Expeditors International of Washington, Inc. (EXPD) Earnings Call Transcript & Summary

Sure. Let's move on to some topics on supply chain. So let's start with kind of a high-level take on kind of where we see some of the action around derisking and how companies are beginning to move chips around the table and think -- and look for opportunities for sourcing. And you've all heard terms like friendshoring, nearshoring, China Plus One, China Plus Many. These are all ways of saying derisking. And there are just different way -- different strategies aimed at mitigating particular risks, depending on what risks the companies are trying to manage, whether it be direct exposure to geopolitical risk in particular regions. It could be to try to get closer to demand. It could be to improve ESG. These are all goals that we hear over and over again. A point to note here, though, is that with each of these different strategies, they bring on new sources of risk. So there's no risk-free move out there for companies. So for example, if you see risk in Southeast Asia and you want to move closer to demand in centers of North America and go to Mexico, there are advantages of that, but there are also risks that brings along in terms of security on the ground, logistics at the border. These are all challenges that companies need to manage proactively. So this is a really dynamic kind of situation. And what even complicates this further is that at a time when companies are thinking about derisking and changing their strategy, countries are doing similar things, and they're changing in meaningful ways and competing using policy to attract foreign capital. And this is -- this slide shows a snapshot of kind of how we look at key policy areas listed on the left-hand side. There are 6 key policy areas, and just a snapshot of some of the countries we cover and a sense of whether policies are making things more or less attractive for foreign investment. But the 2 or 3 themes I would like to highlight here are first, we see most countries, including the U.S., not shown on this chart, using industrial policy to draw domestic and foreign capital into particular sectors. In the U.S., it's obviously around the CHIPS Act and bringing semiconductors and high-tech onshore. In Thailand, it's EVs. In Vietnam, it's Consumer Electronics. So we see these countries making concerted efforts to draw on capital, at the same time, using infrastructure policy to build up their logistics capacity to match the new manufacturing that's going to be taking place onshore. And not every country is going to be able to pull this off. And so there's a dynamic here where, for example, you take a Vietnam that is really heating up in terms of drawing in manufacturing, has a pretty robust plan for infrastructure, but it's not clear whether or not that's all going to be timed correctly and whether the right regulations or policies will be in place to ensure that Vietnam won't overheat, for example, or that Vietnam will be able to keep up logistics performance or even improve it to match some of its peers in Southeast Asia. Then going a step further, thinking about ESG, these companies and countries are changing at a time when there's some pretty big kind of regional regulations coming around ESG disclosures. And in particular, the shift from voluntary disclosures to mandatory, which in itself is enough to be -- to pay attention to, but the increased transparency and depth of the reporting is a game changer for many companies, in particular, ones that are operating in Europe and California, where these regulations are hitting the hardest. And the 2 things I'll highlight here is that, first, that these regulations now include Scope 3. So it's going to -- it requires full transparency of supply chains. And then there's this issue of double materiality, which sort of the way we used to do ESG and climate reporting was to show how climate affected one's business and whether or not your business was resilient to climate change. Now the opposite is true, where you also have to report on how your business impacts the climate. And so the increased pressure that investors and regulators will be able to apply to companies based on this new reporting regime, we think, is going to be extremely significant and something that forces supply chain professionals to really pay attention to their overall strategy but specific sourcing opportunities as they move forward. And oh, by the way, this is happening at a time when, unfortunately, decarbonization efforts have stagnated. And as time goes on, it's becoming clear, which countries are driving decarbonization and which ones are kind of lagging behind. For example, if we look at the ASEAN+6, Indonesia, Philippines and Vietnam are lagging behind, while Singapore, Thailand and Malaysia are investing heavily in renewable energy and pushing decarbonization forward. So there's going to be some separation here in terms of performance. And then if we take kind of a step back and think about when countries are looking at derisking and moving to alternate sourcing options and what options are available outside of China, China makes up about 30% of global manufacturing. And the most reasonable alternatives to China make up less than half of that combined. So all the red dots on this chart make up about 15% of global manufacturing. Most are less expensive. So if you look at total landed cost, most come in cheaper than China, but not all of them come in at a lower carbon intensity than China. So this creates a bit of a 3D chest, if you will, on how to navigate derisking supply chains in an environment where country-level policies are changing, decarbonization is stagnating a bit, but companies are looking to derisk out of China, in particular, but have limited options. So the countries that are able to kind of thread this needle of continuing to industrialize, but do it in a sustainable way, we think, are going to be -- we think will be the ones that are kind of the winners in the long term. Great. So with that, maybe I'll pause again and see if there are any final questions on that section before we hand over to Fernanda.

How about just 1 question within the ESG space? What like signposts or markers should people be looking for this year, whether it's a policy, regulation? Like if people were to pay attention to 1 or 2 things, what would you recommend they look for?

