Media Clips -1-16-2001

UPS, Deutsche Post lead the way in linking trade finance with logistics services

By Helen Atkinson

March 11, 2002

Does it make sense to combine banking with third-party logistics? United Parcel Service thinks so. The logistics giant is selling its UPS Capital subsidiary's financing as a package with forwarding and other logistics services for international shippers.

Thin margins and stiff competition have encouraged several big third-party logistics providers to offer or consider packaging of finance with their other services. "The average profit margin for the average logistics business or freight forwarder or trucking company is around 2%, and that can't be squeezed any more. The one end of that that hasn't been squeezed is the finance end," said Thomas Leissl, senior managing director and co-chief executive officer of PB Capital, a New York based division of

Germany's Deutsche Postbank AG.

The big 3PLs see finance as a way to lock in business and gain more leverage from their financial resources. UPS is expected to generate more than $2 billion in free cash flow this year. The company views supply-chain finance as a service that few of its smaller rivals can match.

Although UPS is taking the lead in combining finance with other logistics services, it isn't alone. Deutsche Post, which has expanded from its German postal monopoly to become one of the world's largest providers of 3PL services, acquired Deutsche Postbank last September, and has signed an agreement with consulting firm KPMG to develop financial services for logistics customers. Postbank also closed an inventory-financing deal last year with Fiat, the Italian automaker.

Trade financing can take many forms. A financial services company can take a shipper's accounts receivable for a fee. It can buy a shipper's in-transit inventory, freeing capital so that the shipper can buy more goods and make suppliers happy by paying them promptly. It can offer complex deals that convert a long-term contract into a lump sum that a company can book as revenue immediately. UPS Capital and Postbank also make straight loans.

An importer's relationship with its suppliers improves if the importer can pay them more quickly. Leissl said most purchasing officers try to "beat up their vendors and extend payment terms as long as possible. But that's stupid, because if you pay early you often get a discount." He said PB Capital is negotiating a deal under which it would pay an automobile manufacturer's suppliers up front and then split the discount with the automaker.

During the last two months, UPS Capital has struck deals with two shippers -- Eurofrut, a British fruit importer, and Haemacure, a Sarasota, Fla., biotechnology firm -- to include financing in a logistics-services package.

In those contracts, UPS said it was not interested in acting merely as a banker to finance accounts receivable. The company said it would handle the work only if it could control the entire logistics process through its various divisions, including Fritz, its international forwarding unit.

Haemacure imports a temperature-sensitive blood product from Austria and previously had to deal with five companies between Vienna and the destination hospital. Because of the delicate nature of the product, which must be closely monitored for temperature control, Haemacure had trouble obtaining cash advances against its inventory. But because UPS handles the entire delivery chain, it was willing to extend a $6 million line of credit to Haemacure and finance 80% to 85% of the shipper's accounts receivable up front.

"They said: 'If the inventory is controlled by UPS from start to finish, then we'd be interested.' Then they would know the product quality has been maintained," said Jim Roberts, Haemacure's chief financial officer. "What they did was take a relatively complex nightmare off our hands."

Roberts said the arrangement also provides his company with cheaper access to working capital than the company could obtain by issuing stock. "For years, Haemacure has raised capital in the stock market in Toronto," Roberts said. "Not only do you have to discount your share price, but you have to pay brokers and lawyers, and that takes off about 10%. With UPS we save the issue costs, and the discount on shares," Roberts said.

Not all 3PLs are sold on the idea of combining trade finance with other logistics services. Panalpina recently dropped plans to offer finance as part of its logistics services.

Kuehne & Nagel, the Switzerland-based 3PL, has been studying the question internally but is proceeding cautiously. Gerard van Kersteren, chief financial officer at Kuehne & Nagel, said the company estimates that a trade-finance division would cost $1.2 million to establish. But first, he said, "We want to find out if it makes sense."

Van Kersteren said it "seems a very logical additional service," but that there are risks. He said, for example, that companies that want to take inventory from their balance sheets tend to be "those customers that have weak financial standing."

And although Deutsche Post has gotten into trade finance through its PB Capital unit, Leissl said that in the wake of the Enron scandal, businesses are ultra-cautious about trying to move inventory off their balance sheets. "That's going to be a lot more difficult after Enron," he said.

Big 3PLs such as UPS and Deutsche Post say that by taking charge of goods throughout transit, the companies can reduce their risks enough to offer better deals than a bank and still turn a profit. "We wouldn't be in this business unless we believed it was a profitable business," said Janelle Alberts, a UPS spokeswoman.

Leissl said PB Capital helps attract business for Deutsche Post subsidiaries Danzas and DHL, and that having logistics and forwarding services in-house is a plus for the group's trade-finance activities. "As a banker, the worst thing that happens is something goes wrong and you can't find your collateral. This stuff moves around," he said. "At least in this scenario, I can put my hands on it."