DHL Express U.S. CEO Greg Hewitt assesses market trends and themes

Logistics Management Group News Editor Jeff Berman recently caught up with DHL Express U.S. CEO Greg Hewitt to discuss various topics, including DHL’s growth in the U.S. and globally, the evolution of shipping, and logistics trends, among other topics. A transcript of their conversation is below. 

Logistics Management (LM): How do you view the prospects for the 2022 Peak Season? It seems like there is a decent amount of sentiment that it will be slow to develop, or be more like a plateau, of sorts.

Greg Hewitt: I think that what I'm seeing and what I'm hearing would align with what you've heard. We're not forecasting, that it's going to be a return to pre pandemic peak levels where traditionally we would see a 25%-to-30% lift in November, December over the prior quarter’s run rate. I think it'll be a little bit better than last year, which, when I look back at last year, what we saw was very flat and there was almost no peak. And what that looked like was there still was the traditional lift that goes with the business-to-consumer (B2C) e-commerce market, there was a rise in those customers that corresponded to people's buying behavior around the holidays.

But what we saw was a continued decline in the traditional business-to-business (B2B) areas of high tech, automotive engineering, and manufacturing. That was just down and so it looked flat. I think that when I look at this year, we've seen a continuation of that trend into 2023. And when we meet with our customers, what we're hearing is a couple of things. In my business, some of our decline is the fact that people have more confidence in the traditional supply chain. So, there's a shift back to ocean freight and a shift back to true airfreight and a little bit more capacity. So, there is less volume moving on a fixed express network like we have. That's a part of it. But there are a couple of other pieces. One would be that demand is down. Orders are down. I think one of the things I've heard that really stood out to me in some of the meetings I've had was in the semiconductor space, where they talked about how there was a backorder or a backlog in in some parts and capabilities that were an impact on the supply chain. They saw huge quarter volume go up and subsequently what they're hearing is their customers were ordering from everybody. The orders were almost false. What you've got is demand is down, because the orders they thought that weren't all real orders that as people have been able to find things somewhere, they cancel the orders. And I can speak from experience. It was interesting last year I had a similar talk with Ford over my vehicle order because they were worried that companies were doing that to them…because there were shortages in the supply chain people were ordering from multiple sources and then canceling them.

I'm chalking that up to demand is a little bit softer than people found and maybe it's even a little worse than they thought it was going to be because some of the orders they thought they had didn't materialize as the supply chains worked itself out. And false orders or extra orders have been dropped. So that's a definite piece and that's the one that I would most closely tie to when people talk about a recession or the concept of a recession. Its orders are just demand being down in B2B. The other piece to that that ties in a little and impacts supply chain would be because of the historical challenges with supply chain and some of the uncertainties particularly around cost and capacity maybe people ordered too much inventory. So, usually I'd say that one first it would be “Hey, we ordered too much inventory. We brought it into stock, and now demand is soft, and it's not moving.” So as such everybody's reporting kind of a little bit depressed results and our overall volumes are down. Our import volume in my business translates to our import business down.

Specifically, we've seen a reduction in weight per shipment. So, I still have the same number of shipments. I just have less weight. Order sizes are down. Sizes of the shipment is down for me. Some of these heavier weight moves have gone back to air and ocean. And I think the economic impact is a little harder on the traditional B2B supply chain and, say, the e-commerce one that's still moving, not as rapid and as spiked as it was during the pandemic, but still healthy and people are still buying online. As we prepare for the end of the year, the hope—fingers crossed—is the demand does pick back up a little, and that the inventory people have that they're sitting on and they're, they're running through right now will diminish. And I'm hopeful that we will see some level of peak as things get back to a little bit more of a normalized supply chain, but I think it will be softer than pre-pandemic but a little bit better than next year. That's my where I'm sitting right now, but it is going to be wait and see. None of us know for sure.

LM: You just mentioned inventories, so let’s hit on that. While inventories remain elevated, there are indications that they are heading down. What are your customers saying about the current state of their inventory levels?

