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Express Opportunities In ChinaPackaging a Strategy for the International and Domestic Express Delivery Market
byAlexander [email protected]
Justin [email protected]
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CONTACT INFORMATION
Hong KongEd [email protected]
McLeanJustin [email protected]
StuttgartAlexander [email protected]
Originally published as:
Express Opportunities in China: Packaging a Strategy for the International and Domestic Express Delivery Market, by Ed Tse, Justin Zubrod, Alexander Niehues, Simon Gillies, and Paolo Pigorini, Booz Allen Hamilton, 2007.
1
Express Opportunities in ChinaPackaging a Strategy for the International and Domestic Express Delivery Market
Introduction
China is on its way to becoming a global trade
powerhouse—with an economy that is expected
to reach a gross domestic product of USD 4.5
trillion within the next decade. Its huge avail-
ability of cheap labor has already made China a
global manufacturing center, which will continue
to strongly drive import and export transporta-
tion needs over the coming years.
As China strives to further improve the quality of its manufactured products and reliability of delivery, the share of high-value goods as part of the Chinese trade flows will rise further— increasing the need for express delivery service providers, both domestically and internationally.
Because most of China’s trade flows are focused on the United States, Europe, and the Asia Pacific region, global integrators are well-positioned to capture growing express demand in their worldwide networks. With China increasingly becoming an inte-grated part of the worldwide manufacturing process-es, express delivery services will grow in importance to cover the demand for time-sensitive shipments in global supply chains.
Exhibit 1China Foreign Trade Flows (in USD Billions)
Legend:Legend:
Imports in $USbnExports in $USbn% value denotes share of total imports orexports respectively
Imports in $USbnExports in $USbn% value denotes share of total imports orexports respectively
US$29 (8%)$91 (21%)
China ImportsChina Imports
Hong Kong$5 (1%)$68 (16%)
South Korea$42 (11%)$20 (5%)
Japan$53 (14%)$43 (10%)
Germany$17 (5%)$18 (4%)
Malaysia$10 (3%)
Russia$9 (2%)
Netherlands$13 (3%)
China Exports China Exports 14%9%
3%
64%
4%3%
3%
• Plastics in Primary Form
• Crude Oil
• Computers & ElectronicEquipment, Parts
• Machinery & MotorVehicles, Parts
Other
12%9%
68%
6%
Taiwan$41 (11%)
• Steel & Aluminum Products• Iron Ore
• Steel Products
• Computers• Apparel & Textiles
• Electronic Equipment, Parts
Other
• Furniture
2%2%
Source: Statistic Department of Customs General Administration of China (for the first half of 2006)
2
Therefore, it is not surprising that China is the stron-gest developing market in the Asia-Pacific express and parcels delivery sector—showing continuous growth close to 30 percent on average per year. At about USD 4.4 billion in 2006, the Chinese express market has already become a major strategic target for global players.
When China joined the World Trade Organization (WTO), the country experienced a rapid market liberal-ization and modernization as well as rising domestic consumption. As a result, the Chinese express mar-ket continues to offer huge growth prospects for local and foreign players alike – since growth of time-def-inite deliveries are running at about +40% per year. Tremendous growth in foreign trade and direct invest-ments, strong domestic economic development, and state support in massive infrastructure investments create a market environment that offers tremendous opportunities for both domestic and international express companies.
However, despite the investment enthusiasm sur-rounding exponential growth rates, there are still huge chal lenges in doing business in China: Over-
regulation, fragmentation, a weak transport network, and congestion are holding back the industry. There are many risks for western companies attempting to enter the market, although these did not prevent the major global integrators such as UPS, TNT, DHL, and FedEx from establishing a local presence two decades ago.
Despite the large business opportunities, the market is one of the most difficult in which to operate. As it develops further, both domestic and international players need to revisit their strategies to create and maintain sustainable positions that enable them to tap into future expected growth. In light of China’s explosive growth and the full liberalization of the transport sector, the pressure is now on the express delivery providers to understand new strategic imperatives. They need to anticipate the challenges and obstacles that must be overcome to achieve and secure sustainable, profitable growth in the Chinese international and domestic express market.
Exhibit 2China Express Delivery Market (2004-2008) in USD Billions and Major Drivers of Growth
DomesticEconomic
Development
DomesticEconomic
Development
Foreign TradeForeign Trade
Foreign DirectInvestment
Foreign DirectInvestment
MarketOpening andState Support
MarketOpening andState Support
8-10% GDP growth in recent years
Expect 10% average growth of air cargo traffic next 20 years (Boeing)
2001-06 CAGR +30% Import/export volume exceeding $1400 bn p.a.
WTO agreements Closer Economic Partnership
Arrangement (CEPA)
FDI exceeding $60 bn p.a. Outward FDI by Chinese
Enterprises over $7 bn in 2006, growing at 26%
4,83,83,12,51,9
2,61,9
1,41,1
0,9
International ExpressDomestic Express
2008E2007E
7,4
5,84,4
3,52,8
2006
+28%
20052004
Source: Market Research, Booz Allen Hamilton Estimate
3
A. China’s International Express Market
The Growth StoryThe beginnings of the market for express delivery services in China date back to the early 1980s, when the Chinese Postal Administration introduced Express Mail Service (EMS) for international deliveries. At that time, the prospects of the Chinese economy opening up to become something resembling a free market, and China’s eventual accession to the WTO were still far removed from reality. However, the major global integrators such as TNT, UPS, DHL, and FedEx recognized that China presented an opportunity not to be missed. With ever more foreign companies entering China, and the country’s growing awareness
for the international exchange of goods and docu-ments, these “big four” integrators made sure their services were available.
