It was 11 p.m., but one corner of the Louisville International Airport in Kentucky, U.S.A., still had all its lights on. Four layers of conveyors moved forward at a steady pace between concrete reinforced steel pillars, carrying parcels of all sizes and shapes. The conveyors sort 300,000 parcels every hour.
This is the international”Hub of the Future”for UPS, the international courier giant. It has an area equivalent to 43 college soccer fields. Every day, 15.6 million parcels pass through here and are then delivered to more than 200 countries and regions by over 560 airplanes. The conveyors have a total length of 122 miles — roughly the distance from the hub to Cincinnati. It makes use of more than 75 million pounds of steel, nearly five times the amount used in the Eiffel Tower.
A parcel stays in the international hub for approximately eight minutes; 40% of parcels are equipped with fiber optical cables and don’t require manual processing. Fiber optical cables are more than 4,500 miles long — equivalent to a roundtrip journey from the hub to Seattle. Fiber optical cables process one million data exchanges per minute — more than 59 million in an hour. In contrast, daily data exchanges at the New York Stock Exchange are just 25 million.
In 1907, Jim Casey, age 19, identified an opportunity in Seattle, the capital of the state of Washington. He borrowed $100 from a friend to establish UPS, a small courier services company that depended on bicycles to deliver letters.
One hundred years later, bicycles are long gone, and UPS Airline has become the 8th largest in the world with more than 1,500 freight flights everyday. Workers in brown uniforms drive brown trucks in more than 200 countries and regions of the world.
But in China, where the courier market is flourishing amid the backdrop of a fast-growing economy, international courier giants such as UPS are not as aggressive as they are in international markets. Due to persistently high costs and difficulties in developing networks, they are either on the sidelines or are exploring the market on a small scale. Some have even seen declines in business.
Slower Expansion
Since the 1990s, China’s international courier market has gradually been taken over by the four international giants — DHL, TNT, UPS and FedEx, which have been growing by more than 20% to 40% per annum. EMS, the courier service by China Post, has been declining by 4% year-on-year.
The domestic courier market has a lot of potential. According to World Trade Organization (WTO) requirements, the Chinese courier market had to be fully opened up to competition by the end of 2005. But in most regions, especially central cities such as Beijing and Shanghai, private courier companies command 80% of market share.
Today, if one calls the customer service departments of FedEx, UPS, DHL and TNT to courier documents from Guangzhou or Shanghai to Beijing, UPS would respond that it only serves clients with whom it has contracts; FedEx, DHL and TNT would take the business, but the quote would be more than 100 RMB from FedEx and DHL; TNT emphasizes medium-to-high end clients, and would actively persuade the customer to sign a long-term contract.
In early 2004, DHL took the lead in entering the Chinese courier market by launching two services — 24 hour courier service for 2,000-30,000-gram parcels and 48 hour courier service for 30,000-1million-gram parcels. At that time, the regional branches of DHL-Sinotrans, DHL’s China courier services company, had separate domestic courier divisions and dedicated workers.
But two years later, DHL closed many regional courier divisions, and workers were transferred to international courier divisions. When the domestic courier market was fully opened, DHL shrank its domestic courier business unexpectedly.
TNT, which at one point aggressively offered domestic courier services, signed up 50 new partners in 2005. But it announced recently that it would no longer develop new partners. In addition, TNT has stopped some regional development programs. At the same time, TNT (China) has overhauled its structure and merged its international and domestic courier services.
Currently, TNT’s domestic courier services cater mainly to multinationals — offering them both international and domestic courier services. Fees are settled weekly or even monthly. And single parcels are seldom processed. TNT has a network of 4,500 stores, 1,300 mail boxes and 17,000 franchisees in the U.S., its home country. In contrast, in China, TNT only signs contracts with a few clients.
High Costs and Difficult Acquisitions
According to Ken McCall, former CEO of TNT China, TNT had analyzed and planned the domestic courier business after having developed partners in China for a year. TNT found that the scale of Chinese courier services is not big and the market is not mature. As a result, TNT considered a low-key approach. “The domestic courier business is very small -– an infant in our big family,” he notes.
Chen Xianbao, executive vice president of ZJS Express, a private courier service company, says that DHL had suffered huge losses since it started domestic courier services due to small volume and high operating costs. Daily courier volume originating from Shanghai, for example, was just tens of kilograms. Private courier companies tend to have several times larger sales. EMS of China Post delivers more than 100,000 pieces a day.
Jin Xiao Xun, vice director of Courier International Division of Shanghai Post, suggests that although the domestic courier market had been fully opened, international giants were still experimenting with the market. On prices and coverage, they don’t have any advantages compared to private courier companies and China Post.
