express opportunities in china

7/30/2019 Express Opportunities in China

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Express Opportunities in ChinaPackaging a Strategy for the International and DomesticExpress Delivery Market

by

Alexander [email protected]

Justin [email protected]

Edward [email protected]


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1

Express Opportunities in ChinaPackaging a Strategy for the International and Domestic Express Delivery Market

Source: Statistic Department of Customs General Administration of China (for the first half of 2006)

US

$29 (8%)

$91 (21%)

Hong Kong

$5 (1%)

$68 (16%)

South Korea

$42 (11%)

$20 (5%)

Japan

$53 (14%)

$43 (10%)

Germany

$17 (5%)

$18 (4%)

Malaysia

$10 (3%)

Russia

$9 (2%)

Netherlands$13 (3%)

Taiwan

$41 (11%)

Imports in $USbn

Exports in $USbn

% value denotes

share of total imports orexports respectively

Legend:

China Exports

12%

9%

68%

Steel Products

Computers

Apparel & Textiles

Electronic Equipment,Parts

Other

Furniture

6%

China Imports

4%3%3%3%

2%2%

14%

9%

64%

Plastics in Primary Form

Crude Oil

Computers & ElectronicEquipment, Parts

Machinery & MotorVehicles, Parts

Other

Steel & Aluminum Products

Iron Ore

Introduction

China is on its way to becoming a global trade power-

housewith 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.

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 inter-

nationally.

Because most of Chinas trade flows are focused on

the United States, Europe, and the Asia Pacific region,

global integrators are well-positioned to capture grow-

ing 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.

Exhibit 1

China Foreign Trade Flows (in USD Billions)


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2

Therefore, it is not surprising that China is the stron-

gest developing market in the Asia-Pacific express and

parcels delivery sectorshowing 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.

When China joined the World Trade Organization (WTO),

the country experienced a rapid market liberalization

and modernization as well as rising domestic consump-

tion. As a result, the Chinese express market continues

to offer huge growth prospects for local and foreign

players alike since growth of time-definite deliver-

ies 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 forboth domestic and international express companies.

However, despite the investment enthusiasm sur-

rounding exponential growth rates, there are still huge

challenges in doing business in China: Over-regulation,

fragmentation, a weak transport network, and conges-

tion 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 integra-

tors such as UPS, TNT, DHL, and FedEx from establish-

ing a local presence two decades ago.

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 play-

ers need to revisit their strategies to create and main-

tain sustainable positions that enable them to tap into

future expected growth. In light of Chinas 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, profit-able growth in the Chinese international and domestic

express market.

Exhibit 2

China Express Delivery Market (2004-2008) in USD Billions and Major Drivers of Growth

4,83,8

3,12,51,9

2,6

1,9

1,4

1,10,9

2008E2007E

7,4

5,8

4,4

3,52,8

2006

+28%

20052004

Domestic Express International Express

WTO agreements

Closer Economic Partnership

Arrangement (CEPA)

FDI exceeding $60 bn p.a.

Foreign Direct

Investment

2001 - 06 CAGR +30%

Import/export volume exceeding $1400 bn p.a.Foreign Trade

Source: Market Research, Boeing, Booz Allen Hamilton Estimate

Outward FDI by Chinese

Enterprises over $7 bn in

2006, growing at 26%

Market

Opening and

State Support

8-10% GDP growth in

recent years

Expect 10% average

growth of air cargo

traffic next 20 years

Domestic

Economic

Development


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3

Initiation (1980 - 1988)

Market Establishment

after first Express Mail Service

offered by China Post

Expansion (since 2001)

Rapid Market Growth

following Chinas

WTO Accession

starts

domestic

air serviceopens

retail

stores

launches

domestic

servicecancels

Sinotrans JV

first cross-

border flight

to Japan

renews

Sinotrans JV

until 2052

starts Hoau

aquisition

buys out

DTW

offers direct

flights to

China

Cooperates

with Okay

Airways

enters via

agencies

launches

domestic

service

switches JVfrom EAS to

DTW

1999

Offers next-day

and next-

morning svc

12 / 2001

China

joins WTO

1980

China Post

launches EMS

Source: Literature Search, Company Web Pages

12 / 2005

Market opened

to WOFEs

2003

operates first

direct flight of

intl cargo air-

line into China

enters via

agencies

1996

forms JV

with Sinotrans

enters via

agencies2005

2006

2007

2004

2002

1981

from JVs with

Sinotrans

1986

buys

out JVDomestic EMS

launched

2004

enters via

Sinotrans JV

1988

switches JV

from Sinotrans

to EAS

1995

A. Chinas International Express Market

The Growth Story

The beginnings of the market for express delivery ser-

vices 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

Chinas eventual accession to the WTO were still far

removed from reality. However, the major global inte-

grators 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 countrys growing awareness for the international

exchange of goods and documents, these big four

integrators made sure their services were available.

