Below is the transcript of a CNBC interview with Frank Appel, CEO, Deutsche Post DHL Group. The interview played out in CNBC’s latest episode of Managing Asia on 26 June 2020, 5.30PM SG/HK (in APAC). If you choose to use anything, please attribute to CNBC and Christine Tan.
Christine Tan (CT): Mr. Appel, thank you so much for talking to me. From where you sit in Germany, as CEO of Deutsche Post DHL Group, when you see the disruption happening in your industry, how would you describe what you’re seeing?
Frank Appel (FA) Yes, it is definitely an unexpected event. We probably haven’t seen such a crisis before because it is not a recession in a normal way, there is really discontinuity. That means things are changing so rapidly. People have been in lockdown. We have seen a massive drop in consumer demand, and that’s very different from other crises that we have seen before and that needs new answers somehow. But at the end of the day, we will manage that crisis somehow altogether if we are focused on what is important for the people on the planet.
CT: We know the pandemic started in China, do you remember the early weeks of the outbreak in China and the impact on your operations there? How did you react?
FA: Of course, we remember that, and we reacted probably in the same way to SARS. We probably had been more proactive at the beginning. Yes, we said, ok, we have to secure the health of our people in China. We have to watch how trade flows will work. But, if I’m honest, we probably had not anticipated that it would spread so rapidly. We felt it was probably more like SARS, it could be contained in the region and the rest would go on. If you reflect on what happened in the capital market, it was the same. The stock market was still booming. What we actually did was we started to introduce for our I.T. service centres where one was in Malaysia, we put an A/B split or red and blue team split straight from the beginning. We said the I.T. service centres were very important, the data centres were very important, and therefore, we had to protect them. We started to do these kinds of things to the rest of the world later. Actually, I travelled to Davos. In Davos, nobody felt at all that there was a danger of a pandemic, interestingly enough.
CT: Well, things quickly changed. A pandemic forced many countries to undergo lockdowns. As a global logistics player, how big of a challenge was it to operate under shutdowns and quarantines?
FA: If I look back, it was surprisingly easier than expected. The focus from the beginning was to create a task force under my own leadership with the operational heads in February. We said, ok, what we had to do was we had to align our activities in the respective countries and follow the governmental rulings or recommendations. They were different from day one in their countries. Then, we adapted our measures. We have gone through that amazingly well I have to say. The energy level and the commitment of our people have been terrific. This is what we hear from our colleagues, that we put health and safety first, then service quality second – never the other way around – and that has engaged them.
CT: DHL has a dedicated fleet of over 250 freighter aircraft, were they in high demand? Did you have to scramble to get more cargo space?
FA: We have a competitive advantage, without a doubt, that we control so many cargo airplanes. You know, since there’s no intercontinental travel, there’s a massive shortage on belly-space capacity and we see the benefits. We have seen financial impact at the beginning as well. We see now increasing demand, fortunately, around the world, not only in China, but also in Europe and the US. Of course, if you control 250+ wide bodies, that gives you a competitive edge. Also, for our air freight business, so that has worked very well. Of course, since we have a long-lasting relationship with many carriers, we get better control of additional capacity than some of our competitors. So, that has worked very well and to our advantage. Of course, you know, we have lower volumes as well. And therefore, financial numbers will be impacted. But overall, relatively to many of us, we have done very well, in particular because we controlled so many aircraft.
CT: So, at a time where air freight capacity is so tight, did you put more priority on health care equipment and supplies?
FA: The first thing is obvious, that you assure that you have enough supply for yourself. Of course, we helped many governments around the world get the stuff moved around the world because we prioritized PPE and delayed our stuff somehow. We have seen a massive turn particularly out of China, and there was tremendous demand around the world and there was all this shortage. We helped many governments to get stuff into the airports and then to the right places. So, that is improvisation you have to do as a company. What is most essential has to be delivered first, and we have prioritized accordingly.
CT: Like all global logistics players, you are impacted by the global disruption in the supply chain. Your first quarter earnings took a hit and you abandoned your profit forecast for 2020. At what point do you hope to gain some visibility? Could you resume guidance in the second half of the year?
FA: I think we have to come to that. What is important is that we all, together with those in leading positions regardless of what we do, whether we are in in journalism like yourself, in politics or in business, we have to give certainty again. There will be a time in the second half that we definitely will have more visibility. At the moment, the signs are encouraging. Not only the infection rate is coming down in Europe and North America, but also business is picking up again. We see the same pattern as what we have seen in Asia and particular, China. We had a significant drop and we had a good recovery. I’m pretty optimistic that we will see now, definitely in June, a good recovery in Europe and the Americas. All these take some time, but overall, the trend is definitely heading in the right direction.