Consider the Shanghai to Beijing courier route as an example. S.F. Express and Tian Tian Express charge 20 RMB and 15 RMB per kg respectively and 10 RMB for every extra kg. EMS charges 26 RMB per kg and 12 RMB for every extra kg. In contrast, FedEx’s Next-Morning Delivery charges 135 RMB for 2kg, and 90 RMB for Next-Day Delivery.
High operating costs might be a major reason for these high fees. According to Xu Yong, former operating director with FedEx East China and former president of Tian Tian Express, human resources, management and operating expenses for international courier companies are three to five times higher than those of their private counterparts.
DTW, which had a joint venture with FedEx in 1999 to conduct an international courier business, is a case in point. Blindly copying DHL and FedEx’s experiences in their home markets, DTW has paid a huge price. Its operating costs are high and its organizational structure is massive.. For example, DTW always uses vehicles regardless of costs. The staff of private courier companies, on the contrary, still ride bicycles to serve customers. DTW has survived up until now mainly on its share of close to 100 million RMB from the joint venture’s international courier business.
Furthermore, international giants hope to acquire domestic courier companies to quickly fill the gaps of their domestic coverage. But there are not many candidates for acquisition. Large private courier companies are mostly alliances of small franchisees. The headquarters have limited managerial control over franchisees, which fight for their regional turfs. If international giants acquire these franchisees, they have to inject a lot of capital and energy to remedy this situation.
Opportunities and Challenges
Not all international courier giants are pessimistic about making money in the China market,however. FedEx recently entered the market on a high note.
In June this year, FedEx announced its entry in the Chinese courier market and launched its domestic limited delivery-time service in more than 200 cities. It had been planning for it for three years: It first acquired DTW, its Chinese JV partner, for a hefty price, and then took over OK Airline, the first private airline in China, to use as a freight airline.
When FedEx entered the China courier market, Chen Jiangliang, president of its China operations, noted in public that although FedEx didn’t have any pricing advantage compared with domestic courier companies, it catered to high-end customers demanding timely delivery and reliability. According to him, “90% of our existing international clients in the China market told us they needed reliable limited delivery-time services in China, expecting us to deliver parcels for them in China while conducting international business.” Indeed, UPS pointed out in its recent report that China would have a very large middle class in the next 20 to 30 years. Chinese business and economic development means that demand for high-end services has huge potential.
Alan Graf, CFO of FedEx, said on June 20 that the courier business in China would negatively impact on its quarterly earnings and 2008 profits.
According to Li Limou, secretary general of China International Freight Forwarders Association, the labor cost advantages of private courier companies might evaporate in five years’ time. In the future, customers will care more about safety. This is a potential problem for private courier companies. Currently, international courier giants such as UPS have the technology to identify the exact location of a parcel. Private courier companies, on the other hand, are still in frequent disputes with customers over lost parcels.
Many large private courier companies are mulling over transformations. Low-end business accounts for 60% of the total market, and has long bid farewell to the high-margin period to enter into a thin-margin era instead. From 1992 to the present, courier costs from Shanghai to Hangzhou dropped to between 3 and 5 RMB, a reduction of 100 times. It is imperative for courier companies to look for new areas of profits, the experts note.
“We can no longer fight for business at each distribution points,” says Xu Jianguo, the head of a private courier company. “We need to drive the network by products and customers.” Having experienced failure once, Xu Jianguo has overhauled his business model completely. Today, he no longer targets the low end market of delivering documents, samples and gifts, but targets parcels under 300 kg and small-scale logistics businesses over 300 kg. His main clients are big companies such as DHC and Procter&Gamble.
Delivering high-value goods and even providing warehousing and storage services in the medium-to-high-end markets are areas of focus for private courier companies reinventing themselves for breakthroughs. Currently, Shentong Express, ZJS Express and Yuantong Express, well-known private courier companies, are expanding into logistics and even e-commerce. For example, Shentong and Yuantong have been appointed courier companies for taobao.com, the largest C-C e-commerce website in China.
Regulatory Risks
For private and foreign courier companies, the uncertainty of the Postal Law of PRC has been their number one headache.
The current Postal Law was issued in 1986. In recent years, the Postal Law has been amended but not passed yet. The main issue is the range of weights under the monopoly of China Post and the administrative qualification standards for conducting courier business. China Post wishes to limit the competitive pressure on EMS from private and foreign courier services companies by setting the range so that it can continue its monopoly.
The Postal Law under revision has already seen nine drafts, and the latest one even bans foreign companies from delivering letters in China. Currently, four international courier giants have all entered the domestic courier market, and business letters are part of their businesses. If the ban takes effect, the business of the international courier companies will be dwelt a serious setback.
