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3 posts categorized "Current Affairs"

Has Donald Trump Awakened the Sleeping Logistics Giant?

By Elmore Alexander | 02/05/2017 | 12:37 PM | Categories: Current Affairs

During the 1980’s, I worked as a consultant for FedEx helping to develop the company’s first quality management system.  Two tangential elements from my experience stand out to me today.  First, I remember a conversation between Fred Smith and Jim Barksdale where they wondered if it were possible that there were over a million packages to be shipped overnight.  In 2012, that number topped 25 million.  Second, I remember that the tiny office off to the side of the sorting hub (a manual not a technological operation at that time) that housed the US Customs Service was the most feared part of the organization.  “They can shut the entire sort down in less than a minute” was a refrain that I heard every time I stepped into the hub.  Growing from less than a million packages a night to over 25 million has a lot to do with the growth of e-commerce, but it can also be attributed to globalization. 

Like most of American industry, logistics managers and executives in the various parts of the shipping and delivery business are wondering what new trade policy under the Trump administration will mean for their industry.  The potential problems are multifold.    An article in this week’s Economist [i] does a good job of outlining the issues. 

Higher tariffs represent the biggest threat to trade with the potential to cut demand for cross-border purchases.  This could become more complicated, however, as customers could choose to order directly from foreign retailers such as Alibaba keeping their purchases under the $800 limit and avoiding tariffs all together.   The trade impact, in this case, would fall heavier on US retailers than on foreign ones. 

A second threat could come from the disruption of trade agreements and free trade zones.  Today, most goods flow freely within the industrialized world.  A breakdown in multilateral trade agreements begun with Brexit but potentially being followed by action by the Trump administration could result in complications with customs codes resulting in higher prices for shipping services and again a dampening of overall demand.  

On Thursday, Fred Smith was in Washington testifying before Congress on the benefits of international trade.  He has gone so far as to urge FedEx employees to contact their Congressional representatives urging them to oppose Congressional and Executive actions that hamper free trade.[ii]  The Economist reports that he has, without a public announcement, shifted his attention to lobbying from day-to-day operations at FedEx.  Fred Smith has been amazingly effective advancing the company’s interests in Congress whether it related to deregulation of the air cargo industry in 1977[iii] or labor legislation in the 1990’s.[iv]   This will be an interesting and a consequential fight.  The mantra attributed to Fred Smith in the 80’s at FedEx was “Who wins the fight between a bear and an alligator depends on where you have the fight.”  This will be an interesting and a consequential fight, and Fred Smith has been in this swamp before.

 

[i] http://www.economist.com/news/business/21716074-fedexs-founder-will-spend-more-time-campaigning-free-trade-logistics-companies-fear?frsc=dg%7Ca

[ii] http://www.bizjournals.com/memphis/news/2017/01/25/fedex-employees-encouraged-to-contact-congress.html?ana=yahoo&yptr=yahoo

[iii] http://marketrealist.com/2016/03/fedex-concept-blossomed-industry/

[iv] http://www.nytimes.com/1996/10/12/business/federal-express-knows-its-way-around-capital.html

Transportation Infrastructure & Trade: A Tale of Two Cities and Two Countries

By Elmore Alexander | 11/14/2016 | 6:25 PM | Categories: Current Affairs

I just returned from a week-long trip to Germany, where I was working with a German university on a partnership in global logistics—one that would link Bridgewater State University with universities in Germany, England, Malaysia, and Vietnam. Seeing the culmination of the U.S. presidential election from Europe was amazing. But that’s not where I want to go with this blog. Two of the highlighted issues of this presidential campaign were U.S. infrastructure (specifically, roads and bridges) and the impact of international trade on the loss of jobs. On both of these issues, the contrast that I saw between Germany and the U.S. was dramatic.

Infrastructure

Over 70 years ago, General Eisenhower experienced the German Autobahns first hand; and as president, he began the process of building our system of interstate highways. If you’re old enough to remember cross-country travel in the 1950’s or earlier, you remember travel that was slow and inefficient. Today’s highway system is quite different. The logistical marvels that we have experienced in the last 50 years clearly result, in large part, from our investment in our interstate highways and the trucking systems that they spawned. Unfortunately, underfunding and the resulting deterioration of our highway system jeopardize our future. 

