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Northwestern University

2000 Patterson Lecture: "Expressing the Future"

Frederick W. Smith
Chairman, President and Chief Executive Officer
FedEx Corporation

I'm very proud to be here giving the Patterson Lecture. I actually met Mr. Patterson one time and had the privilege of knowing a great number of the real pioneers in the transportation business. I'm from a transportation background. In fact, I'm the third generation of my family to be involved in transportation. My grandfather, who, if he were alive today, would be over 150 years of age, was a captain with the Lee Line Steamers on the Mississippi River back in the Mark Twain days. And my father, who, if he were alive, would be 105 years old, was one of the pioneers of the bus business in the United States. So I guess genetically, I was preordained to be in the transportation business.

Now against that historical background, I'd like to talk to you tonight about our industry - the express business - and make a few predictions about where I think express transportation is headed in the future. Let me note as a preface that FedEx Corporation, which today has over 200,000 employees and $18 billion in sales, certainly didn't start at such a grand scale. FedEx Express has been in operation for about 27 years, and on that first night of operation in April of 1973, we carried 186 packages, served 25 U.S. cities and operated 14 Falcon jets, each of which was about the size of one of the engines on our current MD11 airplanes.

Federal Express has changed dramatically since its inception 27 years ago. Today, FedEx Express is just one of five independent operating companies that make up FedEx Corporation. Collectively, we deliver over five million shipments every business day to 210 countries using the world's second largest air fleet.

Independently, each FedEx company focuses on its market segment.

In the early years of the express sector, deregulation of our industry was probably the biggest single factor that helped our industry grow and prosper. But in addition to the original air cargo deregulation in 1977, we followed it up with interstate deregulation in 1980 and intrastate surface deregulation in 1994.

Throughout the 1990s, there has been, with a few exceptions like the United Kingdom, increased liberalization of the international air transport regime. All of these deregulatory movements have been of enormous benefit to passengers and shippers everywhere. In fact, it is hard to imagine the type of fast moving economy that we're enjoying in this country absent these important political developments. Transportation deregulation has certainly sparked increased competition and an almost uninterrupted 25-year decline in the cost of moving freight in the U.S. economy. In fact, Bob Delaney here tonight, one of the country's leading experts in logistics, would be the first to note that transportation as a percentage of U.S. distribution costs has declined nearly 21% since 1975. We're all hopeful that increased efficiencies will generate even further improvement over the next 5 to 10 years.

In the post-transport deregulation era, logistics costs actually peaked at about 17% of GDP in 1981. By 1993, logistics had decreased so that it accounted for only 10.2% of GDP. Since the late 1990s, that figure has trended up slightly, but it's still only about 10.5%. Over the 20-year course, entrepreneurship and government deregulation of our industry has put about 6.5 to 7 percentage points of GDP back into the pockets of consumers everywhere. This has led to an enormous increase in investment and in the social and economic well being of this nation.

Roughly a quarter of a century ago, when FedEx was founded, the prevailing business model was one driven by economies of scale. Goods were moved primarily by ship or rail. Manufacturing occurred in a linear push/pull model, and power was concentrated mainly in the hands of the intermediaries in the logistics chain. Imperfect information required a doubling up or more of people and inventory to meet unanticipated fluctuations and demand. Since World War II, with the exception of the oil shocks in 1973 and 1979, all U.S. recessions can be attributed to this fundamental imbalance between supply and demand and corrections in inventory cycles.

Now, of course, we're in the information age. And the profound implications of being able to replace inventory with information in the emerging new network economy are only now beginning to be recognized. Real-time information is helping to eliminate safety stocks and worker redundancies. In fact, I was watching Bill Gates at a technology conference in Washington just today, and he made the comment that as a result of the internet, the cost of handling a purchase order for the client will fall from about $75 per transaction to about $10 per transaction over the next 10 years. This is called disintermediation, or removing barriers between producers and the ultimate consumers without the need for enormous inefficiencies in the middle. Technology has, in short, created a leaner, faster business paradigm as insight and collaboration continue to replace brute strength, physical bulk, and unneeded investment.

