by
Alexander Niehues
[email protected]
Ed Tse
[email protected]
Justin Zubrod
[email protected]
Express
Opportunities
In China
Packaging a Strategy for the
International and Domestic
Express Delivery Market
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Justin Zubrod
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.
Alexander Niehues
1
Express Opportunities in China
Packaging 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 availability of cheap labor has already made China a
global manufacturing center, which will continue
to strongly drive import and export transportation needs over the coming years.
Exhibit 1
China Foreign Trade Flows (in USD Billions)
Netherlands
$13 (3%)
Germany
$17 (5%)
$18 (4%)
4%
3%
3%
3%
9%
64%
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 integrated part of the worldwide manufacturing processes, express delivery services will grow in importance
to cover the demand for time-sensitive shipments in
global supply chains.
South Korea
$42 (11%)
$20 (5%)
Russia
$9 (2%)
Japan
$53 (14%)
$43 (10%)
China
China Imports
Imports
14%
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.
• Computers & Electronic
Equipment, Parts
• Crude Oil
• Machinery & Motor
Vehicles, Parts
• Plastics in Primary Form
• Steel & Aluminum Products
• Iron Ore
Other
US
$29 (8%)
$91 (21%)
Taiwan
Hong Kong
$41 (11%)
$5 (1%)
$68 (16%)
China
China Exports
Exports
Malaysia
$10 (3%)
• Apparel & Textiles
12%
9%
2%
2%
6%
Legend:
Legend:
Imports
Imports in
in $USbn
$USbn
Exports
Exports in
in $USbn
$USbn
%
% value
value denotes
denotes
share
share of
of total
total imports
imports or
or
exports
exports respectively
respectively
Source: Statistic Department of Customs General Administration of China (for the first half of 2006)
• Computers
• Electronic Equipment,
Parts
• Steel Products
• Furniture
68%
Other
2
Therefore, it is not surprising that China is the strongest 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.
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.
Exhibit 2
China Express Delivery Market (2004-2008) in USD Billions and Major Drivers of Growth
Foreign
Foreign Trade
Trade
International Express
Domestic Express
Domestic
Domestic
Economic
Economic
Development
Development
 8-10% GDP growth in
recent years
 Expect 10% average
growth of air cargo
traffic next 20 years
(Boeing)
2,8
0,9
7,4
+28%
5,8
4,4
3,5
1,1
 2001-06 CAGR +30%
 Import/export volume exceeding $1400 bn p.a.
2,6
Foreign
Foreign Direct
Direct
Investment
Investment
1,9
1,4
1,9
2,5
3,1
3,8
2004
2005
2006
2007E
Market
Market
Opening
Opening and
and
State
State Support
Support
4,8
2008E
 FDI exceeding $60 bn p.a.
 Outward FDI by Chinese
Enterprises over $7 bn in
2006, growing at 26%
 WTO agreements
 Closer Economic Partnership
Arrangement (CEPA)
Source: Market Research, Booz Allen Hamilton Estimate
When China joined the World Trade Organization
(WTO), the country experienced a rapid market liberalization and modernization as well as rising domestic
consumption. As a result, the Chinese express market continues to offer huge growth prospects for local
and foreign players alike – since growth of time-definite deliveries are running at about +40% per year.
Tremendous growth in foreign trade and direct investments, 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 surrounding exponential growth rates, there are still
huge chal­lenges in doing business in China: Over-
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.
3
A. China’s International Express Market
for the international exchange of goods and documents, these “big four” integrators made sure their
services were available.
The Growth Story
The 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
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 identical market strategies in the region. All four players
chose as their first joint venture partner the stateowned 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 3
Major Events and Growth Periods in China Express 1980 to 2006
Initiation (1980 – 1988)
Expansion (since 2001)
Market Establishment
after first Express Mail Service
offered by China Post
Rapid Market Growth
following China’s
WTO Accession
cancels
Sinotrans JV
form JVs with
Sinotrans
1986
enters via
agencies
1981
enters via
agencies
Domestic EMS
launched
1984
1980
China Post
launches EMS
Source: Literature Search, Company Web Pages
switches JV
from Sinotrans
to EAS
1995
enters via
agencies
enters via
Sinotrans JV
1988
forms JV
with Sinotrans
operates first
direct flight of
int’l cargo airline into China
1996
switches JV
from EAS to
DTW
1999
first crossborder flight
to Japan
2003
renews
Sinotrans JV
until 2052
2002
opens
retail
stores
starts Hoau
acquisition
offers direct
