Amazon is getting directly into the business of moving packages and freight across the country and around the world. In the latest move, the company confirmed yesterday that it has leased 20 Boeing 767 freighter aircraft to boost shipping speeds and increase capacity for one- and two-day delivery.
In addition, the company has received a license to expand into ocean freight, as well. That news was broken by Ryan Petersen, the CEO at Flexport, a freight forwarder and technology company based in San Francisco.
So what is Amazon trying to do here? GeekWire recently spoke with Petersen to get his take on Amazon’s moves and where the company may be headed, from the perspective of an industry insider. Continue reading for edited excerpts from our conversation.
You broke the news that Amazon was getting into the ocean freight business. What did you see that made you realize what was going on? And what is actually going on?
Ryan Petersen: I just heard a rumor that Amazon was going to be selling freight. And so I went and looked in the license database and, sure enough, they were there.
It’s helpful to take a step back and understand how the freight world works. It’s one of these behind-the-scenes things that we all take for granted. It’s different than the parcel world. We’re all more familiar with parcels because as a consumer you ship a package to your mom on FedEx or something. The line is drawn around a hundred kilograms. The package is just too big. Literally, it’s physically too big. It will not fit in the truck. The FedEx truck doesn’t take full pallet loads, certainly not container loads of goods. The conveyor belts, they’re all set up for little things.
In the parcel world, that company controls it from end-to-end. You ship it with FedEx, it never leaves FedEx’s possession. A FedEx truck picks it up, takes it to a FedEx warehouse, puts its on a FedEx plane, then mirror image on the other side.
In the freight world, what you have is seven or eight companies that are going to touch that freight. No company in the world has enough scale to be able to have trucks in every country, planes connecting them all, ships connecting them all, warehouses everywhere, brokerages everywhere to clear the cargo with customs. The role of the freight forwarder, which is what Flexport is, and which is the license that Amazon got, is to coordinate that complexity. To string it together. It doesn’t mean they’re going to own ships or planes, though I wouldn’t be surprised to see that Jeff Bezos has those ambitions.
This doesn’t mean that. It means they have a license to sell the freight and to stitch together other people’s freight services into a unified experience that’s simple and easy for the company whose freight needs to be moved. That’s the license that they have.
So what can Amazon do with this license?
Petersen: There’s a lot of things they can do with it. The most obvious thing is to just sell freight and make a profit. There are real profits to be made there. There’s a lot of inefficiency, there’s problems I described with all of the seven or eight companies that are going to handle that freight. And today the hand-offs are like relays of paper. “Here’s the freight, here’s the paper telling you where to take it next.” All these transactions, trillions of dollars of transactions are managed on paper or in legacy IT systems that are kind of a disaster.
I talked to you about the parcel network, and how it never leaves that company. That means they’ve got a person with a scanner every step of the way so you get those handy updates telling you where your stuff is. That doesn’t exist in the freight world today. There’s an opportunity to stitch it all together and give the customer, okay, here’s where your stuff is.
Amazon can make a ton of money selling freight to small businesses, especially Chinese businesses. Help Chinese businesses connect direct to consumers in the United States. Today Amazon gets 40 percent of its revenue from third party merchants on the platform. All those guys are just middlemen. They’re buying freight in China, buying products in China, importing it, managing the import process, and then selling it. All that margin and the inefficiency from lots of little guys managing freight is available to Amazon, if they connect directly to those factories and let them onto Amazon.com.
I would imagine that this is something they’ve had a front row seat for, in their position as an e-commerce company, seeing the inefficiencies. Could that have inspired them to take some action here?
Petersen: Yeah. It’s a bit surprising they haven’t done it before. Not like, for example, Walmart. When Walmart buys products, their suppliers deliver it at origin. Walmart has distribution centers in China. The Chinese factories deliver it to that distribution center. Walmart manages the importation and the distribution into all the different Walmarts. Amazon doesn’t do that today. Amazon only does that for the Amazon white-label basics, their own products. In all the third-party brands, Amazon requires you to deliver it to their (distribution center) in the United States.
