The following is the unofficial transcript of a CNBC interview with FedEx CEO Raj Subramaniam from the CNBC Evolve Global Summit, which took place today, Thursday, November 2nd.
All references must be sourced to the CNBC Evolve Global Summit.
Frank Holland: Raj, thank you for being here to help us kick off Evolve and talk about the transformation of FedEx and its next 50 years.
Raj Subramaniam: Well, Frank, thank you for joining us in our FedEx facility. It’s great to celebrate the 50th anniversary of FedEx, but as we say at FedEx, that 50 years it’s a good start.
Holland: That’s a good start. So speaking of starts, I’m gonna do a quick history lesson this is really for the audience. FedEx was founded actually, in 1971 by American business pioneer Fred Smith. He got the idea from a term paper at Yale, but it wasn’t until 1973 in April, when the first flights took off from Memphis. So then, fast forward 50 years later to April of this year, you announced a pretty audacious plan. You’re transforming the company, then operated as three different businesses – air delivery, ground delivery, trucking. You’re going to combine them into one single company. That processes is underway right now. Give us a sense, give us an update. How is that transformation going? And when you transformed the operations, did you also have to transform the culture?
Subramaniam: Well, Frank, since we are talking history, let me also give you a little bit of perspective here. At the turn of the century, FedEx, the ground parcel business, we were at 10% market share, and our competition was at 80% market share. That was a 70 point gap. That’s when, you know, with Fred, this idea of operating independently, to create a differentiated value proposition for our customers. It was simple, faster, cheaper. And metronomically, every single quarter for what 16 years, we took share. So that gap of 70 points is now single digits. This is probably one of the most unwritten stories in business. So talk about a transformation, that’s a transformation. Now, what changed? We saw in 2016, that 90% of the future growth is going to come from ecommerce. But what does that mean? From an operations perspective at that point, 75% of our stops were businesses. Which means you have two trucks coming in, one delivering 10 packages, another one delivering six packages maybe, which is fine. But what changed was ecommerce. Well, that means 75% of the stops became residential. I mean, now we have two trucks, one delivering one package and another one delivering the other package and that doesn’t work. So that’s where – this is an evolution of our strategy as the business environment has changed. This was always the plan. And it was just the timing of it. We needed to get the technology to work and we needed to make sure we had the right facilities and so on. So that’s where this transformation that we’re going towards what we call Network 2.0 and we will take our time to make sure we do this right and make sure we provide the best service to our customers. But I wanted you to have the context for which that we announced that transformation.
Holland: So understood it’s been years in the making, but still a big change from the original vision of the company, a big change for many of your long term workers. So talk to us about an update. How is that process going as a leader? How do you Institute such dramatic change?
Subramaniam: Well, I tell you what, you know change is a constant FedEx. You talked about the culture. What we’re doing is strengthening the FedEx culture. I mean, one of the things that does not change is the FedEx culture. We are very, very proud of it. Fred’s – one of the key contributions he created is that people service profit culture at FedEx. And I can see far because I’m standing on the shoulder of a giant. And so what we’re doing is strengthening the accountability pillar of the culture. It just basically says drive business results, and that’s where the word drive, our transmission program, came from. So we’re, you know, the team is doing a fantastic job. You know, one of the great things that has happened in the last year is that despite the volumes being down, our operating profit went up. That’s the first time in the history of FedEx that has happened. And I think the team has just done a phenomenal job of taking on this challenge. We decided a year ago there, you know, we saw the volumes – early to see it. And we decided that we’re going to come out stronger than when we went in and we’re going to use this crisis as an opportunity to get significantly more efficient. So the team has done a really remarkable job. You know, again, we are focused on the things we can control and the culture is very strong and very alive at FedEx.
Holland: So you mentioned the milestone of a year ago, we’re going to talk about some comments that you made about a year ago. But first, I want to talk a bit more about this transformation and the culture aspect. So I’ve covered FedEx for quite a few years. I want to tell you, you’re really well liked and well respected in your organization, by Mr. Smith, by the employees across the board. But at the same time, we often hear that culture eats strategy. This transformation is a big change in strategy. As the leader, how do you bring in a new strategy and how did the culture— did you have to change it? Or did it evolve with your plan?
Subramaniam: No again, I would just say this much change is a constant at FedEx. If you’re not changing, you’re gonna go bust. And that’s been a constant at FedEx from the very, very get go. So that part of it’s just part and parcel of our culture. So this is the next phase of our change. And there are two aspects of the change that’s coming here. One is the fact that we are moving towards this idea of our Network 2.0, the second aspect of the change is a digital change. You know, we have built this foundation over the last 50 years, build this network that’s unparalleled. And underneath that is the technology foundation. When Fred talked about the information about the package being as important as the package itself, he said that in 1978. And that’s what has been underpinning for FedEx. Now that we build out this physical networks, it’s almost you flip it the other way. The physical networks now provide a foundation for us to provide digital and data driven solutions for and again, create value for all our stakeholders. So the two aspects of this change that we’re driving, and again, I will just reemphasize that as part of the FedEx culture change is an absolute constant.
