These past two weeks have been rather active in terms of supply chain developments, not the least has been the announcement by UPS on its intent to acquire European based TNT Express. The all-cash deal, valued at $6.8 billion is headlined as the biggest in UPS history, and has global shipping implications. It represents what we believe is a means to block rival FedEx and others from expanding their own ground transportation services within Europe.
In its coverage of the UPS acquisition, the Wall Street Journal characterizes the deal as allowing UPS to capitalize on further long-term economic growth in Europe while FedEx remains better positioned to take advantage of long-term growth across Asia. In essence, both global providers are making different strategic bets on future value-chain growth and global shipment volumes.
FedEx capabilities servicing Europe currently lie in air express capabilities while UPS now has the potential to leverage both air express, ground transport and rail networks. Because Europe is more compact from an overall geographic perspective, ground transportation is a viable shipping alternative in terms of time and cost.
Asia increasingly represents the focal point for today’s component and finished goods manufacturing activity. The region represents a much wider geographic footprint traversing large bodies of water. Manufactured goods generally enter other supply chains by either ocean transport or air freight. Ocean container carriers invested far too much in container ship capacity, causing gross overcapacity, little profit that have resulted in an erosion in transit times to Europe or the U.S.. Thus for any shipments that are time-sensitive, shippers have little choice but to bite the expense bullet and opt for air express. That is why both FedEx and UPS have benefitted in their Asia investments in air freight capacity. FedEx’s fiscal 2011 full year earnings announced last June noted a 6 percent increase in daily international package volume driven primarily from export volume originating from Asia. In yesterday’s announcement of Q3 results, FedEx reported a 1 percent decline in international shipment volumes and announced that it would temporarily idle some of its international freighters. The company also reflected a rather cautious international and U.S. economic outlook for the remainder of 2012. Asia exports and imports have obviously slowed.
It is the view of Supply Chain Matters that the final commentary related to UPS’s strategic move to acquire TNT comes later as global economies and supply chain activities shift to accommodate changing sourcing patterns, value-chain footprints and commerce fulfillment models. Both UPS and FedEx can continue to benefit or one, or the other, may feel the effects of a wrong bet.