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Q4 2014 Earnings

February 03, 2015
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We're Not in Kansas Anymore


Abstract:

David Abney, Chief Operating Officer, addressed students, faculty, and area business leaders at the Thunderbird Global School of Business Global Issues Forum. In his remarks, Abney stressed five business lessons that have proved instrumental in UPS's worldwide expansion.

Good afternoon, everyone. It's great to be back in Arizona. I enjoyed visiting Thunderbird several times while a Scottsdale resident during my days here in the late '90s as President of Sonic Air, which has become UPS's same day delivery service.  

UPS has enjoyed a long, outstanding relationship with Thunderbird. A number of Thunderbird graduates have become key members of UPS's leadership team.

As Thunderbird students, you've picked a good time to be in school and to add to your international business skills! As we recover from the Great Recession, you'll graduate well prepared for global economy success.

Like you, UPS strives to get stronger during economic downturns. We know the territory. We've been through 21 recessions plus a Great Depression in our 102-year history. We continue to build strengths - like our technology capabilities and global network resources in the right places - that will help us emerge stronger than ever.

Today, I want to provide you a few of our lessons learned from UPS experiences. I hope they can be of benefit to you ahead in your careers. 

You may be wondering about my choice of title. Here's the story on that.

Here's a brief snapshot of our business in 2010.

We're truly a global company. Each business day, we deliver more than 15 million packages, or the equivalent of two percent of world GDP, in 200 countries.

We employ 70,000 in our international operations, and all but 90 or so are nationals of the countries where we do business.

Those employees and our customers rely heavily on UPS technology to simplify the complexities of trade. We've invested a billion dollars a year in technology development since the late l980s. Our core, Package Level Detail, or smart label technology, has spawned a number of benefits customers enjoy today such as guaranteed delivery, new products, and automated processes. It's also saved each of our drivers a half-hour a day in productivity time, millions of miles not driven, and a greatly reduced environmental footprint.

We're ready for the world of mobile networking. UPS is the only transportation company with apps on both Blackberry and iPhone.

How have we grown our international presence? I believe attention to five points has had a lot to do with it. In some cases, it was natural for us to gravitate to these priorities early on. For example, we were a privately held company until late '99, so adopting a long term vision was ingrained in our culture. In others, we went through a learning curve to arrive there. When it came to business acquisitions offshore and developing important relationships, we learned that when it comes to cultural customs, when in Rome do as the Romans do. In all cases, we're never satisfied with where we are. One of the most exciting things about international business is it's a lifetime learning experience.

Let's look at each takeaway a little closer.

Vision

One of the things we didn't fully appreciate in our early days in Europe and Asia is that our highly recognized U.S. brand would be virtually unknown.

We had to persuade brave young people - many like yourselves - to join our ground floor enterprise. One included a young man named Wolfgang Flick back in 1976.

Wolfgang showed up for his job interview in jeans and T-Shirt, while the UPSers were in suits. But to his credit, Wolfgang knew wholesaling, and we could work on his wardrobe. So we hired him right away.

Soon after Wolfgang started, his dad asked his son why in the world he'd want to join an upstart U.S. company no-one had ever heard of? Wolfgang told his bemused dad he thought he had joined the company he would spend his career with. 

Since 2004, Wolfgang has been President of UPS Europe, following a grow-from-within approach to talent development that's served us well around the world.

In our early days in Europe, we established a vision - and one that would serve us well in future years - to adopt a single Europe mindset. You have to imagine that in those days if you sent a package from Marseilles, France, to Milan, Italy, it went from Marseilles... to Paris... to Cologne... and then to Milan. That was an expensive trip full of currency exchanges and convoluted customs regulations.

We envisioned it would one day be Marseilles to Milan. And we began to invest accordingly. Our vision influenced the way we approached brokerage... managed people... developed transportation modes including ground and air... and consolidated back office functions.

As events like the Fall of the Berlin Wall... formation of the European Union... and advent of the World Wide Web accelerated cross-border trade, we were in place with a network and portfolio of services to benefit.

When the Central Europe nations joined the EU in 2004, we acquired and assimilated Poland's largest domestic carrier into our single-region network. We were soon able to serve Western European companies that had set up sourcing supply chain ties in Central Europe.

For several years, while we were investing and building out our network in Europe, we lost money. But we stayed the course and it's paid off.