All international companies who arrived in the 80s

and 90s were only able to enter the Chinese market

by means of local joint venture partnersforcing inter-

national express companies to adopt identical market

strategies in the region. All four players chose as their

first joint venture partner the state-owned Sinotrans

Group, which was the largest player in logistics in China

at that time. But in subsequent years, they followed dif-

ferent paths in developing their businesses.

Exhibit 3

Major Events and Growth Periods in China Express 1980 to 2006


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4

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 inter-

national express delivery with about one third

of the market. In 2004, DHL was the first of the

international integrators to offer a domestic par-

cel service in China, again via the Sinotrans JV.

FedEx started express opera-

tions 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

Groups express business, including domestic

express assets in 89 locations, thus convert-

ing 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 coopera-

tive agreement in 2004. It effectively bought

out the existing customer contacts and 23 sta-

tions 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 serv-

ing about 600 cities across the country. Since

2005, this company also offers domestic ser-

vices. TNT is currently the smallest player of

the big four with about a 7 to 8 percent market

share of the Chinese international express mar-

ket.

Market Strategies of the Big Four


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5

Over time, the 'big four global integrators' have cap-

tured between about 80 percent of Chinas interna-

tional express market, absorbing the largest part of

the immense market growth into their networks. Theincumbent state-owned EMS of China Post, which held

97 percent of the market in 1995, comparatively stag-

nated 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 operators 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 JapanPost that guarantees time-definite express delivery

between China, Singapore, and Japan. EMS also part-

nered 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, ChinaPost launched a speeded up All Night Flight delivery

program, which guarantees that mail reaches recipients

in Chinas 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 ser-

vice between Europe and China, massively increasing

uplift capacity.

Overall, the big four international players are well estab-

lished in the China international express market and

have divided up the market among themselves. Eachone offers comprehensive service levels at competitive

prices and has partially complementary competen-

Exhibit 4

China International Express Market Shares (1995 vs. 2006)

Other

97%

6%

30-34%

1%

19-21%

19-21%

18-20%

2%

7-8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995 2006

Source: DHL, Morgan Stanley, Press search, China Economic Review June, 2006; Press Search; BAH analysis


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6

cies in serving the European and U.S. markets. None

of these players have a major competitive advantage

nor does EMS have any options for breaking out of its

primarily regional role. The key for any further market

developments, therefore, is the way in which compa-

nies operate within China and if and how they set up

their domestic delivery networks.

New Strategic Opportunities

With Chinas 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

Sinotranspresumably locked in by mutual long-term

commitments and managements belief that the close

governmental ties offered by Sinotrans provide a com-

petitive 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 segmentsDHL Express

sticks to the joint venture. Annual growth figures of up

to 45 percent for express volume and revenue seem to

prove that DHLs strategy is the right one.

The other integrators follow the route of higher inde-

pendence 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 approaches after decid-

ing the Sinotrans JV did not fulfill their strategic purpos-

es; both companies chose much smaller JV partners.

FedEx cooperated with smaller partners, EAS and DTW,

They both offered significant benefit to FedExs opera-

tions at the time of JV formation but were small enough

to avoid dependence. FedExs final move was the com-

plete takeover of DTWs express division in 2006. TNT

joined with Machplus, a company so small that TNT had

great control over the Chinese assets from the begin-

ning. Since 2003, TNT has effectively operated inde-

pendently. UPS remained with the Sinotrans JV until

December 2004, when it signed a USD 100 million

agreement to take direct control of Sinotrans opera-

tions 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 chal-

lenges such as more limited network coverage. This

has opened a new competitive battlefield the Chinesedomestic express delivery market

Exhibit 5

China International Express Market Shares (1995 vs. 2006)

97%

40%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995 2006

3%

Source: China Economic Review June, 2006; Lit Search; Booz Allen Estimates


8/19

7

B. Chinas Domestic Express Market

Similar to the international express market, China Post

used to be the monopoly in the domestic express deliv-

ery market a decade ago, but has been losing signifi-

cant market share since then (see Exhibit 5). 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 Posts 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 pres-

sure from competitors as well as the State Council.

