FedEx, UPS Gain Only Partial Access To China’s Domestic Express Delivery Market
FedEx (NYSE:FDX) and UPS (NYSE:UPS) have been granted partial access to operate in China’s fast growing domestic express delivery market. [1] The State Postal Bureau (SPB) of China announced that FedEx, which has a much greater presence in the country compared to UPS, has been allowed to operate in eight cities, while UPS has been allowed in five. The domestic express delivery market is currently dominated by state-run China Post and other home grown players, and both FedEx and UPS will need an all-China permit to compete effectively against these leading local players. Over the long term, complete access to China’s domestic express delivery market can add significant growth to the top lines of both these companies.
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Partial access to China’s domestic express delivery market
FedEx currently provides intra-China deliveries in nearly 400 Chinese cities through several joint ventures. It had applied for an all-China permit to run its operations without depending on partnerships and thus drive up its profitability, but it received approval to operate in eight cities only. These include Shanghai, Guangzhou, Shenzhen, Hangzhou, Tianjin, Dalian, Zhengzhou and Chengdu. While UPS, which currently does not have any partnerships with Chinese companies to cater to the domestic express delivery market, received approval to operate in five cities, including Shanghai, Tianjin and Guangzhou. In addition, both the companies have not been allowed to carry letters in their express delivery operations.
The approvals are believed to have been driven by China’s commitment to allow greater access to its markets to foreign companies under its World Trade Organization (WTO) obligations.
China’s domestic express delivery market
China’s domestic express delivery market, though much smaller in size compared to the U.S., is expected to grow at 20% each year over the next two decades. And, FedEx and UPS, both of which are registering marginal growth in developed markets of the U.S. and the E.U., are eying greater shares of the Chinese market to add to their growth. The Chinese market is presently dominated by state-run China Post, SF Express and other home-grown players. And it is also skewed heavily in favor of the low-end segment, which delivers using roadways and railways and not airways, and offers price advantages to customers. On the other hand, FedEx and UPS are expected to start their services catering to the high-end market, which delivers through air operations and is relatively more profitable. However, on a cautionary note, DHL, which started its operations in China’s domestic express delivery market in 2009 by catering to the high-end market, was forced to exit the country by 2010-end after suffering losses.
Thus, at present, the challenge for FedEx and UPS is double-fold: competing against established players through a limited geography as well as against the dominating low-end segment. And for these multinationals to compete effectively with local players and to generate significant profits from this market, they will need an unrestricted, level-playing field with the current market leaders.
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Notes:- FedEx, UPS Get a Toehold In China’s Express Delivery, September 10 2012, online,wsj.com [↩]