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

Hello. Hello, everyone. Thank you for attending today. We appreciate your interest and your time spent with us. Today's webinar is part of a monthly series with different topics each month. Today's session is called Europe at a crossroads policy outlook for 2024 to '25. With the EU Parliament, holding elections in June, this represents a key time to look at potential changes in policy areas across the EU. In addition, we'll look specifically at the larger economies in Europe, including the non-EU member, U.K., plus France, Germany and Italy. We'll also look outside of Europe with a focus on transatlantic relations with the U.S. as well as relations with China. Lastly, as the Russia-Ukraine war continues on, we'll focus in on Europe stands towards Russia and what policies to consider with this dynamic. Throughout the event, we'll be polling the audience a few times so you'll have the opportunity to share your feedback at a few points throughout the presentation. All right. Go to the next slide, and before we begin with the content, just a few administrative details. [Operator Instructions]. And we'll be responding to those throughout or we'll answer the questions live at the end of the presentation. And then lastly, sometime today, within a few hours, you will get a short survey. We just ask for your feedback to understand how you receive the content today and what you're interested in seeing in future events. When you fill that survey out, you will get a copy of the presentation that we're giving today, both the slide deck as well as the recording as this event is being recorded. Okay. Now before we get into today's event, I do want to announce next month's topic. I mentioned this is a monthly webinar series we're offering this year. Next month, the topic is The Evolving Landscape for Chinese Firms Abroad. And we have 2 options for you to attend depending on your time zone and your preferences there. We'll be examining how Chinese firms are maneuvering outside of the country given lackluster domestic growth in China. And with this internationalization of Chinese firms, it has implications for other regions and countries. We'll explore the dynamic, which relates to nearshoring strategies or target consumer markets, which faces rising protectionism in those host countries. I'll drop the link into the chat here shortly for each event. You can use your phone right now, if you'd like to go ahead and pull up the QR code and start registering. Okay. And then lastly, I just want to give a an overview of Onyx, who we are. Onyx Strategic Insights is a division of Expeditors, and we are formed in the last couple of years. We offer strategy consulting through the lens of geopolitics and macroeconomics. We do projects that are tailored to individual client needs, either as one-off projects or ongoing retainer relationships. So you can follow us on LinkedIn. We publish our observations there and offer updates regularly and then you can visit our web as well at onyxsi.com. All right. So with that, I'm excited to introduce our speaker, who is -- you can see there on camera, Elizabeth Rust. She's our Practice Lead for Global Trade, Policy & Economics for Onyx Strategic Insights. Elizabeth leads Onyx's analysis of international trade and investment flows and advises global firms on how trade policy and market forces impact their supply chains. Prior to joining Onyx, she led FrontierView's Global Economics practice in London and was Senior Economist with Keybridge Research in Washington, D.C. So now I will turn it over to Elizabeth, and she'll take us through the content today.

Great. Thank you, Nick, for that introduction. Let's jump right into the agenda. Five main topic areas that we'll cover today when it comes to the policy outlook in Europe and how that will impact supply chains. So first off, we'll start off with a little bit of analysis of the EU Parliament Elections, which are coming up in just a couple of weeks on June 6 through 9. And we'll talk about what the policy outlook looks like stemming from those elections. Overall, we do expect a shift to the right in the European Parliament. But for a number of reasons, we don't expect that shift to massively change the direction of EU policy, and we'll talk about why and what that means. Then we'll get into a little bit of the national level policy outlook for the next couple of years in the 4 biggest European economies, where a majority of our clients have, at least, some operations. France, Germany, Italy and the U.K. One big takeaway here is that despite a number of efforts toward reforms and raising investment in these economies, high debt levels and government disunity and dysfunction are going to slow some of these efforts. Next, we'll go into EU foreign relations and trade relations with some of the biggest economies in the world. So we'll talk about the outlook for transatlantic relations. In our view, where EU-U.S. relations had really depends on the outcome of the U.S. election. So we'll talk about that briefly. We'll then get into what's going on in EU-China relations, where there's been a lot of activity in the last year or so. In our view, the EU will retain a hardline stance against China and pursue further targeted trade actions, and we'll talk about what we're expecting there. Then lastly, we will get into our expectations for the Russia-Ukraine war and Europe's overall stance toward Russia. We'll talk a bit about what that means in terms of our expectations for sanctions policy, along with defense spending in Europe. We'll cover all this on quite a high level, but we do invite our audience to jump in with their input and questions on any of this material. This helps direct where we will take our future content and webinars. And in light of that, we'll actually kick things off with a quick poll to understand a little bit more about our audience and where your company stands with respect to Europe and European supply chains.