So what's driving this new network economy in general and our express industry in particular? There are four essential macroeconomic trends that those in transportation and logistics who desire to prosper in the 21st century ignore at their peril. The first of these is the increase in high-tech and high-value-added goods as a percentage of all economic activity. The second is the continued globalization of the supply of these types of items. The third is the increasing velocity within the supply chain through the adoption of fast-cycle procurement and distribution. And last is the increased visibility of inventory in motion with the emergence of broad-based, low-cost, standardized, internet e-commerce capability.

The number one factor in these four macroeconomic trends is the inexorable increase in the ratio of high-tech and high-value-added goods as a percentage of all economic activity. One of the most fascinating statistics that I have seen in a long time came from Chairman Alan Greenspan of the Federal Reserve when he noted that the weight of the United States' entire economic output has not changed a bit in over 50 years while the value of our economic output has increased by a factor of five.

Since the end of World War II, the development of the transistor initiated a wave of technological innovation, including the microprocessor, the computer, satellites, lasers, fiber optics, and computational power of unimaginable proportions. These have allowed us to achieve more productivity and the miniaturization of many goods. In turn, these innovations have sparked a downstream advance in many value-added sectors from biotech, aviation, automotive industries, travel, entertainment, banking, etc. These high-value-added and high-tech products are clearly the drivers of the new economy in terms of the movement of physical goods just as surely as the agricultural and extractive sectors led the economy at the turn of the 19th century.

Consider the tremendous proliferation of new high-tech products such as computers, cellular phones, optics, measuring devices, metering items, automated devices and robotics. Within the high-value-added sectors, think about the amazing new pharmaceuticals, airplanes, high-fashion goods, and specially prepared gourmet foods - in short, any product with a high degree of intellectual content in the production process and a relatively high value-to-weight ratio. In the United States, this technology-driven growth has generated tens of millions of new jobs and helped improve economic productivity at a rate that was unimaginable only a few years ago. It has created an economic environment that has let unemployment fall significantly without igniting the predicted inflationary spiral.

High-tech and high-value-added goods also have had an undeniable effect on the express transportation business. It is interesting that our industry of moving goods by air represents less than 2% of the tonnage moved in international commerce. However, it represents over 40% of the value of all international trade today. And if you remove from those statistics petroleum and agricultural products, it's over 50% of the entire international trade conducted over long distances. By 2010-2015, it will be two-thirds, and by 2020, we estimate that over 80% of all manufactured goods moved over long distances will be moved by air rather than by sea. The items being carried will be reflective of this high-value-added, high-technology revolution as more and more value is put in smaller and less weighty goods that we consume.

While this technology is clearly changing the way the world works, I think it's also important to recognize that it is creating a common culture in which all of us now conduct business globally. To be sure, there are still differences in culture, architecture, vegetation, terrain, and so forth, but exactly the same equipment is used to control airplanes whether it's in Beijing or Buenos Aires. We find the same surgical kits, pharmaceuticals, and ethical drugs in Germany as we do Japan. It's the same Boeings, Airbuses, Canadairs, and Embraers that are used for passengers and cargo in the air transport industry in all four corners of the world.

That leads to the second macroeconomic trend - globalization. Of course, this goes hand in hand with the rise of our business, the international express business, or the air cargo industry in general.

Other forms of transportation, such as truck and rail, obviously are limited by geographic borders. Ocean transport is limited because the value of much international trade today is increasingly constrained by time. Therefore, air cargo has become the leading facilitator of transcontinental trade.

Globalism clearly has been good for the vast majority of people alive on the planet today. With global sourcing and selling, companies have been able to streamline supply chains, provide new markets for their products, and buy new items from providers and suppliers undreamed of just a few years ago. Globalization has been an enormous economic benefit. Since 1990, the volume of international trade has grown at 6.7% compounded per year. That is more than double the rate of 3% average GDP growth in all industrialized countries. This is just one sign of the increased importance of international trade in improving peoples' economic lives. Perhaps more important than these raw statistics is the inherent improvement, freedom and the cultural exchange that comes from this expansion of business between continents through these exceptional transportation and telecommunications networks.

