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With the U.S. economy suffering from a prolonged slowdown, the one bright spot is an increase in exports. The question is whether this trend is just a short-lived blip caused by the low value of the dollar, or is it a longer term pattern reflecting greater emphasis on selling abroad? To get the perspective of the largest logistics company in North America, we spoke to Scott Szwast, an 18-year global logistics veteran currently serving as director of marketing for UPS's global freight services. Scott directs a team that aligns global enterprise resources for brokerage and a suite of supplier management services for strategic sourcing compliance and visibility.
Q: The Department of Commerce, the Federal Reserve and other government agencies are touting the upsurge in export activity from the U.S. How do you see this trend?
Szwast: We have seen two different types of export trade flows growing. The first is the spike that started in late 2007 and has accelerated ever since. This growth is primarily driven by the worldwide surge in commodities. The weak valuation of the U.S. dollar is supporting this surge, as is the increase in infrastructure investment in China, Southeast Asia and Eastern Europe. All of these trends have come together to create a demand for commodity exports from the U.S., especially for scrap metals.
The other trade flow has been longer in developing, and we believe will last much longer. It is related to the economic growth in emerging markets throughout Asia, Eastern Europe and elsewhere where there has been a steady increase in general prosperity. The growing middle class in these regions is stimulating demand for consumer products and many other types of products the U.S. has to offer.
The U.S. has always been a leading exporter of foodstuffs and other agricultural products. As emerging economies grow a larger, more prosperous middle class, these people want more protein and high-quality food in their diets. They also are increasing the demand for lifestyle consumer products that the U.S. has long provided. The rising standard of living has been gradually increasing since 2002 and the export flows have risen accordingly. There is no sign of this trend abating. Regardless of the value of the dollar, demand for higher value trade goods is going to remain strong because of the rising tide.
Q: Do you attribute this only to the drop in value of the U.S. dollar compared with other major currencies?
Szwast: The value of the dollar relative to the euro and other major currencies puts U.S. products on sale, but that is only part of the picture. Sourcing is based on many factors other than currency. Companies in foreign countries look at the total opportunity cost. They want to source from areas that create the greatest value-add with the lowest opportunity cost. While the value of currencies is important, companies look just as intently on such things as embedded transportation costs, the frequency and capacity of transportation services, compliance and regulation, taxation and environmental issues. All of these things create a total opportunity cost of sourcing for a region.
Many countries restrict the hours when planes can fly, when ports can operate, the speed vessels can enter and exit ports, and so on. The U.S. has very favorable opportunity costs when compared with competitors in Europe, Asia and elsewhere. We have strong logistics capabilities, abundant availability of transportation by various modes, a trade-friendly business environment and limited regulatory and environmental stipulations.
Q: Is UPS involved in export flows for commodities, scrap and the other items you mentioned?
Szwast: UPS is best known for its huge small-package business that handles 7.9 million shipments every day and moves about six percent of the GDP of the U.S. through its network. But UPS also acts as a large multimodal international freight forwarder and trucking company. As for UPS Supply Chain Solutions, there are no trade flows that we do not participate in. Exports of commodities and bulk products move through our network as well as the higher-value consumer goods.
Q: How sustainable is this trend? Do you think it will continue even if the dollar strengthens and U.S. products are not as price competitive?
Szwast: The commodity trend is not sustainable. As currency differentials change, the value-to-opportunity equation will change and commodity-oriented exports will diminish. But the larger trend is different. Look at any car today. There really is no such thing as a foreign or domestic car. The most American brand car has an engine that might have been made in Japan, electronics constructed in Malaysia and other components from Mexico and Canada. Business is inherently international.
Q: Do you see a corresponding drop in import and foreign sourcing activity from U.S. companies?
