Oct 8, 2004 ... Absolutely, positively a force in China. By Dan ... A dozen more flights a week
might not seem like ... not only between Asia and the USA, but.
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Money October 8, 2004
Absolutely, positively a force in China FedEx CEO saw market potential 20 years ago By Dan Reed USA TODAY MEMPHIS — From Fred Smith's perspective, one of the great walls of protectionism will tumble any day now. It will happen when the U.S. government formally awards FedEx, the company Smith founded 33 years ago, the authority to more than double its overnight air freight service to China in the next six months. A dozen more flights a week might not seem like much. But Smith promises that's just the first wave of new trading opportunities that will yield big benefits for the USA and China and, in the process, FedEx, too. FedEx is hardly alone among transpor tation companies — or U.S. companies in general — in eyeing the profit potential in China. When the government grants authority for expanded ser vice to China, other carriers, including rival United Parcel Service, will get similar rights. But FedEx is better positioned than its competitors to take advantage of China's economic awakening. Because Smith saw the potential of the Chinese market two decades ago, the Memphis-based carrier leads the competition in its ability to deliver time-sensitive, high-value cargo
across the Pacific, within China and among Asian nations. The new authority to serve China couldn't come at a better time for FedEx. It has moved aggressively in recent years to exploit new business opportunities to offset slow growth in its traditional domestic deliver y business. Development of its China business has ascended to the top priority for the company. Now, FedEx has 295 flights a day across the Pacific and within Asia. That includes 11 a week to China, and 25% more capacity in that market than UPS. Working with Chinese partners, it serves 213 markets in China. Thanks to the new air services treaty signed by the two nations last summer, FedEx plans to launch 12 more USAChina non-stop flights a week this fall and next spring. UPS, which has six flights a week to China, is getting a similar number of new routes. Combination carriers — passenger airlines that carry cargo in the bellies of their planes — will also get additional routes to China. And several Chinese airlines will get new rights to serve the USA. But because of their deep roots in the Chinese market, FedEx officials believe they can expand their market-share lead. FedEx expects to extend its services to an additional 100 Chinese markets in the short run. Later this decade, it expects to open a major cargo hub there, allowing for increased flow of goods and documents not only between Asia and the USA, but also among Asian nations.
To capitalize on those new China route rights, in 2008, FedEx will take delivery of the first of 10 huge Airbus A380 freighters, which will have more cargo capacity than any commercial plane ever built. The A380s will replace the MD-11s that FedEx currently flies to China, and offer about double the capacity. The oppor tunities to grow internationally have stirred excitement within FedEx for a long time. Until 1987, David Cunningham was "just a Memphis boy who'd never been further away from home than Oxford, Miss." Today, as president of FedEx Express' Asia-Pacific division, the Hong Kong-based Cunningham is at the point of the spear in the company's aggressive assault on China's fast-growing market. "I was just a lowly financial analyst in Memphis when I heard the chairman (Smith) speak about the international horizon and what a tremendous opportunity that was going to be for the company," he says. "I wanted to be a part of that world-changing growth." A changing market FedEx's global growth helps to offset slackening in the domestic air express business. Only about 10% of the company's revenue now comes from overnight document delivery. It never was as big a piece of FedEx's overall business as many assumed. FedEx's memorable TV commercials — the promise to "absolutely, positively" get documents to their destination by 10 a.m. the next day — just made it appear that way. But the lawyers, bankers and other
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white-collar workers targeted by those commercials in the 1980s today are using emails and fax machines. The company's bread-and-butter express clients always have been industrial companies. They rely on FedEx for shipping time-critical replacement parts or for moving finished products to markets quickly, bypassing warehouses. In the USA, that market is relatively mature and slow-growing. While FedEx has managed 35% revenue growth in the fouryear period ended May 31, it has done so mainly by international expansion, by acquisitions and by identifying new services to sell. This year, about 40% of FedEx revenue will come from units other than FedEx Express, its traditional core business. This year, the little start-up that literally invented the concept of overnight express deliver y on a national scale expects revenue of about $27 billion, up from $18.3 billion in fiscal 2000. It trails UPS in total packages handled each day, and in revenue. But its volume in the lucrative air express end of the business — FedEx's home turf — is nearly 60% greater than that of UPS. Its operating margins and returns on investment are still less than half those of UPS, but analysts expect FedEx to narrow that gap in the next few years. Smith is moving FedEx aggressively into what he calls "adjacent spaces." He talks of taking the FedEx brand deeper into communities and closer to the lives of its existing customers. It's rapidly expanding its conventional trucking business, its custom freight-hauling unit and its new FedEx Home unit, which specializes in delivering goods bought online or by phone directly to consumers' doors. Smith talks also of the growth potential of subsidiary FedEx Trade Networks. It's now a bit player in the business of logistics management and warehouse outsourcing. But Smith says it has plenty of growth potential because of the ability of FedEx to deliver the services at low costs.
