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Q2 2015 Earnings

July 28, 2015
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Asia and the World: Finding a New Global Business Model


Scott Davis, chairman and CEO, addressed attendees of the Global Leaders Series hosted by the American Chamber of Commerce in Singapore. Davis discussed how creating a better business model for a new global economy comes down to three components - reality, resources and rules.

Thank you, good afternoon. It's an honor to be with you today.

Like everybody else, I spend a lot of time thinking about the economy and what's ahead. Frankly, there's enormous uncertainty out there.

I read an interesting quote that I think describes it:

"Crisis is an opportunity riding the dangerous wind."

What does that mean?

To me, that simply means...

We're making our way through a time of historic transformation, in search of the next phase of global growth.

But... we're doing it without any guidance, without any precedence, because this is unlike any previous recession we've seen.

Today, I want to take a few moments to look at both

  • The challenges that we're facing, and
  • The opportunities for companies who adapt to this economy.

I can't think of a better place to have a conversation about global change than Singapore.

Every time I fly into Changi Airport, I see a city that is constantly changing and growing.

Forty years ago, Singapore was a start-up nation with a favorable location and an uncertain future.

Today it's an excellent example of the tremendous benefits that result from planned growth and open trade.

It has combined technology, infrastructure, policy, and competence into a prototype for 21st century commerce.

I'm very pleased to say that UPS has been part of that story.

We arrived in 1989, through the acquisition of Asian Courier Service. We started with one 600 square foot office space.

Today, we have six facilities and approximately 850,000 square feet of space.

Our newest facility is our 425,000 square foot distribution and logistics operation at Airport Logistics Park, which is home to UPS Supply Chain Solutions.

For nearly 20 years, Singapore has been the headquarters for the growth of our Asia-Pacific business that now serves more than 40 countries, through 267 facilities, with over 14,000 employees.

As we meet in this place that is so important to global trade and UPS, let me begin by stating the obvious.

It's been a very difficult two years for business, for markets, and perhaps most importantly, for everyone's confidence.

The bad news has been coming so fast from so many places, it reminds me of what Henry Kissinger once said:

"I'm sorry. There can't be a crisis next week. My schedule is full."

If crisis builds character, I think most of us have about all the character we can handle.

The good news is that the economic outlook is considerably brighter today than it was a year ago.

Certainly, we still have plenty of work before we fully recover.   

But we can stop obsessing about worst-case scenarios, and start thinking about next-phase opportunities.

There are still many open questions about where we go from here.

But one thing is certain.

We will come out of this recession with a very different global economy than the one we entered with.

In the past, we could always take comfort in the fact that, eventually, things would get back to normal.

But what we're experiencing is not a normal business cycle.

So I don't believe we'll emerge from this able to conduct business as usual.

We're building a global economy in search of a new global business model, and we're putting that model together in real time.

Any business model has many moving parts, particularly one that crosses time zones, boundaries, and cultures.

But I think I can simplify it.

Creating a better business model for a new global economy comes down to three things: reality, resources, and rules.

Let's look at each one of those components of the new global business model as I see it, beginning with Reality.

Reality simply means seeing the world as it is...  not as it was, and not as we might like it to be.

I see several key realities.

The first reality is that the global economic improvement we've seen over the past months has come almost exclusively from the action of governments.

So the obvious and pressing question is:

What happens when those governments begin to ease back on stimulus packages and other support?

Timing is critical.

It's a little like teaching your child to ride a bike.

Hold on too long, and they depend on you too much.

Let go too early, and they crash into the hedge.

Government action can get us through a crisis, but it can't get us all the way back to consistent growth.

A second reality is that stimulus withdrawal is going to create a vacuum. The only thing that can fill it is consumption.

But... who's going to do the consuming?

Unless we see some dramatic improvement, it won't be the U.S.

Harvard economist Kenneth Rogoff put it like this:

"The U.S. consumer has been the engine of world growth for the last quarter century, and ... that engine has stalled."

