Online Extra: BW 50: Delivering The Goods At FedEx

Founder-CEO Frederick Smith reflects on the company's high-flying growth

The past three years have been absolutely, positively great ones for FedEx (FDX ): The Memphis delivery giant saw its stock rise 70% over that period, and profits more than doubled in the past year alone -- a performance that earned FedEx Corp. the No.39 spot in the BusinessWeek 50 rankings this past April. Atlanta Bureau Chief Dean Foust sat down with founder and Chief Executive Frederick W. Smith recently to discuss trends in the business. Edited excerpts follow:

(Note: This is an extended version of the interview that appears in the June 13, 2005, issue of BusinessWeek.)

Q: FedEx has had quite a nice run over the past three years. What were the keys?


First, we worked hard to build a unique international network. The second is that back in the mid-'90s we recognized that our customers wanted us to broaden the things that we did for them. They particularly wanted us to be in the ground package business, they wanted us to be in the freight business -- so we made some good acquisitions, and I think we engineered their absorption into the FedEx system well.

Q: Your China traffic has been growing 50% annually. Is there a point at which your international becomes bigger than your domestic business?


It would not surprise me if, fast-forward 10 years, the international portion of FedEx Express is a bigger revenue generator than the domestic [express]part of the business. The Internet has created something that has just never been true in human history before. You have a low-cost, standardized system on virtually every desktop in the industrialized world, which allows you to see the wares of anybody who wants to sell something without regard to time and place. And we can facilitate trade between these completely unprecedented supplier-buyer relationships. I go in a FedEx hub [and] I'm just always shocked -- you see something from Georgia of the former Soviet Union going to Hattiesburg, Miss., or something like that. You just say, "My, that's the most incongruous thing that I ever saw."

Q: What are some of the new services you see adding in coming years?


I think that probably 10 years from now you'll actually be able to watch a shipment in transit. You'll be able to see things as they're actually moving, not just as they go through a gate, if you will, and are scanned by a human being. There will be some intelligence in the shipment so that you have real-time visibility.

Q: What are going to be the growth markets over the next 20 years?


I think Brazil is becoming a major economic force. In all likelihood, if you fly the airline system for [more than] a couple of days, you'll be on a Brazilian-built airplane, Embraer, which is a heck of a plane. Their agricultural economy has really taken off.

India, same thing. I mean India has deregulated, eliminated a lot of bureaucracy, signed an open-skies agreement with the United States, which is a reason I think that China will do so, too -- and their economy is booming.

I think Eastern Europe's going to grow. It's inexorable. The demographics of Western Europe are such that they can't really sustain themselves unless they have growth markets and people to come in and work in those societies, and the natural affinity is Eastern Europe.

Q: FedEx has clearly been a beneficiary of globalization and free trade. But in the past year some economists, such as Paul A. Samuelson, have questioned the long-held tenet that free trade benefits all countries. Have you seen anything that has made you waver?


I have the greatest respect for Professor Samuelson. [But] I have to say I'm a lot more optimistic. People [in the U.S.] are very creative; they'll figure out how to make things and sell things. This time last year, Boeing was a dead duck. "Airbus is going to rule the skies, Boeing's got all these problems."

Well, guess what? Up in Seattle [at Boeing], they had all these guys cooped up, figuring out some pretty nifty things, and now they're selling 787s like hotcakes. They're back in the game. Plus the advantages of scale: How can you not be interested in a potential market in excess of a billion people in India or China? I think that trumps the fact that our textile industry is going to China.

Q: Do you think there is always going to be the political support for free trade?


I think that political support for free trade has been reduced a lot over the last few years, but the remaining battles over trade are not in mainstream area of trade -- they're on the periphery. It's, in the scheme of things, quite silly that Europe pays so many dollars a day for a cow. It makes no sense whatsoever to be paying a lot of money to well-off farmers down in Burgundy. It doesn't make any more sense to be paying a lot of well-off farmers to make sugar beets and sugar cane in this country.

