Below is the transcript of an interview with Singapore Post Group CEO Paul Coutts. The interview will play out in CNBC's latest episode of Managing Asia on 31 August 2018, 5.30PM SG/HK (in APAC) and 11.00PM BST time (in EMEA). If you choose to use anything, please attribute to CNBC and Christine Tan.
Christine Tan: So Paul you were appointed the CEO to speed up the transformation of SingPost. What are you doing differently from your predecessors to turn things around?
Paul Coutts: I think the first thing was trying to understand the pieces of the business that we had acquired -- our legacy businesses. Then try to understand how we were actually going to piece those together in terms of one go-to-market strategy, one value proposition as an organization; so, bringing those individual pieces into a collective which would represent one SingPost to the community. So, that integration of those products and services across businesses and also across geographies as well, has been focused for the last 12 months or so.
CT: You're trying to model yourself after Deutsche Post DHL?
PC: Well that's a good example. I had 21 years with the Deutsche Post DHL organization in both the break forwarding, the contract logistics but also in mail and express. We have to adapt it. We have to shape ourselves a little bit differently but the template's there for us to follow.
CT: As the fourth CEO of SingPost in 12 years, do you feel the pressure, to turn-around, to transform this national postal service provider?
PC: I think I would feel the pressure if I felt that the people weren't behind the company, that the people weren't behind our strategy, that they didn't buy in, if we hadn't won the hearts and minds. But one of the things that struck me very early when I came into the company was how passionate people were about SingPost. They were very protective about SingPost. They have a lot of pride for working for Singapore Post and for me that was something that we hadn't yet tapped into, but that energy was there you know. So one of the key things that I've really focused on is trying to make sure that we give the seven and a half-thousand people that work for the organization a clear view in terms of where we're headed, how we're going to get there, what part people have to play in that process.
CT: So growth is taking over the e-commerce side, what eventually is going to happen to your postal mail services legacy?
PC: So first of all, we recognize that the domestic mail business, particularly the letters is in decline as it is all around the world. We're fortunate in Singapore in the sense that the rate of decline for that product is actually a lot less than other postal organizations around the world. But nonetheless, we're facing it, so we're in single digit decline today. But we are actually diversifying into more digitalization of products. We're also using our e-commerce platform to drive a lot more e-commerce parcels and traffic through our postal network which also helps to plug that gap.
CT: Did you have to layoff anyone in the process?
PC: So when we went through the restructuring program, we didn't set out with a kind of strategy around massive redundancies, that's not what it was about. This was about driving cost leadership as an organization. Moving from a high-margin domestic mail business, which is in decline, to an e-commerce and logistics which operates in thinner margins, and we had to re-engineer our cost base and we have to do that in a systematic way in a processed way. So if we had redundancies, they actually came through as a result of the engineering processes and there were very few and far between we handled those as sensitively as we possibly can because people are affected in that situation.
CT: So Paul, as CEO of SingPost, you put in place a 5-year transformation program to build up the company's footprint in e-commerce and logistics. One year into the job, what sort of progress have you made?
PC: Well, I think the first thing is the financial performance of the business has improved the last year versus the year before. So that was quite satisfying. But it's the first year, as you were right to say, of a five-year transformation program. So our net profits were up, versus our prior year, our revenues were up, versus the prior year. Even more pleasing for me is that our free cash flow was up versus the other prior year. So we saw some of the key financial metrics progress very well.
CT: Where is the traction coming from?
PC: Traction was coming from a number of different areas really. First of all, we improved the financial performance of our business in the US. Particularly, our trade global business which had been a problem business so we developed a turnaround plan for that business and they delivered on that turnaround plan for the year, for the last year so that showed significant progress. Our international mail business saw very significant growth, 38, 39 percent growth through the period of the year. We had a fantastic and very buoyant peak season last year which also gave us a little bit of a tail wind in terms of our financial results, but we also re-engineered parts of our business as we went through the year as well to make us more cost efficient and to actually drive some of those cost savings into our profitability
CT: A lot of concern still surrounding your loss-making e-commerce unit in the US, TradeGlobal, which the company acquired in 2015. I understand you are now integrating it with your other US company, Jagged Peak. What's the progress there? What's the latest?