Good question. So they should be watching what happens in the U.S. So we have new laws in California. We're watching what the SEC does and whether -- and to what extent they increase requirements. I think the other thing to watch out for is how strict are the reporting standards going to be on Scope 3. Our sense of it is that no one has -- virtually no one has really good data on ESG throughout their entire value chain. That's going to be an enormous lift for most companies to gather that information, audit it and verify it. And I think we're going to get -- as we progress through this year, that's going to become an increasing challenge and be highlighted. So I think it's really important to watch what happens in Europe, in particular, to see the strictness around that reporting standard and what kind of best practices come out over the next, say, 9 to 12 months.

Okay. Great. I think at this time, we're going to hand it over to Fernanda for the third section of the webinar here.

Great. Thank you. So we're going to be talking a little bit about the looming geopolitical risks that can alter this trajectory. Well, first of all, this is a year of big elections, right? We've started with Taiwan, then moving on to Indonesia and South Africa; Russia; South Korea; India in April, May; in June, the EU parliament and Mexico; the U.K. no later than January 2025 and then to finish it off, the United States. Now this is just a small collection of or a list of elections this year. I mean, we still have Bangladesh and others. But a lot of the economies that are driving global supply chains are going to the polls this year. And these are pretty consequential elections, right? We started with Taiwan, where the key issue is cross-rate relations. You did have a winner that is much more pro-independent. And so it always rises tensions with the Mainland, in particular, as Beijing looks for any signs of a unilateral declaration of independence or any steps towards independence. And so that always infuses risk into the system. Now if we go to the next slide, this is a summary for you to think about these elections, right? Just because it's a big election year, it doesn't mean that it's something to be worried about, right? A lot of these elections will actually mean a continuation of the trajectory, particularly for Indonesia and Mexico in terms of becoming attractive to foreign capital, in particular, Indonesia here and India. We don't expect -- I saw a question on what do we expect from India? We don't expect to change here. The BJP is largely poised to win this election and continue on with reforms to make India more attractive and an alternative to China. The question for all of those is simple unrest because of the polarization that's happening across economies across the world. Indonesia, you do see a change of guard. And so for you folks that are thinking about Southeast Asia, it's important to think about what are the policies, right? And what -- how will they be changing, right? The 4 policies that we always tell you to think about are trading tariffs, industrial subsidies, labor regulations and infrastructure, right? Besides ESG, which Adam has just talked about. This is -- these are the policies that can actually change the environment for supply chains. Now we don't see a lot of change here. Now on Russia, we can debate whether this is a credible election or not. There are a number of opinions out there, but the turnout is important in terms of as a barometer of support for the Ukraine war. We don't have a lot of credible public polling coming out of Russia these days, but that will give you an indication of how much support the government has as it continues on with its war in Ukraine. And then last but not least, let me just talk a little bit about South Korea. We don't expect a complete change here either in terms of policy direction. But we do expect a continuation of the perennial question for the Koreas, which is do we align with the United States and Japan or do we try to achieve a more balancing act, right? So -- and in the background here, you always have North Korea. And the critical change here that has happened in the past few days is that North Korea has changed its policy publicly, and it's not seeking reunification with the South anymore. In fact, it wants to continue to be an independent country. And it's -- and the rhetoric around war has notched up a little bit. Now do we have reason to expect a conflict involving the 2 Koreas? Not necessarily. And this is not necessarily new in terms of North Korean policy. In fact, there has been months where that had been indicated. But at the same time, it does create a little bit of -- it does increase attention around South Korea in its elections as well. If we move on to the next slide, I just -- I saw a question there, what if Trump wins? What happens, right? Well, it's impossible to call this election. But here's a map for you to think about the various issues where you're likely to see some change in policy as a result of the election, right? So in the X-axis, you see the likelihood of policy action. Will anything change? And then on the Y-axis, you see how much in agreement are the 2 parties, Republicans and Democrats, on these issues? And there's quite a lot of agreement on being tough -- that's the only bipartisan issue in the United States these days, and you can expect that a continuation of policy towards carbon trading investment with China. Now there are differences in approach between Republicans and Democrats. A Trump administration would favor tariffs and tariff increases. But even Congress these days is looking at increasing tariffs in China. You also see export controls there. And then the USMCA. This is important. And in many ways, this is the year of trade policy, so for the compliance folks on this call, and in particular also our logistics folks, the USMCA is coming to its [indiscernible]. And so in 2024 and 2025, we're going to see a flurry of activity in terms of potential renegotiation of certain elements of the USMCA. Labor standards come to mind. But there's one trend in trade policy these days that it hasn't become policy yet but it's evolving as a trend, which is a shift from country of origin to country of ownership of the company that's producing or manufacturing and then exporting. You see that already in terms of export controls on technology and its sanctions as well and that's likely to continue. It's not lost in the U.S. government that Chinese companies are nearshoring to Mexico. And so that is a top concern when you think about trade policy, too. Now on the other hand, where you do see differences is trade with partners other than China. This is where you're likely to see action if there is a Trump administration on other countries as well as a way, particularly on tariffs, as a way to bring back production to the United States and to curb the trade deficit. We can debate the merits of this and whether that won't fairly punish certain industries that are dependent on imports or the cost of producing in the United States. But the idea that -- and it's -- there's already a lot of tension particularly in Brussels and thinking about a potential return of tariffs or new tariffs, I guess, trade partners other than China, and particularly in Europe. Where you see a difference here is in climate and sustainability as well. So a rollback of all of all -- of the subsidies and industrial policy when it comes to renewables, when it comes to green technologies, right? So if your company is relying on green subsidies today, federal green subsidies, then there's a little bit of a contingency planning to be done in the event of -- especially of a Trump administration. Trump himself has already indicated that he intends to roll back a lot of the provisions of some of the signature initiatives of the Biden administration, for example, the IRA, right, the JOBS Act. And so there's something there to think about and be aware of. Let me just pause here for a second, Nick, to see if there are any questions related to elections or this part of the outlook.