But the remaining barriers to completely liberalized trade lend themselves to be very focused defensive positions. I mean, we've got CAFTA (Central America Free Trade Agreement), which is supported by almost everybody intellectually, being held up by the sugar lobby, protecting a 1% degradation in their market share, which is what it calls for.

That's always been the problem with free trade, the pain is always localized and obvious, and the benefits are always diffused and hard to see on any end of the actual transaction. But in the mainstream of economic activity -- iPods, pharmaceuticals, surgical kits, auto parts, airplane parts, diagnostic equipment, wafer manufacturing, and so forth -- it's a completely open market now. There are virtually no tariffs to and from any parts of the industrialized world.

Now the question would be, could you get some sort of anti-trade movement that would not just deal with the status quo but somehow could start rolling things back. I think that's pretty unlikely. You got $2.7 billion of this economy that's involved in trade, and we have, to use a popular term, a hell of a lot of investment in this country that's been "insourced."

You know, we had the first Korean auto manufacturing plant just established in this country the other day in Alabama [Hyundai], and you got Mercedes in Alabama, BMW in South Carolina, and on and on. So I think that it's unlikely that that's going to roll back.

Q: One acquisition that some analysts think hasn't paid off yet is Kinko's. I've even seen some of the executives involved in that division talk about how they underestimated the degree to which the retraining of store workers would become a disruption, it pulled them out of the stores and such. How is it working?


I don't think anything we've gone through has been a surprise to us. Maybe it's been a surprise to other people, but we knew what we were getting into, that we had to rebrand, [and] train all the people. I tell you one thing: I was heartened and just enormously happy, with the performance that they turned in during this peak season. You know how many complaints I got -- and believe me, customers know how to get in touch with me -- about FedEx-Kinko's pack-and-shipping during the peak [holiday shipping] season this year? Not a single complaint. So they executed it brilliantly.

I'm sure Ken May and Gary Kusin, the COO and CEO, respectively, haven't got it where they want it, but we're pretty happy with it.

Q: I want to get you in the remaining few minutes we have to talk about the other interests that you have. You're part-owner of a pro football team...


The [Washington] Redskins.

Q: ...And you also have an ownership stake in a production house, Alcon Entertainment.


Yeah those are my two avocations. One of them's a great business, the other's a terrible one. [Laughs.] 50-50.

Q: How's Alcon working out for you?


Racing Stripes was very successful, and the DVDs are selling like hotcakes. The movie business is a terrible business, but I backed two young men who went to Princeton [University] who convinced me that they had a different take on the business and could minimize risk. We've actually done pretty well with it. Not by any real business standards, but by movie business standards.

We've got several hit movies, we've got really mediocre movies, we had a flop. Racing Stripes, the most recent one, was a good one, and Insomnia, it was a very successful movie. A great movie that we made is called My Dog Skip. If you watch that movie and don't have a tear at the end of the movie then you don't have a heart.

The Redskins, I'm just an investor there, but that's a very good business.

Q: You're 60 now. Do you see staying past 65?


I don't know. A lot of it depends on how I feel. I had a heart bypass, but in retrospect that might have been the best thing that ever happened to me. I can't figure out anything else I'd rather do. My wife sure as heck wouldn't let me stay at home all the time, so I'd have to do something else.

Q: How do you stay entrepreneurial at 60 -- after 30-some years as CEO?


The important thing is to keep a young perspective, and by that I mean that you don't [say] "Well, I've lived 60-something years, and so I know everything there is to know," or "I don't want to hear about that because it's not something I know about."

And the other thing -- and this is probably the most important -- any big company has to innovate, and it has to be appropriately entrepreneurial, or that company is in the process of liquidation at one rate or another.

Everything changes. Everything. Now when you're talking about a big publicly held company, you certainly cannot get yourself in the position where you have to bet the ranch. But we've got a lot of really nifty projects that we're looking at right now that are very entrepreneurial within our core businesses or in an appropriate adjacency, and they're fun. Most of them we won't ever do, but it's fun looking at them.

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