Rogoff believes that the world will be adjusting to a lower-spending U.S. consumer for many years to come.

A rebalanced global economy is simple to describe but hugely complicated to achieve.

To get well, the U.S. consumer has to save more and consume less.

So in order for the recovery to work, consumers in other parts of the world have to consume more and save less.

A third reality: Every country can't pin its recovery hopes on exports.

Additional markets have to step up their purchase of the world's goods.

And that means, in part, that those markets must change and tailor social policies. They must free up household money for consumers to spend.

Clearly, that is not an easy shift. But just as clearly, it's the only long-term solution.

And the final reality:

While the timing and strength of the recovery remain open questions, one fact is obvious: Asia is going to be one of the forces that lead the recovery.

The Asian Development Bank has raised this year's Asia forecast from 3.4 percent to 3.9 percent and from 6.0 percent to 6.4 percent next year.

Since the rest of the world will struggle to reach the low 3 percent range, that's impressive.

It's an extension of an amazing run for Asia.

The growth rate for companies in emerging Asia over the past two decades has changed the region and changed the world.

Obviously, China has been the prime engine.

Over that period, UPS has shown its commitment to this region by investing steadily.

  • We entered China in 1988, and did business for 16 years as a joint venture with Sinotrans.
  • By 2004, we had 18 weekly flights from the U.S. and served 200 Chinese cities.
  • In 2005, we assumed ownership of Sinotrans' international express operations.
  • That same year, we were named the express delivery and logistics provider for the Beijing Olympics.
  • In 2008, we opened China's first US-owned air hub in Shanghai.
  • Next year, we will open our largest capital commitment yet in Asia, our new intra-Asia hub in Shenzhen.

It's about a million square feet cost $180 million U.S., and has the capacity to sort 18,000 packages an hour.

It's a sign of our confidence in the region's growth that we have built in the flexibility to double that capacity in the future.

So the reality I see in today's business world truly is one filled with significant challenges, but also enormous opportunities… provided we are prepared see the world as it is, not at it was, and not as we would like it to be.

With those realities setting the stage, let's take a moment to look at the second prong of the business model, Resources.

By resources, I mean every single asset and capability that contributes to competitive position and consistent growth, both within your company and externally.

Today, every single one of those resources must be examined and, if necessary, realigned around new demands.

As we emerge from the recession, increasing demand will again stress the supply of both physical and human resources.

The past entitlements of developed nations are gone.

General Electric's Jack Welch once said:

"When the rate of change inside the company is exceeded by the rate of change outside the company, the end is near."

He's right.

Few, if any, companies can change fast enough... or act broadly enough to capitalize on all the opportunities... if they choose to act alone.

It's is going to take partnerships, in every aspect of your business. Both your internal and external operations. Partnerships impacting such things as HR, manufacturing, and your supply chain.

I know a little about supply chains and what a critical role they play.

Invariably, the supply chains that allow you to take advantage of all the opportunities before you will be more numerous, more complex, and more vulnerable.

The rate that you and your companies adapt to all the changes will in large measure, determine whether you will capitalize on the opportunities before you.

As Jack Welch said: for truly successful companies, your rate of change should meet - or exceed - the rate of changes occurring all around you.

In summary, the companies that adapt and emerge stronger from this economic turmoil will harness the incredible potential of all their resources, and form partnerships that will give them a huge competitive advantage.

The final prong of the new business model is Rules.

Today, the simple truth is that government's role in the business world is one of increasing intervention.

Now, and well into the future, regulatory policy will have a seat at the Board table.

How government's impact on global commerce takes shape is going to have a major influence on how and when we find our way to consistent global growth.

We all are subject to an evolving set of rules that govern global trade. And I emphasize the word: "Evolving."

Trade is ultimately about supporting and creating jobs. But when you lose jobs, you tend to see the worst instincts of politics.