buys out flights to
China
DTW
2005
launches
domestic
service
2006
buys
out JV
Offers next-day
and nextmorning svc
2004
12 / 2001
China
joins WTO
starts
domestic
air service
launches
domestic
service
12 / 2005
Market opened
to WOFEs
Cooperates
with Okay
Airways
2007
4
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 international integrators to offer a domestic parcel
service in China, again via the Sinotrans JV.
FedEx started express operations 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 converting 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 investments in Sinotrans in 2003. Because of competitive 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 serving about 600 cities across the country. Since
2005, this company also offers domestic services. TNT is currently the smallest player of
the big four with about a 7 to 8 percent market
share of the Chinese international express market.
5
Exhibit 4
China International Express Market Shares (1995 vs. 2006)
100%
Other
2%
90%
6%
7-8%
80%
18-20%
70%
60%
19-21%
50%
97%
19-21%
40%
30%
20%
30-34%
10%
0%
1%
1995
2006
Source: DHL, Morgan Stanley, Press search, China Economic Review June, 2006; Press Search; BAH analysis
Over time, the 'big four global integrators' have captured between about 80 percent of China’s international 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, comparatively stagnated at low single-digit growth rates. One
reason is that the early presence of all large integrators 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 existing 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 destinations.
Competitive Landscape
As 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 network, providing express delivery to major European
centers. In addition, China Post launched a speeded
up “All Night Flight” delivery program, which guarantees 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. markets. None of these players have a major competitive advantage nor does EMS have any options for
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 networks.
New Strategic Opportunities
With China’s announcement that it would open up the
ground transportation market to WOFEs, new strategic opportunities arose.
DHL remains the only international express integrator that is still operating in a strong JV relationship
with Sinotrans—presumably locked in by mutual longterm 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 strategy is the right one.
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 formation 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 independently. UPS remained with the Sinotrans JV until
December 2004, when it signed a USD 100 million
agreement to take direct control of Sinotrans’ operations 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 battlefield— the Chinese domestic express delivery market.
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 conflicts. FedEx and TNT have followed similar approachExhibit 5
China International Express Market Shares (1995 vs. 2005)
100%
3%
90%
80%
70%
60%
50%
97%
40%
30%
40%
20%
10%
0%
1995
Source: “China Economic Review” June, 2006; Lit Search; Booz Allen Estimates
2006
7
B. China’s Domestic Express Market
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 protectionism of local authorities, especially with regard to road
transport, put up significant barriers to large expansion 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.
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 continuously loses ground to fast growing domestic competitors. With the final opening of the express market
in 2005, China Post’s remaining “safe” income
stream is the state-guaranteed monopoly on delivery 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 competitors as well as the State Council.
Exhibit 6
State-owned and Private Players in the China Domestic Express Segment
Type
China Rail Express
China Air Express
ZJS Express
Express Services
Network
 Domestic express
 736 service hubs in 275
Chinese cities
State-owned
Infrastructure
 International
transportation and
logistics
State-owned
Infrastructure
 Domestic express
8/12/24/36/48-hr.
service
 287 cities
 Domestic express
12/24/48-hr. –
3/4/5-day service
 >2000 cities and
districts, 40 branches
Nation-wide
Express
 Value added
services
 Internat’l express
TTK Express
Nation-wide
Express
 Domestic express
24/48-hr. service
 Internat’l express
 “Door-to-door” service
network covers more
than 380 Chinese cities
 900 domestic air routes
between 129 airports
 1200 vehicles, 14
rented airplanes
 .000 employees
 500 cities
 11,000 employees
Notes
 Largest competitor of EMS,
more than USD 150 million
revenue
 Expanding air and road
network
