Leading package delivery companies
United Parcel Service, Inc.
) received permits to trade in express-package business within
While FedEx received approval for operations in eight cities
including Shanghai, Guangzhou, Shenzhen, Hangzhou, Tianjin, Dalian,
Zhengzhou and Chengdu, UPS got access to five cities comprising
Shanghai, Guangzhou, Shenzhen, Tianjin and Xi'an.
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
FedEx and UPS, both are 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
Like other big players, namely, 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)
have succeeded 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 by 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 ever increasing 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 carriers, 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 to.
Currently, we maintain a long-term Neutral rating on FedEx and
UPS. For the short-term (1-3 months) FedEx holds a Zacks #3 Rank
(Hold), while UPS has a Zacks #4 Rank (Sell).
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