Holland: Still, you have about a half, you know, 500 million – or 500,000 workers, I should say. A lot of them have been with the company for many years. Many I’m sure since almost when Mr. Smith began the company. How do you explain to them that things need to change?
Subramaniam: Well, communication is a really important part of the agenda for sure. I think we do a particularly good job of that. We use communications from the top down but also for the frontline management. You know, it’s something that we do very, very well. And again, the idea here is people understand the business evolution. I just told you, they know a key aspect of it is the way the business has evolved. So everyone understands why we’re doing it. We’re going to do it with the people first way, we’re going to do it the data driven way. And you know, it’s going to be quite transparent. And we’re going to do it carefully so that our customer experience gets better. And so yeah, we are underway and so far, so good.
Holland: So you mentioned the customers. I want to mention the customers and also your investors. So FedEx shares, they’ve outperformed since you announced this plan back in April. They outperform the market, and also your rival. We’re not going to name them – they’ve also outperformed your rival. So it seems like you’re getting a big vote of confidence from your investors. What would you say about these changes to your customers – the people who are going to trust you with their deliveries every day, but also their holiday deliveries that are coming up? Because it is a change to business and a lot of people trust you with these things that are very precious to them.
Subramaniam: Well, you know, our foundation of everything that we do is differentiation and for value proposition for our customers. So we do today have the fastest network and we do have competitively superior service levels. So we are shooting at 10 feet high baskets, our competition shooting at eight feet high baskets and we are doing a pretty damn good job. So you know the other part of it is the technological solutions that we have put on the market. But you just talked about – we have great solutions for our customers, where you know we have integrated data platforms with our customers to make sure that we streamline their supply chains. At the same time, we have launched picture proof of delivery, we’ve launched a much better machine learning model driven estimated delivery time for the customers so the consumers have a much better experience as well. So our value proposition is superior. And that’s ultimately what FedEx is all about. From the very get go we have been customer centric and that’s what will drive us forward as well.
Holland: I want to talk a lot more about your technology in just a moment. I do have to touch on one thing. So just over a year ago, you came on CNBC with our Jim Cramer and you said you thought we are on the way to a global recession. What do you feel about the economy right now? What do you see out on the globe right now? You’re a big player in Asia, you have operations over in Europe. What are you seeing right now? What would you tell other leaders about the economic environment right now?
Subramaniam: Yeah, Frank, I think, you know, there are three things that I’ve consistently talked about over the last 12 months so let me hit those. First is that we felt that the industrial economy around the wall and global trade were in a slowing environment and that is actually proved out very correct. And it’s continues to be so. The second thing was we said that the consumers are spending more on services versus goods. So while the consumer spending has stayed high, the mix has changed and what impacts our business is spending on goods. Now I have to say here, that is now beginning to normalize to the pre pandemic levels. So there was a period of time here where there was a disproportional spending on services. But now we can see that starting to begin to normalize from the pre pandemic level. The third thing is that there was also an ecommerce reset. So the pandemic and grow up, it’s come back down. But again, if we look versus where the pre pandemic was, it’s again begun to normalize where we would normally expect it to me. So those are the three things which are negative to our industry, and that’s what I said. In addition to that, there was obviously the inventory, you know, at that point, destocking. I think that period is now over. We haven’t begun the restocking yet, but I think again, that’s part of reason. So we saw this early, and we said that we’re going to control what we can control and make sure that we’re going to come out of this better than we went in. And that’s exactly what we have done. These factors are where it is today. Like it’s like I said the you know, the global trade environment is soft right now, the industrial economy is soft right now. We’re waiting for some kind of inventory restocking to take place, and we’ll see how that goes in the next few months.
Holland: You’re talking about FedEx, though, but what about the global economy? I mean, a year and some change ago, you seemed pretty confident that we’re heading towards a major slowdown. What do you see right now? We also hear other people concerned about a recession. What are you seeing?
Subramaniam: Well you know, listen, I leave it to the economists to figure out where the economy might go, but what we are seeing I would say is, like I said, I would say the industrial economy is relatively slow in many parts of the world. You know, and that the consumer spending while it’s, you know, high on services now is starting to reset and hopefully that will come back in a positive way in 2024.
Holland: Alright, here’s the part I know you’re excited to talk about. Let’s talk about technology, emerging technology and this legacy company. So right now we’re here in Edison, New Jersey, a couple miles outside of New York City. This is one of 160 facilities that are fully automated in the FedEx network. Allows you to deliver packages in one day, all the way up to Vermont, all the way down to Washington DC. So let’s talk about it. Automation, machine learning, AI. How does that play a part in the future the next 50 years of FedEx?
Subramaniam: Well Frank I think you’re 100% was right. This is the you know, if you think about FedEx 2.0 our DNA that we have on our technology, is going to help us really significantly going forward. Over the last two, three years we have undergone a transformation to make FedEx a data driven digital first company. And that transformation is well underway and there’s so much value that we can create. Think about this, you know, 16 million packages every single day, we scan these things 29 times a day. We are sitting on insights about supply chain every single day. You know, before the pandemic by the way, if someone mentioned the word supply chain, you’d probably be escorted out of the room because you don’t want to mention in polite company. Now it’s like, you know, everybody was talking about including talk shows.