Today, you see the best of global companies taking the long term view, even during the recession. Hewlett-Packard, for example, has set up research and development facilities in India, China and other developing economies to match computer design to local needs and tastes.

Computer penetration is poised for substantial growth over the next decade in developing nations as 70 million people from developing economies reach middle-class standing each year.

Of course, the best visionary thinking will not succeed without the ability to master the drivers found within individual country markets. How will you navigate local regulatory and legal requirements? What are taxes and fees specific to markets (e.g. Value Added Taxes)? How do you price your services? How do you anticipate demand? Who are the right suppliers to work with? 

Mastering these drivers requires skilled local leadership - people who understand sound business principles, and people who know the inner workings of individual national markets.... leaders like all of you.

Connection

Speaking of H-P's preparation for computer growth in developing nations, technology is connecting the world is it not? And that brings me to my next point - access where you want to do business. Relationships are more important than ever today as multinational businesses face a world-wide trust deficit.

One of the things we've done is to go to remote areas of the world in Poland, Mexico, India and China and build computer labs where many kids have never seen computers. A few years ago, a UPS team with our CEO wielding a hammer and nails built a computer lab near a primary school in rural China near Xibaipo. UPS donated the computers. One little girl was so excited she screamed, "We're getting a computer. Then she asked, what's a computer?"

Building computer labs seems like a fairly simple outreach gesture doesn't it?  But it's personal and non-self serving. It went a long way in China. These kinds of gestures become a first step in a license to operate. It helped open doors for UPS to help secure a national sponsorship at the 2006 Beijing Olympic Games and to build our brand in China.

One of my favorite examples of relationship building is an IBM program called the IBM Corporate Service Corps. 

The program exposes high performance IBM employees to pro-bono work in developing nations including Africa, Asia and Latin America. 

The IBMers perform community-driven projects that vary from helping entrepreneurs and small businesses to introducing information technology to communities left behind by the digital divide.

Today, you see leading companies combining their expertise with community support and philanthropy - companies like Coca-Cola lending its expertise in water stewardship, and Home Depot in building affordable housing.

UPS does so as well.

We've trained a cadre of our UPS logistics people for deployment as part of the World Food Program Disaster Relief Team.

These employees, some of whom had never been out of the country before, have found themselves in Honduras, Indonesia, a Darfur refugee camp in Chad, in more recently in Haiti where they supported the Red Cross, UNICEF and CARE in providing relief supplies to tens of thousands of victims of the tragic earthquake in Haiti.

I think you're going to see this trend toward making proactive connections in a strategic way... whether it's targeted to sustainable social or environmental concerns... receiving more attention within companies and within business school curriculums.

Values

If strengthening your relationships with communities worldwide is a priority for your reputation, what do you do if your values come into a cultural conflict?

We've seen that played out in the news in the tension between Google and China.

Last month, Google ceased censorship of search results on its China-based site, Google.cn, and redirected users in China to its uncensored Chinese-language site based in Hong Kong.

China has rules requiring self-censorship. Google is openly opposed to censorship.

There's a lot at stake for both parties. China has 400 million Internet users today. Online users in 60 of China's largest cities spend 70 percent of their leisure time online.

My sense is that some sort of compromise will be reached. But the issue raises the challenge of doing business where cultural values don't align.

As an American company, UPS must comply with the Foreign Corrupt Practices Act. And we impose a high standard of ethical conduct on ourselves that's been part of our cultural DNA for 102 years. 

What do you do when bribes and payoffs are standard business practices at some border customs offices?

It's a difficult challenge and one we confront in terms of integrating our services in the BRIC nations and serving expanding needs of our customers like Hewlett-Packard.

Brazil, for example, is emerging as the major economic engine of the Americas. Brazil did not experience a banking crisis. But it's still hampered by high tariffs, customs bureaucracy, and corrupt practices that limit its potential.

Russia is striving to empower a technical innovation movement – a Russian Silicon Valley of sorts - that would become a catalyst for change. But such a movement is hampered by a lack of property rights, rule of law, competitive marketplace, and corruption by the bureaucratic ruling elite. What's going to become the incentive to propel technical innovation forward?

As frustrating as some of these challenges become, I don't think you can ever compromise on your values. Any short term gain comes at the risk of long term reputational harm.