I think mostly, there's curiosity on the U.S. election. I've seen a question or 2 there. Nothing beyond that at this point. But yes, I think that's probably it for now.

Yes. Let me just say that, I mean, it's impossible to call this election, right? And everybody that has tried this in the past, has been a little bit traumatized by the results of their efforts, right? But it's important to think about the presidency but then also Congress. Now it's a toss-up as well. But a lot of the issues that we're talking about can be changed or results through executive action. A lot of the trade policy aspects of next year and this year are really concentrated in executive action, right? Industrial policy is a little bit of a question here, Russia-Ukraine, another question, right? But -- so some limited scope for uncertainty coming from Congress.

There was a question that just came in back to the Taiwan election, and you talked about how the person who won is more pro-independents. Is there -- do you have a sense of like how is that going to affect U.S.-China relations? Is it -- do we know? Is it too soon to tell? I believe it's the same party that was in power, so it's not like it changed parties, but do you see anything yet in terms of a significant shift on the U.S.-China relations coming out of the Taiwan election?

No, if anything, there's a continuation of tensions, right? It is very sensitive for Beijing. It sees Taiwan as a part of its territory. Now it is official U.S. policy that Taiwan is a part of China. And so that puts -- issues around Taiwan always put the United States in a bind because while the U.S. is publicly still subscribed to a One China policy, at the same time, it does have an unofficial security umbrella in Asia and in particularly -- and particularly around Taiwan, so that policy of strategic ambiguity. What would the United States do if tensions around Taiwanese independence increased to a point of potential military action? Allies of the United States, in particular, Southeast Asia look at what the United States does vis-à-vis Taiwan as an indication as to whether the United States would come to their rescue if they had a problem with China. So that idea of a security umbrella if the United States falters in one case, then it could be anybody. And so there's a question of credibility there. And it's important because in the absence of any free trade agreements or market access being offered to Southeast Asian nations in particular, the 1 card that the United States has in terms of attracting allies to its orbit is a security umbrella. So we don't see necessarily a change in trajectory, but the potential for escalation and accident increases expectation. Now if we go to the next slide, just wanted to talk a little bit about our -- some of the existing prices around the world that are affecting supply chains. We do see the [ BALCO ] South China Sea and China, Taiwan, really staying in status quo. We don't expect an escalation at this point. The 2 flash points that are important to pay attention to and we all are, is our Russia-Ukraine, now tilting a little bit towards escalation. Support for Ukraine has faltered a little bit in the past few weeks. There have been important Russian victories and a bit of a loss of momentum for Ukraine, but both parties still see this as a war of survival. And as the military imbalance at least apparently is tilting towards the Russian side, there is an incentive to continue to fight this war. Now what victory looks like at least for Russia is a question mark. There's certainly a need for fixed saving option here, at least in the east, but not necessarily a negotiated solution is on the silhouette of the table at this moment. And so important to watch the Russian elections for that. In Israel-Hamas, it's a little bit all options are around the table right now. There's significant pressure on the Netanyahu government to find a negotiated solution with Hamas. At the same time, we've seen a push towards escalation. And you can tell that escalation is happening when it stops being just about the Palestinians. Now there are 2 flash points that I wanted to highlight here. The first is obviously the Red Sea. So the Houthis overly say that they are sympathetic to the Palestinian cause, and they've launched these attacks as a way to force Israel to negotiating too. But under the radar, really, what's happening here is that the Houthis want to be recognized as the legitimate government of Yemen, and they want to bring -- they want to force Saudi Arabia to the negotiating table to achieve that objective. So the 2 signposts that are important to observe when it comes to the Red Sea crisis here are, first, of course, the Palestinians, right, and the negotiating solution with Hamas. But second, indications of a negotiated solution for the situation in Yemen itself. It's relatively underreported here, but it's important. I mean, for the Houthis, the agenda is clear and it's been something that they've tried to achieve without success for a number of years. The second point is Iran. Now, we've seen an escalation with Iran bombing Pakistan, Pakistan bombing Iran. We've seen attacks in Syria, in Iraq. And this is about Iranian security and militant groups, but at the same time, also Iran's regional