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Fedex Bellwether Ringing Softly for Consumer Electronics
Declining Demand in US Impacts Manufacturers in China, Taiwan

FedEx has cut its earnings guidance for the year ending in May on the expectation that shipment volumes will be weak.

Demand for the consumer electronic gadgets made in Asia, particularly in China, has dropped. CFO Alan Graf said that though the slowdown extends to perishable foods, high-end apparel and automotive and industrial parts, "the primary driver of the reduced demand is lower sales of electronics products." The slide started in July and is impacting Taiwan contract manufacturers like Compal and Quanta.

So it looks like the holidays could turn sour. FedEx said retailers are keeping their inventories lean and it's not predicting a "significant peak" season this year. However, it's also not predicting a double-dip recession in the US, at least not yet.

Graf said, "Our customers' hair is not on fire. They're just saying we're taking it steady as it goes. It just feels completely different than it did back in '08." The company's expecting the soon-to-be-announced iPhone 5 to boost volumes. Seeing momentum in the US "basically stall," UPS CFO Kurt Kuehn said pretty much the same thing the week before, warning of a "bumpy ride" globally.

When it reported its first-quarter results last week Fedex said US shipments fell for the second quarter in a row as the economy failed to grow as much as forecast. FedEx CEO Fred Smith blamed lack of confidence in US and European officials finding economic solutions for the lagging growth.

FedEx' US shipments dropped 3% last quarter; international packages fell 4%; domestic shipments in other countries were up 38%. Sales at FedEx jumped 11% to $10.5 billion. Its earnings were up 22% to $464 million or $1.46 a share.

Graf said, "The US and global economy grew at a slower rate that we anticipated during the quarter. While FedEx Ground and FedEx Freight achieved improved operating results despite lower-than-expected growth, the more rapid decline in demand for FedEx Express services, particularly from Asia, outpaced our ability to reduce operating costs. We have slightly reduced our earnings forecast to reflect current business conditions and are aggressively working to adjust our cost structure to match demand levels."

The company's Express revenues were up 12% last quarter while operating income dropped 19%. Revenues in its ground segment were up 16% to $2.28 billion and ground's operating income was up 42% to $407 million. Economic worries typically see consumers and businesses switch to cheaper ground shipments to save money.

FedEx now figures the best it can put on the bottom line at the end of its year is somewhere between $6.25 and $6.75 a share, down 10 cents from $6.35-$6.85. Wall Street was projecting $6.40. The company's stock dropped 8.2% to $66.58, its lowest level since 2009 in response. It recovered a point Friday. UPS slipped 3.4% to $62.17 in sympathy. It slipped again Friday.

FedEx handles shipments equal to about 4% of the US gross domestic product and 1.5% of the global GDP. It means to raise US rates 3.9% in January, which means UPS will do the same.

FedEx' projections are based on a 1.8% tickle in US gross domestic product this year, down from a previous calculation of 2.5%. Next year it now assumes a 2.5% rise, not 3%. UPS, which is putting $200 million into an expanded air hub in Germany, has said it expects US GDP will return to more normal growth in 2013 although it conceded it could take longer.

About Maureen O'Gara
Maureen O'Gara the most read technology reporter for the past 20 years, is the Cloud Computing and Virtualization News Desk editor of SYS-CON Media. She is the publisher of famous "Billygrams" and the editor-in-chief of "Client/Server News" for more than a decade. One of the most respected technology reporters in the business, Maureen can be reached by email at maureen(at)sys-con.com or paperboy(at)g2news.com, and by phone at 516 759-7025. Twitter: @MaureenOGara

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