Hewitt: I would say that just about everybody [across all industry verticals we serve] is focused on it, but I see it most in B2B, where you're talking about bringing goods in that are being finalized for finished goods here for U.S.-based customers. On the import side, all I hear is that that people are over inventory, that they brought a lot in that they're well stocked, and that with demand down and orders down, they're wondering will they be able to move the inventory they have? That's probably the bigger question around it. For me, the hope is that I think they're responsibly not continuing normal buying cycles and ordering more and more inventory.

So, what I have to hope is that they run that inventory down and then at Peak Season they need rush routing and smaller order sizes to help keep up with maybe demand coming back. That's the hope but I'm I've got to be able to balance kind of on the head of a pin, which is right now the volumes are down and the weights are down. I think I've done the right things in right-sizing my organization through normal attrition, reducing overtime hours, reducing casually, or so that we've been able to keep our employees there and are managing their hours effectively, and we think we've got the right staffing levels in our hubs, our gateways and are on road to manage what will be a fairly flat volume period between now and November. The question is, will we get an indication in October and November that there will be some lift around peak…at which point our first levers would be casuals and overtime, and weekend work to balance it that volume goes up. The good news is I've got some flexibility to flex up around that.

LM: How do you view the ways in which shippers need to look at sourcing options, whether it is a China plus One-type of strategy or turning more to Vietnam, Thailand, Indonesia, and especially Mexico?

Hewitt: I think there are a couple of things. We have watched the idea of China plus One evolve over the last few years, and I think what the pandemic did was highlight how dependent the Western, specifically the U.S. but I would say North America and Europe, had the same reliance on manufacturing in China. And when China was hit hardest early by the pandemic and responded with lockdown shutdowns in a continued inability to keep that supply chain open, I think it forced the hand of companies to look at alternatives and options. I think compounding that were some of the challenges around the ports and the canals and the instability in ocean transport. Also, the high cost of fixed network aviation…also had people saying, “well, maybe we shouldn't just look at other markets than China, but maybe we should get closer to home and near source.” I think what I'm hearing today is everybody [agrees] that there is no replacing China. It's just it's too big. It's too important. It's got such an advantage around quality, capability, staffing, technology, all these areas…China isn't going to go away. But what the pandemic did was allow companies to invest and start to build up some secondary markets. The first ones that we see more volume growth from would be those in Asia that pick up the slack like Vietnam, Thailand, Indonesia, Malaysia, India, and Pakistan. These were areas that we saw lift up and fill in, because they could they could, in smaller batches, match the quality, cost point, and capability of China, but none of them, save maybe at one point India given their size, can step up and be China. So, we're seeing companies find pockets based on capability in the industry segment.

A good example would be definitely Vietnam in how it has stepped up as has Sri Lanka to some extent, with the capability around textiles and garments as a specialized garment manufacturer. They've been able to step in and play a role and take some of that business from China. What does that mean for us? The good news is we have a presence in 220 countries and territories around the world. So, if you start up a business there, the good news is we've already got boots on the ground. We have experts, local experts in customs, and we have operational capabilities. We have partnerships where they're needed. I think, what's been the biggest challenge is how do you scale the aviation network to match the pickup and delivery capability? And that to me is you need to find a few key anchor customers and enough people have to go there to truly warrant increasing capacity to a level where you could compete more effectively cost- and service-wise with what you had before. And what that means in its simplest terms, it is difficult if you have to add the cost of going if your cost point is a little bit higher if your quality is not quite there, and you have to fly it to China anyways before you fly it back and add time and distance and cost to it.

That makes you a little less competitive. But as you build it up and as more people buy in, all of a sudden if you get the cost, the cost to produce down and the quality up and companies like ours can put on direct flights from those markets into the U.S., you eliminate, at a good cost-per-kilo, you are balanced out and you're more competitive. And that's what we've seen starting to happen. I think the other area that that has been important is leveraging the concepts of free trade zones and bilateral trade agreements, which, for us, the biggest would be the rise in the maquiladoras and more companies finding ways to move goods in bond down into Mexico, leveraging the workforce there at a lower cost and a better production capability to do some of the work and then bring those goods back into the U.S. under the duty-free tag and avoid those. That capability has definitely increased and what does that mean for us?