PC: So the first thing was to clearly identify what the two businesses were. So I want to describe the TradeGlobal business. It was a good solid warehousing and fulfilment business and it had some technology. The Jagged Peak business in the US is a technology platform, it's a technology company and it does some warehousing and fulfilment but it does that kind-of down streaming activity. So what we had to do was to reshape the TradeGlobal business so that it became a mirror image of Jagged Peak and that's where we spent the last 12 months, making sure that we made that transformation. At the same time however, we had to re-engineer the business to get it closer to profitability, so again, we made progress as I mentioned earlier.
CT: So when can we expect your US businesses to become fully profitable?
PC: Well we haven't set a target for that, the key thing for us is that we have a plan and we have to execute the plan. We've reshaped TradeGlobal now so it's a mirror image of Jagged Peak. That makes an integration that much more smooth, much easier. And the key focal point really is around an e-commerce play. So Jagged Peak's advantage is we have a technology, a software technology called Edge, which is a supply chain technology that connects everything end-to-end for consumers. And that's the play that we're now making in the TradeGlobal organization and we believe that putting those together will give us a much more powerful entity and of course we'll drive synergy benefits out of that as well.
CT: A lot of questions in the past about the circumstances around the decision to buy over TradeGlobal. A lot of questions about whether SingPost overpaid for the deal as well. But this of course was done before your time, under the previous management. Any hard lessons learnt there for SingPost when it comes to making future acquisitions?
PC: I think that it was obviously very public in terms of the trade global acquisition. Both in terms of governance and due diligence that took place at the time. We clearly identified a number of lessons that came out of that, in both areas in terms of governance but also due diligence. In terms of the governance issues, we've addressed all of those key findings. In terms of the due diligence, I think there were some key lessons around making sure that we understand operationally how this business runs, what are the key advantages to the business. What are the value propositions, what is the proper market strategy, how does it fit with the overall e-commerce play that we're embarking on. And having a clear understanding in terms of how we're going to reshape that business if we have to reshape that business so that it fits with our overall strategy. And also some of the key things that came out of the due diligence for me.
CT: So as a result of that, are you now more cautious when it comes to making future acquisitions?
PC: I'm always cautious when it comes to making acquisitions. You know I think that it's easy to get caught up in the hype. It's easy to get caught up in deal fever. You know we have to make sure, we clearly understand what this business does for us in terms of driving value for shareholders. And it may not drive value for shareholders next month, or next year even, but that it actually has a clear path to incremental shareholder value within a reasonable period in time you know. And for me that's the horizon we're working on.
CT: So does that mean you're not looking for any acquisitions for now? You're staying put?
PC: Well we're leaving our options open, we're always leaving our options open. We try and balance our organic growth strategies, but also we never rule out inorganic growth strategies as well if a good opportunity comes up, if we think it's the right fit...
CT: What would be a good opportunity for you? What would you like to acquire?
PC: It's a good question. We're pretty open really. It has to fit with the strategy. I think that's the key thing. You know we're clear in terms of what the strategy is, we're clear in terms of what our infrastructure and capabilities are today. We're also clear in terms of where some of the gaps are that we may have to fill. So an example of that might be for instance here in Southeast Asia, you know we will build infrastructure and capabilities in parts of Southeast Asia, we may also have to acquire in Southeast Asia to get to the size and scale of capability we need to get to. Within a shorter period of time, within the next few years, the Southeast Asia market is going to grow by 2025 to 200 billion US dollars, and...
CT: So you literally need to scale up?
