CEO of Deutsche Post DHL sees logistics as a change agent

JOC Staff | Mar 20, 2016 9:17AM EDT

To Frank Appel, logistics isn’t simply a business. It’s also a change agent that has increased global prosperity significantly in recent decades as trade agreements pulled down market barriers and helped reshape not just trade lanes, but also economies and even societies.

Logistics is and can be a transformative industry, says the CEO of Deutsche Post DHL Group, the largest global transportation and logistics provider by revenue after UPS. But the logistics community will have to work harder to find catalysts for future change.

“We don’t have (global) population growth, and we’ve seen fewer productivity increases in the last 15 years than in previous periods, so we have to look for new sources of economic growth,” Appel said in a keynote address to the 16th Annual TPM Conference in Long Beach this month. Prior to his speech, Appel met with JOC editors to discuss the global economy, emerging markets, e-commerce and freight forwarding.

JOC: Dr. Appel, thank you for meeting with us today. Let’s start with a big question: How do you view the state of the world economy and the health of global shipping?

Frank Appel: Shippers don’t always tell us what they might ship in two months or three months, so my evidence comes probably more from talking to colleagues at other large companies. The best opportunity I had to do that was recently in Davos (at the World Economic Forum’s annual meeting), where I saw a lot of CEOs and bankers. I would say their mood was significantly better than what you read or hear in the media.

There is no expectation that China will fall off the cliff, and people believe the U.S. will continue to grow. Many people think as well that Europe has turned the corner. Low oil prices actually help consumers in most parts of the world, though oil-producing countries have struggled. I think we will see modest growth around the world, because there is no trigger for a significant change, like the major movement (of manufacturing) to China. We will not repeat that.

JOC: Is there no new China really to go to?

Appel: Not yet. If India really gets reforms done, then India can become the next China, but that probably is 10 years out. India is the future workforce for the world. China is aging pretty rapidly, like Europe is aging, Japan is aging, and I recently read that 25 percent of all people on the planet less than 25 years old are living in India.

JOC: When you said the tone was more optimistic, what are the reasons for that?

Appel: China will continue to grow its domestic economy and that will help, and it will continue to grow 6 to 7 percent, I believe. The U.S. has a low unemployment rate. Available income is higher than it was the last two years due to low oil prices. Salaries are increasing. That means we should see a strong consumer market in the U.S. In Europe, many countries have done (economic) reforms and are improving. Among the developed countries, the only economy really struggling is Japan. But China is good, Europe is getting better, and the U.S. is still in good shape. These are still the strongest economies on this planet, so why should the world fall into recession? It’s more fear than reality.

JOC: Is there a political factor as well? In the U.S., we have an election year, and the economy is mentioned constantly.

Appel: You know, (income) inequality probably plays a role, but if you look at the world as a whole, inequality has been reduced between countries. The world is in significantly better shape now than it was 20 years, 50 years ago when the difference between the rich and the poor countries was greater. In the developed countries, we’re having discussions about inequality, but on the global scale, the world is a better place. And protectionism is quite often coming up in political debates in spite of the fact that there is overwhelming evidence that it is wrong.

The Trans-Pacific Partnership is a good example. TPP will help the participating countries significantly, including the U.S., but it’s more popular to say it will take jobs away and therefore we have to not sign that. But there is no evidence, there is zero factual evidence that a country ever prospered with protectionism. There is a lot of evidence that the opposite is true.

JOC: Do you see protectionism as a growing threat today?

Appel: No, I think it’s more in the media than in reality. For example, I think it’s good that the U.S. decided to increase the de minimis value for e-commerce (from $200 to $800 in the Trade Facilitation and Trade Enforcement Act, effective this month), which is actually good for the consumer. It doesn’t make sense to have duties on low-value products anyway.

That’s the opposite of protectionism. I have no doubt TTP will be approved. I have strong hopes that TTIP (the Transatlantic Trade and Investment Partnership) will happen as well. In the short term, of course, societies lose some jobs and they build new jobs. Look at the U.S.: You have built all these new jobs in industries nobody even thought about 10 years ago, Amazon now has 200,000 employees around the world and most of them are in the U.S.

JOC: Looking at the growth of Amazon and its expansion into distribution and logistics activities, how do you see the company today, as a customer, competitor or a combination of the two?

Appel: First, we see Amazon as an important and large customer. I think it’s the right of any company to try new things, whether Amazon or DHL. We have our own parcelcopter, a drone. We have had delivery lockers in Germany for 15 years. You need innovation, new ideas, and then customers like Amazon who are very demanding and will continue to work with us.

JOC: Are they forcing more innovation into the market?