CT: So, you hope to resume guidance in the second half of the year?
FA: Yes.
CT: Whether it’s post parcel express, freight forwarding, e-commerce, supply chain, where are you feeling the most pressure right now? Where is growth the slowest? Where is growth being impacted?
FA: In express, we will see early recovery of volumes. We definitely expect that we will see in the second half of the year, volume growth year over year even. That is coming from a limitation of airfreight capacity, so that means there is up-trading of certain airfreight to express. There’s also a significant boom intercontinental on B2C. People want to buy some things and they can’t travel and can’t shop somewhere else, so they buy online. We see the same in our e-commerce business around the world, particularly in Germany, but also in other markets where we do that. On the other side where we’ve seen negative impact is on direct mailings. So, with our letter volumes, which have dropped quite a bit because people do less advertising and that leads to less direct mailings. We also have seen impact on some of our warehouses, which were shut down because if automotive companies didn’t produce, their warehouses were shut down. But more than two-thirds are already experiencing now an increase again. One-third is probably more impacted in a negative way. So, on balance, we have a pretty resilient portfolio and you will see that in the coming quarters that our profitability will be pretty resilient against the crisis.
CT: There are signs of stability. China was a first into the pandemic, now it appears they are the first into a recovery. What’s the status of your operations there? Are handling volumes back to normal?
FA: Yes, we have seen in China growth even year-on-year. So, the operations are working very swift operations. I talk to the CEOs on a regular basis and our operations are back to normal almost everywhere. Most warehouses are reopened. So, we see a pretty much a normalization of our business, which is very encouraging. If I think about my own home country, Germany, and I couldn’t leave Germany for quite some time, I think if I go out to the street, it feels pretty normal. You can go back to restaurants. Of course, you have to keep social distancing. Actually, looking into our global operations. the biggest learning… the biggest protection is not temperature measuring or disinfection, the best indicator to reduce infection is social distancing. We can see that when we look into where we got infections around the world and what the protective measures we took, the best is social distancing. So, keep one and a half meters away from one another. That’s the best protection you can get. If people are doing that, like people do that in Germany, you can lift the lockdown and things can get back to normal.
CT: So, from where you sit in Germany, are you seeing any signs that business is also stabilizing in Europe as well? How quickly could Europe follow the recovery in China?
FA: I think Europe and the U.S. will take a little bit longer, because it’s a different approach anyway. It’s more fragmented. The countries in Germany and in Europe are following different models somehow. Therefore, it’s more scattered. The same is true probably for the U.S., where the federal states are following different models as well. But, overall, I’m pretty optimistic that we have seen already two to three weeks ago the bottom of the curve in Europe and in the U.S. We will definitely see in June a significant recovery in economic activity.
CT: So, do you think the worst is over?
FA: I think the worst is over for the first wave for the developed countries. I’m still worried about Latin America and Africa. They are less equipped to go through that and that is always a challenge. What we will learn from this crisis: the strong countries will become stronger and the weaker countries will become weaker. The same is true for companies. Therefore, the richer countries have to think about that – what can we do to help in Europe. The richer countries have to help the weaker countries in Europe, which actually the E.U. is now starting to do with the support of some governments already. America has to take a same approach to think about what they can do to help some other countries. China has to play an important role in that. We have to take care of the people, whether people in Africa and Latin America, how we can help them as a global society.
CT: As the head of a global logistics player, you would have a good sense, a good pulse of the world economy. Could we see a recovery in the second half of the year? You hopeful?
FA: Yes, I’m very confident that we will see a good recovery in the second half. What we actually have to do is we have to reinstall consumer confidence. This is not a supply driven crisis, it’s a demand driven crisis. On a global scale, consumer demand dropped. We had not broken supply chains. Not a single day any block supply chain was completely blocked. We always travel. Yes, we had some delays, but the supply chain on a global scale has worked. So, globalization actually has worked very well in that environment, if you think about cargo. So, we never stopped operating a single day and we never shut down any major trade lanes. But what has dropped massively is consumer confidence. The most important thing is that people, the consumers are going back to normal. They have to adapt certain behaviors, but they should not stop spending money because then, they will hurt the economy which we are trying to avoid.
CT: Still, the lockdowns have resulted in delays. Supply chains have not fully resumed. As countries restart their operations, when do you think supply chains will return to normal?