As the economy has become increasingly global, it has also become much more fast-paced. There's not a company involved in the high-tech and high-value-added sectors that can afford to wait weeks to source components and finished goods from Asia, especially in high-tech industries, with high obsolescence rates. It should come as a little surprise then that companies of all sizes are turning to our third macroeconomic trend - the adoption of fast-cycle logistics methodologies.

Ohio State University estimates that about 40% of all U.S. manufacturing and distribution activity today is conducted on a fast-cycle basis. They predict that by around 2010, this will double, so that over 80% of all economic activities dealing with goods will be conducted on a fast-cycle or a just-in-time basis. The reason for that is quite simple. Those companies that have not adopted such methodologies simply will not be competitive or able to survive in a fiercely competitive landscape where all products and pricing are made available on an instantaneous basis to buyers.

Fast-cycle transportation and distribution make good business sense. Many observers of companies like Dell and Wal-Mart have noted that for every one dollar spent on express transportation in the high-value-added and high-tech sectors, companies can expect to save about $1.50 in inventory, warehousing, obsolescence, and missed sales expenses. Arguably, the build-to-order model that is spreading from Dell in the computer industry to other high-tech segments - including the automotive industry and others- could simply not exist without fast-cycle logistics.

In the old industrial economy, warehouses were used to store goods until they were needed. They were a device to manage inventory at rest. In the new, information-rich network economy, companies like FedEx can help our customers manage inventory in motion with the same degree of precision and discrete information that used to be available only to companies that had inventory in their physical possession.

An example of the power of fast-cycle logistics is Phillips Semiconductor. Phillips was under tremendous pressure from its customers to speed fulfillment times from its offshore suppliers. With components coming from 17 different countries, each source plant used different shipping operations for a total of 6 customs brokers, 30 airlines, and 8 different carriers. FedEx's various operating companies helped create for Phillips an integrated global solution, from the offshore origin through North American warehouses and on to end customers. This express transportation system cut the order cycle time from 3 weeks to under 5 days. Eight million dollars in pipeline inventory was converted into usable, saleable product, and integrated information systems provided the visibility of goods in transit. This allowed Phillips managers to keep a real-time pulse on their inventory and customer demands worldwide.

Needless to say, customer satisfaction grows dramatically as fast-cycle distribution replaces inventory, carrying costs, and warehousing, and creates a more flexible, nimble competitive environment. Indeed, fast-cycle logistics are indicative of our fourth macroeconomic trend - the evolution of electronic commerce.

E-commerce, as many of you in our business know, is really an outgrowth of a process begun during the Berlin airlift. The military needed to move airplanes from one part of Germany to another so fast that people literally couldn't speak quickly and accurately enough to make sure that no difficulties or even tragedies resulted from transposition errors or miscommunication. And so electronic data interchange or EDI was born. Over the next 45 to 50 years it was adopted by many major companies all over the world, but it was difficult and expensive, so the applications were limited only to the behemoths of the world economy like General Electric, Boeing, and Pratt & Whitney, to name a few.

With the advent of the internet, all of that changed in a flash. EDI-type capabilities in terms of standardized, low cost, electronic data interchanges became available to competitors large and small via the internet without regard to time and space. As Aaron Gellman said earlier in his introduction, the advent of FedEx brought death to distance. To some degree, the internet is putting dirt on that grave because now competitors - wherever they may be in any part of the world - need no infrastructure, no agents, no "rainmakers" - nothing but access to the internet to sell or source goods worldwide. Added to this new ubiquitous communications culture is the ability of outstanding fast-cycle providers like FedEx or UPS or DHL to fulfill those sourcing and selling requirements for their high-tech and high-value-added product.

It used to take years for many innovations and products to penetrate borders. Now with the internet, communities of interest and product introductions can happen in a matter of hours. The gains from the faster transmission of information have incalculable effects yet to be harvested from our economic productivity. Overall, the low-cost, internet-enabled e-commerce market is projected to grow from about $445 billion in the United States this year to nearly $3 trillion by 2004. Of course, that can be divided into two categories: the e-tailing, or business-to-consumer (B-to-C) sector, and the e-business, B-to-B or electronic business-to-business transactions.

