Good Morning. I m honored to be the first speaker at what promises to be a very dynamic meeting of ocean transport professionals.

Transcription

1 Keeping Global Trade and Transport on Course Frederick W. Smith March 3, 2014 Good Morning. I m honored to be the first speaker at what promises to be a very dynamic meeting of ocean transport professionals. And it s great to be in the Port of Long Beach, which has enjoyed six straight years of air-quality improvement, due to its environmental focus. The port requires ships to connect to the electrical grid while at berth. Plugging in one container ship for a day is the equivalent of taking 42,000 cars off the road. FedEx is on a parallel track in our industry. We re changing to larger, more fuel-efficient planes to reduce emissions. We re also adding more all-electric and hybrid vehicles to our fleet to save money, improve the environment, and reduce our exposure to oil price swings in the global market. We could not have accomplished this without our more than 300,000 FedEx team members around the world who work hard every day to help us reach our efficiency goals and keep our Purple Promise: I will make every FedEx experience outstanding. 1

2 The FedEx vantage point First, I d like to review our FedEx portfolio of shipping solutions to help you understand our unique vantage point on global trade. We began as Federal Express and created the modern airexpress industry 40 years ago. Our history spans the most important era of the modern air cargo industry, and today we have the largest all-cargo fleet in the world. Besides FedEx Express, we have other operating companies: FedEx Ground, FedEx Freight and FedEx Services, which contains our retail unit, FedEx Office. We also have FedEx Trade Networks, dealing in air and ocean freight forwarding, customs brokerage, and trade facilitation, and it s what gives us a seat at this conference table. 2

3 I d like to introduce Jack Muhs, our new CEO of FedEx Trade Networks. (Pause and let Jack stand). Jack has 30 years with FedEx, and he succeeds Fred Schardt, who recently retired after six years of doing a great job at the helm of Trade Networks. Because we transport by air, land, and sea, FedEx bears witness to the global trends affecting all those areas. In essence, all trade is interconnected regardless of mode, so major global trends affect not only sea trade but air and land as well. From our standpoint, the reality is that global transportation has changed dramatically over the last decade. The rise in fuel prices as shown on this chart, has resulted in big changes in shipping patterns particularly since the Great Recession of

4 If companies want to deliver something fast, like a new personal electronic device, they choose door-to-door air express, to race new technology to the marketplace. But if cost rather than time is of the essence, more shippers particularly for heavier shipments--have turned to slower maritime transport to save money. And, interestingly, some container ships today take almost as long to cross oceans as the Cutty Sark did more than a century ago. However, due to improved ship- and goods-monitoring technology, customers can now slow steam their cargo, getting their goods to destination at precisely the right time. With historically low global interest rates, this makes even more sense as the carrying costs of inventory in transit is not significant. So the trend of higher fuel costs affects three different segments differently. 4

5 As you can see on this chart, both the air express and ocean modes are growing, and they re gnawing on the middle segment, general airport-to-airport cargo. In fact, we believe maritime shipping stands to gain even more share due to two factors: 1) Over the years, ships have gotten bigger and much more efficient. 2) The newest container ships run more than 3.5 times the size of a football field. This, of course, has resulted in lower unit costs at the expense of frequencies and time-in-transit. Hence, the industry is in the midst of establishing new carrier alliances. 3) Once the Panama Canal expansion is completed, hopefully by early 2016, the new Post Panamax-sized vessels can use the Canal to travel from Asia directly to the U.S. East Coast. 5

6 The Panama expansion could well be a new stimulus to trans-pacific trade, given the improved supply chain efficiencies that will result. In the air cargo sector, profound changes are underway: low growth in the U.S. and Europe, increased China manufacturing costs, electronics miniaturization, and the increase in underbelly capacity in long-range widebodies is putting great pressure on yields. These trends, combined with the new efficient A F, 777F and 747-8F, have resulted in 43 Boeing freighters being parked in the desert and six more have been scrapped. The respective figures for the MD-11F are 20 parked and 4 parted out to date. Absent a reversal of these yield declines which have been inexorable over the last 20 years further main deck 6

7 freighter retirements will be required to balance supply and demand. History of U.S. maritime and freight forwarding To better understand the present day global trade market, let s review briefly where we ve been. In February 1784 the Empress of China became the first ship to sail from the United States to China. In its wake came a steady flow of American merchants in search of wealth they wanted silk, porcelain and above all tea from China. As more merchants began to trade with Asian countries in the 1800s, ship brokers or middle men began to arrange maritime transportation across oceans. 7

8 Eventually some intermediaries began to function as export freight forwarders, ship brokers, and customs brokers, the forerunners of many companies represented here today. With fits and starts trade has grown from these roots to almost 30% of U.S. GDP and even more in other countries. It s important to note that after World War II, the United States led the world in moving toward open markets, a factor important to rebuilding countries devastated by war. This effort was led by a famous Tennessean and Nobel Prize winner, Secretary of State Cordell Hull. 8