FA: We already see many supply chains back to normal. There’s only one limiting factor which will not change soon which is the limited capacity in belly space. That is a challenge. Intercontinental travel will take longer. That’s the reason why we will see for the second half still a very much constrained belly space capacity. That’s the reason why you have to rethink your supply chain. You have to think about longer lead times, that means you have to produce and put it on vessels or a railway. We have seen a significant surge from China to Europe on the railway. There is no rail between China and the U.S., apparently. So, we have to think about how can we design a supply chain that you have enough feed for your production in the U.S. or in Europe, that can only work through shipping vessels? So, that’s different. That’s the only difference. All the rest will work in a normal way. We have seen lockdowns of borders that have stopped us maybe for a day or two, then the borders re-opened and commuters were allowed to cross borders. All of these things got solved pretty rapidly. We never had a major outage anywhere in the world for anything.
CT: Frank, you’re an optimist, but will the constraint in the belly-space that you’re talking about hinder a rapid recovery?
FA: No, I don’t think so. As I said, we have to adapt. Companies have to think about that – they need to ship. Fashion companies have to think differently when they prepare for their winter period: how much they can really fly? When the production needs to be ending so that you have everything in the stores for the Christmas season or in their fulfilment centers for Christmas? You have to redesign that. If you do that, then you can put the stuff sufficiently on shipping vessels and be prepared well for Christmas. That is the job for logistics guys in the companies. We are more than happy to support them because we know all the product lines. Of course, we can deal with more inventory in the destinations because you have to prepare better – you can’t replenish by air freight. It needs careful consideration. Most of the products are on ships anyway. The fraction of airfreight is relatively small from the total volume. And that’s the reason why I think the world will easily cope with that problem if we are all thinking a little bit more forward looking and say, okay, how will be the Christmas period this year which, of course, will be an important part for the economy.
CT: What will these changes that you’ve talked about impact freight rates which have skyrocketed in the last couple of months? Are they still climbing?
FA: Now, they are coming slowly but surely back as well. Of course, they will be higher because there is demand and supply. But we should see higher rates still in the second half, but normalization. The key driver is when we all start retraveling. As I said, I hope that I can travel in autumn to Asia and the Americas again when it’s allowed again. I think we have enough protection measures around the world now to secure safe travel. That will help us to get back on track faster than we might think at the moment.
CT: Within DHL itself, as CEO, you decided to re-align your e-delivery manufacturing company StreetScooter and abandon your plans to build your own electric delivery van. Was it a move to simply conserve cash in this environment to focus on your core business?
FA: No, actually, it’s just coincidence that we decided. We had just decided that more or less two weeks before the lockdown in Germany. You know, the product is great. We are still the largest user of electric vehicles on the planet for last mile delivery. The pity is we are not equipped. That’s not our business. We are not somebody who buys materials for production of the next three, four, five years. You know, we are a service company. We realized that without a strategic partner or a financial investor who is committed to have a long-term perspective on car manufacturing, we were not the right company. It’s a pity because the product is still the best in the market. Our employees are excited about that, but you have to be clear once in a while, what is your core? If you look into our Strategy 2025, we are focusing on our profitable core. We are great in logistics, but we are not the best OEM for cars on the planet. We came to the point where we had to decide either we make commitments for the next three, four, five years or we go the other way. It’s more prudent to take the other alley. After the fact, it was a very smart decision because now with the COVID 19 crisis, things had been much worse actually, than to contain that and bring it back to our own operations somehow. So, that was a lucky strike actually in a moment where none of us really anticipated that what happened to automotive industry could happen.
CT: So, does that mean that the sale of StreetScooter is still on the table? You’re looking for a buyer?
FA: Now, we are not looking actively for a buyer. Maybe there are some interested parties who might take parts of that over, and we will consider that. No, no, for us, we will reduce the operations to the level that we can operate our own fleet. We have 11,000. We will bring it still to more than 15,000 and that means maintenance and having good service quality. That means availability of the cars can be further improved. We will focus on that. If there is somebody who is interested, we are very open but we are not actively pursuing any leads.
CT: What happened to the joint venture deal you have with China’s Chery? What’s the latest?
FA: Yes, this is of course on hold as well. After we stop the activities, it was also very difficult before we even announced that we will wind down our StreetScooter because we couldn’t travel to China and they couldn’t travel to us already in January. Therefore, the whole thing is on hold. We have now to see what we do with StreetScooter anyway. If something comes out of these MOU, we have to see later.
