On Feb 9, there were 78 container ships in queue at the side-by-side Ports of Los Angeles and Long Beach complex in California – the two hubs that account for nearly 40% of US imported goods. It was the first time since Nov 2021 there were fewer than 80 ships waiting, down from the record 109 ships recorded in Jan 2022. (For context, the queue would have been around 17 ships in pre-pandemic times.)

The slowdown has been attributed to the Lunar New Year (42% of containers come to the US from China), and is expected to be temporary. Most of the ships in queue are slow-steaming across the Pacific or loitering in Mexico beyond the ports’ Safety and Air Quality Area (SAQA), due to a new system (Nov 2021) that assigns a spot based on departure from last port of call rather than when the ship arrives.

Experts are predicting that the ocean-freight supply chain strains – which began more than a year ago, cascading across industries and driving up inflation – will persist into 2H 2022. The reality is that the situation appears to be getting worse, not better. As of this week, Flexport’s Ocean Timeliness Indicator – which measures the time from when the cargo is ready at the exporter to when it is ready to leave the destination port – has reached 110 days for China to US West Coast routes, near all-time highs (pre-pandemic this was around 50-60 days).

A confluence of imbalances has contributed to the overloaded ocean-freight supply chain, which transports about 90% of traded goods globally. First, shipping demand has been higher than usual. US West Coast ports (Los Angeles, Long Beach, Oakland) processed a record number of inbound containers in 2021. US consumers stuck at home spent more money on goods rather than on going out and services, driving consumer spending on durable goods up by 30-35% above pre-pandemic levels. While the surge is slowing, spending may remain above pre-pandemic levels for a while longer.

Ports have also been congested with empty containers, which have slowed down unloading. This was one factor in inbound volume at the dual Ports of Los Angeles and Long Beach in Dec 2021 being down 14% year-over-year – the 4th straight month of declines. As a result, there’s been a big ongoing push to evacuate the 100K+ empty containers from West Coast ports. (At the same time, US agricultural exporters in inland areas are having a hard time finding containers.)

US ports are relatively inefficient and less technologically advanced compared to other ports. In a World Bank/IHS Markit index, there was not a single US port among the top 50 most efficient ports globally. Shippers have few alternative options to the large backlogged West Coast ports. The US has 5 deepwater ports on the West Coast – Los Angeles, Long Beach, Seattle, Tacoma, and Oakland (in order of size) – but no other port has the same capacity as the LA/Long Beach complex. Routing via the Panama Canal can be time-consuming and twice as expensive, and can only accommodate smaller container ships.

An automated port can be twice as productive in the same footprint – but converting to automation can cost $4B-5B and take 15 years. Dockworker unions have also pushed back strongly against automation. (US ports are typically owned by the local-government port authority, operated by private companies, and worked by a longshoreman’s union.)

Even running West Coast ports 24/7 – a move that was announced in Oct 2021 – only helps throughput at one point in the supply chain and creates a backlog at the next stage. In the case of ports, the next stage is transport by truckers (trucking moves about 72% of US freight) and storage in local warehouses. At the Port of Los Angeles, 30% of trucker appointments were no-shows in Jul 2021. More recently in Oct 2021, Flexport reported seeing just one truck show up in the evening at the Port of Long Beach, and port workers said some nights they had zero trucks coming in late.

There are many reasons for the underutilized appointments and low overnight volume. First, the US is experiencing a shortage of 80K+ truck drivers nationwide (despite millions of commercial driver’s license holders, who have since opted out of being truckers). To use an appointment, truckers have to offload an empty container at a terminal in order to free up their chassis for a load. The terminal, likely short on space, may only accept empty containers on a highly restrictive basis (e.g. certain color containers on certain days).

Truckers also have mandated federal restrictions on hours worked, which keeps them from working extended hours into the night, and warehouses may not even be open at night to accept the load. There’s also a shortage of truck chassis – the trailers used to move containers around. In part, this is because chassis are being used as short-term container storage at truckyards and local warehouses, which are backed up as well.

More potential snarls are on the horizon. On Jul 30 2022, the contract with the International Longshore and Warehouse Union (ILWU) – which represents 22K+ dockworkers at 29 West Coast ports – will expire. Renewal talks are expected to be contentious – the last ILWU negotiations in 2014-2015 led to severe delays. There’s also the coming freight decarbonization rules from the International Maritime Organization (the UN agency responsible for regulating ocean freight), which mandate regular annual declines in ship emissions starting in 2023. For some ships, this will mean they’ll have to move slower – 30% slower by one estimate.

Businesses – and their customers – are bearing the brunt of high shipping prices. Prices for a 40-foot equivalent unit (FEU) container still costs about $15K to transport from China to the US West Coast, vs. $1,200 before the pandemic. Companies, expecting continued delays, are building up safety stock to avoid stockouts. This, however, risks surplus inventory and excess overhead costs down the road, in addition to limiting their agility.

