A Peek Inside FedEx Founder And CEO Fred Smith’s World

It’s been a tough year for FedEx and for its founder and CEO, Fred Smith. Battered by a softening global economy, rising trade tensions, an ongoing frenemy fight with Amazon and grumpy investors looking for outsized earnings growth, the company has seen shares fall 25 percent in the past year.

Hardly a cake walk, but Smith, of course, has seen worse. Since founding the company in 1971, he’s weathered an endless storm of transformations, each one potentially existential. Oil shocks. Recessions. Wars. 9/11. E-mail.

Through it all FedEx has survived, thrived and grown to a centrality in the global economy perhaps unmatched by any other company. Visiting the night shift at the Memphis hub of FedEx Express (as we did during Chief Executive’s recent Supply Chain and Logistics Summit, see page 64) is to witness one of the most astounding feats of daily human ingenuity: 150 planes and 7,000 employees across 900 acres sorting 1.3 million packages. Every day.

A day after FedEx’s most recent earnings call, in which the company was repeatedly questioned about its spending on new planes and new systems, as well as the headwinds of the economy, Chief Executive talked with Smith onstage at the historic Peabody Hotel in downtown Memphis. The conversation ranged from Wall Street and free trade to his outlook for China and how he sees the future—at FedEx and beyond. What follows is a transcript of that conversation, edited for length and clarity.

The global economy is, perhaps, downshifting somewhat. Can you tell us what you’re seeing out there, the macroeconomics around the world, and how it’s impacting not just your business, but business in general?

First, let me give you a little context about FedEx. FedEx will end up this fiscal year just shy of $70 billion of revenue. Now, we don’t have any cost of goods sold. So, that $70 billion is all EVA, economic value added.

We went into the year thinking we were gonna grow about $6 billion, and we actually grew about $4.5 billion. So even though we didn’t hit our goal, we’re still going to have earnings year-over-year that are probably flat or slightly up… We’re still gonna have, you know, a reasonably good year, is the point that I’m saying to you.

It’s not like FedEx is facing existential challenges. We’re just not making as much money as we had planned and hoped. On June 1 last year, we thought that the year was gonna be strong enough that we could make some very important changes and investments in our business. So we opened up two enormous ground hubs, in Allentown, Pennsylvania, and Middletown, Connecticut. Huge things, 300 acres.

Second, because of the e-commerce revolution, which is a part of our business but certainly not the main part of the business, people want items delivered six and now even seven days a week. So, we went to a six-day operation. So that means we’ve put a bow wave of capacity and expense out there.

And then third, one of the big things about e-commerce nobody talks much about is the tremendous explosion in oversized packages. These aren’t little bitty packages. They’re refrigerators, furniture and stuff like that. So we’ve put a significant new network of oversized annexes in our ground system.

So, then the international revenues did not materialize because of the Brexit situation in Europe and the trade dispute with China, none of which was predictable when we went into the business plan. So, I just wanted to give you that context that we made these expansions to the business, we’re glad we did, and now we’re working hard to make sure that we put the revenues in the systems that justify the expansion.

How do you deal with the short termism of Wall Street when you’re trying to build out a capital-intensive business for the long term?

That’s at the heart of one of the most serious problems with the U.S. economy. Wall Street has this army of analysts trying to figure out our business better than we can figure it out and, more importantly, better than the entire mosaic of the global economy can figure it out. We do 14.5 million shipments a day worldwide with half a million people, 700 planes, 180,000 vehicles, 5,000 facilities. You can’t run a business like FedEx quarter-for-quarter.

Yesterday, we got hammered on an analyst call because we’re not making as much money as we planned, but we just put our goals out there and run the business. We’re making investments for 25 and 30 years, not for the next quarter, but it is very tough on a company run by a CEO who has [only] been in place for four or five years. They feel such pressure to deliver these short-term results, which is a real problem in terms of the growth in the country because it makes management and those CEOs risk-averse and afraid.

The stock market is no longer smart people running pools of capital and investing. It’s mostly run by algorithms. And you’re not talking about little small perturbations. You miss the quarter, and wham, the stock goes down 25 percent. It’s very unstable.

Add the private equity phenomenon on top of that, and that’s why you’ve seen the number of publicly held companies decline by half over the last 25 years. And it will continue to decline because nobody can operate in that type of short-term focus when running a long-term business, particularly when it gets to any scale.

What changes have you seen in the global supply chain that make you think, “That will be a real challenge”?

The biggest thing that’s happened is the rise of China. In 1979, Deng Xiaoping figured out what they were doing wasn’t working, and he began to open up China’s economy. With this enormous amount of productive labor available, they became the manufacturing centerpiece of the world, and almost all supply chains were either in the middle of the growth of China or they were peripherally affected by the growth in China.

By the time of the meltdown in the Western financial markets in 2008… other countries started criticizing China. They take people’s intellectual property. They engage in cyber-espionage. They force JVs inside the company. They’re mercantilists. They put lots of tariffs on our products. They use non-tariff barriers. When the tariff fight started, they, as an example, held up hundreds and hundreds of Ford cars coming into China at a port by making some outrageous claim that the catalytic converters or something weren’t up to standard. The net result was the value of those cars went to zero.

