After expanding in the European continent, the world’s top logistic companies are now making their way into the big Asian markets. According to the recent release by China’s State Post Bureau, around 260 companies were granted license to operate in the domestic express market including global giants like FedEx Corporation (FDX) and United Parcel Service, Inc. (UPS).
Business approval in the Chinese domestic express domain not only represents a milestone in business expansion for carriers like FedEx and UPS but also signifies the growing demand in the emerging markets.
FedEx and UPS, both remain established players in the Chinese international express market. FedEx started its international operation in 1984 followed by UPS in 1988. According to market reports, FedEx and UPS currently hold substantial market positions in the international segment with share of approximately 20% and 19% respectively.
Including other big players like DHL Express and TNT Express, these international companies only dealt in the import and export business of China with other countries.
To date, the top four carriers (DHL, FedEx, UPS and TNT Express) remain successful in grabbing a large portion of international business from predominant regional players like EMS of China Postal Express & Logistics Co., Ltd. According to market studies, these international freight carriers dominate approximately 80% of the international business in China given their advanced freight solutions and global reach.
However, the domestic express business in China has so far been captive to state-owned and private players only. EMS of China Post continues to be the market leader in domestic arena joined by peers like China Rail Express, China Air Express, ZJS Express, SF Express and STO Express.
In 2009, DHL made an attempt to enter the domestic market by acquiring three Chinese express companies. But the efforts remained unsuccessful and the company suffered substantial financial losses given intense price competitiveness and stringent regulation that banned international carriers from entering domestic markets. As a result, DHL backed out of its Chinese domestic presence by selling back these companies in 2011.
Presently, the express delivery business in China is registering rapid growth and is considered as the third largest market for express services. According to China Express Delivery Industry Report 2011, business revenue from this industry surged 30% year over year to CNY53.14 billion and volumes grew over 50% to approximately 2.52 billion. A large part of the growth can be attributed to domestic transactions that grew substantially.
According to the industry report, cross region revenues were up by approximately 37% and inner-city express business revenue increased 58% year over year compared to international growth of 4.9%. The primary contributor to this boom is the aggressive growth in Chinese e-commerce market.
Studies project that the e-commerce biz has grown leaps and bounds with CAGR of 90% over the past five years. China registered approximately 150 million online shoppers, and with Internet-user population of approximately 450 million the e-commerce business is only expected to grow, propelling the express delivery business. According to State Post Bureau of China, by 2015, the express industry is estimated to hit annual sales of CNY143 billion.
Despite having a large pool of domestic carriers (approximately 7,500 firms) the market demand for freight services remains underserved with the rising number of customer dissatisfaction on service offerings. With maximum daily volumes of approximately 18 million, package delivery companies are facing difficulties in providing adequate service levels. As a result, opening doors for more carriers into the Chinese market remains a sound strategy to meet the surging demand for domestic package deliveries.
Given China’s position in the express delivery market, we believe the decision to move East by these freight carriers remains positive in terms of revenue accretion as well as market share gains. Since China is a highly fragmented market with a large number of existing domestic carries, we expect successful penetration of these carriers can only be assessed over the long term. Further, we believe fierce pricing competition at the domestic level can restrict growth for the new entrants.
How far these global giants will be able to repeat their international success in the domestic market is something to watch out for. Whether they will play a fair game through organic growth or repeat their European strategy of acquisition to benefit from the existing set up is something to look forward.
Currently, we maintain long-term Neutral rating on FedEx and UPS. For the short-term (1-3 months) these stocks hold a Zacks #3 Rank (Hold).
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