Within the tangled web of China’s logistics sector there lurk a number of success stories, perhaps none greater than the rise of the express delivery market. The country’s logistics volume is expected to hit US$150 billion by 2010, and given that it is growing at 30-35% a year – three times the global average – air express is poised to play a major role in this development.
It should come as no surprise that the air freight business – with revenues driven by the lucrative international market in particular – is exhibiting such strong growth. Global services are dominated by four companies, DHL, FedEx, TNT and UPS, which have invested so heavily in establishing delivery networks and refined their services to such a fine art that the emergence of another rival carrier is unlikely. Whatever the country in question, multinational corporations (MNCs) will stick with their tried and tested partners.
"The great beauty of the express parcels market is the entry barriers are so huge," said Adam Hylan, a logistics analyst with HSBC Securities in New York. "You have to spend so much on planes, IT and infrastructure that you can’t see anyone else coming in. Compared to things like shipping and airlines, it’s a completely different business model."
Of the major players, DHL has traditionally been strongest in Asia for largely historical reasons, having started life as a cross-Pacific courier service. Its joint venture with domestic operator Sinotrans has seen annual growth of 35-45% in the last few years, with business expansion nearing 60% in 2004 alone.
"The biggest challenge we are facing in this market is to further consolidate our operating capacity, to meet to the growing demand of the market," said Wu Dongming, managing director of DHL-Sinotrans. The company’s share of the US$1.5 billion China international express market has been put at around 40%, with FedEx on anything between 12% and 20%, UPS in the 10% region, and TNT a distant fourth.
However, analysts point to the push being made by UPS and FedEx to develop the size and scale of the services they offer in China as a sign of how the market balance might change. "DHL has been there a while but UPS and FedEx are consolidating, buying out their joint venture partners and expanding flight frequency," said William Fisher, analyst with Florida-based Raymond James & Associates.
Both HSBC’s Hylan and John Manners-Bell, chief analyst for the consulting firm Transport Intelligence, single out UPS as the strong performer in the all round growth story. "In terms of actually establishing its own operations, you would have to say UPS is slightly ahead of the game," said Manners-Bell. "Over a year ago it acquired the express operations of its former JV partner Sinotrans and this should give it more flexibility than previously. FedEx followed suit when it more recently acquired its JV operations from DTW."
The acquisitions referred to came in the wake of China opening up its logistics sector to wholly foreign-owned enterprises in December 2005, in accordance with the country’s WTO accession requirements. Whereas the global firms’ access to the domestic market was limited to partnerships with local operators, now they are free to make headway on their own. This deregulation has strongly influenced the firms’ activities in China.
At one time or another, UPS, TNT and DHL have all worked with Sinotrans. But while DHL has strengthened its joint venture with the state-owned group, UPS responded in advance of the reforms by purchasing Sinotrans’s share of their joint venture for US$100 million. In January 2005 the company took control of operations in Shanghai, Guangzhou, Shenzhen, Tianjin and Qingdao, with the remaining 18 locations transferring once the ownership regulations were formally altered.
TNT severed ties with Sinotrans in 2002 and has entered into negotiations to buy HOAU Logistics Group, based in the northeastern province of Heilongjiang. The acquisition would give TNT access to a network of more than 1,100 hubs and depots serving all first- and second-tier cities.
FedEx employed a similar strategy, turning to the relatively small DTW Group once its joint venture contract with EAS expired in 1999. In January, the company announced it was to going to pay US$400 million for DTW’s 50% stake in their International Priority joint venture as well as the Chinese firm’s domestic express delivery network. In doing this, FedEx has gained ownership of 89 new locations.
"Having direct control of our operations will enhance our business flexibility and improve speed to market," said David L. Cunningham, Jr, president of FedEx Express Asia-Pacific. "With this acquisition, we can invest more effectively and directly in the long-term growth in China."
These movements into the domestic market are unlikely to deliver the stellar profits these firms are used to, at least not in the short term. For the time being, the bulk of the their China revenue will keep coming from MNCs who use the firms’ services in other markets.
"Exports will remain the focus," said HSBC’s Hylan. "Western multinationals are credit worthy and more likely to go for value-added services. Chinese companies are not used to paying high prices and then the domestic market is more cutthroat and competitive." He also points out that, despite UPS’s expansion plans, the company is only offering services on account and focusing on specific sectors.
The thinking behind the acquisitions is not just first-mover advantage – having complete control over services is also at stake. The global players know they cannot compete with domestic operators on price, so their major selling point is exactly the same as it is in the international market: quality service.
"They need to control their own services," said Fisher of Raymond James & Associates. "If you have a sizeable investment somewhere, you don’t want to rely on subcontractors."
All four of the companies operate on a strict guaranteed delivery basis and they are in the process of upgrading their China infrastructures in order to meet these requirements when dealing with larger volumes of parcel traffic. Having first made its mark on the China market in 1989 with the US$880 million purchase of cargo airline Flying Tigers, in March FedEx increased its weekly flights to China from 23 to 26.
"FedEx will maintain its leadership position with the most all-cargo flights to and from China than any other US cargo airline," said Cunningham, Jr.
Hub of activity
Work has already begun on the company’s US$150 million Asia-Pacific hub in Guangzhou. Scheduled for completion in 2008, the 63-hectare facility will be able to handle 24,000 parcels per hour. UPS, which runs 18 flights to China each week, plans to open its own international air hub at Shanghai Pudong airport in 2007.
DHL has gone so far as to invest money in a future Chinese workforce, setting up the DHL Logistics Management University in Shanghai. The university is to offer 7,500 traineeships during its first year and train 2,000 employees by the end of 2006.
"We are confident that it will build and attract the pool of talent needed to manage the strong growth in Asia-Pacific, particularly China," said DHL-Sinotrans’s Wu. "These specialists will also help to raise the professional standards in the industry."
The domestic market for express delivery may have yet to mature but no one is unaware of its potential. The major players are positioning themselves to try and replicate in China the dominance they enjoy elsewhere. "The Chinese market is absolutely crucial to them," said HSBC’s Hylan. "It is the fastest-growing market in the world – more and more supply chains are originating there."
Blanket coverage: cornering the China market
Having established a 50-50 joint venture with Sinotrans in 1986, DHL has put in place a US$215 million five-year investment plan to boost capacity further. Its current services cover 95% of China’s major population and business areas with 56 branches and 116 facilities catering for 318 cities. The company’s China Domestic service, launched in 2004, is now available in 50 Chinese cities, while there are currently three express logistics centers and 16 spare parts centers in the country.
First entered the China market in 1984 and now has a network covering more than 200 cities, with plans to add a further 100 in the next few years. The acquisition of DTW boosted FedEx’s China workforce to 6,000 and a further 1,200 jobs will be added on the completion of its US$150 million Asia-Pacific hub in Guangzhou. This facility is also expected to contribute US$63 million to the local economy by 2020. The company serves China with 26 international delivery flights per week.
The company supplements its comparatively small share of the express delivery market with strong operations in other parts of the logistics sector such as supply chain management. TNT has 4,500 staff running a network of 140 facilities covering 600 cities which link into seven major import-export gateways in Beijing, Shanghai, Guangzhou, Dalian, Hangzhou, Xiamen and Shenzhen.
In January, it assumed control of the entire network set up through its earlier joint venture with Sinotrans. This effectively added 23 operational regions with coverage in 200 cities to the company’s China business. The company plans to have more than 3,500 employees in China by the end of this year, running a system of 1,400 delivery vehicles and 75 facilities covering 330 cities. It is also official logistics and express delivery sponsor of the Beijing 2008 Olympic Games.