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In China’s package delivery market, smaller is better

July 13, 2012

SHANGHAI: China’s 35,000 express delivery companies can ship packages hundreds of miles for less than the cost of a standard US letter, pricing out global players such as FedEx and UPS that control just 3% of the fast-growing market.

Backed by an e-commerce boom, China’s express delivery market more than doubled to US$13 billion in revenue in the five years to 2011, and is expected to overtake the US$70 billion US market to become the world’s biggest within two decades.

But with so many local companies vying for business, a crushing price war that has already driven Deutsche Post DHL out of the domestic market may trigger a massive wave of consolidation that eliminates thousands of small firms.

“You can ship from Shenzhen to Guangzhou a pound of barbecue pork for 2 or 3 renminbi (31-47 US cents),” Jerry Hsu, Asia-Pacific head of DHL Express, told Reuters, referring to the two southern cities that are 730km (454 miles) apart.

“We want to be in China… but is it worthwhile for our name to get involved in that kind of movement?” Hsu said.

The US Postal Service charges 45 US cents to mail a standard domestic letter, and express package delivery there typically costs more than US$10.

Size is normally an advantage in China, where large state-owned companies dominate industries from banking to energy. In express delivery, however, smaller has proven to be better.

The local companies deploy an army of package-delivering bike couriers who zip through narrow, traffic-snarled city streets that are too jammed for trucks to navigate quickly.

“The local couriers don’t wear uniforms, drive nice trucks or have fancy gadgets that those at foreign firms have. But they still get the job done,” said Max Henry, a Shanghai-based expert on China’s supply chain. “The Chinese are very cost-aware.”

DHL, Europe’s biggest mail and express delivery group, will open its North Asia hub in Shanghai on Thursday to ramp up international shipments to and from China, one year after it pulled out of the domestic Chinese market.

DHL, FedEx Corp and United Parcel Service Inc are among the foreign players that still account for the bulk of international shipments to and from China.

Quality control

The rise of local privately run firms such as Shentong Express and S.F. Express threatens even China Postal Express, the largest Chinese firm in the domestic delivery market. China Postal, the operator of the Express Mail Service (EMS), has seen its domestic market share by volume fall to less than a third last year from near 60% in 2006.

China Postal plans to raise US$1.6 billion through a Shanghai initial public offering to help fund expansion of its logistics centres, warehouses and delivery network, although the timing of the IPO is uncertain as capital markets wobble.

China Postal, FedEx, and UPS representatives in China declined to comment for this story.

Some industry watchers say the next phase of development will see a move towards reliability, service and specialisation instead of low cost. That will weed out many of the smaller companies and benefit the larger ones, including foreign firms.

Xu Yong, chief consultant at China Express Consulting, said industry consolidation could result in as few as a handful of major couriers, most likely including S.F. Express and EMS.

“Others will be integrated into larger ones and more focused on certain segments, such as frozen seafood, cosmetics and pharmaceutical delivery,” he said. “Our estimates are based on what we see in the United States and Europe, where only a handful of major couriers exist.”

The China unit of Japanese logistics firm Yamato Holdings Co Ltd, which started its delivery service in Shanghai in 2010, is banking on the sector moving more upscale.

“As people’s incomes increase, so will their demands. We are already getting a sense that people in Shanghai want better-quality products and services,” said Minoru Noda, chairman of Yamato (China) Transport Co Ltd, adding that the firm was looking to expand city by city.

A move up the quality ladder might also lure DHL back into the market some day, Hsu said. But he cautions that the path to success will not be easy.

“You asked me how I look at the other players? Good luck,” he said.



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