In an exclusive interview with CEP-Research, DHL Express CEO, Ken Allen, discusses the economic outlook in the division's main market, Europe, the slowdown in China and recessionary trends in emerging markets such as Brazil and Russia.
He also comments on DHL Express' international B2C e-commerce expansion and the pricing environment while touching upon the opening up of Iran to international trade, FedEx's proposed takeover of TNT and the impact of the possible suspension of the Schengen area in the European Union due to the migrant crisis.
Speaking on the margins of yesterday's DP DHL Group 2015 full year results media conference call, Allen began by expressing optimism about seeing "a moderate acceleration in the economic recovery in Europe" this year.
"Relatively low energy prices and rising employment should help to stimulate higher growth in the overall economy than we saw last year. At DHL Express, we still have a very positive outlook on the region and are continuing to invest heavily there," he explained.
"We are investing in major hub expansions in Leipzig and East Midlands and a new hub in Brussels, and we have a large number of smaller investments throughout the region, particularly in our gateway infrastructure. Europe is our largest market and was the fastest growing region in terms of volume for DHL Express in 2015, with double-digit growth."
He said that this was partly thanks to a weak euro which stimulated increased trade with markets outside of the Eurozone.
"However, intra-EU shipment growth levels were also high, with France and Italy, in particular growing dynamically on the back of small and medium-sized exporters. The intra-European growth perhaps reflects the fact that many companies are electing to invest in 'safe havens' like Europe for a stable (albeit lower) return while other regions are exhibiting even more volatility. It additionally shows, however, that our growth was also thanks to our strong, leading market position in Europe and the fact that customers are rewarding us for our consistently high quality levels."
Outside of the Eurozone, the UK was probably the "standout performer" among European countries, Allen said, "driven in particular by the surge in international e-commerce volumes originating there. Central Eastern Europe has also seen very good growth in recent years. This has been driven in part by weaker domestic demand, which has proved favourable for exports, as businesses have been forced to look for growth opportunities outside of their home markets."
Commenting on the perceived economic slowdown in China, Allen said: "China is a key market for us, and we see the latest slowdown purely as a normalization, as the country matures and moves towards a market economy. Compared to virtually any other major market in the world, China still has enviable growth rates, so we are not overly concerned by the developments we have seen recently.
"We have a long-standing presence in China, with a strong joint venture partner in Sinotrans and an unrivalled position for time definite international delivery in the market, and we are still growing both in China and within the overall Asia Pacific region.
"Our North Asia Hub, which opened in Shanghai in 2012, has grown strongly, and we are set to open a new , larger South Asia Hub in Singapore later this year. We are continuing to invest in our hubs and gateways and our aviation network across Asia Pacific and are confident that it will remain a major driver of our growth in the future."
Asked if recession-hit emerging markets such as Brazil and Russia were of concern to DHL Express, Allen replied:
"One of our major strengths is our resilience. If you look at our growth over the last 5-6 years, this has not been driven by any one single region. We have a truly global footprint, and the beauty of our network is that if one region sees a slowdown, we have always been able to capture opportunities in others.
"The other feature of our network business is that we have to be present everywhere, regardless of how a particular economy is performing. Brazil and Russia have seen slowdowns in recent years.
"However, we are well-established and have exceptionally strong teams on the ground in both markets. We have been able to maintain a stable performance in both markets. In the case of Russia, we also have an extensive domestic time definite offering – due partly to its expansive geography and the demand in the market for quality express services – which has helped to offset some of the impact we’ve seen on international flows to the country."
As to the opening up of the Iranian market following the lifting earlier this year, of UN nuclear-related trade sanctions, Allen revealed that DHL has been present in the country for many years.
"It was the first market that we entered in the Middle East in 1976. Where sanctions still apply to Iran, we will continue to observe them. It’s still relatively early to make any predictions about how rapidly trade will expand as sanctions are lifted, but we will also continue providing services to and from the country and will expand our operations as we see demand increase."
Turning to pricing, Allen said DHL Express' annual increases for 2016 had been implemented successfully.
"Our price increase is a very transparent process – in most countries, we announce it in the third quarter of the year, in order to support customers in their budgeting and planning processes. 2016 has followed the same approach and our customers have overwhelmingly demonstrated that they understand and accept the increase.
"We are not only aiming to protect ourselves against inflation; our price increase allows us to invest continuously in our global network and to offer a consistently high level of service quality that adds value for them (customers) and helps their businesses to grow."
Allen described the European express market as "quite mature and rational, with all players offering relatively high service quality and customers generally showing an appreciation of the value embedded in what we do – features borne out by the pricing environment.
"We have been consistent in ensuring that our prices reflect our service quality, that we have surcharges that address cost drivers related to external and non-standard shipment factors, and also in being willing to walk away from business that is unprofitable.
"We also don’t see any of our competitors engaging in reckless pricing tactics or risking price wars that could be destructive for the overall sector and that could also threaten future quality levels."
Moving on to the subject of FedEx's imminent acquisition of TNT and the impact it could have on DHL Express, Allen said:
"We were always relaxed about the outcome of this deal. Experience shows that large-scale integrations can distract companies from focusing on customers. That's why we see additional business opportunities arising from a combination of the two companies."
On DHL Express developing its presence in the fast-growing B2C/cross-border e-commerce segment, Allen emphasised that the company was "already very active in international B2C."
He continued: "Our time definite international delivery network is a very good fit for particular segments of the international B2C market, such as high value or high service proposition goods, or for online retailers who are entering new markets with smaller shipment volumes and who don’t want to invest in infrastructure or dedicated distribution networks.
"B2C has accounted for a significant proportion of our growth in many markets, such as the UK, Italy and the US. Although we are still primarily a B2B company, we expect this to continue as a trend, which is why we are looking closely at ways of enhancing and optimizing our last-mile delivery network and technology solutions that can help us to integrate more closely with retailers."
Lastly, Allen was quizzed on the impact of the possible suspension of the ‘Schengen’ area – in response to influx of the migrants – on DHL Express’ business and the re-introduction of border controls in Europe.
"Given that this is pure speculation right now, we would prefer not to be drawn into a discussion on this topic. What I can say is that DHL Express operates in over 220 countries and territories worldwide. Our business is built around helping customers to cross borders as seamlessly as possible. We expect international trade to continue growing at a strong rate and we expect to remain very well-positioned to help businesses trade globally, whatever happens in the future."
