October 2006 Newsletter
We Need More Balance In China Trade
 Back in the nineteen thirties, the slogan in Nazi Germany was, "Today
Germany, tomorrow the world." Fast forward seventy years and the
slogan can be updated to "Today China, tomorrow the world." In terms
of transportation, the world is becoming a one way street--China to
the rest of the world. Such traditional trade lanes as U.S.A-Europe,
Europe-U.S.A., Japan-world and Europe to its former colonies in Asia
and Africa, are shrinking into oblivion.
There simply is no balance in China trade between that nation and the
rest of the world. If there is no leveling off of Chinese exports and
there is no sudden jump in Chinese imports, the world is heading for
an economic showdown. All the platitudes about globalization, supposed
to provide the basis for uplifting poor nations out of poverty through
the production and export of goods, will come to naught if China keeps
pumping out its exports. Other Asian nations like Malaysia, Vietnam,
Thailand, Singapore and even India are hurting. The recent coup in
Thailand is no help to that nation's export drive. In the case of
Africa, despite almost sixty years of independence from England and
France, there is less wealth today than when the African nations were
under colonial rule. In the case of countries like Zimbabwe, formerly
Southern Rhodesia, there is absolute chaos.
While China is not the only culprit in helping to destroy the
underpinnings of globalization, it must take much of the blame with
its attitude of me first, me last and me always. Globalization has not
promoted the benefits of democracy and a fairer distribution of
wealth. Rather, more people are living in greater poverty than ever
before. The World Trade Organization has been an abject failure in
attempting to lift the living standards among underdeveloped nations.
Its only claim to "success" is helping to destroy the middle class of
the world's nations.
Our world cannot go back to the days of colonialism and gunboat
diplomacy. At least, however, let's try and revive some of the
traditional trading blocs between nations. Although often unfair to
the "southern" nations as producers of raw materials and foodstuffs,
at least there was a certain solidity and sense of tradition among
these countries and their peoples.
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Needed By U.S. Airlines, New Attitudes Toward Freight
Sometime this month, the Journal of Commerce will be running an
article signed by me re the air freight situation among U.S.
airlines. In my estimation, that situation is not good. I charge
U.S. airline management with indifference, disinterest and even
disdain toward cargo. Perhaps these attitudes can be understood
when it is realized that at the combination carriers, senior
managers always are promoted from the passenger side. To be
assigned a cargo position at most domestic airlines is akin to
being sent to Siberia. Airline managers do not seem to have rear
view mirrors on their aircraft. They don't see the LTL truckers
rushing up to take away their domestic cargo business. For one of
the great ironies of our business is that truckers, whom the
airlines disdained as little more than illiterate thugs, have
become enormously effective competitors. As a matter of fact,
integrators like BAX Global and all-cargo airlines like Kitty
Hawk, boast of their expanded ground networks, not their air
capabilities.
As the airlines continue to pack them in on the passenger side, as
they announce higher fares and start making some money after a
five year drought, the carriers are reasserting their old
arrogance. "Who needs freight?" they ask. A number of them are
appointing General Service Agents (GSAs) to handle their freight
instead of traditionally keeping it in-house. Cargo sales offices
have been closed and freight salesmen have been dismissed en
masse. I haven't seen a domestic cargo rep in two years despite my
office being located less than a mile from LAX.
Freight forwarders need less airlines' tricks and more honesty to
maintain and expand their business. Like not having the airlines
change rates too quickly and without warning. Or canceling flights
because there is not enough passenger loads so the already booked
freight gets the heave-ho. We are the airlines' best friends and
should be treated accordingly. Some 70 percent of all domestic
freight is originated by forwarders (in international, the figure
is 90 percent). Without a new attitude toward freight, without
greater cooperation between airline management and forwarder,
truckers will continue to grab greater market share.
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Qantas Forms New Freight Subsidiary
 While U.S. airlines play fast and loose with their freight operations,
international carriers are expanding their cargo activities. The
latest foreign flag carrier to expand its cargo operations is Qantas.
The Australian airline is stepping up its freight operations with a
new, wholly owned subsidiary called Australian Air Express.
The new subsidiary is starting operations this month with the
conversion of four passenger 737s into freighters. More will be coming
on line during the next few months. Qantas CEO Jeff Dixon said that
freight business would be a major focus in the next twelve months.
"Growing our freight operations is a core strategy for Qantas aimed at
diversifying and strengthening our revenue base," he commented. Quite
a contrast with the cargo philosophy of most U.S. carriers. When did
we last hear from a U.S. airline CEO declaring that freight was an
important, strategic part of his business? As the old song goes, "I
can't remember where or when."
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The TNT Story Continued
 I'm
continuing to be fascinated by the TNT story as it relates to the
reality, not the fantasy, of our industry. Here is one of the big
four integrators going its own way and so far prospering because
of its realistic thinking. To quickly recapitulate, TNT a few
months ago sold off its logistics business, which accounted for
about 35 percent of its total revenues of about $14 billion. Many
in our industry thought TNT management had taken leave of its
senses to sell off such a large piece of its supposedly highly
profitable business. In my book, TNT management was crazy like a
fox.