It means we're doing more to explore and expand capabilities along the border in areas like Customs clearance, in terms of our facilities with bonded facilities and Customs expertise on the border and starting to look at where it makes sense for the long-haul capability through partnerships to move goods on the ground across the border before we inject them into either our strong Mexican delivery network or our strong U.S. delivery network. That would be the other one that's it's closer to it. And, certainly, you've heard of the idea of buying U.S and nearshoring to home. We have seen some companies do that. I know that Apple did engraving work and some customization overseas. They brought that back to Indianapolis after the pandemic and they're going keep it there. I think the semiconductor market has been very transparent and felt very exposed with everything being in Taiwan…not that Austin, Texas or Columbus, Ohio are going to replace Chinese or Taiwanese chip farms, but you're going to see the capability built up to have some production at least of the high value and very important chips here on U.S. soil. Those things are all happening as part of the evolution of the supply chain, but it'll take a few years for that to sink in and take hold.

Some of the big players are going in to work on it together. In the two markets. Columbus, Ohio and Austin, Texas, are the areas where there will be U.S.-based chip farms, but those are probably three-to- five years away before they're ready. And they're not going to be the high production; they're going to be the very specialized high-value chips that maybe have caused some of the shortages. They can afford to pay more for those and produce them here. There will still be reliance on Asia to supply the primary chips. So, to me, it's just about diversifying the supply chain. And the good news in our business is that plays well into globalization, digitalization, e-commerce, and sustainability, the four big global trends that that we think will continue for the next few years and link in well with our corporate strategy and our capabilities.

LM: E-commerce remains active albeit perhaps not at the pandemic-driven levels we got used to seeing for a while. How do you think it is doing now? Also, how do view the current state of B2B e-commerce?

Hewitt: We've been watching B2B e-commerce. When I looked at what happened during the pandemic and the idea that everybody started to grow more comfortable buying online, why would companies—if you were willing to buy anything online as a consumer—why would you not carry that behavior forward into business and be comfortable saying I don't need to have a local person holding my hand to sell or buy in an area. Why can't I select it online, order it, and you fulfill it from one of your locations around the world? We have been anticipating a bigger rise in B2B e commerce than we've seen. What I would say is traditional e-commerce has held strong.

More people continue to buy to new marketplaces, and new players have propped up. In our industry, it has meant that some of the big players continue support commercial airlines by being able to leverage bigger spends and bigger buys to move product overseas into their big facilities. You see the building out of domestic infrastructure for delivery. The most famous, of course, would be Amazon's rise in logistics here in the United States, building out an air network and a ground network. I saw [some data] that had Amazon's on-the-ground deliveries in the U.S. now third behind USPS ups and then Amazon passing FedEx, which you can imagine is a big jump in in a short period of time and they were not far behind UPS. So, it shows that particularly on the domestic buying front, that economy continues to grow and we're a big partner with them and we we've enjoyed that growth. I think e commerce continues to be a trend that isn't going away. Traditionally, commerce on the consumer side is still largely fueling it. Certainly, you've got two things that are going on. You've got the rise in the strength of the bigs, like Amazon, Ali Baba, and [some others] as great examples of really giant, powerful marketplaces.

And then you've got the rise of the technology and the players like Shopify as an example of the true enablers to small business that are allowing small businesses to act look and feel like the big players and compete and between those, it means that we as consumers have unprecedented access to goods from around the world at great prices, and I don't see that going away. I do think when we get through some of the demand pressures, and the supply pressures, that the B2B e-commerce wave will come. It's hard to measure it now with demand being down and people being tight on budgets. People aren't making big changes around it. They're looking at saving costs, not changing supply chains, definitely not risking customers and orders by forcing a new platform and order system. So, I just think the timings a little off and it'll come around.

LM: Let’s shift gears to sustainability. How does DHL approach Sustainable Aviation Fuels and electric vehicles, as they pertain to your operations?