All international companies who arrived in the ‘80s and ‘90s were only able to enter the Chinese market by means of local joint venture partners—forcing international express companies to adopt identi-cal market strategies in the region. All four players chose as their first joint venture partner the state-owned Sinotrans Group, which was the largest player in logistics in China at that time. But in subsequent years, they followed different paths in developing their businesses.
Exhibit 3Major Events and Growth Periods in China Express 1980 to 2006
12 / 2001China
joins WTO
Domestic EMS launched
enters via agencies enters via
agencies
opensretailstores
buys outDTWform JVs with
Sinotrans
enters viaSinotrans JV
enters via agencies
12 / 2005Market opened
to WOFEs
switches JV from Sinotrans to EAS
forms JVwith Sinotrans
operates first direct flight of int’l cargo air-line into China
switches JV from EAS to DTW
renews Sinotrans JV until 2052
cancels Sinotrans JV
first cross-border flightto Japan
launches domestic service
buysout JV
Offers next-day and next-morning svc
launches domestic service
starts Hoauacquisition
2006
2004
2003
2005
1999
2002
1996
1995
1981
1984
1986
1988
1980China Post
launches EMS
Initiation (1980 – 1988)Market Establishment
after first Express Mail Serviceoffered by China Post
Expansion (since 2001)Rapid Market Growth
following China’sWTO Accession
2007
offers directflights to China
startsdomestic air service
Cooperateswith OkayAirways
Source: Literature Search, Company Web Pages
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Market Strategies of the Big Four
As the first foreign express company in China, DHL signed
an agency agreement with Sinotrans in 1981. In 1986, both companies formed the first Chinese international express joint venture (JV), which prevails to this day. In 2003, DHL underlined its strong partnership by purchasing an equity stake of 5 percent in Sinotrans Ltd. Due to its first-in advantage, the DHL/Sinotrans JV now holds the lead position in Chinese international express delivery with about one third of the market. In 2004, DHL was the first of the inter-national integrators to offer a domestic parcel service in China, again via the Sinotrans JV.
FedEx started express opera-tions in China in 1984 on an agency basis and in 1986
entered a JV with Sinotrans, shortly after DHL. After termination of the Sinotrans JV in 1995, FedEx partnered first with smaller EAS International Transportation (now Kerry EAS), and in 1999 switched to the then little known Tianjin Datian W. Group Co., Ltd. (DTW Group). Following these moves to ever-smaller JV partners, at the beginning of 2006, FedEx announced a USD 400 million takeover of DTW Group’s express business, including domestic express assets in 89 locations, thus convert-ing its Chinese operations into a wholly owned foreign enterprise (WOFE). FedEx holds an approximately 20 percent market share of the international express delivery market.
In 1988, UPS followed the same approach as DHL and FedEx and used Sinotrans as a delivery agent to gain access to the Chinese
express market. This was followed by a joint venture agreement in 1996 and equity invest-ments in Sinotrans in 2003. Because of com-petitive conflicts with the DHL-Sinotrans JV, UPS exited the cooperative agreement in 2004. It effectively bought out the existing customer contacts and 23 stations in major cities for USD 100 million in an agreement phased until the end of 2005. Thus, UPS has established its own network in China, which currently serves about 19 percent of the international express market.
TNT Express also entered the Chinese market in 1988, by means of a JV with Sinotrans
that lasted until 2003. Subsequently, TNT took over about 90 percent of the employees and entered into a new JV with a very small partner, Machplus (founded in 1999 and with 800 staff at the time). The company built a network of 25 owned and 50 franchised locations serv-ing about 600 cities across the country. Since 2005, this company also offers domestic ser-vices. TNT is currently the smallest player of the big four with about a 7 to 8 percent market share of the Chinese international express mar-ket.
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Over time, the 'big four global integrators' have cap-tured between about 80 percent of China’s interna-tional express market, absorbing the largest part of the immense market growth into their networks. The incumbent state-owned EMS of China Post, which held 97 percent of the market in 1995, compara-tively stagnated at low single-digit growth rates. One reason is that the early presence of all large integra-tors ensured they were in place when their existing multi-national corporation customers (MNC) entered China. The key factor, however, is the non-competitive international product offering of EMS. China Post got a late start, in 2003, in operating its first few international flights. It largely relies on the Universal Postal Union network of national post operators for international delivery. Delivery times in its exist-ing network are dependent on the individual postal operator’s handling capabilities and are far removed from the next-day time-definite guarantees the large integrators offer for an increasing number of destina-tions.
Competitive LandscapeAs the former incumbent, EMS is working hard to catch up with time-definite delivery services. In May 2004, EMS set up a service with Singapore Post and Japan Post that guarantees time-definite express delivery between China, Singapore, and Japan. EMS also partnered with the TNT Group in offering a
“China Express” international delivery product that serves international destinations via the TNT net-work, providing express delivery to major European centers. In addition, China Post launched a speeded up “All Night Flight” delivery program, which guaran-tees that mail reaches recipients in China’s biggest cities by 10 a.m. the following day.
