Ship Happens

Includes: FDX, UPS
by: Peter Pham

Talk of sales of virtual goods is all the rage these days, as online companies seek the golden goose for making money from nothing. Until then, the ugly reality of e-commerce is that when people buy your stuff you have to send that stuff to them. Even as the world becomes more and more connected virtually, some things still require putting rubber to road.

Despite what you've heard about the demise of the US postal service, sending stuff is still very big business. According to eMarketer, US e-commerce sales in 2012 will grow by 13% over 2011 totals, reaching $343.4 billion by the year's end. They go on to forecast continued steady growth going forward, albeit at a declining rate of 1% per year, as the US market reaches saturation.

For most online retailers, third-party delivery services provide the final link in the supply chain, and often the only human-to human interaction in the transaction. So for all intents and purposes the face of the delivery person is the face of the seller. Delivery is a crucial part of the customer experience. Perhaps the most important part. Which is why so many e-tailers choose to outsource the job to professionals.

While the outlook for freight companies is good, there are concerns as a recent spike in fuel prices was blamed for driving up FedEx's (NYSE:FDX) operation costs by 28%. Analysts cite this and decreasing postal deliveries due to increased use of online communications for concern about future performance of FedEx and UPS (NYSE:UPS), as well as weak Asian demand for express services.

The late Larry Hillblom, the "H" in DHL, became one of the pioneers in air freight in 1969 when he realized that flying cargo manifests ahead of ships made the process of offloading containers in port faster and more efficient. This of course eventually led to sending the actual freight itself by air. Hillblom took an early interest in Asia, starting various businesses in Vietnam and settling in Saipan, where he was known as an eccentric recluse (he even imported a DeLorean to the island) until the private plane he was piloting went down in the Marianas. DHL took an early lead in capitalizing on increasing globalization by connecting the world, a trend which may now be on the decline as high fuel prices and new technology are forcing companies to rethink their priorities.

There's no place like home

Asian businesses are finding that with a growing domestic and regional market, and increasing talk of gloom and doom in the west, that their growth strategy can more easily be realized here closer to home. Recently, both China and India have made moves to dramatically increase trade and cooperation with ASEAN. These are not symbolic gestures. Zhang Wei, vice-chairman of the China Council for the Promotion of International Trade cites zero tariffs, preferential policies and proximity as key factors making Southeast Asia so attractive, both as sources of manufacturing and new markets, saying recently that "ASEAN will become China's number one trading partner by 2015."

Think local, Act local

Recent trends toward more local focus are the result of a perfect storm of global, regional and local circumstances. In places like Vietnam, Cambodia and now even Myanmar large populations are re-emerging onto the world scene after decades spent in isolation. Not to mention the two behemoths of China and India, who have been seeing fantastic growth even as the west languishes. Rising wages and new-found freedom and access to goods are creating a whole new, hungry and under-served consumer base right here in Asia.

These new markets have high growth potential, they are more familiar and, most importantly they are closer. Despite some recent relief, fuel prices are forecast to continue trending up, keeping up pressure to reduce shipping and transportation costs.

As Asia continues to develop its own industries to serve its own needs, there will be less and less need to rely on the west for the creative and the cool gadgets and products. Asians are already making it, so who is to say that they can't also take over the creative development, and the design and the branding and the marketing, and take a bigger cut of the action.

Home a-grown

The result could be a pullback from recent trends toward increased globalization, at least when it comes to the trade and transport of physical goods across vast distances. As this trend continues, we can expect to see a more insular approach to business, with businesses seeking to increase trade with their neighbors and fostering relationships closer to home.

Indeed, with the exponential explosion of technology providing more tools of creativity and production becoming cheaper and more accessible to more people, it is quite reasonable to assume that innovation could come from anywhere. There is no fundamental reason why the next Facebook (NASDAQ:FB) or (NASDAQ:AMZN)‎ could not come from Calcutta or Costa Rica.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.