The e-tailing sector has been highly visible, but as a column in the Wall Street Journal mentioned today, it's also an industry under tremendous pressure. That is not surprising to us at FedEx because it has been our projection for some time. We took a lot of hits on this. People were saying to us, "You're not on the B-to-C bandwagon, so you're missing something." But our view was always that the B-to-C sector is important but very tiny compared to the much bigger business to business sector.

B-to-C is about $40 billion this year, up from about $18 billion last year. Best estimates are that we can garner about $180 billion in business by 2004. Obviously, we've seen all kinds of dot.coms come and maybe some of them are going as part of this new direct business model. While the internet offers a wonderful new electronic data interchange that's cheap, ubiquitous, and standardized, the internet in no way, shape or form has suspended the economic laws and input costs that govern our activities of transportation and physical distribution.

Therefore, we believe that the most important element of the distribution revolution brought about by the internet will be the business-to-business or the e-business sector. I think this really can be put into perspective by citing one statistic. In 1998, which in cybertime I guess was an eon ago but seems pretty close to me, the total revenues of all internet e-tailers together did not match the revenues of just one of our business to business, EDI or internet-based customers. Cisco was getting about $9 billion of business through the internet, compared to the e-tailing sector.

According to Forrester Research, U.S. business-to-business spending will top $406 billion this year. That's over 10 times bigger than the e-tailing sector. By 2004, the B-to-B sector of that $3 trillion market will be approximately $2.7 trillion or about 15 times size the B-to-C market. Acceleration of online auction systems, aggregators, bid systems, and purchasing exchanges is expected to fuel this B-to-B growth.

The e-business sector is showing the fastest growth, as I mentioned, and certainly the greatest return. As the early adopters, including the computer, electronics and aerospace industries, have demonstrated, the cost of their internal processes can be cut over 40%. That's serious money. Any industry that ignores or dismisses the incredible effects of this e-commerce opportunity combined with fast-cycle distribution capabilities will do so at their peril.

When we talk about e-commerce at FedEx, we like to paraphrase that famous country and western song and say that we were e-commerce before e-commerce was cool. FedEx online transactions generate over two million shipments a day, about two-thirds of our domestic express volume, all electronic with no paperwork. In the past year alone, the number of our FedEx interNetShip® users has doubled to over half a million customers online. At the same time, our monthly online volume has tripled. Close to two million customers have downloaded our FedEx Ship® software, and we have more than 120,000 FedEx PowerShip® computer systems deployed with plans to move each of them into an even greater level of functionality later this year and early next.

So here's the bottom line for this e-commerce revolution for FedEx. Not only do we provide greater customer convenience and greater exactitude in transactions, but we save on every shipment we process electronically over the old verbal and paper-intensive method.

From the very beginning, I think what this indicates and what we recognize at FedEx, is that the information about a package is just as important as the physical delivery of that package. Today, the average U.S. shipment that travels through the FedEx system is scanned about 12 times. For international shipments, it's about 20 times. At FedEx Custom Critical, each shipment is followed on a real-time basis by satellite tracking systems and two-way satellite communication interfaces to all the vehicles underway.

On a corporate level, we invest about $1.5 billion every year on the most sophisticated information and the most sophisticated telecommunications people that we can find. As a telecommunications company, that would put us in the very top tier of purchasers of information and technology services and capital goods in the country.

We believe this type of technology investment is absolutely essential. For the express industry, the sheer velocity of movement is simply not enough. It is essential that we provide our customers real-time information to ensure that the visibility of goods in transit is just as exact as goods in their possession. As I mentioned earlier, the FedEx website was the first internet site that actually brought that visibility right to any customer's desktop.

As the primary facilitator of economic prosperity worldwide, these four macroeconomic trends are creating incredible opportunities, particularly in our fields of endeavor: transportation and logistics. We believe that our company, FedEx, has a golden opportunity as part of these macroeconomic trends as well. As high-tech and high-value-added goods as a percentage of total economic activity rises, and as globalization continues to take place, and as more competitors move to fast-cycle production and distribution solutions, all of which are tied together with real-time information, we believe there will be only a few companies in the middle of these massive transportation and logistics revolutions. We certainly are looking forward to playing our role in it.