9 He helped craft the post-world War II GATT policy that opened our markets to world trade and helped rebuild Germany and Japan. America s willingness to open our markets has been the key to lifting billions of people out of poverty around the world. Of course, the mid-20 th century also saw a simple but huge change in ocean transport that originated with my friend, Malcolm McLean, who passed away 13 years ago. 9

10 As you know, McLean invented the shipping container, a contribution to maritime trade so phenomenal that he s been compared to the father of the steam engine, Robert Fulton. I think even Malcolm McLean would be astonished at today s Panamax-class vessels that can transport around 16,000 TEUs, compared to the tiny ships he started with and even those he used at the end of his career. Another factor helping to spark trade was regulatory reform. From the late 70s through the early 90s, regulatory changes around the world made for easier entry into both air and ocean international freight transport. 10

11 History of air cargo While maritime transport was evolving, so was the air cargo industry, which had been chronically unprofitable despite its seemingly great promise after World War II. However, a confluence of three factors beginning in the 1970s transformed the air cargo industry into a major world economic force: The economic miracle of the four Asian Tigers and Japan; The increased manufacture of electronic products in these countries; and The introduction of the Boeing 747 freighter which, as you may know was an historical accident. More about that in a minute. Beginning in the 1960s, Japan, Hong Kong, Singapore, Taiwan and South Korea, evolved into major manufacturing 11

12 locations. This was driven by the exploding market for electronics and automobiles in the U.S. and Europe. Significant foreign investment in these Asian countries, including modern infrastructure and hi-tech factories, produced high growth rates that continued into the 1990s. The world economy was booming so much in the 1960s that travel and transport demand had outgrown the airliners then in service. But in January 1970, Boeing introduced its 747 which revolutionized aviation. Its operating costs were 30% lower per passenger seat or unit of payload than any other commercial aircraft. 12

13 It was two-and-a-half times bigger than the largest jet airliner in service at that time. As I mentioned earlier, the 747 freighter was an accident. Boeing had competed for the contract to develop a jumbo freighter for the U.S. Air Force, but lost out to the Lockheed C5-A. So they looked for other uses for their unique design features for the military such as the aircraft s iconic hump that allowed a nose door for direct loading of the cavernous main deck. The layout for Air Force requirements proved ideal for Asian loads particularly dense consumer electronics which rapidly became half of the total air cargo market. The 747 could carry such high-tech, high-value items across vast distances at significantly lower costs, particularly given the decline in fuel prices during the 90s. In turn, this allowed 13

14 fast supply chains to be efficiently centered on Asian manufacturing. The international air cargo market came to resemble the sea freight market with large point-to-point freight consolidations from major cities in Asia to a few distribution centers in the U.S. and Europe. As the 747 began to dominate long-haul services, an upstart network called Federal Express began flying from Memphis in spring Our hub-and-spoke distribution system was uniquely developed to deliver overnight express packages from one point to any other on the network. Also, we created an integrated air-ground express network that was a first in the air cargo industry. International air express emerged as a distinct major sector as FedEx acquired Flying Tigers for its routes and facilities 14

15 and combined them with door-to-door express pickup and delivery networks for dutiable packages and light freight. Other integrated networks such as those of DHL and UPS became major players in this space as well. China s emergence as a manufacturing superpower changed supply chains throughout Asia but continued these basic global trends. So, combined with deregulation in the 1970s, by the 90s all the elements were in place for air express and air cargo to basically change modern logistics. In addition, late in the 20 th century most international aviation treaties were liberalized to allow freighter operations to align with global trade flows. All these transportation efficiencies helped the growth of global trade, which on average exceeded GDP growth by two and half times for three decades, up until the last few years. In the same vein, the North American Free Trade Agreement has seen economic activity among the U.S., Canada, and Mexico almost quadruple over the past 20 years to more than $1 trillion today. The follow-on to the GATT, the World Trade Organization or WTO agreement further integrated the world s economies and significantly increased global trade. 15

16 China s accession to the WTO which FedEx strongly supported was a watershed event in this regard. As a result, China is now the world s largest trading nation, exporting over $400 billion to the U.S. alone in Today s challenging environment Unfortunately, the Great Recession of 2008, the rising cost of fuel, higher wages in China, and low growth in the U.S. and Europe have shrunk trade growth to a trickle in the last several years, but we believe even modest growth is not a foregone conclusion without a decisive change in direction by governments around the world. One of the biggest reasons trade is no longer growing rapidly is the rise of protectionism. Over the last few years almost every trading nation has instituted policies that permit greater regulatory intervention in the trade process. Unfortunately, history shows protectionism stifles competitiveness, innovation, and consumer choice. It s discouraging to watch nations made prosperous by the opening of markets and the growth in global trade attempt to throttle the very forces that have created their prosperity. This is not a new phenomenon. Every nation wants to promote exports and reduce imports to the advantage of its national producers. French economist 16