Managing Risk

Another sort of international business challenge springs from the unexpected. I'm sure many of us recall the events of the global financial crisis that struck late in 2008 as if it happened yesterday. But do you remember that earlier in that same year, we had a couple of other shocks - like soaring fuel prices, and worldwide food shortages?

A byproduct of our world today of global interdependency is the increase of risk from unanticipated sources.

UPS did a study with the Economist Magazine a couple of years ago on the state of risk in global business. We interviewed 344 global company senior executives and we found a few surprising things.

Four in ten of the survey's senior executives said their supply chain expansion and complexity have outpaced their ability to control risk.

Yet, in the face of such vulnerability, just one in six of the business leaders said their firms paid the proper attention to risk mitigation and creating a resilient company.

Flexibility is a key attribute of achieving sustaining results in today's era of volatility. The mega-retailer Amazon, for example, places so much attention on the optimum locations for its distribution centers that it uses advanced data analytics to determine them.

The French aviation company, Airbus, has devised a risk assessment formula that analyzes each of its suppliers on 80 different parameters including its capacity, financial situation, technology, people and more. Airbus doesn't want to tie its future to suppliers that may be at financial risk.

For our part at UPS, our international network - especially our air network - is built around a flexible model.

We can scale up and scale down as demand dictates. 

In that model, we only fly higher-margin premium-priced express packages and a small percentage of freight on our own aircraft. We transport lower margin freight on contract aircraft. As a result, we generate a 16 percent profit margin per package - the best in the industry. Competitors achieve around a 2 percent profit margin per package.

Flexibility is also key to how we enter new markets. We often leverage local business agency or joint venture partnerships to learn about the market's business practices and customs. An agency or joint venture arrangement also enables us to ramp up when market growth dictates. 

As an example, we worked with an agency called Unisped in Turkey for 20 years. That agent grew to become UPS's largest service contractor. Now that the Middle East market is poised for growth - this year it will expand at a 3.5 percent clip - we've acquired Unisped.   

We've also appointed the company's CEO as the UPS head of express package and logistics services, not only of Turkey, but for most of the Middle East and Central Asia as well. His knowledge of the region's business landscape is invaluable.

For our supply chain customers, one of the biggest risk variables is fuel costs. If costs are moderate, they can source across the world. If fuel costs should approach levels we saw in the summer of 2008, near-sourcing becomes part of the equation. The key in today's world is to be ready with contingency plans.

Trade Advocacy

Speaking of risk, a couple of global economy risk factors I see today are the residue of the global financial meltdown - currency disputes and protectionism.

  • Is China keeping its currency, the Yuan, artificially low to keep the price of its exports too low?
  • Is the U.S. trying to pressure the Chinese to raise the Yuan to make its exports more desirable?
  • In a climate of distrust, has the global mood shifted toward protectionism? 

Last year, the U.S. imposed 46 protectionist measures and the European Union, 90. Predictably, China and India retaliated with 51 and 29 anti-trade measures of their own. This all makes products more expensive and stalls global growth. (Businessinsider.com)

I'm not an economist. But if you've studied economic history, you probably know the two major culprits in the collapse of global trade in the 1930s were protectionism and beggar-thy-neighbor currency devaluations. The U.S. protectionist practices in the 1930 Smoot-Hawley Tariff Act strangled global trade as other nations retaliated.

You know, you hear protectionists speak often of a (quote) "level playing field" for workers. 

Did you happen to see the 60 Minutes Report recently that spotlighted the U.S. territory of Samoa in the South Pacific and how many pro football players come from that island?

An interesting sidebar in that report talked about the dependence of the Island workforce to its two, tuna canning operations. In the interests of a level playing field and thinking it was doing the Samoans a favor - the U.S. Congress raised the workers' minimum wage. 

The problem was it exceeded the canning costs of the plants. So one canning company that accounted for half of the Island's jobs moved to another island, and the second company is threatening to do the same.

The concept of level playing field is not always a matter of black and white.

As all of you enter careers in international business, one of your opportunities will be to become advocates of global trade and to collaborate with governments worldwide to make open trade a reality. Business people must step up. A great way I think is by continuing to build the connections I talked about earlier with communities and government to win trust. If we don't become advocates of the benefits of trade, who will?

Those are my five lessons from UPS's international business experience. Thanks so much for your attention. I wish you all the best in your careers. 

Now it's time to turn it over to you. I'd be happy to take any comments or questions you might have.

For more information, contact:

404-828-7123

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