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VOL. 124 | NO. 93 | Wednesday, May 13, 2009

Fred Smith Talks Green: Helps the environment and Fedex's bottom line

By Bill Dries

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Fred Smith is going green. In the case of the FedEx founder, however, it’s a different shade – something like military fatigue green.

Smith is reframing the push for alternative fuels and energy from a discussion of “what ifs” to a national security issue.

Electric vehicles and biofuel incentives are part of a plan Smith admits is controversial. It includes nuclear energy, a carbon tax and maxing out domestic oil exploration.

Smith is co-chairman of a coalition of corporate executives and retired military generals called the Energy Security Leadership Council. The other co-chairman is retired general and U.S. Marine Corps commandant P.X. Kelley.

In two speeches this year, one at the National Press Club in February and the other to a conference at the University of Memphis last month, Smith continued the ESLC bid to set specific goals for American energy independence and take the green movement from theory and individual practice to national policy.

After terrorism and nuclear proliferation, Smith and the council rank the nation’s dependence on foreign oil as the “largest national security risk in front of the United States.”

Smith and Kelley wrote a column for The Washington Post in the summer of 2006 that began with a question.

“Could a mere 4 percent shortfall in daily oil supply propel the price of a barrel to more than $120 in a matter of days?” they wrote. “Such a rapid rise in fuel costs would have profound effects that could severely threaten the foundation of America’s economic prosperity.”

Two summers later, they turned out to be off the mark by only $27 a barrel.

“People forget that while subprime mortgages and CEOs and all of these other risky instruments and problems with Fannie Mae and Freddie Mac and all of the other things you’ve read about were the bonfire that’s consumed our economy, the match that lit it off was $147-per-barrel oil, which reached its peak last July,” Smith said at the April 20 supply chain conference at the University of Memphis’ FedEx Institute of Technology. “Each of the five major recessions since the first oil embargo in 1973 have been coincident with a significant hike in fuel prices.”

Toward the end of the Bush administration last year, the ESLC was instrumental in helping win passage of the first increased standards for fuel efficiency in cars in 20 years.

The founder of FedEx is calling for the electrification of short- haul transportation as a major part of reducing America’s dependence on oil. Fred Smith told a gathering at the University of Memphis last month that oil won’t go away overnight as an energy source, but reducing reliance on it is a matter of national security. -- PHOTO BY LANCE MURPHEY

“We spent 20 years from the last time the country increased fuel efficiency standards, which all of my free market friends argue against with me,” Smith said. “Nobody is more free market than I am. FedEx is a creature of deregulation. … This is not purely an economic issue. It’s a national security issue.”

Interests to protect

The five recessions and the five corresponding spikes in fuel prices span the life of FedEx, the cargo innovator Smith founded in Little Rock in the early 1970s and that, soon after, moved to Memphis.

FedEx uses a lot of oil in its air and ground operations. The company has almost 700 aircraft in its entire operation and runs more than 80,000 vehicles of different types, Smith said. Aviation is the most energy intensive use FedEx has.

FedEx Executive Vice President William J. Logue told a U.S. Senate committee in 2007 that FedEx Express alone consumed more than 1.3 billion gallons of fuel in fiscal year 2006.

And Smith said that has propelled the company’s own quest through the years to find and even encourage research and development of more fuel-efficient vehicles as well as those that use alternative fuels.

The speech at the University of Memphis was the first part of an unusual two-day set of public comments from Smith. The next day he attended an executive session of the Memphis City Council at the council’s invitation. The council solicited Smith’s advice on how government could operate more efficiently.

His answers to those questions were specific and he was careful not to stray far from the questions.

Smith’s remarks on green as a national security issue were heavy on specifics even though Smith was talking extemporaneously.

Longer battery life developments prompted by the needs of those using personal computers and other devices has created the technology that has made possible electric cars like the Smith Newton shown here at a recent green conference at the FedEx Institute at the University of Memphis. -- PHOTO BY LANCE MURPHEY

“Over half of our $600 billion-plus military budget every year is spent for the sole purpose of protecting the oil trade,” Smith said as he noted complaints about the cost of a carbon tax, which he favors. Smith said there are no similar concerns about “having to have a military establishment of the size that we have that’s gotten us involved in two wars in the Middle East, which is almost exclusively because of our dependence on petroleum coming from that part of the world – not totally – but almost exclusively.”

Smith, who backed John McCain in the 2008 GOP presidential primaries, even went back to the 1950s Eisenhower administration benchmark that set anything above a 20 percent dependence on foreign oil as a “grave national security risk.” That dependence is now at 60 percent.

“That might be in a perfect world not a problem. But we don’t live in a perfect world,” Smith told the group of about 100 people at the University of Memphis. “And, unfortunately, contrary to a great deal of what you hear about in terms of the oil business, it’s not our great integrated oil companies like Chevron and Exxon who control most of the oil.

“Ninety-percent of the proven oil reserves in the world belong to national oil companies. And many of those national oil companies are outright hostile to the United States, or at least indifferent to our standard of living and our national interests.”