 Founded 1996 by Civil Aviation
Authority under participation of
all major domestic airlines
 Largest private express
company in China, founded
1994 in Beijing
 ~USD 100 million revenue in
2005, rapidly growing
 Founded 1994, with
headquarters in Shanghai
 Handles ~200.000 parcels/day
Regional Road
Express
 Domestic express
in Zheijang and
Jiangsu
 > 400 delivery points
 Founded in Shanghai
 > 2,000 vehicles
 Handles ~200.000 parcels/day
Regional Road
Express
 Domestic express
in Guangdong,
plus Hong Kong
 > 100 cities
International
Logistics
Group, 3PL
 Domestic
12/24/36/48/72-hr.
service and
internat’l express
 > 1,100 cities, 100
branches
Kerry EAS
 EAS is a former JV partner of
FedEx, taken over by
international Kerry Group in
2005
 1000 service points
CNEX/Jiaji
Integrated
Logistics, 3PL
 More than USD 100 million
revenue; generally 3PL but
references to large share of
Express
STO Express
SF Express
 Express delivery
 10,000 employees
 > 3.000 trucks, of which
1.200 are long-haul
 10.000 employees
DTW Group
Hoau Group
Source: Literature Search, Company Web Pages
Integrated
Logistics, 3PL
Freight +
Package Road
Transport
 Domestic express
 International
express in FedEx
JV
 Package delivery
 Founded 1993 in Guangdong
 20 provinces
 144 stations in JV with
FedEx
 89 domestic locations
previously not in JV
 1.100 depots
 56 hubs
 3.000 trucks
 12,000 employees
 Former FedEx JV partner, all
express business (even nonJV domestic) bought out by
FedEx early 2006
 Largest private road network in
China
 In negotiation with TNT for
takeover to be completed by
mid 2007 (for 135 Mio. USD)
8
Market Strategies of Selected Domestic Players
Established 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 facilities 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 partnerships, 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 flexibility 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 stateowned provider of express services. It was founded in 1996 under
direct control of the Civil Aviation Administration of
China and has access to the majority of Chinese airlines 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 distribution centers.
Of the private companies, the largest 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 companies. 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 covering 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 company 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 professional 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 competitive prices, without having the far-reaching aviation 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 operation; 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.
9
Building the Domestic Express Business in China
At the beginning of 2006, immediately after China
has opened the market following WTO accession
requirements, all four large international integrators are poised to expand in the Chinese domestic 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.
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.
Exhibit 7
Overview of the Big Four International Express Players’ Strategic Footprint in China
Network coverage
 318 cities, 56 outlets, 163
stations,
 > 220 cities, to increase by  330 cities, covered by 75
100 in the next 5 years
facilities
 >600 cities, 25 owned + 50
franchise facilities
Year of market entry
 1981, JV with Sinotrans in
1986
 1984, JV with Sinotrans in
1986
 1988, JV with Sinotrans in
1996
 1988 via JV with Sinotrans
Type of presence
 Sinotrans JV since 1986
 WOFE since Jan. 2006
 WOFE since Jan. 2006
 Effectively WOFE since
2003
Staff
 ~ 9,200
 > 6,000
 Expansion of Air Freight
business with 17 domestic
destinations
 In Jan, 2006, FedEx
bought out DTW for USD
400m
Strategic
announcements
 > 3,500 by the end of 2006
 6,500 in APAC total
Key Fact
 Has set up an effective
 Opened first two express
franchising system since
retail centers in September
2003
2006
 Raising stake in Air Hong
Kong to 40%, Cathay
Pacific holding 60%
 May move its AP express  Moved its China HQ from
hub from the Philippines to
Hong Kong to Shanghai in
Guangzhou in Southern
July 2003
China
 Outlets to increase from 50
 Departed Sinotrans JV for
to over 70
USD 100 million
 USD 200m+ infrastructure
investments, expanding
Pudong, Guangzhou and
Hong Kong hubs
DHL has the longest history in
China and continues to build its
success on the proven
Sinotrans joint venture.
 Investing USD 500m into
new hub at Shanghai’s
Pudong airport
China is the only country for
which FedEx has established a
separate headquarter, showing
its importance as a market.
 > 3,000 (Feb 2007)
“Brown Initiative” aims to have
only direct operations; no JV or
agents in the future to ensure