Appel: Yes. The ultimate goal is that e-tailers want to gain more market share, and the better and more convenient it is to get your products, the bigger your piece of the cake will be. We have our own (online shopping) portal for food in Germany, and it’s growing rapidly. You order food, and it’s delivered to your home. It’s same-day or defined in hours. I delivered food to households in Germany as part of our pilot program, and I had one experience that was quite funny: A young boy opened the door and said, “Oh, our stuff is already here. That’s great.” And then he called his mother and said, “Mom, look at this. This is the future, not going to a grocery store.”

JOC: So you helped deliver the order yourself?

Appel: Yes, I work on a regular basis in our own operations, be it warehousing or express. I have done that around the world. I delivered tires once in Taipei. Of course, I had somebody with me, as I don’t speak any form of Chinese. But I think as a CEO of a large company you have to love your own products and you have to enjoy working with your people. You understand the job people are doing better when you see it with your own eyes instead of getting PowerPoint presentations.

JOC: In terms of delivering e-commerce, what are some of the challenges you see in various markets toward expanding it, delivering the goods in the final mile?

Appel: It is about convenience. In Germany, even before the Internet, before the Berlin Wall came down (in 1989), we had strong mail order companies. Our heritage was great service and good returns solutions. In the early 1990s, it was completely chaotic. In East Germany, people ordered goods (by mail) because there were no retail stores. Now the question is, if you want to order something, do you want to have it that same day, or at a specific hour? That’s a reason why (car) trunk delivery (of parcels) will probably be quite successful (DHL Parcel, Amazon and Audi are testing “car drop” package delivery in Germany). It all comes from a mindset that asks how to make it more convenient, simpler for the consumer. With parcel boxes in front of a private house, you don’t have to be at home to get a parcel. And you can even think about product launches. You know these 50,000 consumers have a parcel box in front of their home, so you can send them a parcel without any order. Put it in their boxes and then they can decide to keep it or send it back the next day. That’s a completely unrequested sale, and that is the future of e-commerce.

JOC: As e-commerce grows, how will relationships between shippers and forwarders and carriers change?

Appel: We need more integration and more information exchange, which is still a challenge. We still have too much paper. I would love to see that we get a little bit more electronic. But you know the idea that all shippers will interact directly with carriers will never work. You need the forwarders. I don’t think that model will change. A key question is will there be supply chain orchestrators who will put themselves in front of the shippers. Accenture came up with the idea of the 4PL 20 years ago. That didn’t work because shippers said, “OK, for the big volumes, I still need partners who know what really happens physically.” Has technology changed that?

JOC: How does the prospect of more ocean carrier consolidation affect your business?

Appel: That’s a good question. The more consolidated the market becomes, the less opportunities and choices, and that might lead to less product variations and less offers. So that’s probably again not good for shippers because they have less choices. On the other side, if you see how much the carriers have struggled in recent times, you know they have to do something because if they don’t do something, they have significant problems, too.

JOC: And as you have challenges in the ocean shipping market, it creates issues for the air market as well. How do you see the interplay evolving between the two markets?

Appel: In the last couple of years, more air freight volume has been upgraded to express or downgraded to ocean, and we believe that trend will continue. In addition, in the air freight market, we will see a continuation of overcapacity in belly space because passengers will continue to travel. And if you have more and more widebodies, then you have belly space anyway. That trend has benefited our express division and challenged our air freight business. But in total we have benefited because we are a big player in ocean freight, in air freight, and in express.

JOC: You’ve clearly refuted reports that DHL Global Forwarding might be up for sale. But do you see a need for greater consolidation in forwarding? Would you be interested in buying companies?

Appel: I don’t see any major takeovers. I think the consolidation will more happen by the exit of small “local heroes.” That has happened already in the last decade, when larger forwarders grew on average faster than the market, and nobody knew the small companies that exited the market.

I can’t foresee any major acquisitions. We don’t have any need. We already have a global footprint. We would only distract our organization if we acquired somebody on a big scale. We might acquire small local companies where we can increase value for customers, but we have no plans and no need for any major acquisition. We have no intention to sell, either.

JOC: People think of parcel and express and forwarding as separate businesses. But is it not true that there’s a great deal of interplay and integration across those platforms?

Appel: There’s some. These platforms will become more and more integrated with newer technology. But at the moment customers are still buying parcel and express services separately from forwarding. We tried 10 years ago to offer more integrated services and it didn’t fly. And I have not seen significant change in how customers purchase services.

JOC: So not a great change in the mindset of the customer in terms of how they run their supply chain and procure different services?