Most of those companies are smaller than Amazon. Most companies are smaller than Amazon. Therefore, they’re not going to have the same purchasing scale and efficiency and automation that Amazon can have. There’s a clear opportunity to cut costs by just managing the freight. Then, the fact that so much of their revenue, 40 percent, comes from middlemen, means that there’s a chance to cut out those middlemen, work directly with the Chinese producers.
My sense is that they’re not going to try and make tons of money on the freight, just because Amazon’s never been that. They’re much more focused on how do we cut costs, how do we increase the market share, how do we grow the business by being the cheapest retailer in the world?
As you’re describing this, I’m thinking about Amazon Web Services, where they’ve built out an infrastructure for themselves and then used it to offer to third parties. Is there an analogy here?
Petersen: I think it’s the right analogy. There’s a few little wrinkles, though, that come with freight. As a freight forwarder you see every shipment, where does it originate? You’re clearing it through customs so you know the price that was paid at the factory. You get crazy visibility. Amazon would love for all of its merchants to come on the platform and tell them where do you make all of your stuff, how much do you pay. There’s a wrinkle there. I think their current marketplace merchants are going to be pretty put off by that.
What do you think of the confirmation that Amazon is leasing 20 Boeing 767s from Air Transport Services Group?
Petersen: I think it’s pretty amazing. In addition to leasing 20 planes, The Loadstar reports that they want up to 60 planes in the coming years. So two thoughts immediately come to mind. First, they’ve made the rent vs. buy calculation, and determined that they can fill at least 20 planeloads full of goods. That’s a lot of volume, considering that FedEx is only operating 31 Boeing 767s. And second, things just got a little bit more challenging for UPS and FedEx. No only will they be losing one of their biggest customers, they may have to soon start competing with it. Talk about adding insult to injury.
Stitch this together. I realize that it’s separate from package delivery but they’ve been clear that they’re at least going to augment UPS and FedEx. If you look at all of this, where are they heading in your view?
Petersen: I think the two worlds are super intertwined. All those parcels had to originate as a freight shipment somewhere and then get broken down into little bits and sent out into their own direction. You move the freight in through this automated process where each little parcel on that pallet is already bar coded, labeled, ready to drop in the parcel networks. You bring a big pallet load in, you bring it straight to the (distribution center). It’s already labelled and ready to go straight out to the consumer. With software and algorithms and big data and machine learning, you can start to optimize the network and put together a beautiful elegant system from end to end. For me, it’s a giant play in the global e-commerce logistics world.
Do any other retailers do this? Does Alibaba? You mentioned how Walmart does things. Would Amazon be unparalleled if they went to that logical end?
Petersen: I think this is an explicit arming up, in the arms race against Alibaba — getting this license and saying, “Look, we’re going to connect Chinese factories to U.S. consumers.” It’s a shot across the bow to Alibaba. Alibaba’s core business is within domestic commerce in China.
Here’s how the world works today with Amazon and third party merchants. Most of them will move stuff one or two pallets at a time. We call this less than container load cargo, LCL. The way that world works is that your two pallets get combined with five other guy’s two pallets and fill a container and you ship it over. It could be that each of those different LCL shipments, they’re each a different company inside the container. Maybe they’re all going to Amazon, today, by coincidence, right? Just imagine a scenario where they all happen to be Amazon sellers.
Not a far-fetched scenario.
Petersen: Not a far-fetched scenario at all. Today, the way it works is that each one of those guys is managing his own freight. He’s calling, when it arrives, he’s got his own freight forwarder who has a trucker come. Picks up his two pallets, drives to Amazon. Then another trucker comes to pick up the next two and the next two. You’ve got six truckers for this one shipment.
Whereas with Amazon running the whole thing, one trucker takes the whole container to the Amazon (distribution center). There’s real efficiency gained if all the cargo is flowing to Amazon. Efficiency gains translate to cheaper prices on Amazon.com, both because you cut out the middleman and because you’ve eliminated all the truckers.
My sense, having followed Amazon very closely over the last 15 years, is that they will focus on relentlessly cutting costs and not trying to take profit out of this system. They could make a lot of money just charging people the same price they pay now for LCL freight but having a lower cost since there’s only one trucker. My sense is what they’ll actually do is, “Hey, now you can buy something on Amazon for 10 percent cheaper.”
For more from Ryan Petersen and Flexport, follow the company’s blog.