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 strate-

gies. Some local operators, however, have found ways

to expand profitably in the last decades 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.

Domestic expressInternationaltransportationand logistics

736 service hubs in 275Chinese citiesDoor-to-door servicenetwork covers more than380 Chinese cities

Largest competitor of EMS, morethan USD 150 million revenueExpanding air and road network

Domestic express8/12/24/36/48-hr.service

287 cities900 domestic air routesbetween 129 airports

Founded 1996 by Civil AviationAuthority under participation of allmajor domestic airlines

Domestic express12/24/48-hr. 3/4/5-day serviceValue added servicesInternatl express

>2.000 cities and districts,40 branches1.200 vehicles, 14 rentedairplanes8.000 employees

Largest private express company inChina, founded 1994 in Beijing~USD 100 million revenue in2005, rapidly growing

Domestic express24/48-hr. serviceInternatl express

500 cities11.000 employees

Founded 1994, with headquartersin ShanghaiHandles ~200.000 parcels/day

Domestic express inZheijang and Jiangsu

> 400 delivery points> 2.000 vehicles10.000 employees

Founded in ShanghaiHandles ~200.000 parcels/day

Domestic express inGuangdong, plusHong Kong

> 100 cities20 provinces

Founded 1993 in Guangdong

Domestic 12/24/36/48/72-hr. serviceand internatl express

> 1.100 cities,100 branches

EAS is a former JV partner of FedEx,taken over by international KerryGroup in 2005

Express delivery 1.000 service points> 3.000 trucks, of which1.200 are long-haul10.000 employees

More than USD 100 million revenue;generally 3PL but references tolarge share of Express

Domestic expressInternational expressin FedEx JV

144 stations in JV withFedEx89 domestic locationspreviously not in JV

Former FedEx JV partner, all expressbusiness (even non-JV domestic)bought out by FedEx early 2006

Package delivery

State-ownedInfrastructure

State-ownedInfrastructure

Nation-wideExpress

Nation-wideExpress

RegionalRoad Express

RegionalRoad Express

InternationalLogistics

Group, 3PL

IntegratedLogistics, 3PL

IntegratedLogistics, 3PL

Freight +Package Road

Transport

1.100 depots56 hubs

3.000 trucks12.000 employees

Largest private road network inChina

In negotiation with TNT for takeoverto be completed by mid 2007(for 135 Mio. USD)

Source: Literature Search Com an Web Pa es

China Rail Express

China Air Express

ZJS Express

TTK Express

STO Express

SF Express

Kerry EAS

CNEX/Jiaji

DTW Group

Hoau Group

Company Type Express Services Network Notes

Exhibit 6

State-owned and Private Players in the China Domestic Express Segment


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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 invest-

ing heavily in infrastructure and IT to ensure growth and

reliable delivery.

China Air Express is another state-

owned provider of express services.

It was founded in 1996 under directcontrol 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 com-

pany 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, TTKs revenue was about 10 percent lower than

that of ZJS. Like ZJS, TTK also offers an option for inter-

national 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 intheir 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 net-

work 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 com-

petitors in the Chinese express market. Of special interest

are the DTW Group and the Hoau Group, which are beingbought by FedEx and TNT, respectively, to further strength-

en their footprint in the Chinese transport market.


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9

Building the Domestic Express Business in China

At the beginning of 2006, immediately after China has

opened the market following WTO accession require-

ments, 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.

The players that have so successfully dominated

Chinas 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 relation-

ship 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) pick-up and delivery fleets and

increased its participation in domestic trade. Nonetheless,

some hurdles remain:

DHLs 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 adomestic airfreight express services in China. Going for-

ward, DHL plans to invest about $215 million in express

Exhibit 7

Overview of the Big Four International Express Players Strategic Footprint in China

Strategic

Announcements

Key Facts

Staff

Year of Market Entry

Type of Presence

Network Coverage 318 cities, 56 outlets,163 stations

1981, JV with Sinotransin 1986

~ 9.200

DHL has the longest historyin China and continues tobuild its success on theproven Sinotrans jointventure.