PC: Exactly, we always need to be placing ourselves ahead of the curve, we're always going to invest ahead of the curve in e-commerce. The growth will come. It's just quite simply a case of making sure that we're well positioned to be able to ride on the wave of that growth that takes place. And sometimes that will be organic and sometimes that will be inorganic through acquisition.
CT: Today, ecommerce and logistics, which is what Jagged Peak and TradeGlobal are now part of is growing very fast but there's so much competition and margins are so thin, are you watching these margins very closely? It is a very competitive business.
PC: It's a hugely competitive space, the logistics industry. That's for sure in e-commerce...
CT: Is it going to get worse these margins?
PC: Well you know, I think we have to understand that there's a whole bunch of dynamics that we don't control today you know? What is going to happen to global trade in the next 6 to 12 months? I think everybody's thinking about that at the moment. We don't control that. You know the logistics industry works on EBIT margins somewhere between 3 and 6 percent. We are certainly aiming for the top end of that, if not more than that. The e-commerce sector of course there's a whole series of start-ups who are out there and they're trying to grow their market share and grow their volumes very quickly...
CT: So in which markets will you see the most pressure when it comes to margins?
PC: We'll certainly see pressure increasing over North Asia, particularly with a lot of the start-ups from China going into Hong Kong, which is a key market, so there's pressure there. There's pressure in Singapore, you know, those start-ups that are coming up the Singapore market, they're obviously competing very heavily on price. Whether that's sustainable in the long term, you know we'll see. I actually think that startups coming into the industry are good, I think it actually challenges the industry to do things differently you know. We're a 160-year old organization but we have to have somewhat of a startup DNA in the company as well to be able to revolutionize ourselves in certain key areas. So that challenge is always there and the US of course is an increasingly competitive market.
CT: So Paul we're at one of your mail sorting centers here in Singapore, just how busy does it get these days?
PC: Well we handle over 3 million items a day through our sortation facilities and this is the biggest, this is the main central control point for Singapore. But of course in peak season, once it gets to uh to Christmas time, once it gets to the great sales that are taking place, that 3 million literally explodes in a very, very short window.
CT: You know we're here at this logistics center and I'm seeing a lot of heavy equipment, a lot of heavy machinery, there's a lot of investment involved isn't there when it comes to setting up a logistics center or a sorting center like this one?
PC: Yeah very much so. So our e-commerce hub, that was an investment of 160 million dollars, we invested that two years ago, and that's actually helped us cope with the volume surge that we've had. We set out with a ten year plan, so we build it with a ten-year horizon, but the volumes we're seeing today are actually shrinking that horizon pretty quickly.
CT: So what's the utilization rate like when it comes to making a new investment? What are you looking for? Is there a number you're looking for?
PC: So if you go back to the quarter one calendar year of 2016, we were handling around 13 thousand parcels a day it had only been just opened a couple of months at that stage, one year later, we were handling 21 thousand parcels a day and we go to 24 thousand parcels a day. During the peak season we just went through in 2017 there were days where we were handling 33 thousand parcels a day. So we have an ambition to grow our market share, so we have the ability to process 40, 50, 60, 70 thousand parcels a day up to a 100 thousand parcels a day with very little manual labor. One touch in, one touch out and that's a great advantage there.
CT: If you had the one event where you are the busiest, what would that be?
PC: Definitely double eleven (11:11), Alibaba's huge sale and Lazada of course now, (12:12) so we have all these sales campaigns running around the e-commerce platforms and it gets pretty crazy but the operations of the organization are how to keep the service level stable at the same time as they're having to ramp up volumes through a very narrow window. So they've engineered it year on year to get better every year.
CT: Let's talk more about that. To what extent can you share some these logistical costs with some of your e-commerce customers and partners like Lazada and Alibaba for instance?