An electric plan

Smith’s suggestion as well as that of the leadership council includes a goal of converting the nation’s short-haul commercial vehicle fleet to electrically run cars and trucks. That goal also would include personal cars and trucks.

“The United States should as a matter of national policy move toward a largely electrified short-haul transportation system,” is how Smith put it.

In a February speech at the National Press Club in Washington, Smith said electrification would be a “sea change” made possible in part by technological advances in the past 25 years that have given longer life to batteries. But he said the transition still will be difficult.

“Nobody is more free market than I am. FedEx is a creature of deregulation,” FedEx founder Fred Smith said before adding, “This is not purely an economic issue. It’s a national security issue.” Smith also called for maximum oil exploration in the U.S. and the use of nuclear energy to end dependence on imported oil. -- PHOTO BY LANCE MURPHEY

“We cannot encourage the purchase of electric cars and then not have the generation capacity to power them, the transmission capacity to deliver that power to the consumers who need it, or the smart grid technology that will be required to handle those cars as we plug them in and out of the grid,” he said.

At Syracuse University in New York, Patrick Penfield has been writing for several years about the emergence of this turn in the green movement.

“In the next several years, you will be hearing more about supply chain sustainability or the green sustainable supply chain,” he wrote in August 2007.

The assistant professor at the Whitman School of Management at Syracuse also cast the validity of the move in different terms.

“The whole idea of a sustainable supply chain is to reduce costs while helping the environment,” he wrote.

It’s no accident that reducing costs is mentioned first.

On the second day of the green supply chain conference at the University of Memphis, Mike Bruns, the president of Memphis-based Comtrak Logistics, said lower fuel consumption is at the root of green considerations for him and others in the freight business.

“I guess I could sit here and tell everybody that I’m a real believer in green – and I guess I am,” Bruns said. “But I’m really a believer in making money. And it’s generally interesting that everything we’re doing to make some money at Comtrak has everything to do with being more green.”

At the same panel discussion, Mark Schulze, a vice president of BNSF Railway Co., one of the city’s major rail presences, was more direct.

“I haven’t seen one decision made yet that was environmentally based,” he said. “It gets down to cost and on-time performance. … But there is a mandate to lower our diesel fuel consumption, which will benefit us with (fewer) greenhouse gas emissions.”

Price-driven alternatives

Penfield told The Memphis News that converting to such a green supply chain will be “long and arduous.” He also said interest and commitment could wane in direct relation to the price of gas.

Mark Aubry, vice president of Sales & Marketing for Smith Electric Vehicles, describes the performance of the company’s electric trucks to Tommy Miller, FedEx marketing adviser, at the recent green conference. -- PHOTO BY LANCE MURPHEY

“When gas prices are high, there’s actually a benefit to the greening of the supply chain,” Penfield said. “When gas prices are low, that whole impetus is taken away. Nobody wants to talk about it. Nobody really wants to figure out ways to help the environment.”

Smith, however, saw differences in last summer’s gas price spike. There was the part that China and India played in upping the demand for gasoline.

“Prior to last summer’s run-up, you could anticipate that the crisis would come, demand would go down and you’d come back and to some degree it would be business as usual,” Smith said. “On the supply side, there really was little alternative to the continued consumption of fossil fuels. But in the interim … the development of battery technology fueled … by the proliferation of laptops and PDAs and cell phones has created a whole new generation of batteries that have the amount of storage that will allow the daily use of a personal automobile to be tolerant by batteries.”

That means traveling 40 miles on a single charge.

FedEx teamed with the Environmental Defense Fund in 2004 to launch the first commercial hybrid truck. Smith calls it a PUD – pickup and delivery vehicle. It’s a step-in delivery van that has 700 cubic feet of space. It is 42 percent more efficient than diesel-powered delivery vans and its emissions are 90 percent less. The FedEx fleet uses 300 of them.

“The problem with the vehicle is it is more expensive than the conventional diesel,” Smith said.

It’s more expensive by about $30,000.

“When the price of fuel was up to $4 or $5 per gallon for diesel, you actually were getting close to getting a reasonable return on investment for that,” he added. “But as fuel has come back down – and it will go back up in all probability – it’s very hard to justify.”

Victoria Mills, the managing director of the EDF’s corporate partnerships program, said the FedEx request for proposals on the hybrid trucks was nevertheless an important step.

“That’s where the transformation started,” she said. “Then within two years, no fleet trade show was complete without a hybrid offering.”

One of 300 FedEx low-emission trucks now in use was on display at the green conference last month. FedEx sought proposals to meet lower emission and higher mileage standards set by the Environmental Defense Fund, which worked with FedEx in developing its PUDs – pickup and delivery trucks. -- PHOTO BY LANCE MURPHEY

By the EDF’s count, the 300 hybrid PUDs FedEx has are among 1,200 hybrid trucks either on the road or on order in North America. The FedEx fleet of hybrids is one of 85. And there are 36 makes and models.