In short, these trends mean more smaller, door-to-door shipments versus traditional layered or lumpy distribution systems. Today, international aviation already binds the world's trading partners together on an unprecedented level. The value of goods last year moved by air set a new record. It surpassed $2 trillion in total value for the first time.

In 1999, the total U.S. time-definite market including U.S. domestic air, U.S. air export, and the less-than-truckload freight sector is expected to grow to a market in excess of $82 billion. U.S. express shipments are expected to grow at about 9% this year. Our current international door-to-door express traffic has grown at 15 to 16% on a unit basis, year over year, versus 1999. Over the next 20 years, most people who study the transportation and logistics businesses believe that, at the minimum, the movement of goods between continents will compound at a rate of 6% per year. That would be down from an historical 9% average compounded growth over the past 25 years.

What's perhaps even more exciting to us, in the international air cargo market today, is only about 6% of the revenue ton miles are represented by door-to-door express transportation. Boeing, Airbus, Colography, and others believe that around 2015, the express share will increase to about 30%. That means in today's dollars that the intercontinental express market will be a marketplace of over $125 billion! Compared to the much smaller growth in traditional transport sectors, this is an extremely lucrative, challenging and interesting market for us, to say the least.

Most important, this tremendous explosion in human connectivity - a result of the internet and transportation and telecommunications systems that have been developed over the last 25 years - offers by far the best and greatest hope for humankind to achieve prosperity and contentment. And we hope these benefits are transmitted to all parts of the world just as they have been enjoyed in the industrialized nations over the last couple of decades. Manufacturing will become even more focused on high-tech and high-value-added items that are sold globally. Fast modes of transport will handle more than 80% of the value of all international trade by 2020. McKenzie & Company opines that while only 20% of manufacturers are sold across borders today, by 2020, that will be 80%.

To meet the demands of this global marketplace, there will have to be innovative solutions to close the gap between slow and inexpensive sea transport and expensive and rapid air transportation in our international system. Opportunities for entrepreneurship and innovation in transportation and logistics are greater now than I've ever seen them in my business career. I've seen a lot in transportation and logistics over these last 30 years, and looking historically through two generations prior to me, I'm even more astounded by the progress.

So to those of you who are involved in the study of these issues, and who have been kind enough to come out tonight to listen to this talk, I wish you every success in your chosen field of endeavor, and I share with you the excitement of unprecedented opportunities before us all. Thank you very much.

Question and Answer Segment

What major factors do you see influencing the future of aviation?

I'm a big believer in markets, and I'm a big believer in technology. Some years ago, prior to the deregulation of air transportation, we were limited in the size of airplane that we could fly. We could fly only airplanes that would carry no more than 7,500 pounds. Passenger carriers were limited in that they could fly no more than 30 passengers in the airplane. If you flew an airplane bigger than that, you had to go get a certificate of public convenience and necessity. This was as big a Catch 22 as was ever put into federal law because you could never demonstrate that the public convenience and necessity required another airliner. So there was no trunk airline certificated in this country from the formation of the Civil Aeronautics Board in 1938 until the deregulation of air transportation in 1978, although there were some regional carriers and charter carriers.

With this constraint in mind, we went up to Canada and convinced them to build a small freighter airplane. This plane ended up being the Canadair Challenger Executive Jet and was designed by famous aircraft designer Bill Lear. It was 88 inches in diameter, but we insisted that the diameter of a cargo carrier needed to be 106 inches because that was the diameter of the Convair 580 that allowed four abreast seating in the airplane. We wanted this airplane because, in the event that deregulation did take place, the airplane would be stretched and made into a commercial airplane rather than just an executive jet. In our files in Memphis, I can show you the plan form of the Canadair RJ from 1978. In 1990, they introduced the first regional jet, and I believe they now have orders for something like 800 of them between the British, the Brazilians, the Canadians, and whoever else makes these jets.

The significance of this history is that nobody really thought that there was going to be a market for 50-passenger jets. Then a cargo carrier and a manufacturer wanted to make a big fat airplane for executives to ride in, and almost by accident, there appeared on the scene in 1990 a small efficient executive jet. The Brazilians, seeing the success of that, introduced another one, and now there are several generations of regional jets.