These disruptions have disproportionately impacted smaller businesses (who may now be more susceptible to the lure of ecommerce rollups’ capital and support). Larger companies are better able to absorb higher supply chain costs, and adopt pricey tactics like chartering their own ships (e.g. Amazon, Walmart, Home Depot, Costco, IKEA, Target) or flying their own cargo aircraft. (Even the big ocean-shipping lines are buying their own air cargo fleets.) These large retailers gain more flexibility – for instance, to use less congested ports with shorter delays. Recently, however, the West Coast port congestion has been spreading to other ports.

For companies able to pass costs on to their customers, the resulting inflation can actually help their financials. Maritime shipping companies, which were able to use the supply-demand imbalances as leverage, are posting record profits. Amazon saw a surge in its stock price after reporting strong earnings and a plan to raise its Prime membership price by 17%. Some large companies are taking their windfall and investing in vertically integrating their supply chains, which can be a capital-intensive undertaking.

These supply chain troubles have drawn the attention of policymakers, who fear their impact on key industries and inflation. The $1T infrastructure bill signed Nov 2021 dedicates $17B to port infrastructure and waterways. The funding includes construction projects at coastal ports (e.g. deepening harbors), pop-up container yards near ports to expand capacity, grant programs for port infrastructure, standardized data exchange, and initiatives to reduce congestion and emissions (which may forestall automation). Whether the funding will address the core near-term issues behind the current snarls remains an open question.

Jan 31 2022 (Special Edition): Looking ahead – 14 market shifts that will unfold in 2022

Apr 4 2020 (Brief #28): Global supply chains diversify away from China

Last week, Meta announced $115B in ad revenue across its family of apps for full-year 2021 – representing 37% growth. (Meta relies on ads for 97% of its total revenue.) The news was overshadowed by Q4 2021 ad revenue figures showing relatively weaker 20% growth. Meta’s ad business is also expected to take a $10B hit in 2022 from Apple’s App Tracking Transparency (ATT) rollout starting in Apr 2021. (ATT asks Apple device owners if they want a given app to track them across other apps and websites.)

Meta described the headwinds: “Apple created two challenges for advertisers. One is that the accuracy of our ads targeting decreased, which increased the cost of driving outcomes. The other is that measuring those outcomes [attribution] became more difficult.” Meta’s disclosures contributed to its stock plunging 26% in one day – wiping $232B in market value, the largest one-day decline in value for a stock in US history.

Meta is at a critical juncture. Its business is largely app-based, which means it is reliant on other big tech firms’ operating systems and hardware (i.e. Apple and Google). Meta’s ad platform is reliant on its ability to track users across sites and measure conversions/outcomes. Apple’s ATT breaks the virtuous cycle by which Meta could use conversion-tracking to optimize targeting of similar “lookalike” audiences that are likely to respond favorably to ads.

Notably, Google – a major Apple partner that funnels billions of dollars (as much as $18B-20B this year) to Apple from its search ads – does not face the same constraints. According to Meta, Apple’s ATT doesn’t apply to browsers so Google still has the advantage of accessing 3rd-party data.

ATT is not Meta’s only threat. Its family of apps is losing eyeballs to TikTok, which has been luring marketers away. TikTok is on track to be a social and advertising juggernaut – reaching 1B+ monthly active users, overtaking YouTube in monthly hours per user, and passing Google in internet traffic rankings. Meta, according to Mark Zuckerburg, is facing an “unprecedented level of competition” from TikTok, and has put its short-video platform Reels first on its investment priority list for 2022.

Apple’s iMessage is also drawing attention away from Meta’s family of apps. iMessage – a rival to Meta’s Messenger – comes pre-installed on the 1.8B active Apple devices worldwide and holds the default SMS messaging-app slot. iMessage – a key element of Apple’s strategy to create stickiness in its device ecosystem – has become a must-have texting tool with teens, a segment where Facebook has seen its popularity decline.

Policymakers in Europe and the US are increasingly looking to limit the use of personal data for ad targeting. Last week, for instance, a Belgian regulator ruled that the Interactive Advertising Bureau (IAB) Europe’s widely-used Transparency and Consent Framework (TCF) used to justify data-sharing for ad auctions was not compliant with GDPR. The ruling has potential ramifications for behavioral advertising across Europe. (Meta is also facing GDPR issues stemming from its Facebook Connect single sign-on plugin and the flows of the “personal data” collected in the EU back to the US.)

Meta recognizes its business is in for some headwinds. First, it needs to disentangle conversions and outcomes from their measurement – it believes its ads are more effective than it can currently measure. It also needs new privacy-sensitive tools that can help marketers target users and show clear ROI. Its Aggregated Event Measurement tool, for instance, is specifically designed for measurement of iOS user activity and “limit[s] the amount of personal data used to facilitate conversion reporting and ads optimization” (though it currently seems to work better with large advertisers than small businesses). Meta can also use Apple’s SKAdNetwork native attribution APIs, though the data is less granular and Apple enforces a 24-48 hour minimum data delay.

This week, Mozilla announced it has been working with Meta for months on the development of a new “privacy-preserving attribution technology” called Interoperable Private Attribution. The technology aims to perform attribution without letting any party (e.g. websites, browsers, advertisers) learn about individuals’ behavior and without generating results that can be tracked back to any individual user.