All right. Great. Yes. Thank you, Elizabeth. So we'll ask this question here. You can read it on screen and also, you'll get the poll here in just 1 second. We are looking to get all that applies. So this is a multi select. So how is your company adjusting at supply chains for European end markets? So several options there. I'll let you read those, and we'll just give it a few minutes or not a few minutes, we'll give it about a minute. That would be a long time to wait, wouldn't it? Hopefully, these should be pretty self-explanatory. Give it about another 10 seconds or so. We got about 50 responses. And if you're not sure what to say, just kind of use your best guess what your company is doing, really just looking for what's top of mind here. Okay. Why don't we end it here? So we've got 60 responses. Here are the results. So it looks like the onshoring. You can see that right, Elizabeth? The onshoring is the top one there.

Yes. Yes. So that one really floats to the top, along with none or something else, which obviously can encompass a number of different things. And if there's anything in particular you had in mind there, please feel free to share that in the comments as well as if your company is pursuing a really different strategy for many of these. But these are some of the top ones that we hear from clients. And overall, in terms of our research on how businesses are adjusting their supply chains in Europe. Very interesting to hear onshoring come out as the top there. And actually, I think another interesting area is relatively few respondents saying that they're decreasing their production within the EU or that they're deemphasizing Europe as an end market. So generally, these responses speak to a strong continued presence in Europe or if anything, an increasing presence in Europe, which may also speak to our audience. And obviously, their interest in what is going on in the EU policy outlook. It looks like the second most common response is increasing sourcing or production in lower-cost EU countries. This is another area where we are seeing that this is a common response, especially in Central and Eastern Europe. A number of companies considering increasing production in places like Poland, Hungary, Czechia, Romania, go on down the list, depends a bit on the industry and what products we're talking about. But that is -- there's a lot of discussion about deindustrialization in Europe. And this really speaks to the fact that it's a much more complicated story than that. And if anything, with the increase in energy costs, we're simply seeing companies moving their production to lower-cost areas within Europe. All right. So we'll get in now to what we're seeing in the policy outlook within Europe and starting with the EU Parliament elections coming up in early June. So overall, this is what we expect for the general outlook based on what we see with the polling today. We expect a shift to the right in the European parliament with far-right groups, which we define as political parties and groupings that lie to the left of the center right, European People's party. We expect these groups to take about 1/4 of seats, and that's a significant pickup in vote share. The chart below has -- on the top part of the chart, the probable 2024 outcome, in terms of the seat breakdown for these different groupings and that compares to the current parliament. Overall, these groupings are organized from left to right and right-wing parties are shown in blue. So you can really see a pretty substantial pickup in vote share for those 2 far-right groupings, the European Conservatives and Reformists, the ECR, and the Identity and Democracy grouping. The latter, which is commonly constituted as far-right and nationalist is set to become the third largest parliamentary grouping after the 2 traditional center-left and center-right groupings, the Socialists & Democrats and the EPP. That pickup in vote share for right-wing parties, we expect to come at the expense of 2 major groupings, The Greens. So you can see that green vote share is likely to shrink a bit as well as Renew Europe in yellow, which is a liberal centrist grouping. Overall, this speaks to the fact that far-right groups are likely to gain a bit more of a voice in European policy-making. However, if you take a closer look at where power is likely to live following the elections, despite that pickup in seats, we don't expect a massive change and where power lies in terms of policy making and therefore, the overall direction of European policy-making. A couple of reasons for that. Following the European Parliament Elections, the parliament votes for a commission President. And overall, we expect the current Commission President, Ursula von der Leyen to remain Commission President for a couple of reasons. She retains pretty strong support from within her party, the EPP, the European People's Party. And there's quite a bit of uncertainty about the election process, which tends to change after every election. But overall, we see that von der Leyen has sufficient support from across groupings. There may be a challenger here and there. But overall, she is the woman to beat. And so that is one factor that's generally speaking to continuity and European policy-making. The other factor comes down to what are likely to be the governing groups within the European Parliament. The process of government formation doesn't