Delivering value

Any place, anywhere, anyhow

Economics textbooks will tell you that perfect competition – a market with plenty of buyers and sellers – is a desirable state of affairs.

But China’s policymakers aren’t so sure they agree, at least not when it comes to the express parcel business. There, they want to see fewer, more profitable players offering a more reliable service – and they may finally be getting their wish.

Whether it was prompted by government policy or simply by industry realities, China’s fragmented logistics industry is well into the early stages of consolidation.

The major factor last year was a new postal law designed to bring ‘order’ to the market by raising minimum capital requirements for express mail companies (see WiC32). The immediate effect was a 40% price hike from five of the country’s largest express firms (STO, YTO, Yunda, ZTO and TTK). But the changes facing the industry didn’t stop there.

There are currently around 30,000 express companies in China, many of them highly localised couriers known as kuaidi, who can deliver almost anything within a city for a dollar or two.

Most of these operators are now struggling to meet the capital guidelines (registered capital of Rmb1 million if they want to deliver parcels between provinces, or about half that amount to do so within a single province).

The eventual winners in the consolidation process will be much bigger operators. To do that, most companies need to grow quickly, not least as competition in much of the sector is based on having the lowest price and the widest delivery network. The first few companies that build comprehensive nationwide platforms are likely to dominate.

That takes money, and many parcel companies are merging or taking on partners to fund their expansion.

One of the most aggressive new players is HNA Group (the owner of Hainan Airways). In May it bought 60% of TTK Express, one of the oldest and largest privately-owned express mail companies in China. HNA has also recently been linked to offers for major express firms HTKY and Shentong.

“The whole express business is going through a period of turbulence,” an HNA employee told the Southern Metropolis Weekly, “and existing businesses in the market can be easily acquired.”

HNA is not the only firm with grand ambitions. The major multinational couriers like DHL, Fedex and TNT all harbour designs on the China market. As far back as 2004 they began forming joint-ventures and buying stakes in local delivery firms.

But they are also facing competition in express mail from local retailers and manufacturers, as companies like Alibaba, Lenovo and Fosun look to buy domestic couriers.

Higher prices (for now) and the prospect of fewer competitors are making the parcel business look increasingly lucrative. Also promising is the growing popularity of e-commerce (over a billion parcels were sent through the popular website Taobao.com last year).

“In the next five years, the Chinese express mail industry will see 4-5 companies hold 70-80% of the market, just like in the US,” predicts Chen Dejun, boss of Shentong Express.

Keeping Track: In WiC71 we wrote about consolidation in China’s courier industry. This week UPS told the Financial Times that Amazon is using 500 delivery providers in China and that the industry is ripe for M&A. The American firm has also applied for a domestic licence, so as to be able to rollout next day package deliveries. It estimates the Chinese market could see 5 million packages delivered per day. In 2009 UPS delivered 1.2 million packages a day outside the US. (October 1, 2010)

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