Why did TNT exit the logistics business? Because TNT is a very
sober Dutch company and shut its ears to the high flown rhetoric
of the "one stop" shopping theories of the 3PL logistic gurus. TNT
makes most of its money moving freight and express on its
worldwide network. In TNT's view, logistics was not a networks
business. And logistics was not a particularly profitable
business. At TNT, it generated only about 3 percent of its profits
despite accounting for 35 percent of its volume. In theory,
logistics contracts require swift and reliable road and air
transportation. But in practice, as TNT learned, this requirement
really did not exist. Also, contract logistics generally means a
single contract with a customer to manage its supply chain or
spare parts feed. In TNT's opinion, that made the logistics
supplier an in-house employee rather than an outside agent--with
all the risks that entails. TNT wanted its independence and
contract logistics bound the company to its customers to a much
too close and uncomfortable degree. So, TNT got out when the
getting was good. It sold the logistics division to a private
equity company called Apollo Management for a handsome $2 billion.
The supply chain management business, particularly the 3PLs, would
be far healthier if they stopped listening to their own propaganda
and viewed the cargo business through realistic rather than
rose-colored glasses.
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World Trade Agreements; Are They Worth The Paper They Are Printed On?
 During the past few years, trade agreements have been signed all over
the world. There is the NAFTA agreement between the three nations of
North America. There is the CAFTA agreement between the U.S. and
Central America. And there is the Australia-U.S. Free Trade Agreement.
But are these agreements, signed with much fanfare by politicians of
all stripes, worth the paper they are printed on? The answer is
decidedly not.
Let's take a quick look at each of them. The NAFTA agreement was
supposed to increase trade between the U.S., Canada and Mexico by
eliminating tariffs and cumbersome customs rules and regulations.
Although Canada was part of the agreement, NAFTA's main thrust was
with Mexico--to stimulate trade between our nation and theirs. The
framers of the agreement believed it would not only stimulate trade,
but perhaps more importantly, raise the volume of Mexican industry and
improve the nation's standard of living. Five years after the
agreement was signed, there is little industrial, social or political
progress south of the border. The government is paralyzed between
conservative and radical factions. Illegal aliens continue to pour
across the border because of few employment opportunities in Mexico.
And broken down Mexican trucks, now allowed on U.S. highways, could
pose serious threats to life and limb. Many forwarders rushed to
establish facilities along the Mexican border to take advantage of the
trade opportunities supposedly fostered by the NAFTA agreement. Sadly,
many of these offices are closed today.
The CAFTA agreement between the U.S. and Central America is a case of
smoke and mirrors. Almost nothing has changed in trade patterns
between the U.S. monolith to the north and the seven tiny nations to
the south. Trade still remains in its traditional groove; bananas and
other agricultural products moving north and industrial goods shipped
south.
Our company is particularly interested in the U.S.-Australian Free
Trade Agreement. Some 75 percent CII's business is generated down
under. What's happening down there since the Agreement was signed? Not
much. Despite all the hoopla, trade still is pretty much the same.
Australian exports have benefited somewhat, but the reverse is true
ex-United States. Freight rates generally are a barometer of the
health or lack of it for exports and imports. In the case of air
freight, rates have remained static at best. Ocean rates are weak
because of all that new capacity coming on stream with those huge
10,000 TEU container ships.
The problem lies not so much between the nations involved in these
treaties but a familiar threat lurking 10,000 miles away. That threat
is our old nemesis, China. Its trade tentacles spread across the
world. Cheap Chinese manufacturing has impacted the U.S., as it has in
Mexico. All those Mexican maquiladora plants that sprung up along the
border to manufacture cheaply for American companies now find they
have been trumped by even cheaper factories in China. Ditto for
Central America. The seven little nations try and compete against
China, producing items like textiles and inexpensive apparel. They get
murdered by the industrious Chinese. With Australia, even the cheaper
U.S. dollar doesn't hack it anymore. Australian importers, like their
brethren everywhere, are interested only in price. If American goods
are too expensive, the Aussies will turn elsewhere--almost inevitably
to China.
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DHL Keeps Shuffling Along
 A few issues ago, our Newsletter suggested DHL shut down its U.S.
operations because of its inability to compete with FedEx and UPS
while racking up losses of close to $1 billion. I'm more convinced
than ever before our advice was sound after discovering that the
transportation subsidiary of Deutsche Post is shuffling once again
its top management in an effort to make the U.S. division
profitable. Good luck. Just as rearranging the deck chairs on the
Titanic was useless to the doomed ship, shaking up its executive
staff will not save DHL's American division from drowning. In
another change of direction, DHL is taking its road cargo business
out of the company's express division and folding it into its
logistics unit which basically is DHL's Exel division. Reflecting
even greater weakness, DHL will stop providing financial details
of the company's U.S. operations but will "blend it in" with
financial statements of the entire company. In effect, hiding U.S.
results. How's that for transparency in corporate governance?
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Norman Mineta Resigns As U.S. Transportation Secretary
 Little
attention was paid, even by people in our industry, to the resignation
of Norman Mineta as U.S. Secretary of Transportation, last July. Yet,
as the person overseeing the Department of Transportation and the
Federal Aviation Administration, Mineta was the most powerful person
in our industry. Mineta, who is 74, resigned after a six year tenure
under both the Clinton and Bush Administrations, to take a job with a
large public relations firm.
Was Mineta effective in this key transport role? Not particularly. He
was a caretaker rather than an activist. He missed the opportunity to
overhaul outdated U.S. rules on foreign ownership and control of
domestic airlines. He was largely invisible when Congress attacked and
won the fight to keep a Dubai-based company from acquiring the
management of a number of U.S. ports. The position of Transportation
Secretary, appointed by the President and confirmed by the Senate, is
admittedly a hot potato. He or she must balance the the many different
demands of many different constituencies--all with their own agendas.
Let's hope the next U.S. Secretary of Transportation, Mary Peters,
(nominated by Bush but not yet confirmed by the Senate) will be more
forceful and resolute in carrying out her vital duties.
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Julian
Keeling
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