Competition in the China express industry remains intense, with operators snapping up opportunities in an effort to stay ahead of the competition. For example, FedEx invested USD 150 million into a new hub at the Guangzhou Baiyun International Airport in Southern China, the largest air cargo hub in Asia Pacific. In 2007, UPS will establish an international air hub at Pudong International Airport and plans to open more than 20 new facilities in major Chinese cities during the next two years. TNT has put two new B747-400ERF 100-ton cargo planes into operation that will go into daily service between Europe and China, massively increasing uplift capacity.
Overall, the big four international players are well established in the China international express market and have divided up the market among themselves. Each one offers comprehensive service levels at competitive prices and has partially complementary competencies in serving the European and U.S. mar-kets. None of these players have a major competi-tive advantage nor does EMS have any options for
Exhibit 4China International Express Market Shares (1995 vs. 2006)
Other
97%
6%
30-34%
1%
19-21%
18-20%
2%7-8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1995 2006
19-21%
Source: DHL, Morgan Stanley, Press search, China Economic Review June, 2006; Press Search; BAH analysis
6
breaking out of its primarily regional role. The key for any further market developments, therefore, is the way in which companies operate within China and if and how they set up their domestic delivery net-works.
New Strategic OpportunitiesWith China’s announcement that it would open up the ground transportation market to WOFEs, new strate-gic opportunities arose.
DHL remains the only international express integra-tor that is still operating in a strong JV relationship with Sinotrans—presumably locked in by mutual long-term commitments and management’s belief that the close governmental ties offered by Sinotrans provide a competitive edge. Despite inherent though smaller conflicts of interest between Sinotrans’ Freight Forwarding and 3PL Business with DHL Exel Supply Chain Solutions—acting as competitors in some segments—DHL Express sticks to the joint venture. Annual growth figures of up to 45 percent for express volume and revenue seem to prove that DHL’s strat-egy is the right one.
The other integrators follow the route of higher independence in the Chinese express market, to be quicker in their decision making, gain more control over their operations, and avoid internal cultural con-flicts. FedEx and TNT have followed similar approach-
es after deciding the Sinotrans JV did not fulfill their strategic purposes; both companies chose much smaller JV partners. FedEx cooperated with smaller partners, EAS and DTW, They both offered significant benefit to FedEx’s operations at the time of JV forma-tion but were small enough to avoid dependence. FedEx’s final move was the complete takeover of DTW’s express division in 2006. TNT joined with Machplus, a company so small that TNT had great control over the Chinese assets from the beginning. Since 2003, TNT has effectively operated indepen-dently. UPS remained with the Sinotrans JV until December 2004, when it signed a USD 100 million agreement to take direct control of Sinotrans’ opera-tions in 23 Chinese cities.
The three integrators now operating independently have taken a big step. Although they have gained significant knowledge of the local market and culture through their long phase of cooperation, they are faced with challenges such as more limited network coverage. This has opened a new competitive battle-field— the Chinese domestic express delivery mar-ket.
Exhibit 5China International Express Market Shares (1995 vs. 2005)
97%
40%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1995 2006
3%
Source: “China Economic Review” June, 2006; Lit Search; Booz Allen Estimates
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B. China’s Domestic Express Market
Similar to the international express market, China Post used to be the monopoly in the domestic express delivery market a decade ago, but has been losing significant market share since then. Although China Post is still the strongest player, it continu-ously loses ground to fast growing domestic competi-tors. With the final opening of the express market in 2005, China Post’s remaining “safe” income stream is the state-guaranteed monopoly on deliv-ery of personal mail letters, since now all operators are allowed to deliver business letters. China Post is trying to lobby for new regulation, for example, to ban all express companies in China (other than EMS) from delivering goods that weigh less than 350 grams, but these efforts face pressure from competi-tors as well as the State Council.
Over the last years, with the rapid growth of China express, many new operators came into play in the domestic market. Among the thousands of small to medium-sized companies, the vast majority are local truckers who operate at very low prices and varying (mostly low standard) service levels in the fragmented geographical and regulatory landscape of Chinese logistics operations. The strong protection-ism of local authorities, especially with regard to road transport, put up significant barriers to large expan-sion strategies. Some local operators, however, have found ways to expand profitably in the last decade’s double-digit growth environment. Nonetheless, none of the new emerging local operators captured more than 10 percent of the market, leaving all the players except China Post in very fragmented positions.