The contrast to Germany is as stark today as it was in 1944.  German roads (whether between cities or around city neighborhoods) are marvels of quality and efficiency.  I cannot remember the last pot hole that I experienced on a German road.  Asphalt is pristine and smooth.  Traffic bottlenecks seem much less onerous than they do here.   Eisenhower would be shocked that today’s comparison of US and German roads harkens to the contrast that he observed during World War II.

If American roads are going to be great again, we simply have to make the kinds of investment that the Germans have been making for almost 100 years. If not, our logistical systems will simply fall apart. The good news is that President-Elect Trump talked about this issue throughout the election. Maintaining U.S. international competitivity in the upcoming decade will necessitate substantial investments in the repair of our roads and bridges. 

International Trade

I’m from a textile and furniture town in North Carolina (High Point). The town I was visiting in Germany (Reutlingen) shares very similar roots. Prior to World War II, Reutlingen was also a textile town. Today, High Point and Reutlingen are approximately the same size (100,000 inhabitants); but the similarities end quickly. 

Reutlingen saw the post-war future of manufacturing shifting to high technology and away from low-wage textiles. As textile production left Germany searching for low-wage opportunities in the American South and then Asia, Reutlingen retooled physical facilities and its workforce for high-wage, high-technology production. Today, the focus is on advanced-technology manufacturing, biotech, and medical and environmental technology. Reutlingen boasts a Bosch plant producing automotive electronics for Mercedes and other high-end automobile manufacturers. Reutlingen is reputed to be the wealthiest city in Germany.  It has a large vibrant downtown that is free of automobiles. The city becomes greener every time I visit.

The High Point economy is quite a contrast.  Only one manufacturer remains within the top 10 employers in the city—a school bus manufacturer.   Furniture manufacturing and textiles are pretty much gone.  The company that I worked for one summer during high school, Myrtle Desk, went out of business and the abandoned plant where I worked burned down a few years ago.  Downtown has been taken over by the furniture market; and with the exception of “Market Time,” the sidewalks are pretty empty.  The city has tried to build two malls in my lifetime—neither succeeded.  One has been converted into a church and office complex and connects to the retirement apartments where my mother lives.  The other is a shadow of what it was when it was built just 20 years ago and is gradually being turned into classroom space for the local university.  High Point is wealthy but far from the level of Reutlingen.  High Point, like many other US cities,responded slowly to changes in the world economy.   They emphasized low-wage/low-tech textiles and furniture manufacturing long after it was clear that such manufacturing was going elsewhere.  High Point would say that it has been victimized by free trade.  I’d disagree.

The contrasts that I saw on my trip were stark. Germany invests heavily in its roads and bridges. They may be the best in the world. Furthermore, Germany invests much more than we do in worker retraining and industrial policy, leaving it much less dependent on industries that are vulnerable to competition from low-wage countries. These are critical factors for the logistics industry. Our logistics system will not continue to operate effectively with crumbling roads and bridges. Likewise, we need to identify strategies that will expand high-value manufacturing giving us products that will compete both at home and abroad. 

NAFTA and Logistics

By Elmore Alexander | 10/21/2016 | 6:43 AM | Categories: Current Affairs, Weblogs

Interestingly, the NAFTA debate of the current election cycle has focused primarily on US–Mexico trade generally ignoring the US–Canadian relationship.  Sometimes we forget how significant this latter relationship is[i]:

  1. The largest bilateral trading relationship in the world—approaching three-quarters of a trillion dollars and supporting almost 2 million jobs;
  2. The longest international border in the world—crossed by 400,000 people each day;
  3. The largest integrated electrical power system in the world—and, lest we forget, Canada is the largest supplier of foreign oil to the US; and finally,
  4. The largest system of Foreign Direct Investment in the world with the US being the largest source of FDI in Canada and Canada being the 3rd largest source of FDI in the US.

There can be no question that the United States and Canada are uniquely joined.  Even pre-Brexit, our interdependencies were much more significant than those of the European Union—we share a common language and a common level of economic development and it has now been over two centuries since we raised arms against each other.  

NAFTA created a $19 trillion dollar common market of 470 million customers.  Importantly, it was the first trade agreement that combined developed nations (the US and Canada) with a developing one (Mexico).[ii]  This is a remarkable achievement and represents an element that is critical to the future resiliency of the partnership. 