Most recently, FedEx's diversification efforts made headlines with the $2.4 billion purchase of Kinko's Office and Print Centers. Smith says the FedEx brand and FedEx's operational exper tise can bring more customers to Kinko's and get more profit out of its already successful operations. Kinko's similarly strong brand and nearly 1,300 prime retail locations should bring FedEx closer to existing customers and attract new shipping customers he says. "We want FedEx Kinko's to be America's back office," he says. But FedEx is going even closer to its customers through a $7 billion, seven-year contract to carry mail for the U.S. Postal Service, its original competitor. That deal allows it to place FedEx drop boxes at nearly 5,000 post offices around the USA. In an arrangement that capitalizes on each organization's strengths, certain kinds of parcels flown overnight on FedEx's planes are being carried by postal workers "the last mile" to consumers.
Building on success Memphis-based FedEx has managed impressive growth by doing more business overseas and by diversifying its services.
2002
Micky Mirchandani, sales director of Unisys Transportation Group, a logistics consulting firm, says FedEx has become the most versatile mover of goods and information in the world.
1% 1%
1% 1% -2% -6% 3,167
-6%
shipments
… it makes more money per package… Change from prior year in revenue per package: 9% 6%
2% 1%
0% $18.55 Per package revenue
… which affects total package revenue intake Change from prior year in total package revenue: $15 17% billion 14% revenue 5%
u Earnings. It earned a record $838 million in its fiscal 2004, ended May 3. It also has put together back-to-back record quarterly profits of $412 million in fiscal 2004's fourth quarter and $330 million in
7%
2% 2% -3% -6%
-7%
The approach seems to be working. FedEx is on a roll.
4% 5%
-1%
-1%
At one end, he says, the company is spending $2 billion for new Airbus A-380s. At the other, FedEx Kinko's is hunting document business at 8 cents a page. "It's an incredibly wide field of service that they are seeking to dominate," he says.
2004
Change from prior year in average daily package volume: Total International packages USA Priority 9% 7%
Ever expanding "FedEx clearly is not resting on its laurels of having invented a business," says analyst Ken Hoexter at Merrill Lynch, which does investment banking for FedEx. "They are constantly expanding."
2003
As FedEx ships more internationally …
Stock performance mimics company growth $86.85 Weekly closes: $90 Oct. 2003 $80
$68.56
$70 $0 2003
2004
Thurs.
Sources: CSI, FedEx By Alejandro Gonzalez, USA TODAY
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Where FedEx earns its money
fiscal 2005's first quarter, ended Aug. 31.
Revenue breakdown for fiscal 2004:
u Acquisitions. In August, FedEx spent $120 million to buy Parcel Direct, a leading consolidator of shipments from catalog and Internet sales companies. That's on top of its purchase of Kinko's, closed in February.
FedEx Express $17.5 billion u World's biggest express transportation company. Segment also includes FedEx Trade Networks. FedEx Ground $3.9 billion u North America's second-largest small-package ground delivery service company. Delivers to nearly every residential address via FedEx Home Delivery Service. Segment also includes FedEx Supply Chain Services. FedEx Freight $2.7 billion u Provides regional and inter-regional freight services. Segment also includes FedEx Custom Critical and Caribbean Transportation Services. FedEx Kinko's $521 million u Document solutions and business services provider. Offers ground shipping and global express shipping services in its U.S. locations. FedEx's acquisition was complete in February. Kinko's: 2003 calendar year revenue was $2 billion. Other $93 million
u Stock performance. FedEx shares have soared 31.3% this year and are up nearly 200% from early 2000. Still, some analysts rate FedEx stock a "buy" because they expect a sales growth rate more than double that of the domestic economy. u Accolades. CEO magazine named Smith 2004 CEO of the Year. In February, Fortune magazine included FedEx on its list of most admired companies. China, though, is No. 1 on FedEx's to-do list. FedEx began flying there in 1984, working through partners that held route authority to serve China.
In 1989, FedEx acquired Flying Tigers, an international air cargo carrier, giving it route authorities throughout Asia and stronger partnerships for service in China. In the past 15 years, FedEx gradually has increased ser vice to various parts of Asia, following low-cost manufacturers as they shifted operations from Japan to lower-cost locations in South Korea, the Philippines, Southeast Asia, Malaysia and Indonesia. The U.S.-China market has grown 75% in three years, Cunningham says. And China no longer sends goods just to the USA and Europe. China has seen explosive growth in exports to other Asian nations. "China is becoming the manufacturing center of the globe," he says. The explosive growth there, adds L arr y Ducker, head of FedEx Express' International operations, is "one of the greatest economic phenomena of modern times. … It's the kind of thing we will all tell our grandchildren about."
Absolutely, positively a force in china on, research
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nder Fred Smith make his DISCUSSION: How did FedEx fou is FedEx more than a transbusiness profitable? In what way ith planning to expand? por tation company? How is Sm iding how fast a company What factors are important in dec anced on an international should grow? How has FedEx adv what is “one of the greatscale? According to Lar ry Ducker, der n times”? est economic phenomena of mo or ser vice that was develACT IVI TY: Describ e a product been successful in the U.S. oped in another countr y and has ed make that product or Next, identify five factors that help a concept for a new product ser vice a success. Then, outline ential for U.S. and internaor ser vice that you think has pot that you identified earlier tional sales. Which of the factors t’s or ser vice’s success? would be critical to this produc
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