Exhibit 6State-owned and Private Players in the China Domestic Express Segment
Type Express Services Network Notes
China Rail Express
State-owned Infrastructure
Domestic express International
transportation and logistics
736 service hubs in 275 Chinese cities
“Door-to-door” service network covers more than 380 Chinese cities
Largest competitor of EMS, more than USD 150 million revenue
Expanding air and road network
China Air Express
State-owned Infrastructure
Domestic express 8/12/24/36/48-hr. service
287 cities 900 domestic air routes
between 129 airports
Founded 1996 by Civil Aviation Authority under participation of all major domestic airlines
ZJS Express
Nation-wide Express
Domestic express 12/24/48-hr. – 3/4/5-day service
Value added services
Internat’l express
>2000 cities and districts, 40 branches
1200 vehicles, 14 rented airplanes
.000 employees
Largest private express company in China, founded 1994 in Beijing
~USD 100 million revenue in 2005, rapidly growing
TTK Express
Nation-wide Express
Domestic express 24/48-hr. service
Internat’l express
500 cities 11,000 employees
Founded 1994, with headquarters in Shanghai
Handles ~200.000 parcels/day
STO Express
Regional Road Express
Domestic express in Zheijang and Jiangsu
> 400 delivery points > 2,000 vehicles 10,000 employees
Founded in Shanghai Handles ~200.000 parcels/day
SF Express
Regional Road Express
Domestic express in Guangdong, plus Hong Kong
> 100 cities 20 provinces
Founded 1993 in Guangdong
Kerry EAS
International Logistics
Group, 3PL
Domestic 12/24/36/48/72-hr. service and internat’l express
> 1,100 cities, 100 branches
EAS is a former JV partner of FedEx, taken over by international Kerry Group in 2005
CNEX/Jiaji
Integrated Logistics, 3PL
Express delivery 1000 service points > 3.000 trucks, of which
1.200 are long-haul 10.000 employees
More than USD 100 million revenue; generally 3PL but references to large share of Express
DTW Group
Integrated Logistics, 3PL
Domestic express International
express in FedEx JV
144 stations in JV with FedEx
89 domestic locations previously not in JV
Former FedEx JV partner, all express business (even non-JV domestic) bought out by FedEx early 2006
Hoau Group
Freight + Package Road
Transport
Package delivery 1.100 depots 56 hubs 3.000 trucks 12,000 employees
Largest private road network in China
In negotiation with TNT for takeover to be completed by mid 2007 (for 135 Mio. USD)
Source: Literature Search, Company Web Pages
8
Market Strategies of Selected Domestic PlayersEstablished in 1993, the China Railway Express (CRE) rapidly
expanded its service to more than 300 cities in China. In 2003, CRE invested in its own trucks and increased the number of sorting and logistics facili-ties by an additional 12 cities from the original single one in Beijing. In 2004, CRE gained access to more than 60 domestic air routes through airline partner-ships, and thus is able to provide faster service across the country. Currently, CRE is serving more than 380 cities. With an express revenue of more than 150 million USD and a domestic market share of approximately 5 to 10 percent, CRE is the second largest provider of domestic express services in China after EMS. Despite having some limited flexibil-ity in pricing and market approach because of direct control by the Chinese Ministry of Railroads (MOR), CRE has established itself as a premium provider and is investing heavily in infrastructure and IT to ensure growth and reliable delivery.
China Air Express is another state-owned provider of express servic-es. It was founded in 1996 under
direct control of the Civil Aviation Administration of China and has access to the majority of Chinese air-lines and airports. It was one of the first companies in China to offer time-definite delivery via its network of more than 900 domestic air routes between 129 airports. The company is covering about 280 cities and starting to expand local road transport distribu-tion centers.
Of the private companies, the larg-est pure-breed express operator is ZJS Zhai Ji Song (ZJS) Express.
Founded in 1994 in Beijing, ZJS offers a number of flexible express services with delivery times between 12 hours and 5 days. Its overall network covers 2.000 districts and cities and around 40 branch com-panies. ZJS is also offering a number of value-added services such as insurance, payment collection, and packing and storage service. From a backbone of airline-connected major centers, the network has been developed down to smaller municipalities cover-ing more than 1,000 cities. Revenue has reached about USD 100 million in 2005, with year-on-year growth peaking at about 70 percent in 2003/2004. According to the ambitious company leader, Chen
Ping, “We aim to enter into the stock market, name our own flights, board on the Top 500 companies list, and become the most famous domestic express company in China.”
The second private express com-pany that operates across China
is Tian Tian Kuai (TTK) Express. Based in Shanghai, its network covers about 500 cities and reaches remote areas such as Inner Mongolia or Tibet, but the main focus is on the Zhujiang River Delta, the Yangtse River Delta, and offshore Bohai Gulf regions. In 2004, TTK’s revenue was about 10 percent lower than that of ZJS. Like ZJS, TTK also offers an option for international express delivery. It is interesting to note that these two companies have the most profes-sional and complete English-language web presence of all Chinese operators reviewed in this paper.
Of the more regionally road-based express companies, examples of sizable players are SF Express and STO Express. They offer a very
dense transportation network in their region at com-petitive prices, without having the far-reaching avia-tion interface that allows them to offer nationwide services. Their competitive advantage is based on their local connections.
These companies are quite sizable; STO Express, for example, delivers 200,000 pieces per day, which is on the same order of magnitude as TTK. However, as their network is exclusively road based, expanding to much larger regions would require changing the mode of oper-ation; thus in their current form, these enterprises are limited to the growth of their regional markets.
In addition to exclusive express delivery providers, there are numerous integrated logistics firms that also provide domestic time-definite services. The most prominent of these are shown in Exhibit 6. They mostly focus on 3PL services and are generally not considered as core competitors in the Chinese express market. Of special interest are the DTW Group and the Hoau Group, which are being bought by FedEx and TNT, respectively, to further strengthen their footprint in the Chinese transport market.
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Building the Domestic Express Business in ChinaAt the beginning of 2006, immediately after China has opened the market following WTO accession requirements, all four large international integra-tors are poised to expand in the Chinese domes-tic market with full steam. Every one of them has announced that they plan to actively participate in the massive growth that is expected for years to come. They have set up legal structures and built or bought a beachhead into the market, but none of them has any sizable market share yet.