The air traffic control problem is really a problem with about 20 airports and how bad weather affects them. Adverse weather conditions require the hub networks, which are concentrated in these 20 hubs, to be re-engineered on the fly -- no pun intended. I think these small regional jets with their very efficient little engines, combined with the congestion problem at these hubs, will create a solution that doesn't have anything to do with what everybody else thinks needs to be done. The solution is the fragmentation of the hub and spoke system. I think you will see more bypassing of hubs, and many of the current congestion issues will no longer exist. I believe that in good ol' market fashion, technology along with a lot of well-intentioned efforts will solve the problem. It's very difficult to build runways, and it's very difficult to build new airports. Just ask your governor here about the difficulty of building another airport. But look at O'Hare, one of the largest hub airports. The thing that's always been amazing to me is not how many people are going to and from Chicago, but how many people aren't doing a darn thing in Chicago except passing through O'Hare. They don't even want to be in O'Hare!

I have been a member of the Air Transport Board of Directors now for well over 22 years. I was the Chair of it, and I was a Chair of the International Air Transport Association. From that perspective, I have watched this situation, and there are some excellent experts on the passenger business here tonight, but I don't think I'm over-stating the point. I think the passenger market will become much more point-to-point over time because of the technology of these little airplanes, and the current air traffic system will be able to handle what they need.

Is there anything you would do different if you could start over again?

I believe the only way you get through life and business is to be willing to move forward, to take a risk. There is no opportunity without risk. The secret in business, and perhaps in life too, is to take calculated risks. Sometimes those will backfire on you, but you need to innovate and be willing to tack a little bit starboard when necessary. So I would say to you from a business perspective, I think there are a lot of things that I could have done. I would have trimmed the jib just a little bit more to windward or been a little more cautious or been a little more aggressive or moved a little earlier on changing an executive or what have you, but I don't know that there are any macro kinds of things that I would have done differently. I've thought back to the early days of the company, and I think probably in retrospect, there are a couple of things I would have done that would have made it more conservative, but I'm not sure that we'd ever gotten from here to there, so who knows?

What do you see as the future of e-commerce?

In the Internet world, there are two types of companies. One type of company is the pure information play: AOL, Yahoo, etc., and essentially they are using telecommunications technology to move information more directly or narrow cast. Then there are Internet-based companies which have a high component of transportation or physical distribution among them: Webland,, etc. I believe that the prudent investor would be wise to make a little four block grid and put information-only Internet companies as the classification at one level, and Internet companies with physical distribution and transportation in the next block, and at the top, put myth and math.

I don't want to talk about any individual company, but I personally have seen only two Internet companies that have as the essence of their success physical distribution and transportation that, in my opinion, have any prospect of survival much less success. I am always amazed at the response to a little quiz I give. I tell people, "Everybody in the room here who has invested in these types of companies that know a lot about the Internet, raise your hand." Boy, they all raise their hand. "Everybody who knows a lot about venture capital, raise your hand." They all raise their hand. And I say, "Everybody who knows something about transportation and physical distribution, raise your hand." And there's not a hand that goes up. It's the darnedest thing I've ever seen in my life. Also, when you read the prospectuses of these .coms, you'll find that the transportation and physical distribution is way, way down. They've got technologists, they've got Wall Street folks, and usually it's about a third or fourth stringer down there that's doing all the physical distribution.

The physical distribution system in this country did not happen by accident. For many years, I have been a member of the board of the largest wholesale grocery business in the country. General Mills is one of the biggest branded suppliers to the grocery business. This is the most marvelous logistics system that was ever invented in the history of the world. I can go from my house in Memphis, and within 5 to 10 minutes, I can get almost every product on the globe in at least a half dozen supermarkets that are bigger than this room: caviar, baked goods, meat, fish, anything that you possibly could want. That did not occur by accident. It was a compromise between people's convenience and the cost of those getting those goods to market. So, it's crazy for somebody to come in and say, "Oh, we're going to completely revolutionize this industry." I don't mean there aren't niches that might be filled, but the vast majority of these ideas are absolute nonsense. I have never said that to people who know a lot about transportation and logistics and had one disagree. Never. Not one.