actually follow the way in a lot of countries with parliamentary [ systems ] but it's useful to think about which parliamentary groupings are likely to together constitute a majority. And in our view, we still see an overall majority for the current government, which is a Grand Coalition of the 2 center-left and center-right groupings as well as Renew Europe. You'll simply have fewer seats than they currently do but are likely to still constitute a majority that will form kind of a governing coalition in terms of policymaking. The next 2 most likely coalitions, if you will, our Grand Coalition together with The Greens as well as in our view of relatively low likelihood, far-right government. Two reasons why we don't see far-right groups really making it into the government and setting the agenda on policy. One is that together, they're not likely to constitute a majority. You can see they fall just short in our projections. The other reason is that there is a lot of differences and views on policymaking between these parties that will make it difficult for them to partner together on a lot of issues. So all of these signs generally point to a lot of continuity in European policymaking. If we consider each of those scenarios in terms of governing coalitions, we can look at what we expect in terms of policy direction on some key issues. There are 4 key areas that we see as particularly salient right now in European policy-making where there's a lot going on. Those are sustainability. We can consider that broadly as the EU's climate mitigation efforts, environmental regulations, things falling under the Green Deal agenda as well as sustainable trade, things like CBAM. Migration, which is a big sort of contentious issue in Europe right now as well as Europe's relations with Russia and relations with China. Overall in our likelihood scenario, we see a lot of continuity there. On sustainability. We are mostly expecting the status quo. So continued commitment to a lot of the Green Deal and climate mitigation efforts. We do expect new initiatives may slow a bit. And a lot of this comes from some growing concerns even among Centrus groups in Europe about the impacts of these policies on Europe's competitiveness. So mostly status quo there but potentially, a bit of a slowdown in new initiatives. On migration. We are seeing a bit of a hardening in terms of attitudes to migration in Europe, and that is being reflected in European policy-making but mostly, this will be implementation of recently approved legislation. We're going to talk in more detail today about the outlook for Europe's relations with Russia and with China. But generally, we expect continued hardline stance and trade actions accordingly against those 2 countries. Briefly, we'll consider what might happen if we're wrong and far-right groups really gain a lot of seats in The Parliament more than we're expecting and start to become part of the agenda in terms of the policy making. They will be elected on a mandate to delay or roll back of a lot of sustainability measures, focused on reducing immigration, strengthening member states powers to increase funding for their border forces. On foreign policy, it's actually a bit complicated. There's a lot of concerns that far-right parties would want to push for a negotiated piece with Russia and undermine support for Ukraine. But there's actually a lot of differences between the parties on that issue. So there may be a bit of cacophony and confusion when it comes to relations with Russia. On China. Interestingly, a lot of these far-right parties and groups actually advocate for a harder line against China. But there's some confusion on the details on exactly what that means, and we would expect that confusion to also make its way into policy making as well. But overall, general message is continuity for the most part. In light of that, we'll just touch briefly on one area that we know is of great interest to our clients. It's really been affecting them in their supply chains and imports into Europe for the last several months, and that is the EU's Carbon Border Adjustment Mechanism, CBAM, which entered into force in October of last year. This is a significant measure in that it's the world's first ever effort to address carbon leakage, meaning emissions kind of migrating to other geographies, due to strong climate mitigation measures in Europe as well as Europe's manufacturing competitiveness by introducing taxes on carbon-intensive imports. There's a select few affected goods for this round. And starting in 2026, we'll begin the period when importers actually have to pay a tax or a fee to bring the price of their imports in line with the prevailing EU carbon price. Sort of leveling the playing field between EU producers, which are subject to EU regulations and emissions trading scheme with foreign producers of some of these goods. Lots more to say here and actually Expeditors customs has produced really great work and webinars explaining what this means for importers. Onyx has also published some other materials on this. So we encourage you to check that out. But overall message here is continued implementation, no major change in the overall functioning and requirements around CBAM. All right. Before we get into the national level policy outlook, I just want to take a quick break again and invite the audience to comment on what all this means for you.