The players that have so successfully dominated China’s international express market with their prod-uct offerings, have chosen quite different ways to approach the domestic market.
DHL, building on the long-standing joint venture relation-ship with Sinotrans and thus not waiting for the market opening for WOFEs, was the first international integra-tor to enter into the domestic express market in 2004 - offering some 70 domestic destinations, reaching already about 95% of the domestic population. This move enabled DHL to fully leverage its existing China network to better use the “less-than-truckload” (LTL) pick-up and delivery fleets and increased its participation in domestic trade. Nonetheless, some hurdles remain:
DHL’s prices are currently about 25 percent higher than those of China Post. With its acquisition of 17 domestic airfreight licences in 2007 (e.g. operating out of major cities such as Shanghai, Beijing, Dalian and Tianjin), DHL is now the only one of the ‘big four’ that offers a domestic airfreight express services in China. Going forward, DHL plans to invest about $215 million in express centers, new branches, express logistics centers and strategic spare-parts centers.
FedEx is in the process of fully acquiring the express operations of its present joint venture partner DTW. This process will be concluded in the first half of 2007. In addition to its current JV operations, FedEx will have full control of DTW’s domestic express network in 89 cities, which DTW started to build in 2002. FedEx plans to open up another 32 branch offices in China – reaching a total of 58 establish-ments that covers a network of 300 cities and prov-inces by end of 2007.
UPS was the first western company to announce the change to wholly owned operations. The buy-out of the Sinotrans JV in early 2005 gave UPS full con-trol over its operations in China, but did not include
Exhibit 7Overview of the Big Four International Express Players’ Strategic Footprint in China
Has set up an effective franchising system since 2003
Expansion of cooperation with China Southern Airlines
Hoau Acquisition underway, freight/parcel company serving over 1,100 locations
Opened first two express retail centers in September 2006
Moved its China HQ from Hong Kong to Shanghai in July 2003
Departed Sinotrans JV for USD 100 million
Investing USD 500m into new hub at Shanghai’s Pudong airport
In Jan, 2006, FedEx bought out DTW for USD 400m
May move its AP express hub from the Philippines to Guangzhou in Southern China
Expansion of Air Freight business with 17 domestic destinations
Raising stake in Air Hong Kong to 40%, Cathay Pacific holding 60%
Outlets to increase from 50 to over 70
USD 200m+ infrastructure investments, expanding Pudong, Guangzhou and Hong Kong hubs
Strategic announcements
China is the focus for TNT Express at the moment: “We aim to establish our second home market in China.”
“Brown Initiative” aims to have only direct operations; no JV or agents in the future to ensure 100% UPS brand.
China is the only country for which FedEx has established a separate headquarter, showing its importance as a market.
DHL has the longest history in China and continues to build its success on the proven Sinotrans joint venture.
Key Fact
> 3,000 (Feb 2007) > 3,500 by the end of 2006
6,500 in APAC total > 6,000 ~ 9,200Staff
1988 via JV with Sinotrans 1988, JV with Sinotrans in 1996
1984, JV with Sinotrans in 1986
1981, JV with Sinotrans in 1986Year of market entry
Effectively WOFE since 2003
>600 cities, 25 owned + 50 franchise facilities
Sinotrans JV since 1986
318 cities, 56 outlets, 163 stations,
WOFE since Jan. 2006 WOFE since Jan. 2006 Type of presence
330 cities, covered by 75 facilities
> 220 cities, to increase by 100 in the next 5 yearsNetwork coverage
Source: Bear Stearns, Reuters, FT, Morgan Stanley, Company Web Pages, Booz Allen Estimate (based as of end 2006)
10
any domestic business. In July 2005, the company announced it would offer domestic next-day service between 23 metropolitan areas, which according to UPS generate about 80 percent of China’s interna-tional trade. In August 2006, the company opened two retail stores in Shanghai’s business district, in a move to position its product offerings with profes-sional services industries. Currently, UPS has 4.000 employees in China. Being the express & logistics sponsor for the Bejing Organizing Committee for the Olympic Games is expected further bolster brand identity in the region.
TNT is the most ambitious in setting targets for China, with its CEO, Peter Bakker, stating in 2005 that TNT’s aim was “becoming market leader in the Chinese domestic express market.” To this end, TNT has, in addition to its owned stations, opened a fran-chising system to quickly expand its branch network. TNT claims its 25 owned and 50 franchised facilities cover more than 600 cities, which is a higher number than quoted by any other foreign operator. TNT’s sec-ond strategic move is the takeover of Hoau Group, which is assumed to operate the largest private road transportation network in China. If the negotiations succeed, TNT will control a massive infrastructure of 3,000 trucks and almost 1,200 depots across China and plans to differentiate itself from the other com-petitors by operating a comprehensive road transpor-tation network across Southeast Asia. In the long-term, TNT expects to build up 1.100 depots in China.