Szwast: You might assume that a boom in exporting would mean a fall-off in imports and foreign sourcing, but we have not seen that happen to any great degree. The trans-Pacific eastbound import volumes in the West Coast are down about eight percent this year, but that is just temporary. Foreign sourcing is a business strategy, not just a cyclical trend. All the studies we have seen show that supply chain managers will continue to source from foreign suppliers. In fact, they will grow that sourcing by 40 percent over the next five years. The key driver is not currency valuations that fluctuate. It is total opportunity costs that includes embedded transportation costs, labor costs, the regulatory costs, etc.
What we are seeing is an increase in foreign-to-foreign sourcing, so multinational corporations are sourcing from one geography to another completely outside of where they are domiciled. They are not moving all of their sourcing and production from one geography to another to take advantage of currency valuations.
Companies will create value by managing total opportunity costs and relying more on outsourced solutions such as contract manufacturing rather than investing in facilities. One of the great truths of sourcing is that orders will follow short-term opportunities, but facility investment will follow a much longer trade pattern. You can't get a facility up fast enough to effectively capitalize on short-term trends. You capitalize on these shifts with outsourced manufacturing.
Q: Is the export trends primarily among large companies or small ones?
Szwast: Today, international trade is the province of small, agile companies. In fact, government statistics show that 90 percent of all export declarations are filed by small and medium-sized businesses. At the same time, the UPS business monitor survey shows that only about one third of these small and medium companies are actively participating in international trade and only about nine percent are exporters. That means international trade represents a huge opportunity for growth, and it is especially strong with companies we already have a relationship with through our small-package business.
We know that the companies that do export report top-line sales that are six to 28 percent higher than the domestic-only companies. So with a relatively small portion of companies actually doing the exports, marketing opportunities abound. These smaller companies are learning quickly that international business is the fastest way to grow. And when these companies are ready to expand into international markets, UPS and its various divisions are there to help them.
Let me give you an example. We worked with a small company that made high-fashion leather goods that were made locally in the U.S. by a family business and sold domestically. A famous celebrity appeared on a Hollywood awards presentation carrying one of these products, and suddenly the product became a sensation worldwide. This company that had never envisioned selling out of state let alone internationally was suddenly faced with a wave of orders from all over the world. They needed much more robust order management as well as an entirely new capability for international shipping and delivery. We were able to get them into the export business very quickly and successfully. About 90 percent of export declarations are coming from companies exactly like this one. They have an innovative product, but no support structure to tap into for international sales. They do not want to invest in fixed network, just pay for what they need as they need it.
Q: What types of industries do you see being most active in this new export wave?
Szwast: The list is quite long, according to the Census Bureau, which tracks all exports. Among the fast growing groups are electronics and components, vehicle parts, aircraft parts, industrial machinery, fabricated materials, foodstuffs, ag products, chemicals, medical and surgical supply, telecom products and high-value consumer products. These are in addition to the commodities that have been enjoying cyclical growth. Our marketing efforts align closely with this list from the Census Bureau, but we are especially strong in high-tech, retail, consumer goods, healthcare, industrial products, automotive and government supply chains.
Q: Which international markets are the most attractive for these new exports?
Szwast: The growth is everywhere, but it is especially strong in the BRIC countries of Brazil, Russia, India and China, as well as the rest of Southeast Asia. We helped many companies source from China, and now we are helping these same companies penetrate that market with their exports.
What makes an attractive market is the same the world over: Increased business culture, increased infrastructure investment and an emerging middle class. Where that pattern exists, there is demand for foreign products.
Q: What type of help do these exporting companies want from UPS?
Szwast: The scope of service we are providing runs the spectrum from global package delivery to multimodal transportation to full supply chain solutions that go well beyond transportation. Companies used to go to different providers for each type of transportation mode. Increasingly they are combining different modes into a single shipment. We have a service called Trade Direct where we combine the efficiency of ocean freight with the precision of small-package delivery. From the customer's standpoint, it is a single transportation decision, but it is ocean and small-package in the same end-to-end supply flow.
One of the biggest challenges in international trade today is compliance. Just since 9/11 there have been 25 new security regulations that govern international transportation.
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