CT: As the world’s leading mail and logistics player, you have 550,000 staff for you working worldwide. Because of the group’s sheer size, you obviously had to deal with infections in the workplace. What are you doing to keep your staff safe and healthy during this time?
FA: The most important learning is you have to give people the chance to work at a distance from each other. If that’s difficult, you’d need masks and disinfection and all this kind of stuff. We have figured out that temperature control doesn’t help too much to help reduce risk. We have, for instance, introduced two-wave deliveries. We know now that the closer the people are, the more they will get infected. So, we have reduced the first shift, the number of people who are working out of a depot and have introduced two shifts. We also have learned that people who are working outside – our couriers – they have a significantly lower infection rate. So, to be outside is good anyway. That’s the reason why I think the Northern Hemisphere will also see a significant reduction in infections over summer because we are more outside. That helps. We have more infections inside, and therefore, we need more protection inside of buildings. Our absenteeism rate at the moment is lower than it is usually in May and June. We have less of the usual infections and people trust us that the measures are protecting them.
CT: What do you tell customers who are afraid that the virus could spread through the packages and the parcels that you deliver?
FA: So, there is zero scientific evidence and we make that very clear. Actually, that’s interesting and we have factual evidence as well. The people who touch the parcels most are the people who are working on the street and delivering. As I said, we protected them with mask or social distancing. We had lower infection rates than on average in the population. We had lower infection rates than in the other parts of the company. And this is not just in one country, it’s on a global scale. The people are moving stuff around. So, I think there is zero evidence that the infection is spread by parcels.
CT: Do you think the pandemic has totally transformed and will transform the global logistics industry?
FA: No, I don’t think so. I read that as well, that people say globalization is over. The spread of the virus didn’t come from cargo. I always say, at the end of the day, consumers decide. Do we really believe that consumers will say, ok, I pay 10 percent more or 20 percent more for my product because the supplier says your mobile phone is produced more resilient because we have done that more near shore? I don’t think so. What we have to do is think more about how we can protect the supply chains more than we have done. That means that we need more foresight planning from our customers. It means that we are protecting our people more proactively and training them. We definitely will do fire drills even in the next couple of quarters and years to learn more about how we deal with that. Maybe PPE and masks are produced more locally, that’s fair enough, but that is very small niche of a total global trade. The rest will be more different: customers probably will put more smaller production plants in countries, but they will not move from Asia back to Europe and North America. It’s not affordable and that will not happen. The production will remain in Asia massively, in Latin America, maybe also parts of Africa. But I don’t see that everything will be near shored in Europe or the U.S.
CT: And finally, things are still looking so uncertain, what leadership will you provide to steer Deutsche Post DHL out of this health crisis? What are you telling your employees?
FA: We, fortunately, have already a clear leadership approach which is to train our executives and we try to role model as well as our top leaders in the organization, which we call head, heart and guts. So, we have six leadership attributes. They are equally valid at the moment. So, what you need in a crisis is – that is the head part. We need to be very clear what are the targets you are going for? What are the objectives for results? Then, you have to have a heart part which is creating trust and keeping trust in the organization. So, as I said, the most important part of a CEO of a senior team is to be very transparent and consistent in what you are saying. Don’t promise something you can’t keep afterwards. And finally, you have to remain positive. You have to stand in front of the organization and say, listen, it’s a crisis, but we will get through that. We will become stronger because we know what we are doing, and that gives confidence for the people.
CT: So, don’t promise what you can’t deliver. So, what are you promising your employees?
FA: I’m promising all employees that we will definitely go through the crises, that we try to keep as many people in the company, but I can’t guarantee that. Some people said you have to pay a bonus for the hard work. I said, at the moment we have to keep the cash together to go through that. And I can’t promise any bonus and I will not pay any bonus until this crisis is under control and we know better what is happening, and maybe by then we don’t have enough cash. So, I should not do this kind of things. I tell them, listen, I understand that you work hard, it’s good that you work hard and you help us to keep all promises as a company, but I don’t promise anything. So, people say I don’t like it, but at least it’s honest. Others are saying, of course, that’s great that you are focusing on keeping employment up and not thinking about other stuff. So, I think this is working very well, to be clear and straightforward. Don’t hide the difficult questions. I heard from some other CEOs, “my organization feels like it’s frozen.” If you go into our operations, it’s high energy, very agile, very committed. That makes me really proud that this organization is trying to do the best we can to help the planet to go through that crisis. I’m very proud to see that.
CT: Frank, thank you so much for talking to me. And please promise me that you’ll stay safe and well during this time.
FA: I promise you and I wish the best for you as well. Thank you very much for your time.
END
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