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.