end the legislation, which is inhibiting markets, inhibiting price discovery, it’s inhibiting how people would actually engage in commerce, but for the cost associated with this bill, this legislation, and things would move a lot better. So I don’t know. I don’t think it’s that complicated, do you?
Michael Rentz (27:37):
No. I mean, yeah, in theory, it shouldn’t be. I mean, I would love to see an American ocean carrier come up. There are certain, what they call Jones Act carriers that will make feeder runs from Florida to Puerto Rico or from Seattle to Alaska. But they’re tiny. They have like four vessels in their entire fleet, but I would love to see that. I would love to see an American ocean carrier emerge. I would love to see us take advantage of the navigable waterways with a barge system. Northern Europe does an incredible job of barges. And I think that would alleviate a lot of of the problems.
Richard Reinsch (28:10):
Michael Rentz (28:10):
As well as a real infrastructure investment into some new ports.
Richard Reinsch (28:14):
Michael Rentz (28:15):
Our ports are confined by these old cities that haven’t grown. Take Charleston, for example, 400 years. It’s confined to how the city developed, the population developed. And if you want to make infrastructure investments, if you want to find empty land to store containers, it doesn’t exist. Doesn’t exist in LA, Long Beach, it doesn’t exist-
Richard Reinsch (28:31):
I can only imagine, and I know nothing about this, but I can only imagine the regulatory cost associated with trying to create a new port or enlarging an existing one to fit new market realities. I imagine it’s a mess.
Michael Rentz (28:45):
Right? I mean-
Richard Reinsch (28:46):
Years, years, years.
Michael Rentz (28:48):
Richard Reinsch (28:49):
Michael Rentz (28:49):
It’s a decades process. I know South Carolina and Georgia Ports Authority are exploring building a joint terminal in Jasper, South Carolina. And I think the goal was 2030 or 2035 and they started on it five years ago. So the foresight…
Richard Reinsch (29:04):
Michael Rentz (29:04):
Is in leadership has got to be…
Richard Reinsch (29:08):
Talk about the intermodal chassis. I’m reading here 221% trade remedy tariff on imports of the intermodal chassis from China. That can’t be helping us.
Michael Rentz (29:22):
That’s a funny problem. It’s not the main problem, but yeah, so there was the shortest of chassis, and chassis are the metal frame with the wheels that the container sits on. So, the 18-wheelers that people see on the road aren’t really how the containers move. You have a truck, a big trucker that goes to the port, grabs a chassis, hooks it to their… The cab of their truck then goes and picks up the container. So it’s three parts that metal part with the wheels is the chassis. There was a shortage of them. So they decided to order them. And they’re all manufactured in China, and they’re stuck in the same supply chain crisis that we’re trying to solve. And they won’t get here to the middle of 2022. So that’s just a funny problem. The real problem is who owns the chassis. So I think about 10 years ago, the ocean carriers Maersk, CMA, MSC, Hapag-Lloyd, these big international ocean carriers owned the chassis. And it was a problem. People complained it cost the industry billions of dollars a year. And so the ocean carriers said, fine, we’ll sell them. They sell them to private equity groups. And so the private equity groups care about one thing, and that’s sweating the assets out to get as much cash as possible out of them. They don’t necessarily care about the industry or efficiency or anything like that. So the chassis are inherently a problem. And it’s a big problem. And it’s incredibly complex. I mean, I’ve tried to read and study about it, but it has to do with who owns them, how you rent them, who takes care of them, who fixes them when they break.
Richard Reinsch (30:46):
And I suppose, I mean, just for our listeners, the function of it, right? This is what allows you to move the containers.
Michael Rentz (30:52):
Right. The container is just a metal box.
Richard Reinsch (30:55):
Over land in a truck, right?
Michael Rentz (30:57):
Richard Reinsch (30:58):
Michael Rentz (30:58):
That’s right. So, the trucks don’t have… It’s not a trailer, it’s not hooked, like I said, you see the 18 wheelers, it’s just the front of the truck with the trailer hitch basically.
Richard Reinsch (31:09):
Michael Rentz (31:09):
And they come to the port, they pick up the chassis, go get the container, et cetera.
Richard Reinsch (31:13):
As you’ve worked in this, international shipping. And you’ve thought about the elements of the “supply chain,” quote unquote, is it a dynamic industry? I mean, we’ve been in sort of sending forward the case that it isn’t, but shouldn’t it be? Maybe parts of it are, you can enlighten this, but what do you see as the future and what do you see as holding things back? Am I overly insisting upon sort of the… A free market store here that’s not being allowed to work or what’s… What do you see as going on overall?