Different Routes to Capture Domestic GrowthOf the big four integrators’ strategies, the most obvi-ous differentiating factor is the way they expand their business:
n Acquisitions (FedEx and TNT)
n Organic growth (DHL’s Sinotrans JV and UPS, par-tially)
For companies entering a foreign market, acquisitions are often a natural route for quickly gaining market share. In China, however, mergers and acquisitions ( M&A) have little history, because Chinese culture values “blood authentic” relationships in business—only organically grown branches are considered as really belonging to a company. In the case of the FedEx and TNT takeovers, the dangers seem manage-able because both companies have already estab-
lished a strong presence and local management in China. The FedEx acquisition of DTW’s express business can be seen as a natural expansion of the previously existing joint venture, and FedEx has taken care of building up its local workforce: More than 80 percent of the FedEx-DTW JV managers are Chinese citizens, and FedEx was ranked by Hewitt Associates in 2005 as among the Top Ten “Best Companies To Work For” in China.
TNT’s acquisition plans follow a different strategy than that of FedEx. Hoau is not a direct competitor in the express market because it is mainly a trucking company and has no previous immediate relationship to its new owner. Thus, TNT will focus on maintaining the key performance indicators (KPI) of the infrastruc-ture and transportation service Hoau can provide its express business. China’s administrative structure could present an obstacle: as local protectionism still prevails in many administrations, a foreign-owned company could suddenly face difficulties such as excessively long handling times for crossing districts. Because this is fundamentally the same issue facing a company from a different city or province, Hoau, with its existing nationwide network will have devel-oped strategies and contacts to operate in this envi-ronment.
In general, an acquisition strategy in China will be challenging. Because of the high market fragmenta-tion there are few known targets and limited data available to conduct a detailed due diligence. Thus, only small acquisitions by service and/or geography are possible, which result in incremental growth instead of a large leap forward. Rolling up and inte-grating regional express players into an existing net-work and organization will be very difficult. Political interference is another hurdle to overcome because the Chinese government will protect state-owned enterprises and intellectual property.
11
When considering growth via acquisitions, an interna-tional player needs to consider six major evaluation criteria relevant to a successful integration:
1. Potential to fully acquire the target or at least obtain a majority stake
2. Brand reputation and awareness in China
3. Geographic attractiveness (domestic versus inter-national)
4. Financial attractiveness/soundness of operations and customer base
5. Product/service mix, vertical industry coverage
6. Target relationship with local government officials
Critical Success Factors in China Domestic Express
A. Geographical ConcentrationThe three costal regions, Bo Hai Bay, the Yangtze River Delta, and the Pearl River Delta, have 30 per-cent of the total population and represent about half of China’s gross domestic product (GDP). These areas attract 75 percent of foreign direct investment and 84 percent of all international trade volumes. These are also the areas where the big four have focused their operations, generating the majority of their express revenue along the coastal regions.
Over the next years, the demand in the costal regions for express delivery of high-value products will continue to outgrow other areas in China. Since
transportation networks are well established already, economies of scale will drive down operating costs and offer competitive prices that are necessary to be successful in the domestic express market and pro-vide a strong footprint to expand to the (less devel-oped) western regions of China.
B. Price-Service CompetitivenessWhat will be the right strategy for success in this highly competitive and fragmented environment? The success of a domestically grown company like ZJS shows it is possible to build a competitive nation-wide infrastructure. But the ZJS example also shows the difficulties of surviving the competition in China. The company generally handles consignments in the
range of 5 to 100 kg, with a typical size of 30 kg. A price comparison shows that CRE is offering 24-hour service for 5 kg and 40 kg for a lower price than ZJS’s 48-hour product. In mid-2005, the vice presi-dent of ZJS, Xiong Xingming, said that in the face of rising fuel prices, increasing logistics costs, and “cut-throat competition,” margins had dropped down to 5 percent from the previous 10 percent.
Although FedEx and UPS currently do not offer domestic express services between Beijing and Shanghai, DHL’s domestic delivery prices seem to be significantly higher than other players’ express ser-vices.
Exhibit 8Hurdles to Achieve Growth in China Via Acquisitions
Political Interference Intellectual Property Protection
Limited Resources Limited Players Information
Fragmented Market
Limited reliable data Unique accounting
methods in China
All potential companies <5% market share
Only regional coverage
Understanding of regional conditions only by locals
Unfulfilled staffing needs
Risk of know-how leakage Need to retain local
employees
Government protects state-owned companies
12
The only way to justify higher prices is service and quality levels. The Chinese logistics market can be characterized with “three Ls”: Low Skills, Low Levels, and Low Prices. This is typically true of operations across most of the more than two million small local trucking companies in China, where about 80 percent of trucks have no solid body but nylon covered beds. Overloading is common practice, and trucking and warehousing workers often carelessly handle pack-ages, leading to high damage ratios. In a 2005 sur-vey among 3PLs in China, “Quality of service,” “Data tracking,” and “Cargo security” were among the most frequently named challenges (topped only by
“Government regulations”). For the express business, timeliness of delivery is of similar importance to physical integrity of shipments.. In this area, the mar-ket leader EMS is behind many of its private competi-tors, having pushed the on-time delivery of domestic EMS mail items to more than 90 percent.
The Chinese market participants have recognized the importance of offering high-quality services. In addition to verbal commitments and money-back guarantees, many companies heavily invest in IT
infrastructure to ensure the smooth flow of goods. For example, CRE is featured by Intel as a showcase customer for wireless mobile applications in tracking shipments. In this area, the international players cer-tainly have some expertise to bring into the market, but the large Chinese companies are already quite advanced in optimizing their process flows.
