Online Extra: A "Mercedes" in the Parcel Express Industry
DHL, a unit of Germany's Deutsche Post, is the dominant express and parcel company in Europe and also the leader in crossborder air express in Asia. In the U.S., though, DHL is still tiny compared to market leaders UPS (UPS ) and FedEx (FDX ). Deutsche Post CEO Klaus Zumwinkel is trying to change that, in part by acquiring Airborne last year and merging it with DHL.
But gaining ground in the U.S. is proving tougher than expected. On Sept. 29, DHL announced that it won't break even in the U.S. until 2006, instead of 2005 as planned. This is partly because DHL was held up by a regulatory battle after rivals complained that the air fleet used under contract by the German outfit constituted illegal foreign control of an airline. DHL prevailed in the dispute earlier this year. Still, many analysts doubt whether even the revised profit goal is realistic.
Zumwinkel, who has overseen transformation of the German postal service into a global express-courier and logistics company, remains determined. He spoke recently with BusinessWeek's Frankfurt Bureau Chief, Jack Ewing, about how DHL will prove the doubters wrong. Edited excerpts of their conversation follow:
Q: Why is the U.S. worth investing $1.2 billion in? A:
Q: Why is the U.S. worth investing $1.2 billion in?
A:In an industry like ours, the network has to be complete. Customers inside the U.S. and outside are welcoming an increase in our U.S. presence. If we didn't have an efficient pickup and delivery system in the U.S., it would be very tough for us to hold onto our No. 1 position in Europe and Asia.
Q: Has the U.S. been more difficult than you expected? Have there been any surprises? A:
Q: Has the U.S. been more difficult than you expected? Have there been any surprises?
A:In the beginning we had a long battle with our competitors because of [regulatory issues regarding] the air fleet used by DHL.... We lost some time in streamlining and integrating and restructuring the whole thing. But with all of our acquisitions, we're now experts in integration. We have integrated more than 100 companies.
Q: How big a priority is DHL in the U.S. for you? A:
Q: How big a priority is DHL in the U.S. for you?
A:In such a big group we have several priorities. We had the IPO of Postbank [Deutsche Post's retail banking unit in Germany], and Asia is a very attractive and strong growth area. In Europe, we're integrating heavily in several key countries like Italy, the U.K., [and] France. The U.S. is one of these priorities, it's in this class.
Q: So it's not keeping you up at night? A:
Q: So it's not keeping you up at night?
Q: The U.S. market is moving toward a ground network. Does that increase the amount of investment you have to put into the U.S.? A:
Q: The U.S. market is moving toward a ground network. Does that increase the amount of investment you have to put into the U.S.?
A:Yes.... Airborne had already established a ground-based network. Like everybody else in this industry, Airborne found that if you have a good ground network, why should the customer pay so much for air products?
This is a secular trend. We want to provide the same kind of quality our customers are used to in other parts of the world. We want to be the Mercedes in our industry.
Q: What are your profit goals for DHL in the U.S.? Will you be satisfied to break even? A:
Q: What are your profit goals for DHL in the U.S.? Will you be satisfied to break even?
A:Naturally, management is concentrating on [breaking even] in 2006 [and on the goals] to restructure [the U.S. business], to integrate two companies, to integrate into the worldwide network, [and] to build a ground network. That will keep everybody busy for the next two years. [If we broke even,] we would have 500 million [euros or $650 million] more profit, we would have 500 million [euros] losses less. That is only 10% of our whole group profit. That's the main objective. After that, we will see.
Q: Can you foresee that the U.S. will become a major profit center? A:
Q: Can you foresee that the U.S. will become a major profit center?
A:Sure. We have invested a lot of money in the U.S. Our competitors are earning nice profit rates, double-digit margins -- something we're not used to in Europe. We won't get these margins for a while because our competitors have larger economies of scale, but with our economies of scale worldwide, I think we can [realize these margins in the long term].
Q: Is this like the Japanese carmakers coming into the U.S. decades ago where you're willing to invest for a long time in order to get a permanent foothold in the market? A:
Q: Is this like the Japanese carmakers coming into the U.S. decades ago where you're willing to invest for a long time in order to get a permanent foothold in the market?
A:I don't compare myself with Japanese carmakers. Here the game is very simple. The express game is an international game. To be international, one has to cover the largest economy in the world -- the U.S. Otherwise, one is not thoroughly competitive in Asia or Europe.
We're in the U.S. for the long term. I think the globalization trend will strengthen in the next 10 years. World trade has to be transported, and we're here to provide the transport.