Monday, September 10, 2012

FedEx and UPS gain limited licenses to operate in China’s domestic express market

After years of waiting, FedEx and UPS received notice from China’s National Post Office that they had been granted licenses to operate in China’s domestic express market – with a catch – the two integrators could only operate only in select cities and mail handling will still be done by Chinese domestic express providers.

FedEx was granted a license to operate in Shanghai, Guangzhou, Shenzhen, Hangzhou, Tianjin, Dalian, Zhengzhou and Chengdu while UPS was granted a license to operate in Guangzhou, Shenzhen, Tianjin, and Xi’an.

A bit disappointing, but a start in a market that is growing at an estimated 20% per year based on China Post’s current IPO filing. The domestic market is heavily fragmented with close to 7,000 licensed express operators. State-owned China Post is estimated to have a 30% market share while private operators SF Express, YTO Express and ZJ Express follow with considerable less market share.

Currently, FedEx already provides services to more than 400 Chinese cities through joint ventures whereas UPS does not have any such partnerships. This, as well as a license to operate in 8 cities versus UPS’ license for 5 cities, will benefit FedEx. However, UPS’ pending acquisition of TNT will prove beneficial for day-definite road transport. In fact, TNT's Day-Definite ground service consists of around 500 road routes and covers over 200 large and middle-sized cities.

So, where’s DHL? DHL Express sold its domestic express business, a joint venture with Sinotrans, to the Chinese company Unitop Industry, Shenzhen, in the third quarter of 2011. Although no official reason was provided, it was suggested it was due to the restrictive postal law and also that it was not profitable.

A Chinese air transport association expressed opposition to the entry FedEx and UPS into China's domestic express delivery business, saying the entry would amount to an infringement of China's airspace and will impact the nation's air cargo industry. But an official with the National Post office noted that foreign logistics companies are forbidden to be shareholders of China’s air cargo firms and will instead have to rent aircraft from local firms to deliver cargo. This will present an additional cost to operating in the domestic market for both FedEx and UPS as they invest in domestic networks and connect these to existing networks already established.

Despite this, it remains a welcome start to a lucrative market. While competition is expected to be fierce in the cities in which they operate, businesses and consumers alike will reap the benefits of lower rates and reliable delivery service. For many international companies that utilize FedEx or UPS for international services, the benefits are that shipments now will stay within one network and tracked easily. Finally, as mentioned in previous blog posts, the growth of ecommerce will also be an added plus for these two companies.