PC: So the Alibaba relationship is one that we really value, and you're right, it's not just about Ali themselves, it's also about their extended eco-system. So they have a logistics organization in China which they're the majority shareholder in which is CaiNiao. CaiNiao is also a very good partner for us between Alibaba, CaiNiao and ourselves, we have a shareholding in a company called 4PX which is a cross border express parcel operator in China. They're also bringing significant volumes to Singapore Post as a customer. And of course in this part of the world in Southeast Asia we have Lazada, and more recently Ali has obviously taken a shareholding in Tokopedia as well. Lazada is a fast growing customer with Singapore post and you know the discussion that we've had is actually about where Lazada can best use our infrastructure to actually help them on their growth curve as an organization. So the discussions are at a very strategic level and of course that breaks down into tactically, what do we have to do, what actions do we have to put in place to actually help those entities on their journey, on their growth to Asia?
CT: Let's talk more about Alibaba because they were originally a customer, now they're a shareholder of SingPost, they hold a fourteen percent stake, they also have a 34 percent stake in Quantum solutions which is your e-commerce and logistics arm. What does it mean to have such a huge shareholder on board?
PC: Very exciting, you know we talk about Alibaba, we should also recognize we have of course, SingTel organization here in Singapore. They're also a very key shareholder for us. Those two strategic partners are very valuable. So it's not only our shareholders but as customers as well and suppliers in some instances. I think the Alibaba opportunity is actually much wider than just bringing volumes...
CT: Give me an example.
PC: So if you look really where Ali has invested in the last 5 to 10 years, it's been in the areas of artificial intelligence, it's been in the areas of warehouse robotics, it's been in the area of big data and cloud technology. All of those areas give us the opportunity to completely re-engineer our business.
CT: So you've been able to tap on that technology...
PC: We have started discussion in terms of how we set to actually tap on that technology, also with SingTel as well. So SingTel had obviously invested in big data enterprises, in the last few years, so the advantage for us is, we don't actually have to go and build that infrastructure. We don't have to build, we can simply plug into those power bases and that will actually help ignite our growth engines as an organization as well and realign and restructure our cost base. And that's a very exciting opportunity. It's a very large power base that we can tap into.
CT: Any interest, any talk of Alibaba increasing their stake in SingPost or Quantum solutions? Would you and senior management be open to that idea?
PC: Again, we're always open to any investor that wants to come in, Ali's a very valuable shareholder you know, if they wanted to come in and increase their shareholding in our organization, so you know that would be something that we would open to.
CT: Have you talked about it?
PC: We're having on-going dialogues as to how to work better strategically for the future.
CT: About increasing their stake?
PC: No Comment.
CT: These days there are a lot of concerns about global trade and protectionism and how it could impact the flow of good around the country. Are you worried that this could ultimately impact the delivery business for you?
PC: Global trade war is, not a zero-sum game you know, those losses right across the globe. I think Minister Chan Chun Seng said just the other day that a US China Trade War would, could have an impact on 1 percent of Singapore's GDP. You know so that, that's significant. So you start to see that there are actually goes across a number of different markets not just the US and China markets.
So I think for Global trade, there will definitely be a dent. You know if you look at the logistics industry, we are obviously… we carry global trade. So therefore it's going to be impacted to a great degree, but it's not all downside. There are some opportunities that might...
CT: Like What?
PC: Pop up from the global trade war. So if there's a global trade war, the economy starts to come under pressure, interest rates are starting to rise, liquidity might start to dry up, that might open up possibilities for acquisitions, for some companies who might struggle through that type of trade climate That's why we're very careful in terms of what we're doing today to build that infrastructure capability, but also keeping a clear eye out for any other opportunities that might come where we can add to that capability.
CT: So Paul, how does mail actually get sorted out here?
PC: So first of all, the mail is put into the bags here as you can see or they go into some trolleys that we have which are accordion trolleys: they rise and they fall depending on the weight that's in them. Then we deconsolidate the bags, so we empty the bags and you can see the guy is going through here, what they are then doing is then doing another fine sorting in terms of location and then they put it on the belt and then the belt goes through the sortation system, spins round through the tunnel to...
CT: It's like a washing machine!