“What we’re seeing is not just rising orders, but a diversification in the marketplace,” Mills said by phone from Boston. “That reflects confidence in the technology and a much broader trend in business to address climate change.”

Seeking a standard

Penfield said at least for now, the diversity has a downside as well.

“We want to move to batteries. But these different automobile manufacturers are all using different batteries,” Penfield said. “How do you charge it up?”

Penfield talked about charging stations for battery powered vehicles being used in Israel in which motorists simply swap spent batteries for newly charged ones.

“The problem is getting everybody to use that battery,” he said. “That’s an issue. There’s no standard. … Nobody has a path to follow.”

Smith told the National Press Club in February it’s important that whatever standards are set for a national grid don’t create a new dependence on imported technology.

“The investments – private and public – involved in electrification could have a tremendous positive effect on the American economy – if we do everything in our power to encourage the creation of new manufacturing capacity and jobs here at home,” Smith told that gathering. “That means, among other things, reducing the corporate tax rate and changing the tax code to allow the expensing of capital equipment. If we are going to drive battery operated cars, let’s make sure that as many of them as possible are built here in the United States.”

Mills concedes Penfield’s point about the impact changing oil prices have on the demand for hybrids as well as the expense of hybrids at this point.

For business owners who run or manage fleets of vehicles, the main issues are if the new additions to the fleet pay for themselves and over what period of time.

Mills and Smith agree that until the gap in price between conventional short-haul vehicles and the hybrids is bridged, government incentives are essential.

“The difference between having incentive help and having no incentive help can be five to 10 years off the payback of one of these trucks,” she told The Memphis News. “New York, for example – their program will fund 80 percent of the incremental cost of a hybrid truck. At the federal level, money from the stimulus bill has gone into what is called the Diesel Emission Reduction Act (DERA).”

The DERA regulations have spun off a business of organizing hybrid or alternative-fuel fleets for companies integrating them into their overall fleets and capturing the federal incentives.

Tennessee Gov. Phil Bredesen took a test drive last month in an electric car made by Nissan. The Japanese carmaker with a Tennessee presence plans to begin selling such cars for commercial and government fleets in the U.S. next year.

Bredesen has proposed a network of public charging stations for electric cars in a partnership that would involve state and local governments as well as carmakers. At the test drive, he also talked of research on solar-powered charging stations in Nashville, Chattanooga and Knoxville. Bredesen said he hopes to garner some of the federal stimulus funds for the effort.

California recently enacted a voucher program for short-haul vehicle fleets that contributes $10,000 to $40,000 per vehicle for new hybrids.

“Over the road” longer-haul trucks remain problematic if the goal is no diesel fuel.

“We don’t see in the near term any technology that will displace the use of diesel power plants,” Smith told the Memphis audience. “But we have many initiatives to reduce the energy consumption of our over-the-road vehicles.”

Hybrid technology for over-the-road vehicles still involves using conventional diesel fuel, Mills said.

“That was originally the last place people thought to look for hybrid applications,” she said. “But, in fact, Walmart has been testing out some hybrids in long-haul applications, just because when you drive that many miles, smaller percentage gains in fuel economy add up to huge cost savings.”

In one case, the hybrid part “simply captures the energy from braking and stores it in a battery where it can be used to supplement energy from the diesel fuel.”

Here to stay?

For all of the technological changes being explored and garnering attention as well as financing for now in the corporate world, Smith said oil isn’t going to vanish as the fuel that runs America.

“It’s unrealistic to think that the demand for petroleum is going to decline from 80 million barrels per day or thereabouts, which it was last summer, and go to the point where petroleum is going to be irrelevant,” he told the Memphis audience last month. “We should be producing the maximum amount (of oil) that we can in this country.”

It is a point in the leadership council’s set of recommendations that he admits, “We don’t get as high a grade on … from environmentalists.”

Smith said an “enormous amount of resources” beneath the outer continental shelf could be produced in an “environmentally sensitive” way.

He also said, “Nuclear energy should be a huge part of the equation,” noting the use of nuclear power at FedEx’s facilities in Paris, France. “It’s the only completely emission-free power source.”

Penfield isn’t so sure about the future of petroleum.

“I think eventually something is going to happen where it will be a pretty dramatic situation,” he said. “There’s going to come a point in time when we do run out. With the population increasing the way it is and these different countries booming, it’s going to be very, very difficult to attain the stuff.”

He sees a “tipping point,” or point at which the research and development of green alternatives becomes a direction for corporations in possibly the next two to three years, with some important questions still to be answered in the research.

“Does it make sense to switch? Does it make sense to change the infrastructure? If prices of gas are low, it’s going to be a hard thing to convince people to switch. It really is. I hate to say that,” Penfield said.

Mills has a different view.

“I believe we’ve reached that tipping point and gone beyond it,” she told The Memphis News. “I believe that people have internalized expensive and fluctuating fuel prices as a business risk that they need to manage. I believe that people are seeing environmental innovation and efficiency improvements are going hand in hand – getting them where they need to be to address security objectives, to address climate objectives, to address business objectives.”

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