Holland: It’s a buzzword.
Subramaniam: It’s a buzzword. And we know more about this than most people because we have real data and insights every single day. When you see a FedEx truck on the street, you see a truck with FedEx packages, I see logistics intelligence in that truck. So we are we’re going to make sure that we are, you know, create value for our customers. And our mission now is to make supply chains smarter for everyone. Supply chain smarter for everyone meaning starting with FedEx, our customers, their consumer and then create value accordingly.
Holland: All right, let’s talk more broadly about tech. So automation, obviously a big part of your strategy. Again, this is one of your automated facilities. Let’s talk about artificial intelligence. How does that play a part in logistics and supply chain going forward for FedEx?
Subramaniam: Yeah. Well I mean, you mentioned that earlier. I’ve got kind of two points here. One is automation. So what we have here is a facility where it is fully automated. That means the packages coming one end and the system goes to the other very quickly through this facility. And it’s you know, sorted because you’re looking at a six sided scan tunnel right here. You know, we’re an extremely efficient facility. We’re also looking at robotics, you know, for multiple things including package, the loading and unloading process. So there’s so much work we are continuing to push forward on the automation front. On the artificial intelligence machine learning, you know, this is an important thing for us. I told you a little bit about estimated delivery date. And it’s really the delivery time window. You know, when a package is inducted into FedEx system there are so many variables that go into that, so many ways that that goes through the network, the weather patterns, the traffic conditions. We have built deep learning models recognize these patterns and they get better every single day. And the predictability gets better and better and better and nobody has got that. Then if you think about doing advanced things, you know a lot of people talk about GPT and other things. They are looking at you know there’s a chat GPT they’re looking at the public data that’s available, and it’s been trained on that. While there’s a lot of private company data that is not anywhere in there. And I think a lot of people have recognized that we can use these models on internal data but for that, to do that you have to organize your data. And you have to make sure that we have the right data platform. That’s not as simple as you think. We have a head start in this regard.
Holland: What does that mean? What do you mean by organize?
Subramaniam: Because we need to have data platforms that these models can run on so that we can create insights. I’ll give you an example. You know, it’s a very arcane thing. You tried to ship this shirt to London tomorrow. See what happens. It’s not that as easy as you think it is. There’s normally arcane things that happen. Well, we have all that information and data, you know, in a platform, and today we’re building these you know, models where it’s human language, you know, you said I want to ship the shirt. It will ask you a human question back. And in two or three questions, it will predict for you what harmonized code that we need to provide and then you know, make the process very easy. There are so many applications like that, that we can generate. And so, AI, machine learning, GPT all these things are very relevant for FedEx, and especially the fact that now we have, you know, really gone forward in a data first way, we are ahead of the curve here.
Holland: So we’re talking about the next 50 years, but there is a reality. You’re a company that reports quarter to quarter. You have high expectations from your investors and also your customers, especially with the upcoming holiday season. How do you plan both mentally and financially for AI, robotics, machine learning, where you have to spend a certain amount of money and then how do your human workers fit into this plan?
Subramaniam: Well, you know, I think balancing the short term in the long term is something that we have to do constantly, there’s no question about it. You know, honestly, immediate short term, it’s very difficult to predict what the quarter or next quarter or the next quarter after that will be, but you got to take a look at the longer term picture. To look at even the FedEx world from the turn of the century to now, they’ve grown roughly 6% CAGR even. If you take it from before the pandemic now is roughly 6% CAGR. So there is an equilibrium growth rate that we know we will get to. Any particular quarter, I can’t tell you. So we are going to be – we are a growth company. We are going to be differentiated. We’re going to be differentiated on our physical value proposition. We’re going to be differentiated on a digital value proposition and we’re going to drive growth. And you know, now what we’ve done is to get significantly more efficient along the way. So yes, we have to balance the short term and long term, but you know, FedEx has always had a long term view of where the world is gonna go. So, you know, again, building our physical networks and our technology solutions are very, very critical for us.
Holland: Before we go really quick, I do want to ask you the human element, a lot of companies trying to figure out how to combine artificial intelligence, machine learning, etc. with their actual human workers. What’s your general philosophy?
Subramaniam: Well, you know, FedEx is definitely a people service profit philosophy is the core of FedEx. And at the end of the day, that’s what drives us and that’s what I’m very proud. The 530,000 FedEx team members are what makes FedEx stick at the end of the day. People can talk about customer experience all they want, but the point under the sphere, is the FedEx team member interacting with that customer. So obviously, that’s really critical for us. When we think about all the automation solutions, they’re talking about an augmented solution that helps our team members to do their jobs better. And it’s really important for us and you know, we are really keeping that in front and center every single day.
Holland: Ok. Raj Subramaniam, CEO of FedEx. It’s so great to have you here kicking off Evolve. We will be looking forward to the next 50 years of FedEx. Thank you again.
Subramaniam: Thank you for thanks for having me.