C. Staff Resources and Expertise Another key factor for high service quality is attract-ing and maintaining a skilled and loyal labor force. This is even more important in China than in other countries, because the market is growing more rap-
idly than education can provide skilled professionals: China will lack about one million logistics profes-sionals by 2010 and growth targets of the big four require about a ten-fold addition of new resources over the next two to three years. Consequently, numerous companies follow a strategy of “up-skill-ing” and retaining staff. For example, FedEx is offer-ing each employee up to USD 2,500 in tuition reim-bursements for training and is following a strategy of promoting internally—more than 90 percent of man-agement positions in Asia are filled by people who
Exhibit 9Geographical Areas of Growth for High-Value Express Delivery Services
Bo Hai BayBo Hai Bay
Population Population
GDP GDP
12%12%
18%18%
Foreign Investment Foreign Investment
Int‘l Trade Int‘l Trade
21%21%
19%19%
Yangtze River DeltaYangtze River Delta
Population Population
GDP GDP
11%11%
20%20%
Foreign Investment Foreign Investment
Int‘l Trade Int‘l Trade
35%35%
30%30%
Pearl River DeltaPearl River Delta
Population Population
GDP GDP
6%6%
10%10%
Foreign Investment Foreign Investment
Int‘l Trade Int‘l Trade
21%21%
35%35%
Source: Bear China Statistical Year Book; Booz Allen Hamilton Analysis
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began their careers in non-management positions. TNT has built a “TNT China University” in cooperation with a Shanghai management school and is one of very few foreign enterprises offering a comprehensive internship program. In TNT’s franchising system, the members are enrolled into a specific internal train-ing program to build their skill base. This type of a global-background education cannot be matched by the much smaller Chinese companies. It may indeed
be a key attraction for employees in a country where, according to a recent survey, more than half of the students leave university with the feeling of never having learned “anything practical.”
D. Local Network and LicensesHigh complexity for the players in the Chinese par-cel delivery market arises from the complicated and often inefficient legal procedures, which are strongly driven by local administrations. For road transport, which is crucial for the domestic business, legislation exists at the national, provincial, and local level; local protectionism often leads to difficulties for non-local vehicles and ranges from high tolls and lengthy regis-tration procedures for entering a city to close super-vision and heavy-handed fining for minor breaches of regulation. Some downtown areas are closed for trucks between 7 a.m. and 7 p.m. Another critical
success factor to ensure future growth is to obtain the relevant operating licenses to be able to offer international and domestic express services.
In addition to legal difficulties, the security situation in some areas of the country mandates escorting trucks to avoid loss of goods and vehicles, which drives up costs, especially for high-value express delivery. In this type of environment, it is essential to
have a deep understanding of the various factors and a broad network of local connections. DHL enjoy a certain advantage in this area, with its strong JV part-ner Sinotrans and 18,000 employees. If TNT does a good job of managing the Hoau integration, that com-pany’s wide-spread road transport network may prove to be a valuable asset in the same respect.
E. Vertical Industry FocusTo achieve profitable growth in the China market, express delivery players need to concentrate their efforts on sizable industry verticals that offer a good economic delivery model in terms of both pick-up and delivery costs, which are influenced by delivery times and consignment weight. Whereas front-door, low-weight parcels offer a high degree of automa-tion (e.g., electronics, computing, and retail industry) and thus keep operations costs to a minimum, there
Exhibit 10Examples of Domestic Inter-city Express Delivery Prices of Major Players in China
Price for a single package from Beijing to Shanghai (USD; Exchange Rate of Sep 07, 2006)24 hrs Delivery 48 hrs Delivery
0.5 kg 5 kg 40 kg 0.5 kg 5 kg 40 kgDHL 2kg up (14.40) 27 170 40 40 78
FedEx currently no Domestic serviceUPS currently no Domestic serviceTNT 5,30 11,70 8,80 8,80EMS 6,30 11,30 55 2,50 9,30 62CRE Cargo, min 5kg 11,30 25 No Service (only 3 days)CAE 45 54 161 4,40 13 101ZJS 18 18 43 14 14 35TTK 10 19 98 1,30 5,30 41STO No Service (min 3 days)SF No Service 2,50 7,60 52
KEAS 28 39 121 3,10 14 35DTW 4,10 10 58 4,10 10 58
Source: Booz Allen Hamilton Market Research; based on Full-Rate Card Quotes
14
might also be opportunities in the more heavy-weight, back-door business (e.g., automotive, machinery, and equipment industry) because delivery density tends to be higher due to consolidated consignment ship-ments.
Looking at the growth figures across some selected industries that require time-definite express deliver-ies, most sectors in China show above GDP growth, especially the electronics and computing and the automotive and transportation industries. These fast growing industry verticals offer an attractive segment
to further expand local operations as customers require nationwide, expedited transportation services at high quality, but also rely on international coverage (e.g., for overseas on-time deliveries). Players with additional supply chain logistics service—like the big four—should be able to differentiate themselves and move out of the low-cost priced market by focus-ing on time sensitive verticals that explicitly ask for value added services such as after-market logistics capabilities, inventory management, and other 3PL solutions.
Conclusion
Looking at the development of China’s GDP and its foreign and domestic trade volumes, it is clear that the country currently offers the major growth market for express delivery services worldwide. Such growth will probably only be matched by a similar evolution in India. This has been clearly recognized by the big four global players in the industry, namely DHL, FedEx, UPS, and TNT. Consequently, all of them are pursuing aggressive growth strategies in the region.