Hewitt: Our position, in terms of what we're thinking and what we have to do, relates to how Deutsche Post [DHL’s parent company] is heavily leveraged in terms of achieving a zero emissions goal by 2050, including some very aggressive science-based targets that need to be achieved by 2030. With that, we need to add 80,000 electric vehicles on the road by 2030. That's 60% of the fleet. Here in the Americas, we've got only got 400 and we got it, and we got 200 more on order. So, what I would say is we have a long way to go, in terms of electrification of fee. That is not it because we have not wanted to invest and had capital available. It's been more availability, and capability. Specifically, for me, when I've ordered vehicles, they've taken a very long time to actually get to me. I tell the story that in 2016 when I took the job, I was in Palo Alto and I spoke about how we were going to electrify Palo Alto and opening a new station early in 2017. And it was going to be all-electric. I literally just got the vehicles at the beginning of this year.

So, I think part of it is the supplier has been slow to get to us. The second part is we can do a good job when we're opening a new building, or picking a place on the grid and building out the electric infrastructure, in terms of chargers and capability. It is much more difficult than older buildings in some of the places we are, which it's proving difficult to retro fit. But probably the biggest challenge has been we've been unable to find a stable strong 250-mile vehicle with a good load capacity, because for a number of our routes, we don't have the density. We can put electric vehicles in our downtown core, where you drive less than 100 miles and most of the product is small lightweight samples or envelopes. But far more of my routes run 250 miles round-trip every day with a lot of boxes. And until recently, it's not that they didn't exist. They didn't exist at the supply level and the cost point where we can really roll that out. I'm feeling better. We've got some new ones coming that we've tested out here in the U.S. and up in Canada during winter, so I'm feeling more optimistic that I will be able to accelerate my electrification in the next few years. The good news is, overall, globally, we've got 27,000 of that 80,000. So, the reality is we're further ahead in Europe. We're further ahead in Asia, and we'll start to do our part in in the U.S. I think while that problem was going on, and we were scratching our head about how are we really going to do this climate-neutral and achieve the science-based targets, the recognition was that our planes factually have a bigger impact on the environment than our vehicles. And that's where we did find by working with BP and Nestea, we were able to identify a very real carbon incentive program through the purchase of sustainable aviation fuel (SAF) to the tune of about $7 billion euros—is what we're going to invest in SAF. This idea of buying these tools and conducting those into our network doesn't mean today that if you [do business with us] you can dictate and tell me I want my package to only fly on a lane segment with SAF. But you can through our new Go Green Plus product pay for and buy into the pool of SAF that we're doing, which we can prove and show how you are in setting and removing jet fuel with that purchase.

Now in the U.S., we're flying to San Francisco to China and back. That's the lane where we've got SAF so not every package travels on it, but the packages that are on that segment, are traveling with that SAF and we've got others around the globe. So, there is very real impact right now in lanes as we move towards this sustainable aviation fuel. And as we procure it and as, as we make it available to our customers, and it was piloted in the U.K., we've now launched it here in the U.S. It's not a large volume yet, but we're really targeting companies who have as part of their values, ethics, and their shareholder promise, built out science-based targets like we have, that you have to be able to prove. And what we've got is the reporting, the backup, and the scientific figures that show that if you buy in with this product and you buy into the sustainable aviation fuel, you'll be able to prove your insetting not just offsetting—which if you remember, that's the old I will plant a tree in a rain forest, but I don't worry about my own backyard. So, we're pretty excited about it. We haven't had a ton of customers lined up on day one, but anyone who's got those science-based targets is very interested. I think what they've got to figure out is how they how they pay for it, because it's not free. It is truly like we're doing in putting their money where their mouth is and investing in SAF.

And we're hopeful that that's going to be a big part of why many companies do business with us in the years to come, because as sustainability becomes a bigger part of shareholder reporting, compliance reporting, the values of Gen Z, saying that they want to be aligned with ethical companies. There will be more companies that want and need the ability to offset or inset what is a very expensive and very unsustainable part of their business, which is transportation and logistics.