Yes. Great. Good time for that. So here's our second question. I'm going to pull this up, and this is a single select. So one option to choose. And really looking at the next 1.5 years, so the rest of 2024 to 2025, which of these 6 options in terms of policy will have the biggest impact on your company operations? So again, looking for kind of your best guess, your top-of-mind answer there. What stands out. We'll give you a little bit of time to answer that. Just give it another 10 seconds or so, getting some good responses here. Okay. Let's end this. We've got 80 responses this time. Let's share the results. So Elizabeth, you should be able to see that there.

Yes. Yes, you see almost close to a monotonic sort of decline in the vote share for each of these as we go down, and that was more or less, I think what we anticipated and reflects a lot what we hear from our clients, in terms of areas of EU policy that really interest them and that they're tracking and managing a lot. No surprise on sustainable trade. And I would suspect CBAM is one of the top issues within this category. Although there's kind of a whole host of sustainability measures, both in the trade space and just broadly when it comes to operating in Europe, but for many years has been sort of an ongoing area that companies have to manage and stay up to date with. And then sanctions on Russia, we know to be a big area of interest, particularly for clients who are moving a lot of products that fall under the areas of sanctioned goods. Iron and steel, being a big one and these others as well. I mean most of our clients are moving product a lot between Europe, North America, the U.S., China. Those are being the sort of the 3 biggest economies and trading countries in the world. So obviously, a big area of interest. FTA negotiations depends a bit on which countries we're talking about, in terms of where these are of interest. But one kind of theme that we focus on in terms of the direction of EU policy-making as we are seeing less of an emphasis on sort of traditional bilateral free trade agreements coming from the EU. And that reflects a general turn toward protectionism globally and also within the EU, sort of less focus these days on Europe trying to find export markets and more on Europe trying to kind of protect its single market. So unfortunately, it's sort of not a big year in our view for big new FTAs and I think one example there is the stalling of the Mercosur Agreement that we've seen in the last several months but continues to be an area with monitoring. All right. Let's get into the next topic. So shifting focus a little bit from EU level policies set in Brussels to national [indiscernible] policy for some of the biggest economies. As I mentioned in the intro, big picture here is that European governments are constrained in their ability to enact reforms and pursue policies that will raise investments and make it easier for businesses to function within their markets. There are 2 -- you can break down these constraints into 2 general buckets. One is about money, what we call fiscal space. So how much money governments have to spend on investments and infrastructure, and other things that would make it easier to operate there as well as reducing taxes would be another kind of example of fiscal space. And then the other comes down to government unity or functioning. This is an overall framework through which we can view each of these major economies, and they each face a slightly different balance, in terms of these constraints. So starting with Germany. Germany has relatively more fiscal space and that it has relatively low debt levels by European standards. It's somewhere around 60% of GDP. It has consistently run budget surpluses for the last several years. So it has ample fiscal room but Germany does face legal constraints on increasing its debt levels or deficit spending. But more importantly, it's bigger constraint is around the current government, which is disunited, something called a traffic light coalition. So as the name implies, it got a red party, a yellow party and a green party. And there are substantial differences between these parties that are leading to a lot of factions governing within the current coalition. It's also unpopular according to current polling. And that if elections were held today, those parties would lose vote share and wouldn't be in the government anymore. And so that's really limiting the ability of Olaf Scholz, the current chancellor and overall, the current government to enact a vision and pursue a set of reforms designed to raise German competitiveness. France has a different set of challenges. It has less fiscal space as well as less government Unity. So current President Macron has a -- does have a vision, in terms of reform agenda but currently lacks a majority in parliament and will make it difficult to follow through on a lot of those pieces. In Italy. Interestingly, Italy despite being known for government instability and