The EconomistAugust 17th 2019 Business 51F
or outsiders, FedEx is synonymous with the business it pio-
neered: the overnight delivery of packages. For insiders, it
might just as well be called FredEx. It is virtually indistinguishable
from its founder, Fred Smith, who has been boss since 1971. The 75-
year-old, who came up with his idea for air freighting packages at
Yale University, is the stuff of folklore. Some of it is apocryphal,
such as the story that he got a C at Yale for a paper outlining his idea
(he can’t recall the grade). But one tale is, if anything, too good to
check. In its early days, as the firm flirted with bankruptcy, he
saved it with a lucky wager at a blackjack table in Las Vegas.
Mr Smith is an entrepreneur of the old school. The ex-marine
dispatched his first 14 planes in 1973—on the first day they carried
186 packages. FedEx is now the biggest cargo airline in the world,
with 681 aircraft and an average volume of 15m packages a day. He
has played politics as he plays cards, be that securing deregulation
of the air-cargo industry in the 1970s, winning protection from
American unions or schmoozing congressmen at the FedEx Field,
home to the Washington Redskins. Among American firms, FedEx
has long been one of the most recognisable, admired and popular
to work for. In January the board in effect gave Mr Smith tenure for
life, by waiving the firm’s retirement age of 75 for executives. “Like
a Supreme Court judge,” chuckles one admirer.
Shareholders are less giddy. As one of the biggest parcel carriers
in America, FedEx ought to benefit from uninterrupted gdp
growth. Yet since 2009, when America began its longest economic
expansion on record, the company has underperformed the s&p
500 by almost 100 percentage points. This year it has suffered from
the Sino-American trade war, growing competition from Amazon
and problems integrating Europe’s tntExpress, which it bought in
2016 for $4.4bn. Such squalls are not good for its financial health,
yet FedEx has been investing more than $5bn a year since 2017 to
keep deep-pocketed rivals like Amazon and the e-commerce
giant’s Chinese counterpart, Alibaba, out of its delivery business.
This is a game of chance that Mr Smith is not guaranteed to win.
The biggest stakes are at home. FedEx built its name as a high-
end business-to-business firm, offering guaranteed time slots for
delivering parcels and factory goods along the supply chain. But e-
commerce is raising the importance of delivery to homes, at fasterspeedsandlower costs. FedEx has responded by expanding its
trucking service, which will soon reach most American homes
seven days a week. But that clobbers margins. Meanwhile, Amazon
is spending heavily on same-day delivery. It is also building an air-
craft fleet that, though still a midget compared with FedEx’s, will
amount to 70 aircraft by 2021. According to Satish Jindel, a logistics
consultant, Amazon has leapfrogged its rivals to become the big-
gest firm in the world at organising warehousing and transport for
other companies’ goods (as well as its own). Only a few years ago
Mr Smith mocked the idea of competition from the likes of Ama-
zon as “fantastical”. But in the past two months FedEx has severed
its (albeit tiny) remaining ties with Amazon to focus on building
its relationship with retailers like Walmart and Target instead. Its
main rival, ups, is sticking with Amazon. This sets the stage for a
potentially bruising price war that could further crimp profits.
Its second big challenge is overseas. Besides having to fix tnt,
FedEx has found itself in the awkward position of being on the
wrong side of both adversaries in the trans-Pacific trade war. In re-
cent months it was forced to apologise to China for diverting pack-
ages belonging to Huawei. FedEx said that this was owing to an er-
ror. Nonetheless the Chinese government is reportedly
threatening to put FedEx on its own blacklist. And the company
has also sued its own government, saying it should not be depu-
tised to “police the contents” of any packages it sends to check that
they do not violate export bans.
Besides the ugly geopolitics, global competition is also rising
for FedEx. One of the biggest threats comes from Cainiao, a Chi-
nese rival backed by Alibaba that in 2017 pledged to invest $15bn in
cross-border logistics. FedEx claims that its own vast network, ex-
tending to 220 countries, safeguards it from such incursions. But it
is not used to having tanks the size of Amazon’s and Alibaba’s on its
lawn; their troves of data on customers may give them an edge in
the delivery wars.
In response, both FedEx and upsare investing large sums to
modernise their fleets and expand their delivery hubs. But though
FedEx’s revenues of almost $18bn in the last quarter have nearly
caught up with ups’s, its profit margins are weaker and it is gener-
ating less cash. That worries investors. It could seek to reassure
them by reducing purchases of costly items like aircraft, or com-
bining two of its independent businesses in America, FedEx Ex-
press and FedEx Ground, to cut costs. But it has rejected both ideas,
insisting it is best to invest in growth.Stand down and deliver
It may be wise to double down this way. However much risk-averse
investors may prefer share buy-backs to ambitious capital-spend-
ing plans, halting investment could be seen as a flag of surrender
by the likes of Amazon. That said, FedEx’s failures—to respond
more quickly to the changing e-commerce landscape, to read the
runes of geopolitics and to end its stubborn refusal to join its two
businesses—reflect a company whose management is long in the
tooth. Including Mr Smith, FedEx’s ten top executives average
more than three decades at the firm, which is extraordinary.
It is hard not to misread the changing rules of business when
you once rewrote them—even harder when some of your oldest
friends are your sounding board. It is clear that the directors have
no stomach for replacing their chairman in the foreseeable future.
But unless Mr Smith brings in fresh executives, and then listens to
them, his days at the business blackjack table should be num-
bered. Think FredExit, in other words. 7Schumpeter The FredEx conundrum
FedEx’s visionary founder is an old-style disrupter in danger of being disrupted