Despite Ross Perot’s warning of a “gigantic sucking sound” and Donald Trump’s recent declaration that NAFTA is a total failure, most economists argue that the agreement has had a net positive impact on all three countries.[iii]  Unfortunately, the effects have been uneven; and the post-election period will probably focus on worker adjustment programs to ease transitions from old into new jobs or to financially compensate displaced workers.  I do not, however, see a renegotiation of NAFTA on the horizon.  As a matter of fact, I think that a post-election Congress is more likely to support TPP albeit in a form that provides more worker retraining and displaced worker provisions.

The reason I expect this outcome relates to one of the most important, but frequently ignored, statistics surrounding the NAFTA relationships.  Today, approximately 40 percent of the average US import from Mexico is attributable to US value-add.  The comparable statistic for Canadian imports is approximately 25 percent.[iv]  The success story of NAFTA is not free trade but integrated economies.  For example, consider the construction of a Bombardier Learjet.  With the exception of Irish wings, the Learjet 85 is a North American product—fuselage constructed in Mexico and engines built in Canada but designed by Pratt & Whitney in the US. Automobiles are similarly North American with the parts and labor of the majority of cars spread across the US, Canada and Mexico.  When Ford recently decided to shift production of compact cars to a plant in Mexico, it retooled the plant to produce high end trucks and SUV’s at no loss of US jobs.  Actually, auto-making jobs in the US have grown by 200,000 since the end of the Great Recession.

Importantly, since the NAFTA partnership is not homogeneous, it creates opportunities for Canada and the US to utilize lower wage rates in Mexico strategically (as in the case of low margin compact cars) to compete with products from low wage Asian nations.   The development of cluster industries exploiting our heterogeneous North American comparative advantages is likely to grow in future years.  In particular, both demographics (a young Mexican workforce) and energy (huge US and Canadian reserves of low cost natural gas and clean Canadian hydroelectric power) as important hedges against Asian Tigers.  

The unevenness of the impact of trade agreements, however, is real.  Trade boosts overall GDP while redistributing the portions to capital and highly educated workers at the expense of low skilled workers.  Thus, the trade discussion needs to move forward considering funding for increased worker training and displaced worker compensation as a condition for lowered trade barriers. Economist Jeffrey Sacks goes so far as to argue that companies benefiting from free trade should be taxed to provide the funds to compensate displaced workers. 

This strategy should be very familiar to people within the logistics industry. Mark Levinson's landmark book, The Box, provides a great description of our experience with the introduction of standardized shipping containers.  To allow the introduction of standardized containers over the objections of longshoremen in the 1960’s, shipping companies agreed to share the efficiency gains through guaranteed but unnecessary jobs.  Surprisingly (or not), the efficiency gains were so great that the introduction of the new technology resulted in labor shortages not surpluses in the very first year of the agreement.

The world economy is not perfect, but it is hard to make a rational case for isolationism.  I, for one, think that rational analysis will lead us back to a discussion of how to make trade work to the betterment of our economies in the upcoming months.  For logistics, this means an increasingly important role in making the transportation system an increasingly efficient part of the world economy.

 

[i] https://www.whitehouse.gov/the-press-office/2016/03/10/fact-sheet-united-states-%E2%80%93-canada-relationship

[ii] https://www.foreignaffairs.com/videos/2014-06-06/foreign-affairs-focus-carla-hills-nafta-20

[iii] http://knowledge.wharton.upenn.edu/article/nafta-20-years-later-benefits-outweigh-costs/

[iv] https://www.foreignaffairs.com/videos/2014-06-06/foreign-affairs-focus-carla-hills-nafta-20

The opinions expressed herein are those solely of the participants, and do not necessarily represent the views of Agile Business Media, LLC., its properties or its employees.

About Elmore Alexander

Elmore Alexander

Elmore Alexander is Dean and Professor of Management in the Louis Ricciardi College of Business at Bridgewater State University in Bridgewater, Massachusetts. Prior to joining Bridgewater State, he served as Dean and Professor in the School of Management at Marist College. Previously, Dr. Alexander was Dean of the School of Business Administration at Philadelphia University, Director of the Division of Business and Management at Johns Hopkins University, Associate Dean and Chair of the Management Department within the Kogod School of Business at American University in Washington, D.C. and Professor of Management and Director of the Fogelman Executive Center at the University of Memphis.



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