lots of turnover, in terms of its governments. It's facing currently relatively stable government under Giorgia Meloni and the Brothers of Italy party, but currently suffers from very high debt levels that will limit Italy's ability to cut taxes and invest in infrastructure. In the U.K., we are assuming a labor victory in the upcoming elections set to be held in the latter half of this year. But again, given relatively little fiscal space, the new labor government will have less ability to enact its agenda. In terms of specifically what this means, forthcoming policies that we're expecting at the national level in each of these countries and their impact on attractiveness of investment. Lots of detail we can go into for each of these, which we won't today. But overall, we're seeing a mix policies in terms of the impact on investment attractiveness. And a lot of that speaks to the issues we were citing earlier about the constraints these governments are facing. So in France, I mentioned Macron's reform agenda that is set to continue in a number of proposals in the works in terms of trying to raise employment levels in France by reducing unemployment benefits, pushing education and training as well as really pushing incentives in line with Macron's vision for a stronger industrial policy in France. But on some of these other areas, we're likely to see less action due to that fiscal space problem. Germany. A bit of a mixed bag. And again, this comes down to disunity within the current government that has led, for example, to there being no real clear domestic industrial strategy, along the lines of what the U.S. is pursuing with some of the legislation we've seen in the last couple of years around subsidies for clean energy, for example. You're not -- you've seen responses in a number of European countries, but nothing really from Germany. Italy. Again, some areas that we're likely to see reduced red tape, especially around labor policy as well as some positive developments around infrastructure, especially as Italy has helped quite a bit by funding from the EU, but it's likely limited in scope to these couple of areas. And in the U.K., same deal. A little bit of a mixed bag in terms of what the next labor government is proposing. Some measures around labor that may make it a little bit less attractive for foreign businesses to invest in the U.K. But ironically, a little bit more going on, in terms of trade policy and FTAs. Following the U.K.'s exit from the European Union, this is a big area of focus for U.K. governments overall. So an area we're following closely as well. All right. We will now take a turn toward what is the outlook for Europe's relations with some of its biggest trading partners, starting with the U.S. Again, in our view, transatlantic relations really hinge on the U.S. Election outcome more than what is going on in Europe. Part of that obviously has to do with what we said earlier, continuity and EU policy-making, likely the same Commission President. So the area for potential change lies more on the U.S. side and specifically the potential for a change in the presidency. So focusing for a minute on what we expect in the presidential race. Overall, we see tight polling. The race in our view is a toss-up. Trump has a slight edge in polling. You've seen Biden narrowed the gap a little bit in the last couple of weeks, but then Trump has widened it a little bit again. This chart really underscores how close things are in the polls, mostly within the margin of error. Another kind of key area of uncertainty among others, is the role of third-party candidates, and there are 3 that are declared up until this point. Kennedy, in particular, with a substantial enough vote share to potentially change the outcome. And again in the polls, the third-party candidates tend to show a slight preference, in terms of tipping the balance toward Trump. But the main message here is that it's a tight enough race that companies should be prepared for either outcome. Either a continuation of a Biden presidency or a Trump reelection. So worth considering what the world might look like, what U.S. policy might look like under either scenario. Starting with Trump. What would a Trump presidency mean for Europe? A lot of things you can say, but we'll break this down into 2 broad issues that are kind of the most important ones when it comes to transatlantic relations. On trade. We view the overall trade agenda and set of policies that Trump is pushing for as likely having mixed to negative impacts on Europe. There's often a lot of hand ringing on Trump's proposed trade policies especially within Europe, in terms of the impacts on European exports and overall relations with the European Union. But we do emphasize mixed to negative, and there's a couple of reasons why. If we look at the specific proposals that Trump has pushed for. One is a 10% universal tariff on all imports into the United States. This, obviously, has a negative impact on all U.S. trading