Meta is not dead yet – it still owns the largest social networks in the world, with 3.6B monthly active users across its family of apps. Its biggest problem is that it has to play in other people’s sandboxes. On a mobile device, there are a series of “windows” to the consumer – the mobile device, the mobile operating system, the mobile app or browser, and the in-app experience or website – and Meta lacks control of the hardware, operating systems, and browsers. This means it often has to go through gatekeepers to collect and use data.

As we have said before, all paths going forward in digital advertising will lead to and through consent. Consent is becoming the standard for privacy regulation – and moving beyond just checking the box. GDPR, for instance, requires that consent be “freely given, specific, informed and unambiguous.” Consent is the reason why 1st-party data is garnering so much attention, and why large publishers and retail advertising/media (e.g. Amazon) are gaining more power and leverage.

Amazon, for instance, now has a $31B powerhouse advertising business based on its full end-to-end view of customer interactions from product search all the way to purchase. It can draw a direct linkage between advertising expense and ROI using only its own 1st-party data (which means it’s not significantly impacted by ATT’s crackdown on cross-site tracking). If Meta can bring more commerce activity onto its own platforms, that can help with measurement and attribution. Of course, if its metaverse play pans out, it could own the next major platform and “window” to the consumer – and finally get out of someone else’s sandbox and play by its own rules.

Jan 28 2022 (3 Shifts): TikTok plans to triple its fast-growing ad business to $12B in revenue this year

Apr 30 2021 (3 Shifts): App Tracking Transparency is good – and good for Apple’s business

On Tuesday, Apple debuted its Tap to Pay on iPhone feature that will enable US merchants to use their iPhones to process customers’ contactless payments without requiring any additional hardware. Expected this spring, Tap to Pay will be available via supporting iOS apps on all iPhone XS or later models. To make a payment, merchants will just ask customers to hold their payment method (e.g. contactless credit/debit card, iPhone/Apple Watch for Apple Pay) near the merchant’s iPhone. The payment is then completed using NFC (near-field communication) and “protected by the same technology that makes Apple Pay private and secure.”

Tap to Pay will be made available to participating payment platforms and 3rd-party app developers for integration into their SDKs (software development kits) and iOS apps. Stripe will be the first participating payment platform, offering Tap to Pay to partner developers through its Stripe Terminal SDK. Through Stripe’s SDK, Tap to Pay is expected to be incorporated into the Shopify Point of Sale app starting this spring. (In opening up Tap to Pay to partners, Apple hopes to quell antitrust complaints regarding access to its NFC chip for Apple Pay but not other payment systems.)

Tap to Pay on iPhone is already being labeled as a “Square Killer” that could challenge Block/Square’s hardware-based point-of-sale system (which processed $45B in gross payments volume in Q3 2021). Not all analysts, however, are convinced Tap to Pay “will have a material impact” on the payments ecosystem. More information is required on Tap to Pay (e.g. processing fees) before there’s a full understanding of how competitive it will be. (For Apple Pay, for instance, banks pay Apple 0.15% on credit card transactions.)

If Tap to Pay is just a set of APIs without significant fees accruing to Apple, Square could even be a potential partner on Tap to Pay. Square could bring the feature to its customers as part of its expanding suite of SMB services – especially since Tap to Pay falls well short of being a full point-of-sale system. About 116M Americans use an iPhone, unlocking a potentially sizable merchant base of small businesses and entrepreneurs. Large businesses with field workers or distributed staff may also be interested in unlocking new revenue streams – Apple has become pervasive in the enterprise with virtually all the Fortune 500 using Apple products.

Tap to Pay supports Apple’s broader push to leverage its extensive installed base of devices with built-in NFC chips for context-based services (e.g. AirTags). Apple understands that payments are foundational to most versions of the “super app” strategy. For big tech firms, payments is a “utility” in their ecosystem, part of the common fabric that facilitates a familiar, seamless and sticky user experience. Payments also have an impact on the cost structure for participants and the platform, and can serve as a gathering point for critical data (though Apple deliberately keeps transactions private, even from itself).

Mobile phones are a natural platform for payments. Visa, for instance, in 2020 announced its own “Tap to Phone” solution that enables Android devices to serve as contactless point-of-sale terminals. The solution has gained relatively limited adoption so far with just 300K devices globally using it. However, Apple’s partner- and privacy-focused approach could prove to be more attractive to merchants.

For Apple, Tap to Pay is also an attempt to bolster the use of Apple Pay (even though it’s just one compatible payment method). Apple Pay is currently accepted at 90%+ of US retailers and is the biggest in-store mobile-wallet player with $90B in transaction volume last year. Yet, even with nearly 20% of all US transactions now being “tap to pay,” Apple Pay is being used in just 6% of eligible transactions – leaving plenty of headroom for growth as the world transitions to in-person.

Jul 23 2021 (3 Shifts): Square’s sprawling ambitions in all-in-one SMB services and consumer financial services

Dec 13 2019 (Brief #16): Tech players expand their ecosystems through payments & financial services