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FedEx CEO Frederick W. Smith (part 2 of 2)

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CaptJax

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Mar 3, 2006
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Q: But you have been able to not lay off people, correct?

A: Well, we've laid off some people in FedEx Office for the reasons that I said - a very small number of people. And just in the last few days we've had to reduce the manning at our freight business by about 900 people, which would be in California about 70. In other words, there were a small number of people in hundreds of locations around the world.

Q: But that's the first significant cut to date.

A: Correct.

Q: Do you anticipate having to do more?

A: Well, I certainly hope not, but I'm a bit more optimistic than perhaps other people, for our sector. I'm not talking about the financial sector or the mortgage thing coming right, but as far as the movement of goods, what happened in the fourth quarter was everything went full-stop. The people just decided, "I'm not going to buy a car, I'm certainly not going to buy a house, I'm not going to buy as much for the holiday season" or whatever the case may be. So inventories ran up; now since that time, nobody's really been ordering it, so they're bleeding off those inventories.

My guess is that when you get into the late summer and into the fall, as is usually the case, the inventory stocking levels, they will overshoot. So traffic across the Pacific, which has been badly hurt because that's where an awful lot of stuff is manufactured today in China and so forth, I think there in the fourth quarter you may see it pick back up just a bit.

Q: Well, you did just open the Pearl River Delta hub, which two years ago was a goldmine, but now it's tough sledding. In fact, I'm sure you know this, that United announced a service over there and then postponed it. Do you still feel that was a good business decision?

A: Definitely. First of all, we've had a hub in Asia for a long time. It was located at Subic Bay, the old military base that the U.S. Navy put in place in the Philippines. But in the many years that we've had it in place, the economic epicenter of commerce in the Pacific moved up into China with the emergence of the Chinese market economy.

If you look at the Chinese manufacturing and export business, about 60 percent of it originated in the Pearl River Delta. So we just moved our hub up to be closer to the front, to the source of the business. Now we have a very big transpacific operation, a very big intra-Asian operation, and a good-sized Asia to Europe operation. It is of such scale, we actually can reduce it - flex it, if you will, much more than most other people can.

I have no doubt that the hundreds of millions of people in China in particular, and in Asia in general, and in India as well, who long for the same kind of life that we have, are not going to be satisfied with things. And I am very confident that the so-called Asian miracle will get back on track.

Q: I know you have a couple of favorite topics, corporate tax policy and energy policy. How realistic is it to think that this country is going to reduce our corporate tax 10 percent?

A: I think it's not very realistic. We've been advocating two things, the first as you say is the overall corporate tax rates should be lower. The country's not competitive in that area; we're No. 2 behind Japan. So obviously, if somebody has a choice to locate in a lower-tax regime, the capital is going to go to the most friendly location. But, just as you mentioned, it's unlikely to happen.

The other thing that we've advocated, though, which I think has a good chance of happening, is to change the tax code to allow industrial companies, like FedEx or United or health care providers or manufacturers or agriculture or mining or whatever the case may be, to expense capital equipment and software when it's put into service, as opposed to having it depreciated over a period of time.

Now the reason we think that's so important is that finance is not or should not be a primary activity. It's a supporting activity that lets people buy and sell things and produce them and manufacture them and transport them and so forth. And what happened in this country over the past 25 years or so, is that the country became far too heavily invested in the financial sector. And here are a couple of numbers that just really jumped out at me, when I heard them: In '83, finance was about 15.5 percent of the corporate profits of the United States.

By 2007, the last year before the meltdown began, it was 32 percent. The reason that it had grown to such a degree, in large measure, is because interest is deductible. So, if you want to be a private-equity person and buy in a company, the government is basically giving you an incentive to the extent of whatever the corporate tax rate is to do it.

In that same 25-year period, the debt of this country, corporate debt, government debt, personal debt, went up by $45 trillion. GDP went up by $12 trillion. So even a liberal arts major like me can figure out you're getting highly leveraged. So what needs to happen, in our opinion, is that the industrial sector needs to be able to write off equipment and software when you put it in service. And the reason this is so important and which is misunderstood in Washington, I think, is when times get back, every board of directors and every senior management has the same mantra. Cash is king; preserve cash.

And if you track business capital expenditures and employment, they are 100 percent correlated. What actually needs to happen in bad times is you need to accelerate capital investment by business - that's the locomotive that pulls the industrial economy.

Q: I did want to ask you a political question if you don't mind. I know you supported President Bush, I don't know, with both his terms?

A: Yeah, George Bush and I went to college together. He was my pledge.

Q: And you would have been two years ahead of him, right?

A: Yeah, he was my pledge in our fraternity.

Q: What fraternity was it?

A: DKE, Delta Kappa Epsilon.

Q: How do you assess his tenure?

A: Well he made some tough calls, and obviously the execution of the Iraq war was not correct. I think he unfairly gets pilloried because of the lack of WMD every intelligence service in the world thought they were there. You can argue whether he should have gone in or not, but remember he was working on the basis of 14 separate U.N. resolutions and an act of Congress passed during the Clinton administration which was called the Iraq Liberation Act, which said it's the policy of the United States to liberate Iraq.

In the domestic side of the house, or the non-foreign-policy thing, he probably did more to save people with AIDS than any person in the world with his initiative in Africa. He probably didn't use his veto pen enough, the Congress certainly overshot (and things were) hyper-partisan, it was a mirror image of what's happening now, except it's just flopped over.

I suspect history is going to be a lot kinder on President Bush than people today think may be the case. So I have empathy for him with the cards that he was dealt given the 9/11 situation. And you can argue with how he did it, but I think he in his own mind thought he was doing the best thing. And you have to give him credit, I mean we haven't been hit again, and I don't think anybody on 9/12 would've thought that would happen.


Editor's note: The above story misquoted FedEx CEO Frederick W. Smith and should have said that the FedEx philosophy is "People, Service, Profit." The story also should have quoted Smith as saying that he expects inventory stocking levels to fall too low in the late summer and the fall, necessitating reorders that will increase shipping activity.

Participating in this interview were staff writer George Raine and Deputy Business Editor Suzanne Herel. (San Francisco Chronicle)
 

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