Appel: No, not really. I think the majority is still looking at different elements and saying, “We need to coordinate this.” But the key factors for success for different players in the supply chain are different. If you have an integrated global transportation network, you have to fill that network. If you’re a trader, you buy and sell, and if you’re an outsourcing partner, you have to be pretty risk averse because you know if you take over an operation for a couple of years, if you don’t run it right from day one you will suffer for the whole time. I can’t see that this will change very soon.

JOC: What do you think the most exciting emerging markets are, where you would like to invest more? You’ve invested a lot in Africa, for example.

Appel: Things are changing rapidly. I think Asia is still a very interesting market. Africa is, too. Wherever you go in Africa, you see DHL, but you hardly see any of our competitors from the global environment. There are challenges in Brazil, but in Mexico our business is doing very well. Colombia is on a much better path now. Overall, sooner or later where the population is growing, there will be growth. I was recently in Nigeria. E-commerce in Nigeria is growing over 100 percent, because there are no malls, so people order everything online.

JOC: So where infrastructure doesn’t exist at one level, people skip that level for the next.

Appel: And that’s the whole e-commerce story. You know, if you go into some emerging countries, you get better wireless connectivity for mobile phones than in developed countries. I sometimes have more difficulty downloading stuff in developed countries. In emerging countries, they are jumping from no phones to mobile phones, skipping landlines because there is no need. And the same will happen with e-commerce. You know, countries that have no proper retail chains will jump straight from mom-and-pop shops to e-commerce. You see that in India, in other Asian countries and in Africa. The competition you have here in the U.S. between classic retailers and the new e-tailers will not happen in the emerging countries in the same way.

JOC: Many people mistakenly thought when you left the U.S. domestic package market several years ago that you were leaving the U.S. But you’re a major player in international freight and package within the U.S. You’ve been expanding your air hub in Cincinnati. How important to DHL as a whole is the U.S. market, and what’s your vision of the market?

Appel: The U.S. is as important as China or Europe. In the international express business, you have to connect all the dots, and we perceive that as our strength, that we can connect all the countries of the world. I think the decision to retrench from the domestic U.S. market was right. We don’t have to do everything ourselves. We work very well with the U.S. Postal Service, and we have grown our business very nicely in the e-commerce arena. We have expanded our Cincinnati hub now I think for the third time since leaving the domestic market. We’re very happy with Cincinnati, because we have very good infrastructure there and our service quality is superb. Maybe it’s superb because we are not adding complexity with domestic products.

JOC: You’re operating in countries all over the world, and enforcement of the new SOLAS container weighing rule seems to be all over the map, too. How does this affect DP DHL?

Appel: I think the challenge here is that many countries have not made up their minds. For less-than-containerload, we probably can deal with that pretty well because we can weigh this stuff. Full containerload is more challenging because not all shippers have the right infrastructure to do that. But many countries are recognizing that as well. Some countries probably will have a transition period in the implementation process, and I think that’s right. It’s right to protect people. Safety is an important issue for us. There are accidents, but we should not blow that completely out of proportion.

JOC: Whether it’s SOLAS internationally or electronic truck driver logs in the U.S., many regulations being put in place seem to have the overall effect of taking flexibility out of the supply chain. Do you see this as something that is dramatically increasing globally and are your customers coming to you for more assistance?

Appel: We have more regulation than we had 50 years ago. Nevertheless, cargo still moves faster every year than the previous year. I think that’s part of the development of any industry. The more mature an industry becomes, the more regulation we will get.

Of course, not all regulation is good. When I go to Brussels, to the European Commission, I always tell them I have one wish: If you introduce a new law or regulation, cancel another regulation. That would be all right. But even if there is more regulation, overall we still see that the supply chain is working better. Why? Because all the participants got smarter.

JOC: Ocean rates are a big topic at this conference, and they’re in the doldrums. How are low container rates affecting your forwarding business?

Appel: The rates have some impact. Customers are not willing to pay more for the service if they pay so little for the freight. If you pay a thousand bucks a container, it’s easier to add a hundred bucks extra than if you only pay three hundred or two hundred dollars. So maintaining the ratio we need to provide our service is more of a challenge. Forwarders actually make their living from volatility. That’s part of our business. But the lower rate, the more difficult the discussion with the shippers is about what we’ll charge for customs clearance or the overall orchestration of the flow.

JOC: It reduces the margin you have to provide these services.

Appel: There is pressure and you have to defend your margin, because a container still has to be cleared and you have to do the paperwork and it doesn’t get cheaper just because the underlying rate gets lower. You have that day-to-day discussion (with customers). Services come into play, and how you can be creative and innovative. We always have to be on top of the game.