PC: Then it starts to reduce the stacking so it doesn't get caught up in the belt as they go through. And then it gets sorted through to the final post office.
CT: Just how much mail gets sorted here every day?
PC: So we're handling over 3 million items a day through our sortation facilities here. Every single day.
CT: Paul, do you envision a future where mail delivery is fully automated?
PC: I think you can automate up to a certain point but we still need human intervention, so we can automate a lot more of our facilities, we can take some of the processes and automate those processes. But in terms of last mail delivery to the consumer, we're always going to need people at the destination site, people at the final delivery, last mail delivery site. So what we are doing is that the profile of traffic is changing from just being mail to being mail and e-commerce delivery that comes with technology solutions so we're upscaling and up-training our workforce to be able to adapt to those technologies...
CT: So the postman is here to stay?
PC: The Postman is definitely here to stay. But their job in the future will be a little bit different.
CT: So Paul, where do you see the future when it comes to the delivery business?
PC: The changes that we're going to see in the five years are going to be more than we've seen in the previous 2 or 3 thousand years and the challenges are going to be much more complex as well. So we're talking about drone deliveries in the future. We're piloting drone technology at this point in time. That opens up all sorts of opportunities for the future. If you look at it from a postal perspective, we are developing locker infrastructure, which we're placing throughout Singapore. And that will basically take the post office to the community, much close to the community. And on the e-commerce front, you know you can also see that we're going to have a play where more and more artificial intelligence, more warehouse robotics will give us the opportunity to actually process huge amount of volume in a very, very short window.
CT: You know SingPost has gone through so many leadership changes in the last decade or so. You're the fourth CEO in the last 12 years. Are you here to stay?
PC: I'm definitely here to stay.
CT: For how long?
PC: I'm here to, well, I'm here to stay as long as the shareholders think I should stay.
CT: How long does it take to make a meaningful change within a company like SingPost?
PC: Well I think we're already starting the change process, I mean that's happening. We're already seeing that happen last year. I think the other thing I would say is, you know, it's not as if we're a poor performing organization, we're very highly regarded by the outside world. And that's a credit to Singapore and to Singapore Post and that has nothing to do with me. So last year we were recognized by the Universal Postal Union as being the overall best postal provider here in Asia Pacific. But the critical thing for us is how do we take that to the next step, how do we take that to the next level? It's great that we have all that in place, how do we energize the organization? So I see my role and the role of any leader about making sure that we harness the strengths and resources of the company of all of our people to achieve a common goal.
CT: You're 62 years old, you have over 20 years of experience working in global mail and logistics companies, what sort of management style, what sort of leadership style do you practice here at SingPost as you drive that transformation process?
PC: It starts with the values for me, you know, so being honest, being open and obviously having good integrity is fundamental. But it's also about understanding the power that people have in the organization. So my management style is... I'm a scorpion, so I'm naturally impatient but I'm very patient with people so it's about discussing where we're headed, again, get that clear understanding of how we're going to get there. Understanding how we're going to measure success, and then empower people, you know we have an old expression in the UK that there's no point in buying a dog and then barking yourself, you know if you're going to bring someone on board, or give somebody a task, or give somebody a responsibility, make it clear what we're sort of actually trying to achieve, how we're going to achieve it and then let them get on and actually deliver you know and that empowerment piece for me is probably the most crucial thing.
CT: What drives you? What motivates you? What keeps you going?
PC: That's a really good question. I think it's always, I think the most exciting for me is when I get up in the morning. So I've been in the industry for over forty years, but every morning I get up knowing I'm going to learn something new that day, maybe I'm a very very slow learner, maybe that's what it tells you, but I'm actually very passionate about our industry, I'm very passionate about the people that work in our industry, but it's knowing that we can be good today but even better tomorrow and it's that kind of ambition to be better tomorrow that continually drives me forward.
CT: Paul, thank you so much.
PC: Thank you.
END
Correction: SingPost handles over 3 million items a day, not 300 million as stated in an earlier transcript.
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