17 Frederic Bastiat bemoaned trade restrictions in the early 1800s. His solution to the problem for France was to build ships, fill them with locally made goods for export, then sail them a few miles off shore and sink them! If you think about it, Bastiat s 200-year-old suggestion is not far off the trade policies espoused by many of today s politicians. Here s a sobering statistic: Last year, the top 20 world economies passed 23% more protectionist measures than in

18 o For example, Argentina has passed 168 measures since Could the recent crisis there be somewhat related? o While the United States skirts are not completely clean, in most instances this country has abided by its trade agreements and for geopolitical interests has often sacrificed its economic interests to the mercantilism practiced by other countries. o In this regard, first Japan s and now China s trade practices have eroded a great deal of political support in the U.S. for more trade liberalization. o China s Indigenous Innovation policy is clearly focused on protecting Chinese companies against foreign competition. 18

19 o Canadian interests recently opposed lifting de minimus clearance limits, perceiving such a change as injurious to their livelihood. o A small topical example: FedEx couldn t ship 3,000 pillows, which were in short supply, to Olympic athletes in Sochi because Russian customs restrictions would allow only five pillows to be imported with delivery in six weeks! The result was a microcosm of the effects of less trade: No one sold the desired pillows; no one transported and cleared the pillows; and someone s quality of life probably suffered due to lack of sleep! Journal of Commerce editor Chris Brooks last month reported that the World trade Organization was lowering estimates for global trade growth in 2014 because of protectionism around the world, even though several large economies were gradually improving. This is indeed unfortunate. History shows that protectionism reduces prosperity. Conversely, trade liberalization increases human well being though there are often local losers. The Peterson Institute for International Economics estimates that ending trade barriers would increase U.S. income alone by $500 billion. 19

20 The key to the increase in global prosperity since World War II is clear: political leadership that focused on the greater good of expanding global markets rather than protecting parochial interests. So what should be done about the worrisome slowdown in world trade? It s clear we must attack root causes. The problem isn t cyclical as noted before, it s systemic and spreading around the world. Again, history proves that protectionism squelches competition, and lowers economic growth. One only has to study the history of the Great Depression of the 1920s and 30s to understand the consequences of beggar thy neighbor policies like the U.S. passage of the Smoot- Hawley tariffs of To reverse course, all of us must redouble our efforts to again move our governments toward trade liberalization. It s clear that recently the U.S. has not exerted the leadership that began with Cordell Hull, the GATT, and the WTO that held so much promise a few years ago. There have been a few bright spots however. We commend the recent World Trade Organization s multilateral trade facilitation agreement, the first in its 19-year history. While certainly not comprehensive, its goal is to make global trade simpler, more transparent, and more predictable. We must 20

21 urge our government to work aggressively to ensure compliance with the WTO by all participants, including China. Other trade pacts under discussion, such as the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TTIP) could drive up world GDP by as much as 5% just by simplifying trade regulations. If enacted, that s millions of new jobs around the world in many different sectors including ours. And the U.S. should join Mexico s president and Canada s Prime Minister in their call for an expanded NAFTA 2.0. Of course in an ideal world, all countries would declare unilateral free trade and be done with it. Unfortunately, as we re seeing with the TPP and TTIP trade negotiations, it s often mostly a negotiation of what will be excluded from free trade. Add to that the machinations of U.S politics. The Wall Street Journal s Kimberley Strassel noted last month that instead of trying to fast-track the Europe and Pacific pacts, due to domestic politics, many Democrats and Republicans are opposed to even granting the President Trade Promotion Authority or TPA, which allows Congress only an up- or down-vote on trade deals. In years past, TPA has been routinely afforded the Executive Branch to allow effective 21

22 negotiations of U.S. trade agreements, and most other countries have a similar provision in their laws. Considering this, it is essential that the U.S. enforce existing trade agreements as egregious violations will continue to further erode congressional support otherwise. And of course the politics of trade in other countries often make the fighting in Washington look tame by comparison. These are indeed challenging times for global growth, which begs the question of what we in the industry can do. I suggest all of us speak out in favor of free trade and its demonstrable benefits at every opportunity; contact our politicians and policy makers and let them know we stand behind them in supporting new trade pacts; and work together through professional alliances around the world to sell the advantages of open markets. 22

23 Hopefully, such actions will help us regain a positive course for trade expansion in years to come. In the interim, we hope this year sees at least modest growth in global trade. Baseball icon Yogi Berra once said, The future ain t what it used to be. And we agree. The future ain t what it used to be, and it will only get better, if we make it better. It will take perseverance. It will take lots of hard work and very loud voices from everyone in this room and those like us around the world. At FedEx, we re all in, and we hope you are too. 23