In the international market, the global players have
been quite successful in using their existing net-works and multinational customer bases to divide the market mostly among themselves. The only sig-nificant Chinese competitor is China Post’s EMS ser-vice. Similar to postal operators in other countries, EMS offers a product that cannot directly compete with the comprehensive services of the integrators, and therefore is viewed as filling a limited market niche in China’s international express segment. Looking forward, we do not expect any major shifts
Exhibit 11Required Enterprise Licenses and Certificates for International and Domestic Air Express
XXEnterprise Legal Person Business License
XImport/Export Express Operator
XCustoms Supervised Export Warehouse Certificate
XImport Export Quarantine Agent
XQuarantine Inspection Declaration of Import/Export Express Operator
XInt. Freight Forwarding Enterprise Certificate of Approval
XXPostal Entrustment
XClass 1 Cargo Sales Agent
XAir Express Permit
XCustoms Declaration Agent Certificate
XCustoms Bonded Warehouse Certificate
XXEnterprise Establishment License
Domestic InternationalEnterprise Licenses and Certificates
Source: Booz Allen Hamilton Market Research
15
driven by developments within the market; changes will primarily result from global strategies or from the domestic business the integrators build—a strong domestic market position may lead to synergies for their customers, but overall the links between inter-national and domestic express operations are rather small.
In the domestic market, the rapid growth (which has eroded the previous postal monopoly) has so far been captured by a multitude of fragmented small players, some of which have shown the potential to build decent market positions. The global integrators have entered this market recently and are now in a similar position to many of the much smaller local players.
The key success factors in the domestic express market are price competitiveness, service quality, staff expertise, and local connections. Along those dimensions, it should be noted that a number of strategic initiatives may in the end decide ultimate market success. Provided below are some examples of these initiatives:
n Brand Marketing: UPS is currently showing the most consistent approach. Following the so-called “Brown Initiative,” the company is committed to operating only on fully owned assets, explicitly excluding any joint venture or agent operations to ensure a clear
corporate identity is carried in each customer con-tact. At the same time, UPS is carrying its brand to the public in its newly opened retail stores and via sponsorship of the 2008 Beijing Olympics, for which UPS is the designated logistics partner
n Service Differentiation: Targeting very specific cus-tomer segments is one way to maintain profit mar-gins in the low-price Chinese market. An example for this is TNT’s “Clinical Express” product for the clinical trial diagnostics market. Even though there
Exhibit 12Comparison of Economic Express Delivery Models Across Different Industry Verticals
-10%
-5%
0%
5%
10%
-30% -20% -10% 0% 10% 20% 30% 40%
1) Difference in % vs. weighted average across all industries
Average Weight per Consignment higherlower
late
rea
rlier
Del
iver
y Ti
me
1)
Automotive
Retail
Trans-port
Wholesale
Metal Products
Building & Construction
Chemical
Electronics & Computing
Machinery & Equipment
Paper, Publishing& Printing
Professional Services
Pharma / Healthcare
Food, Beverages& Tobacco
Textile
Public Sector
OtherServices
Financial Services
Source: Booz Allen Hamilton Market Research
13 -14%
Textiles & Apparel
8-9%
Automotive & Transport
Consumer Products
Electronics & Computing
9-10%
12 -13%
Ø China GDP
Exhibit 13Estimated Growth of Selected Industry Verticals in China
Source: WTO, Global Insight, China Statistics Yearbook; Booz Allen Hamilton Estimates
16
are many labs in China, for special examinations valuable specimens often have to be transported to diagnostic centers or even overseas to such places as the United Kingdom. This kind of transport was often carried out by lab staff personally carrying the samples on passenger flights. With “Clinical Express,” TNT takes care of properly handling the sample, which can be quite lucrative —a package to Europe that would normally have a USD 400 value could end up costing USD 2000!
n Cooperation: Many cooperation models have been tried in the Chinese market. In 1999, for example, FedEx partnered with Kodak photo stores to serve as pickup and delivery points. These stores form a nationwide network of more than 8,000 locations across China,. TNT has a strategic partnership with EMS, employing the nationwide network of postmen to deliver its parcels, as well as a code sharing agreement with China Southern airlines. Very little information about these agreements is available after the initial announcements, leading to the assumption that they were not successful. The reasons for this are unclear because cooperation, especially between a local player with a strong last-mile transportation infrastructure and a global play-er with the international network, seems to be quite natural, although it is possible that the cooperation model is simply overshadowed by the next option.
n Selected Acquisitions: All private players in the Chinese logistics market are very small compared to the global integrators. Instead of cooperating to deliver a service, it is an even more straightforward choice to directly buy the smaller partner, as UPS and FedEx did when they acquired their JV partners or TNT did in its takeover of Hoau group, which as a local infrastructure provider ideally offers the “last mile” component to TNT’s express product. While some of the acquisitions may not add significant operational assets and capabilities, they can help build the customer base and add volume into the acquisitions network.
At the moment, no single operator has shown a significant competitive advantage that puts the com-pany at the top of the pack. Success is and will be defined by a multitude of key success factors that are required to tap into the growing domestic express market. It might be possible that some local play-
ers like CRE and ZJS, with their greater experience in Chinese operations, will grow their positions to be dominant in the market. On the other hand, the for-eign international integrators with their global reach and financial power may still decide the race in their favor. The opportunity is there—now it needs to be captured!
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