100% UPS brand.
 Expansion of cooperation
with China Southern
Airlines
 Hoau Acquisition
underway, freight/parcel
company serving over
1,100 locations
China is the focus for TNT
Express at the moment: “We
aim to establish our second
home market in China.”
Source: Bear Stearns, Reuters, FT, Morgan Stanley, Company Web Pages, Booz Allen Estimate (based as of end 2006)
The players that have so successfully dominated
China’s international express market with their product offerings, have chosen quite different ways to
approach the domestic market.
DHL, building on the long-standing joint venture relationship with Sinotrans and thus not waiting for the market
opening for WOFEs, was the first international integrator 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) pickup and delivery fleets and increased its participation in
domestic trade. Nonetheless, some hurdles remain:
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 establishments that covers a network of 300 cities and provinces 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 control over its operations in China, but did not include
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 international trade. In August 2006, the company opened
two retail stores in Shanghai’s business district, in
a move to position its product offerings with professional 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 franchising 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 second 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 competitors by operating a comprehensive road transportation network across Southeast Asia. In the longterm, TNT expects to build up 1.100 depots in China.
Different Routes to Capture Domestic Growth
Of the big four integrators’ strategies, the most obvious differentiating factor is the way they expand their
business:
n
n
Acquisitions (FedEx and TNT)
Organic growth (DHL’s Sinotrans JV and UPS, partially)
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 manageable 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 infrastructure 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 developed strategies and contacts to operate in this environment.
In general, an acquisition strategy in China will be
challenging. Because of the high market fragmentation 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 integrating regional express players into an existing network 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 international 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
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 provide a strong footprint to expand to the (less developed) western regions of China.
2. Brand reputation and awareness in China
B. Price-Service Competitiveness
What 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 nationwide infrastructure. But the ZJS example also shows
the difficulties of surviving the competition in China.
The company generally handles consignments in the
3. Geographic attractiveness (domestic versus international)
4. Financial attractiveness/soundness of operations
and customer base
5. Product/service mix, vertical industry coverage
6. Target relationship with local government officials
Exhibit 8
Hurdles to Achieve Growth in China Via Acquisitions
Political Interference
 Government protects
state-owned companies
Limited Resources
 Understanding of regional
conditions only by locals
 Unfulfilled staffing needs
Intellectual Property
Protection
 Risk of know-how leakage
 Need to retain local
employees
Limited Players
Information
 Limited reliable data
 Unique accounting
methods in China
Critical Success Factors in China Domestic Express
A. Geographical Concentration
The three costal regions, Bo Hai Bay, the Yangtze
River Delta, and the Pearl River Delta, have 30 percent 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
Fragmented Market
 All potential companies
<5% market share
 Only regional coverage
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 president of ZJS, Xiong Xingming, said that in the face of
rising fuel prices, increasing logistics costs, and “cutthroat 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 services.
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 packages, leading to high damage ratios. In a 2005 survey among 3PLs in China, “Quality of service,” “Data
tracking,” and “Cargo security” were among the
most frequently named challenges (topped only by
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 certainly 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 attracting 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-
Exhibit 9
Geographical Areas of Growth for High-Value Express Delivery Services
Bo
Bo Hai
Hai Bay
Bay