They’ve done all of those things, and at the same time, they’ve militarized the South China Sea. They started their so-called Belt and Road Initiative. And, probably most problematic, they have their Made in China 2025 initiative, which identifies a number of industries where they say quite openly, “The state will be involved in these sectors, and we will be the leaders in these sectors by 2025.” China has overstepped, and that has created an enormous economic problem.

What’s your view of U.S. trade policy with regard to China?

I don’t agree with the way the Trump administration has approached the problem, but I do agree that the problem has to be addressed. President Trump’s response was to become protectionist. He unilaterally put tariffs in place, and I think that that was a bad decision. The best way to have dealt with China was through the multilateral process; walking away from TPP was a mistake of the highest order.

We’re now in the middle of this re-adjustment. China will try to solve this on a transactional basis, and President Trump is, as we’ve all seen, very transactionally oriented. So, my guess is we’ll get a trade deal, [but] will it solve some of these fundamental problems?

We’ll see how it plays out, but there are lots of moving parts at the moment, and lots of people have been hurt by this. President Trump’s view was, “Well, they sell us $400 billion worth of stuff, we sell them $100 billion, and so if we’re tough enough, we win.” That may be true in the long run, but [not] if you’re a farmer in Midwest selling soybeans or whatever. Our exports to China were very concentrated. Their exports to us are very diversified. So, as you’ve seen, our deficit with China has actually increased, while our exports to China have actually decreased.

A better approach would have been to establish a rules-based system with all of the other trading partners in the Pacific and across the Atlantic and bring China into conformance with the liberal trading system, WTO-based trading system, that way, rather than bilaterally trying to use tariffs.

In a market constantly being reshaped by market shifts and disruptive technology, how can business leaders stay on top of change?

The fundamental thing that everybody in business has always got to realize in a market-driven economy is that you’re in the process of being commoditized. Commoditization always leads to sustenance earnings at best, so you have to innovate and find those blue ocean opportunities.

That’s hard because you’ve attracted a set of skills to pursue your core competencies, and now things have changed, so how do you manage that? That is, I think, quasi-art and quasi-science. And the really good CEOs know how to do that, and the CEOs who are not so good don’t. It’s just a messy process of trying to see where that opportunity is and how to protect yourself from commoditization in your existing business. Many companies simply cannot make that adjustment so they become obsolete, fodder for an acquisition or whatever the case may be.

FedEx was a tremendous disruptor, and now you’ve weathered recessions, fuel spikes, 9/11, the rise of China, Amazon, predictive analytics, A.I. How did you instill adaptability in the company’s culture?

Change is inevitable. If you don’t like change, don’t work here, because I can’t promise you that two, three, five years from now, what you’re doing is gonna be the same, that the market is gonna be the same. You are going to have to constantly adjust, so if you can’t do that, you should go someplace where there’s less change, teach history or something. I’m not being facetious.

There are some people who perform poorly when they’re stressed, and other people, it’s a kick to ’em. They’re adrenaline junkies. If you’re in a marketplace that’s changing or has the potential to change dramatically—and all markets are going to change, it’s just a matter of the rapidity—you’ve got to make sure you have those people in your organization.

How much of your leadership philosophy and strategy comes out of your background as a Marine?

It’s directly related. The Marine Corps is the only organization you can think of that has lasted for over 200 years and whose performance is almost always exemplary and without duplication. There is this mistaken belief that it’s all, “Yes, sir. Aye-aye, sir.” It’s not. It’s always the other way around. The first thing they teach you in the Marine Corps is that if you’re going to be an officer, when you eat, you eat last. And if there’s nothing left, you don’t eat.

It’s that culture that I tried to put into FedEx because it’s the tried-and-true method of running a high-performance organization that requires a lot of flexibility, mission change, adaptation and flexibility. I never went to business school. When people ask “What business school did you go to?” I always say, “U-S-M-C.” They think it’s University of Southern California, but the Marine Corps was my graduate school. It was during the Vietnam War, so it was a tough way to make a living at the time. But I’m very grateful to the Marine Corps.

You have said that your company philosophy is people, service, profit. How is that evident in your approach to performance?

It just tries to synthesize that we’re in the service business. People don’t see me or my son. What they see are those first-line people. Just like in the Marine Corps, we turn the whole thing upside-down. Management is at the bottom. We’re out there to support those people who you see at your doorway, the pilots you saw getting on those planes, or whatever the case may be.

The culture is very important, but FedEx’s culture is not family. It’s team, and it’s high performance at the highest level. You almost can’t conceive of the way these operations take place until you see it, the choreography of these people, machines, time and motion, automation and A.I., and all of these disciplines coming together to create this mosaic of commerce.