Unfortunately, global trade is the most visible and convenient target.

It's tough to argue about the advantages of global trade with a legislator whose district has a 15 percent unemployment rate.

So, all of us who see the connection between fair trade and future prosperity have to be visible and vocal in our support of enlightened trade policy.

It's one of the reasons I'm here... and speaking tomorrow at the APEC SME Summit.

So far, trade disputes have been skirmishes fought within the structure of the WTO.

In other words, the system is working.

We have not seen the across-the-board tariffs and other unilateral moves that could create long-term damage.

Still, some of the recent numbers are cause for concern.

Global Trade Alert, a group of experts and analysts, backed by the World Bank and the UK Government, reported in September 2009:

  • Discriminatory trade laws are outnumbering liberalizing trade laws by 6 to 1... 6 to 1. Pretty amazing.
  • The other finding: Governments are applying protectionist measures at the rate of 60 a quarter.

The single biggest threat I see is the "Buy American" sentiment in the U.S.

It is already causing huge problems with Canada... our largest trading partner.

But it's not just the move and counter move aspect that's worrisome.

It's also the policy signal being sent by the United States, a country the world looks to for leadership.

No one, in the long term, wins with a "protectionist" approach.

World Bank President Robert Zoellick said protectionism is still a low-grade fever.

But "the temperature is rising."

The obvious way to reduce the fever is through fair and workable multilateral agreements.

Obvious, maybe.

But not easy.

The up and down history of Doha shows us that.

But the fact that we're still talking about Doha shows us something else.

If we really wanted it to die... it would be dead.

It lives because we know how trade has transformed economies and lives.

It lives because we know that the growth will not come through intersecting webs of bilateral agreements.

Still... this month marks nine years since the Doha round began.

Even with talk of scaling back some of Doha's aspirations, a 2010 completion target is hopeful at best.

Meanwhile... the world of commerce has a way of moving on, which is exactly what is happening in Asia.

Economies are forging regional trade agreements that open markets and support cross-border supply chains.

And we believe East Asia is about to take an important next step with the developing Trans-Pacific Strategic Economic Partnership Agreement, also known as TPP.

It would build on the Pacific Rim's P-4 agreement among Singapore, Brunei, Chile and New Zealand by adding Australia, Peru, Vietnam and the United States.

It's a new-generation agreement that takes a holistic approach to trade.

In addition to tariffs, it addresses issues like market access, trade facilitation, supply chains, the environment, competition policy, and intellectual property.

And it could be just a start.

TPP could be a step toward an eventual Free Trade Agreement of Asia Pacific, which would involve all 21 APEC members.

We strongly advocate that the U.S. enter these negotiations because we believe TPP has the potential to be an agreement that reflects the realities of a changed world.

  • It addresses the needs of both business and government.
  • It covers a region that will be a global growth leader.
  • It moves beyond the strict focus on tariffs, and
  • It's a major step in a viable direction, as we work to create the next phase of global commerce.

The third component of the new global business model - Rules - is a critical one.

The rules governing how we operate in a global economy are indeed evolving. We need to be vigilant that they ultimately ensure a free and open approach.

In closing, I tend to be an optimist by nature and a realist by experience.

On balance... I believe

  •  the recovery is real... but it's fragile.
  •  That it's sustainable, but vulnerable … at least for the foreseeable future. And
  •  I firmly believe that global trade will lead the recovery rather than lag it.

But for that to happen we must face up to the reality of a global economy that has new dimensions new issues, and permanent changes.

We must employ every resource for maximum return and leverage them through partnerships and new-generation global supply chains that are predictable, visible, resilient, and environmentally responsible.

And we must do everything we can to make sure all this happens under a set of rules that reflects the fact that global trade is the solution, not the problem.

It's a demanding list. And we won't meet all the demands quickly.

It will take a new level of foresight, cooperation and confidence.

We'll get there.

And I believe Asia is going to help lead the way.

Thank you.

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