 Population
Population
12%
12%

 GDP
GDP
18%
18%

 Foreign
Foreign Investment
Investment
21%
21%

 Int‘l
Int‘l Trade
Trade
19%
19%
Yangtze
Yangtze River
River Delta
Delta

 Population
Population
11%
11%

 GDP
GDP
20%
20%

 Foreign
Foreign Investment
Investment
35%
35%

 Int‘l
Int‘l Trade
Trade
30%
30%
Pearl
Pearl River
River Delta
Delta

 Population
Population
6%
6%

 GDP
GDP
10%
10%

 Foreign
Foreign Investment
Investment
21%
21%

 Int‘l
Int‘l Trade
Trade
35%
35%
Source: Bear China Statistical Year Book; Booz Allen Hamilton Analysis
“Government regulations”). For the express business,
timeliness of delivery is of similar importance to
physical integrity of shipments.. In this area, the market leader EMS is behind many of its private competitors, 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
idly than education can provide skilled professionals:
China will lack about one million logistics professionals 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-skilling” and retaining staff. For example, FedEx is offering each employee up to USD 2,500 in tuition reimbursements for training and is following a strategy of
promoting internally—more than 90 percent of management positions in Asia are filled by people who
13
success factor to ensure future growth is to obtain
the relevant operating licenses to be able to offer
international and domestic express services.
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 training 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
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
Exhibit 10
Examples 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)
DHL
0.5 kg
2kg up (14.40)
24 hrs Delivery
5 kg
27
40 kg
170
0.5 kg
40
FedEx
currently no Domestic service
UPS
currently no Domestic service
TNT
5,30
11,70
EMS
6,30
11,30
55
CRE
Cargo, min 5kg
11,30
25
8,80
2,50
48 hrs Delivery
5 kg
40
40 kg
78
8,80
9,30
62
No Service (only 3 days)
CAE
45
54
161
4,40
13
101
ZJS
18
18
43
14
14
35
TTK
10
19
98
1,30
5,30
41
STO
No Service (min 3 days)
SF
2,50
7,60
52
KEAS
28
No Service
39
121
3,10
14
35
DTW
4,10
10
58
4,10
10
58
Source: Booz Allen Hamilton Market Research; based on Full-Rate Card Quotes
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 Licenses
High complexity for the players in the Chinese parcel 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 registration procedures for entering a city to close supervision 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
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 partner Sinotrans and 18,000 employees. If TNT does a
good job of managing the Hoau integration, that company’s wide-spread road transport network may prove
to be a valuable asset in the same respect.
E. Vertical Industry Focus
To 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 automation (e.g., electronics, computing, and retail industry)
and thus keep operations costs to a minimum, there
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 shipments.
Looking at the growth figures across some selected
industries that require time-definite express deliveries, 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
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
Exhibit 11
Required Enterprise Licenses and Certificates for International and Domestic Air Express
Enterprise Licenses and Certificates
International
Domestic
Enterprise Establishment License
X
X
Enterprise Legal Person Business License
X
X
Int. Freight Forwarding Enterprise Certificate of Approval
X
Postal Entrustment
X
Class 1 Cargo Sales Agent
X
Air Express Permit
X
X
Customs Declaration Agent Certificate
X
Customs Bonded Warehouse Certificate
X
Customs Supervised Export Warehouse Certificate
X
Import Export Quarantine Agent
X
Import/Export Express Operator
X
Quarantine Inspection Declaration of Import/Export Express Operator
X
Source: Booz Allen Hamilton Market Research
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 focusing on time sensitive verticals that explicitly ask for
value added services such as after-market logistics
capabilities, inventory management, and other 3PL
solutions.
been quite successful in using their existing networks and multinational customer bases to divide
the market mostly among themselves. The only significant Chinese competitor is China Post’s EMS service. 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
15
Exhibit 12
Comparison of Economic Express Delivery Models Across Different Industry Verticals
10%
later
Wholesale
Chemical
Pharma / Healthcare
Delivery Time 1)
Retail
Metal Products
5%
Building & Construction
0%
Textile
earlier
Electronics & Computing
Public Sector
Professional
Services
-5%
Transport
Automotive
Food, Beverages
& Tobacco
Other
Services
Paper, Publishing
& Printing
Machinery & Equipment
Financial
Services
-10%
-30%
-20%
lower
-10%
0%
10%
20%
Average Weight per Consignment
30%
40%
higher
1) Difference in % vs. weighted average across all industries
Source: Booz Allen Hamilton Market Research
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 international 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 contact. 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 customer segments is one way to maintain profit margins 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 13
Estimated Growth of Selected Industry Verticals in China
Electronics & Computing
13 -14%
Automotive & Transport
Textiles & Apparel
Consumer Products
12 -13%
9 -10%
8 -9%
Ø China GDP
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
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 lastmile transportation infrastructure and a global player with the international network, seems to be quite
natural, although it is possible that the cooperation
model is simply overshadowed by the next option.
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 company 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 foreign 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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