“Your margin is my opportunity.” – Jeff Bezos
In a speech given at the Cato Institute many years ago, FedEx founder Fred Smith noted a seeming oddity about the global movement of goods and services. While the value of the latter had soared in modern times to reflect the massive expansion of global trade born of broad economic liberalization, the weight of goods shipped continued to plummet. Smith’s observation was fascinating and unsurprising at the same time.
Figure that the initial mainframe computers of the 1960s were massive in weight and size, whereas nowadays we fit much smaller but exponentially more powerful supercomputers into our pockets. Some call them smartphones…
Or consider the modern television. What has much brighter resolution and what grows in inch size year after year is quite a bit smaller in weight and shape. What used to be referred to as an “idiot box,” and that frequently required two to carry or move, is now a sleek screen. In 2021, “flat screen” attached to “television” is a redundancy.
And then there are cars. Tesla models are computers on wheels. The updates for these computers-that-drive frequently take place in the middle of the night. There’s no shipping of new parts to enhance the performance of Tesla cars as much as the “shipping” of enhancements flows through the proverbial broadband “pipe.”
Just as we will be forced to redefine the traditional phone and car as technology evolves, so will we eventually redefine shipping. The way goods move around the world today doesn’t much resemble the past, and it certainly won’t resemble the future. As a dynamic economy, and the U.S. economy is the epitome of dynamic, tomorrow promises to make today appear rather primitive by comparison.
All of this and more came to mind while reading a report about the Biden administration’s plan to target what it deems “anticompetitive pricing in the ocean shipping and railroad industries.” The Biden administration believes consolidation in the railroad industry in particular has given its corporations “monopoly power,” which means “customers have little leverage to negotiate prices.” Up front, the last significant rail mergers took place during the George W. Bush administration, thus raising a question about what has Biden et al concerned. After which, where does one begin?
Really, the statement about ocean and rail shipping and presumption of monopoly power inside the rail industry is pregnant with non-knowledge, and a lack of basic economic understanding more broadly. Most of all, those inside the Biden administration plainly lack an understanding of business history.
The Administration ignores what’s true about economic progress in any dynamic economy: the natural course for prices is downward. Crucial about the previous truth is that the businesses most capable of pushing down customer costs are the ones that attract the most investment. See Silicon Valley if you’re still not convinced.
Considering the above through the prism of rail, no one would modernly mistake capital flows into the latter for what’s happening in Northern California, Austin, Seattle, and other locales known for their clusters of tech companies. Which naturally explains at least the intent for greater consolidation within the rail industry. A desire to more efficiently move freight from Point A to Point B would be a major driver of any combinations. In other words, assuming a big spate of mergers, the leading lights of rail would logically do so with a goal of pushing prices down in concert with higher profits.
If it were the opposite, as in if top rail firms were aiming to combine operations in order to gain leverage against defenseless customers, there’s no way investment banks would finance their mergers in the first place. They wouldn’t because those financed would be staring obsolescence in the face.
Indeed, as the quote from Jeff Bezos that begins this piece makes plain, those charging exorbitant prices or those putting the proverbial gun to the head of customers “with little leverage to negotiate” prices are sitting ducks for Schumpeterian creative destruction. Put another way, service providers intent on ripping off their customers will soon be replaced. Paraphrasing Bezos, your margin achieved at the expense of others is your path to a commercial cemetery populated with formerly “essential” businesses exercising “leverage.”
The mere desire for bigger economies of scale inside rail is an acknowledgment from same that in order to compete, the businesses within the sector must relentlessly search for ways to compete in a world in which the definition of “shipping” is a moving target. No doubt traditional ocean and rail shipping are major players now, but for how long? Some speculate that drones will soon enough shrink waiting times for goods and services to mere minutes, others would point to driverless trucks operated by computers that don’t get tired as the shipping future, while still others would point to increasingly capable airplanes and helicopters possessing the ability to move product much faster and much more directly. At which point there’s the internet itself. As evidenced by how Tesla updates and fixes its automobiles from a distance, and without any shipping of physical goods, the present is unlikely to resemble the future.
More realistically, we haven’t come remotely close to the “frontier” of shipping, which yet again explains the desire within “Big Rail” to arrive into the future as lean as possible. Efficient operations free of duplications are what attract the very investment that makes it possible for businesses to invest in experiments meant to enhance how they’ll meet the needs of an ever-changing consumer base.
Big Rail plainly wants to be around tomorrow, which speaks to how shameful the Biden administration’s actions are. As opposed to bringing on lower shipping prices, the Administration’s actions will only serve to distract Big Rail as its top corporations work feverishly on ways to serve their customers more for quite a bit less.
In short, Joe Biden’s latest pivot against “Big” reveals shocking ignorance about how businesses remain in business. If the President gets his way. Big Rail will be muzzled to the detriment of its customers, and to competition in the ever-changing world of shipping more broadly.
Reprinted from Forbes