partners and that all else equal, it raises the cost of their experts to the U.S. by 10%. But European exports to the U.S. might be a bit less impacted than other countries. The reason is that European exports to the U.S. tend to be a bit higher value, more bespoke, less easily replaceable. And so a lot of the cost there will simply be eaten by U.S. importers, in terms of the incidence of that measure. And overall, may not actually substantially affect flows of European exports to the U.S. But it really depends on what good we're talking about. So the devil is really in the details there. And at Onyx, we do quite a bit of work to dig into those details. Another proposal is a 60% tariff or potentially even higher on all imports from China. This is a double-edged sword for Europe. On the one hand, it may benefit European exports to the U.S., which in some cases, may now be more competitive compared to Chinese exports to the U.S. On the other hand, some Chinese goods will now be making their way to Europe, given that, that trade barrier has now have been raised in the U.S. And so Chinese exporters will be focusing more on the European end market. And this is creating quite a bit of concern in Europe on the potential for a flood of goods or dumping of Chinese goods into European markets and has a potential to set off [ strained ] trade relations. Third area that Trump has proposed is to match the tariff rate that any trading partner has on a U.S. good. So for example, the European Union has a 10% tariff on autos from the United States, whereas the U.S. tariff on European autos is only 2.5%. The U.S. would, therefore, raise their tariff on European autos to 10%. So cars is obviously one area that would be affected by this. There are quite a few other products as well. So this, obviously, has implications for companies moving these products. In terms of the overall impact on trade relations between the U.S. and Europe, a lot of this will be affected by how Europe responds, whether they then try to match as well U.S. tariffs and kind of open up the potential for a tit-for-tat trade war or whether they try to go with a more conciliatory approach. And there are some signs that European policymakers maybe headed a bit more in that direction this time. Security is another big area where Trump has proposed a set of policies that would have big implications for Europe, and there's 2 in particular. One is his proposal to negotiate peace with Russia on Ukraine. He says he would like to do that on Day 1 after his election, even before taking office. More likely, the intention would be once he takes office to try to do this relatively quickly. This is generally likely to undermine EU policy on Ukraine. And in the view of many Europeans would likely incur a Russian rearmament and incursions to other European countries down the line. So this is something that would really have the potential to strain transatlantic relations. Another area that Trump has called for is no military support for NATO members that fall below the 2% threshold of defense spending to GDP. Lots of concerns that, that would open up within Europe and will overall likely drive higher defense budgets across Europe. Worth considering what a second Biden presidency would mean, in terms of transatlantic relations and in our view lots of continuity. We don't see evidence that Biden's overall stance towards Europe, and things that Europe and the European Union see as important, are likely to change. Likelihood of continued collaboration on a number of issues shown on the left-hand side of this slide. On security. The diametrically opposed view on Ukraine and relations with Russia. So likely continued commitment to Ukraine security and support -- military support for Ukraine in the war as well as maintenance of the existing sanctions, regime and alignment with the European Union on sanctions. So this really is 2 different kind of world views that are set out. There are areas where Biden and Trump are not so different, for example, on China. But with respect to Europe, these are kind of the 2 areas of difference that we would expect to see. All right. Before we get into China and Russia, we have one other polling question we'd like to go for it.

Great. I will launch that now. And I can see the question here on the screen. Now here comes the pole. So this is just a single response like the last one. Some of this, Elizabeth just talked about. She's going to talk about China next. So again, just what do you think is the greatest source of risk here of these 6 options to supply chains in Europe? And this will be our last poll question for the event today. Just give another 10, 15 seconds here. Got about 70 responses. It's still going up, so I just want to give it a little more time.

Lots of opinions on this one. A spicy question.

I would think so, yes. Okay. We are at there we go. We tied the level, 82. Okay. So let me show the results here at your responses here, and you can see that on your screen.