Michael Rentz (31:46):
So I’ll take the perspective as an American, and I think we have stretched the rubber band about as far as we can possibly stretch it. I just can’t conceptually in my mind, think about how much more globalization there can be. I mean, we’ve pretty much tried to extract as much value as we can from the system. That plus the pandemic, I think there is going to be a natural reshoring of goods. And I think the ground today is different than it was a few decades ago when offshoring began. And what I mean is I think people are more equipped today to move back closer to what I would call only mile delivery, as opposed to last-mile delivery, which is like a completely vertically integrated supply chain domestically for certain goods.
Richard Reinsch (32:24):
Michael Rentz (32:26):
So I think we’re going to see the pendulum swing back towards that way. Certainly, different administrations will help and probably incentivize people to do so. I think it would be best for the American citizen to have some of those goods back, but certainly, access to capital, access to information, and access to technology is different today than it was, say, 40 years ago. So if you and I wanted to go start a toilet paper manufacturing company in rural South Carolina, the likelihood that you and I could do that today versus 40 years ago is extremely high. I mean, we could take… The cash is there to go out and finance the equipment. The equipment is much more advanced today than it was. It could be highly automated. And then, with access to information, whether it’s YouTube or any other online resources, we could learn what it takes to run a toilet paper business. And that’s a very small and limited scope of an example. But I think in general that’s the American spirit is people will take it into their own hands. And then that’s a truly resilient supply chain. You’re buying from your neighbors to a certain degree for certain goods.
Richard Reinsch (33:27):
Yeah. I mean, my sense is, thinking about the… Just to continue talking about toilet paper here. So, we ran out during the pandemic, a lot of panic buying, and we heard a lot about pharmaceuticals of not being available, potentially the way that China could make things unavailable and make things scarce for their own benefit. Vis-à-vis America. And of course, now this dawning realization that China isn’t… Not is it not, no longer an ally, it’s not even really a competitive partner or an opponent, but maybe an adversary. And the realization-
Michael Rentz (34:03):
Richard Reinsch (34:04):
That the last 30 or 40 years of our thinking about China was wrong and okay. And of course the Chinese government in the last five or six years seems to be interacting in a much more aggressive authoritarian manner. Not that it wasn’t before, but even more so. And so I understand all of that at and, but it is… I mean, it does seem to be the case apart from what’s happened with the pandemic and the way governments have dealt with it, which I think has been not optimal. It does seem like the supply chain has worked and held up nicely. I mean, I don’t know of anything. Certainly the pharmaceutical… I don’t know of anything we really missed out on or that we had dramatic shortages and that weren’t sort of replenished fairly quickly. And I wonder overall with the crisis that we’re in, you tell me, seems to me, we’re going to work through it, despite all of these government issues and the way they’re impeding it, we’re going to work through it probably by the middle of next year. What do you see?
Michael Rentz (34:55):
Yeah, no, that is the best point. And that’s exactly right, is the industry as a whole is operating, it is working. It’s not broken. It’s clogged, but the people of the industry are the best workers in the world. And our entire country really sits on the back of them; whether it’s the truckers or the port operators, or the inbound logistics managers for those retailers, they don’t get enough credit. And they have been working tirelessly to make sure the goods keep moving. And they have. There might be delays on your new couch. It might not be six weeks, it might be six months, but ultimately those should flush through the system by the middle of 2022, barring that they don’t inject any more stimulus capital into the system where people go out and reinitiate the bullwhip effect. So yeah, I mean, it should flow out, and then hopefully once the systems unclog and then more at a steady-state, we can start to have serious conversations about the regulatory environment at certain ports about real infrastructure projects, about opening up some of the navigable waterways to better prepare for the next system. I mean, really, the supply chain industry has dealt with one catastrophe after another. It’s just the whole world knows about this one, but it seems like every few years, there’s a problem. And the industry always seems to swallow it and handle it. But now’s the time.
Richard Reinsch (36:16):
Well, that’s testament to the industry and also to market forces themselves and how they can incentivize people to make things happen. Absolutely. Michael Rentz, thank you so much for joining us today to talk about our supply chain crisis and the industry itself. We really appreciate it. Thank you.
Michael Rentz (36:33):
Thank you, Richard. I appreciate it.
Richard Reinsch (36:36):
This is Richard Reinsch. You’ve been listening to another episode of Liberty Law Talk available at lawliberty.org.