Representing an estimated 66% of urban households, China’s
middle class is spurring many changes. The shift from rural to urban locations
is occuring at a rapid rate. In fact, in 2012, China’s National Bureau of
Statistics announced that for the first time, China’s urban population had
surpassed its rural population.
The old model of economic growth based on exports and big
government spending has become unsustainable. Even in its questionable economic
situation, the government has been reluctant to implement big stimulus
measures. Instead, it has undertaken targeted measures to spur domestic
spending. For example, consumer spending currently makes up about 35% of China’s
total economy. Due to the lack of
safety-net welfare programs like Social Security, the Chinese savings rate is
around 50%. As such, the Chinese government has begun to implement a financial
assistance program for some of its residents.
While the government continues to encourage domestic
spending, international companies are expanding into the Chinese market to take
advantage of the rising middle class and its purchasing power. Among the
international companies that appear to be achieving success in the market
include General Motors which now sells more cars and trucks in China than it
does in the US; Starbucks is opening stores at a rate of more than one a day
and Burberry operates 70 stores in 35 Chinese cities.
As logistics providers and private equity companies invest
in warehousing, transportation and in individual companies, expansion plans are
underway for many of the country’s leading express providers to take advantage
of this growth.
This week it was announced that China Postal Airlines
ordered five B737 cargo planes from PEMCO Aviation Group. This announcement
comes after announcing a partnership with Air China Cargo a few weeks ago as
well as a lease deal with Shandong Airlines earlier this year.
China Postal Airlines was established in 1996 as a joint
venture 51% owned by China Post and 49% by China Southern Airlines and mainly
operates mail and cargo transport services for China Post. As of September
2012, the company operated 16 B-737s, however, by 2014 the company will have at
least 26 cargo planes.
Meanwhile, SF Express, China Postal Airlines’ closest
competitor, operates 30 cargo airplanes and also plans to develop its
airfreight capability.
Combined, these two express providers comprise over 40% of
China’s domestic express market. A highly competitive market, growing at
estimates of over 20% annually, express companies are seeking additional
funding for expansion plans. For example, SF Express recently accepted an 8
billion yuan investment by a consortium of state-backed investors. Earlier this
year, a separate group of investors invested 200 million yuan in Quanfeng
Express. Meanwhile, China Post Courier & Logistics has been approved for an
IPO listing while YTO Express expects to list an IPO by 2015.
With an estimated 630 million consumers classified
as “middle class” by 2022, international companies will flock to China. To meet
this demand, domestic express providers will need to improve their supplychains
in order to effectively compete. Not only is the express market a highly
competitive one, it is also fragmented and the likelihood of consolidation is
quite possible as competition heats up.