UPS hurt by slowdown in manufacturing in Asia

September 20, 2012 08:14 AM

United Parcel Service Inc. projects short-term economic headwinds amid a decline in manufacturing orders in Asia while the company pursues a major acquisition in Europe, the head of its international division said.

“We’ve seen down-trading at UPS,” Dan Brutto said this morning at a Bloomberg Government newsmaker breakfast in Washington. “We’re very bullish in the long term. I think this is just a cycle.”

Atlanta-based UPS, the world’s largest package-delivery company, and FedEx Corp. of Memphis, Tennessee, are considered bellwethers for the economy because they ship goods around the globe. FedEx shares on Sept. 18 dropped the most in three months due to shippers switching to cheaper delivery options amid an economic slowdown.

Despite disputes between China and the U.S. at the Geneva-based World Trade Organization in recent months, Brutto said he did not foresee a trade war between the world’s two largest economies.

“We’re way too dependent on one another” for a trade war to occur, he said. “There’s always going to be disputes on trade.”

European Antitrust

Brutto said UPS sees growth within the European Union, even as antitrust regulators in Europe scrutinize the company’s bid for TNT Express NV of Hoofddorp, Netherlands, a move that may double UPS’s reach on the continent.

“Intra-Europe trade is still really good,” he said. While commerce within the 27-member EU is growing, trade in goods between Europe and Asia has slowed as manufacturing orders have declined, partly due to slower export growth in China, according to Brutto.

EU’s competition commissioner, Joqquin Almunia, said today at a conference in New York that it’s “possible” the Brussels- based agency may send a so-called statement of objections to UPS and TNT. Such a complaint would list potential EU concerns over the transaction. The news caused shares of TNT to fall as much as 4.7 percent, the most since January.

“It’s too early to tell” whether the EU will require UPS to make any divestitures as part of the company’s bid for TNT, Brutto said. By mid-October, EU officials will let the company know whether they have any objections with the transaction, he said.

Growth Projection

“We’ve provided all the information that they’ve requested,” Brutto said. “We feel we have a good case.”

UPS projected 1 percent growth in the U.S. economy, lower than the 2.2 percent predicted by analysts, when it announced earnings for the second quarter on July 24. The company at the time also reduced its full-year profit outlook to $4.50 to $4.70 a share, down from an April projection of $4.75 to $5 a share.

Brutto said some customers have expressed concern with what they said was uncertainty about U.S. fiscal policy.

“Most people don’t know what the rules of the game are,” he said.

UPS ships goods to Afghanistan, Iraq and Germany through contracts with the U.S. military, according to Brutto. While the company has increased its bidding on federal contracts in recent years, it won’t be seriously affected should U.S. spending cuts go into effect on Jan. 1, he said.

“The government is a very, very small percentage of our business,” according to Brutto, who said the share is in the low-single digits. It’s “not enough to move the needle for us,” he said.

Brutto said he foresees collaboration between private- sector packaging companies and the U.S. Postal Service in the future.

“They have a network, and that network has value,” he said.

Bloomberg News

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