A lot of companies say, “We’re all family,” but I’ve never tried to portray FedEx that way. You won’t fire your son or your daughter, but the relationship on a team or a high-performance organization is different. You can’t afford to carry dead weight or have somebody who can’t play. So FedEx is much more like a team, and that’s the reason we call people team members and teammates. If you don’t do your job at FedEx, we will fire you. We’ll try to do it in a dignified way, but if you can’t play at the varsity level, you can’t play at FedEx. We don’t make any apologies about that.

You recently introduced the idea of the same-day robots, and you’re building a $1.7 billion expansion out at the campus, where there will be a lot more automation there. What’s your take on emerging technologies and their place in global commerce?

We’re heavily involved in Blockchain, which is going to revolutionize supply chains. You will have a trusted ledger of the entire life of a dozen eggs, the part that goes on a 777, the medicine that was produced in Japan, whatever it is. Blockchain is going to be a big deal.

We’re also heavily involved in A.I., which is analytics on steroids and will allow you do have much more discrete information and be able to operate things with much more precision. And what makes the FedEx same-day bots possible are sensors and digital storage that cost virtually nothing. So you have the map of the universe, if you want to, in the palm of your hand, and a sensor which can tell you, “Uh-oh, I’m about to run into something. It’s a human being.” All of these things are very important, which goes back to that strategic management process of trying to see what technology is on the horizon and how you can adapt and use them to your competitive advantage.

How has the drive toward sustainability changed FedEx’s Future?

Over the last 10 years, we’ve done a remarkable job in reducing our carbon footprint. Our miles per gallon of our vehicular fleet has gone up 40 percent. We’re introducing 1,000 electric vehicles in California, largely because of the regulatory requirement to do so. These vehicles, by the way, are built in China, which will be an electrification leader.

We’re spending billions of dollars on new, more modern airplanes. We get criticized about this by Wall Street. I dealt with it yesterday. We’re not gonna stop. And part of the motivation for that is because they’re more fuel-efficient than the older planes that they replace. Electrification is a much bigger deal in terms of sustainability for the world than people give it credit. So, between natural gas substitution for coal and power generation, and perhaps in maritime power and maybe even over-the-road power. We have natural gas over-the-road vehicles, you know, on an experimental basis.

The world is using about 96 million to 97 million barrels of oil per day. The traditional forecasts are that it will go up to 106 million barrels by 2025. But I think that because of electrification and natural gas displacement, you might see that actually gravitate back down to 70 million to 75 million. And there are a lot of efforts underway in terms of carbon sequestration and carbon capture. So I’m much more of an optimist that the sustainability of the world due to human ingenuity is much more likely than some of the people who view it in more dire straits.

The world will become more sustainable not because of fear of global warming, but because of economic advantage. We’ll get to the right place—and that’s the history of the world, quite frankly. London used to be enveloped in a coal fog every day. That stopped when they stopped burning coal. And I think the same thing will happen. Carbon emissions are down in the United States over the last 15 years. So, I think the world will get there, particularly China, which is putting a lot of time and effort into this.

How do you defend our economic system at a time when people are openly critical of business and capitalism?

Capitalism has become a pejorative in many circles. People have in their minds a Scrooge McDuck character on Wall Street that’s crushing the little people. And there’s merit to that to some degree. There are a few hundred people with these incredible incomes and, of course, that’s what everybody focuses on. It’s a tiny number of people.

Capitalism has a brand image problem, in my mind. That’s why I use the terms market-driven and government-directed. No credible economist that I know of has ever written about an economy that becomes government-driven and is successful in improving the living standards of its people. It just doesn’t exist.

At the end of the day, the market is what brought China out of poverty. It certainly wasn’t any state-directed or government-directed system. They’ve forgotten that or ignored it in order to perpetuate the power of the Communist Party, and they will suffer consequences because of that. They’d be better off just saying to the state-owned enterprises, “You will have to compete with JPMorgan or MasterCard” or whatever the case may be.

Regarding socialism, most of the youngsters talking don’t know what it means. Bernie Sanders recently said, “They’re gonna love it when they find out what I’m really talking about… free education, free medical care.” Well, that’s government-directed, and it’s not gonna be any more successful [here] than it has been anyplace else.

I think what’s happened here is we’ve gotten so sophisticated in being able to parse the electorate that…when [politicians] get into office they are incapable of doing the fundamental thing that the people who designed our system had at the heart of our government, and that is compromise. They can’t compromise because they won’t get re-elected, and every word they ever said lives forever and can be pulled out of the ether to be used against you out of context. I’ve been going up to Washington for 43 years, and the system as it was designed is overwhelmed by the technology.

So, somehow, I think there will have to be a reconciliation back to the center that forces some kind of compromise. Somehow or another, I have confidence the American system will find some kind of middle ground.

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Dan Bigman: Dan Bigman is Editor and Chief Content Officer of Chief Executive Group, publishers of Chief Executive, Corporate Board Member, ChiefExecutive.net and Boardmember.com. Previously he was Managing Editor at Forbes and the founding business editor of NYTimes.com.