ambitions. And Iran's regional ambitions need to include some sort of accommodation with Saudi Arabia. And so for Iran, it's also all paths lead to Saudi Arabia as well. There was a dialogue. It was sponsored by Beijing earlier in 2023 towards a normalization of relations between Saudi Arabia and Iran. We've seen -- we haven't seen a lot of progress since then before Iran, that's a key element. The second is to prevent the normalization of the relations between Saudi Arabia and Israel in order to avoid regional escalation. So the 2 issues to watch are really Yemen and the relationship between Iran and Saudi Arabia in addition to Israel-Hamas. I'll just quickly finish here by saying that in many ways, you're starting to see the situation in Lebanon also escalating, but a negotiated solution between Israel-Hamas tends to favor a loss of momentum in terms of potential stability also in Lebanon. But it's not a complete resolution of the relationship and the conflicts between Hezbollah and Israel. So lots of volatility to think about. In the next slide, we summarize for you the global supply chain impacts. We see that it won't change for now. Yes, the situation in the Red Sea is worrisome, but we're not talking about World War III yet. But we do see some volatility in ocean. This year, there's an accumulation of risks around ocean, in particular, in the Red Sea. We don't see necessarily a resolution of that issue for now. And then oil price won't solidify as a result of these. But Russia-Ukraine also tends to be a bit more end-to-end in terms of its impact, its continuing impact from raw materials to [ endpoints ]. Now if we go to the next slide, I just wanted to leave you with a thought around the 2 biggest risks today. Now we say they are the 2 biggest because they are the 2 most systemic risks. They are low probability at this point. And China is taking steps to contain a major financial crisis related to its property sector. And in many ways, there's still room for optimism. But that is a huge risk for supply chains, not just because China is an important end market for a lot of companies around here, but also because lots of global economies depend on China as a consumer of raw materials, for example, Brazil. But also because a major financial crisis tends to be contagious across sectors and lead to bankruptcy, so sourcing from China also suffers in this scenario. In the U.S., multiple pathways to a major political or constitutional crisis. In 2024 and then bleeding into 2025. Think somebody can be on the ballot, somebody is not recognized as the winner, but also the legitimacy of the Supreme Court and issues around Congress, budget is not approved, debt ceiling is not raised. Now if that is protracted, besides the major economic and financial issues involved in this, there's a retreat of that security umbrella that I was talking about, and that encourages opportunistic behavior. So everybody or anybody that's unhappy with the way things are today and with the status quo will see an opportunity to escalate and resolve long-standing issues. So all of those geopolitical fault lines and more will become active. Now we do see this as a low probability, but they are -- but the consequence is -- it's low probability but -- and this is a first in my career, it's low probability but not a black swan. And so -- and the consequences and the impact is dramatic. Now we're still optimistic about -- especially the second half of 2024. We do see a lot of potential for a rebound. But in terms of thinking about what else could go wrong and how to be prepared for this year, these are the 2 biggest for instance. Let me stop here and, Nick, see if there are any final questions.

Yes. We do have some questions. We're all getting a little tight on time, so I apologize we couldn't get to everyone's question. I will say, maybe we'll just kind of wrap it up here, just kind of close it out. But there will be a survey, like I mentioned, it's going out today and you have my e-mail. So feel free to reach out to me via e-mail, and when you complete the survey, you'll have a chance to add your comments and ask other questions. So I apologize we couldn't get to every question today. There was -- actually real quick. So just a reminder, please follow us on LinkedIn. You can use the QR code there or just search for Onyx SI on LinkedIn. Reach out to us with our e-mail there and visit us online. We publish different reports and other publications on our website. And then there were some questions like 1 question in particular in the registration was asking about or commenting that fuel's the frequency with geopolitical issues occurring is increasing. And what's our outlook for the next 1, 3, 5 years? And how do companies prepare for that? And so that's actually a great segue into our webinar next month that we are hosting the 2 sessions. And we're going to get into a lot of that, so yes, it definitely feels like there's been an increase in geopolitical hotspots around the world and affecting transportation supply chains. So we're going to get into that next month. Please sign up and attend. We appreciate your attendance for that. Otherwise, thank you so much for attending today. We really appreciate it, and look for the survey coming out later today. Have a great day, everyone.