The distribution and logistics is very significant to the success of these companies. I have seen only two of these companies that I thought would make it. As for the rest - some of them with multibillion dollar market capitalization - I predict they will not survive much less produce return on investment. What is more significant to me is how did the transportation and logistics profession get so discredited that nobody even asked us whether these things made sense?

What will be the impact will industry consolidation?

I think a lot of the consolidation that has taken place in the transportation industry has been ill-advised and the DOT should not have permitted it. I'm sure I'll probably want to do one of them and then I'll be talking out of both sides of my mouth, but I think that some of the airline combinations were really quite questionable. I'm not sure what the people at the DOT thought their mandate was or why they permitted it. I think the jury is still out on the rail transportation business. I don't know that there's going to be much additional consolidation, especially in our business. You have in this country four competitors in the smaller segment. There's FedEx, UPS, Airborne, and the operations of the postal service that they classify as express. UPS and we wouldn't classify them that way, but they do. Those are the four big competitors in the smaller segment. In the heavy weight area, there's us, there's Emory, there's BAX, so the industry is already very concentrated.

In the international area, just take Airborne out and put DHL in there and instead of the USPS put Deutschepost in there or whatever country you want, and that's really sort of the way it's going to end up, I think. There'll be three or four massive rail systems where there are real advantages to scale. I'm not sure that will be the case in the truck load industry where, beyond a certain point, there may not be economies of scale. LTL is abusiness that's clearly in the midst of a revolution at the moment, so there may be room for a little consolidation there.

What kind of investment does FedEx make in research and development?

We've got a lot of research currently underway. In the engineering field, we've got two areas. One is operations research-type engineering. This is a very big part of our business, and I would match our OR group with anybody in the world. We do a tremendous amount of demographic, digital mapping, use of IT to reduce miles between stops, make our networks more efficient, process goods through hubs, and improve densities and load factors. We have thousands of people involved in those types of activities. And then we have engineers in both the aviation and the IT side. We have about 7,000 people in our IT functions -- white collar, professional IT folks make up about 5,000 out of our 200,000 people. We probably have in aviation several hundred engineers working on structures, reliability, and improvements in operating processes, obviously safety issues, and things like that. That's a very big part of our business.

What are the barriers to expanding the global marketplace?

I think barriers will drop for the simple reason that countries which don't streamline customs can't participate in the high value-added and high-tech marketplace. If you have tremendous barriers to bringing in circuit boards and mother boards and what have you, in order to add value on them and export them out, you're not going to be competitive. Our experience has been that the way customs gets modernized is not because we go in there and tell them they should. And it's not because the government tells them they should. It's because the people that employ the folks in the plants that have just located there tell them "if you don't do this, we're not going to expand and improve your economy." We've seen that in the U.K. We've seen it in Canada. We've seen it in China. We've seen it in Thailand. We've seen it in France. We've seen it everyplace. They're moving at different rates, though. Some customs authorities are historically very corrupt. Some customs authorities are very bureaucratic because they were job and patronage machines and so forth. But the pressures to improve these processes are enormous, and they are overwhelming to any bureaucratic resistance.

The Internet, by making available low-cost information, creates an opportunity which would not have been possible just a few years ago. Now you can collect and assemble that information and transmit it to the customs authorities and they can review it. Then with the discreet tracking and tracing, they can select anything they want to review at random or see it or whatever the case may be. That provides a much bigger deterrent than some sort of a physical inspection that takes two or three weeks.

Last, I think the biggest single thing is that the customs clearance process will become less back-end loaded and become more front-end loaded. By that I mean that the customs broker will become much more of a classification agent and a destination problem-solver rather than a rainmaker that gets something done. They will do that by making sure that every regulation in the destination country and every appropriate classification and piece of documentation is presented to the shipper before the item is ever even manifested.

So, I have great confidence that over time, again with varying degrees of progress, that the customs systems will become much more modernized, much more harmonious with fast cycle distribution, and much more information intensive on the front end with very strong working relationships between the carriers and the customs authorities to stop contraband, drugs, and so forth. I know this is a very big part of our operation. I know UPS is a huge leader in this area and so is DHL, so I think those things will be solved.

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