Sinotrans JV since 1986

Expansion of Air Freightbusiness with 17 domesticdestinations

Raising stake in Air HongKong to 40%, CathayPacific holding 60%

Outlets to increase from50 to over 70

USD 200m+ infrastructureinvestments, expandingPudong, Guangzhou andHong Kong hubs

> 220 cities, to increaseby 100 in the next 5 years


China is the only countryfor which FedEx hasestablished a separateheadquarter, showing itsimportance as a market.

WOFE since Jan. 2006

> 6.000

In Jan, 2006, FedExbought out DTW forUSD 400m

May move its AP expresshub from the Philippinesto Guangzhou in SouthernChina

330 cities, covered by75 facilities


Brown Initiative aims tohave only direct operations;no JV or agents in the futureto ensure 100% UPS brand.

WOFE since Jan. 2006

> 3.500 by the end of2006

6.500 in APAC total

Opened first two expressretail centers inSeptember 2006

Moved its China HQ fromHong Kong to Shanghaiin July 2003

Departed Sinotrans JV forUSD 100 million

Investing USD 500m intonew hub at ShanghaisPudong airport

>600 cities, 25 owned+ 50 franchise facilities

1988 via JV with Sinotrans

China is the focus for TNTExpress at the moment:We aim to establish oursecond home market inChina.

Effectively WOFE since2003

> 3.000 (Feb 2007)

Has set up an effectivefranchising system since2003

Expansion of cooperationwith China SouthernAirlines

Hoau Acquisitionunderway, freight/parcelcompany serving over1.100 locations

Source: Bear Stearns, Reuters, FT, Morgan Stanley, Company Web Pages, Booz Allen Estimate (based as of end 2006)


11/19

10

centers, new branches, express logistics centers and

strategic spare-parts centers.

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 DTWs domestic express network in 89

cities, which DTW started to build in 2002. FedEx plans

to open up another 32 branch offices in China reach-

ing 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 any domes-

tic 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 Chinas international trade. In

August 2006, the company opened two retail stores

in Shanghais business district, in a move to position

its product offerings with professional services indus-

tries. Currently, UPS has 4.000 employees in China.

Being the express & logistics sponsor for the BejingOrganizing Committee for the Olympic Games is expect-

ed 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 TNTs

aim was becoming market leader in the Chinese

domestic express market. To this end, TNT has, in

addition to its owned stations, opened a franchis-

ing 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. TNTs second

strategic move is the takeover of Hoau Group, which is

assumed to operate the largest private road transporta-

tion 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 dif-

ferentiate itself from the other competitors by operating

a comprehensive road transportation network across

Southeast Asia. In the long-term, 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 busi-

ness:

Acquisitions (FedEx and TNT)

Organic growth (DHLs 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 val-

ues blood authentic relationships in businessonly

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 established a strong

presence and local management in China. The FedEx

acquisition of DTWs express business can be seen as

a natural expansion of the previously existing joint ven-

ture, 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.

TNTs 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 com-

pany 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. Chinas administrative structure could pres-

ent 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 chal-

lenging. Because of the high market fragmentation

there are few known targets and limited data avail-able to conduct a detailed due diligence. Thus, only


12/19

11

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.

When considering growth via acquisitions, an interna-

tional 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

2. Brand reputation and awareness in China

3. Geographic attractiveness (domestic versus interna-tional)

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 Intellectual Property

Protection

Government protects

state-owned companies

Risk of know-how leakage

Need to retain local

employees

Limited Resources

Understanding of regional

conditions only by locals

Unfulfilled staffing needs

Limited reliable data

Unique accounting

methods in China

Limited Players

Information

All potential companies


13/19

12

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 Chinas

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 transportation

networks are well established already, economies of

scale will drive down operating costs and offer competi-

tive 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.

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 infrastruc-

ture. But the ZJS example also shows the difficulties

of surviving the competition in China. The company

generally handles consignments in the 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 ZJSs 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 domes-

tic express services between Beijing and Shanghai,

DHLs domestic delivery prices seem to be significantlyhigher than other players express services

(see Exhibit 10).

Exhibit 9

Geographical Areas of Growth for High-Value Express Delivery Services

Source: Bear China Statistical Year Book; Booz Allen Hamilton Analysis

Population 6%

GDP 10%

Foreign Investment 21%

Intl Trade 35%

Population 11%

GDP 20%


Intl Trade 30%

Population 12%

GDP 18%


Intl Trade 19%

Bo Hai Bay

Yangtze River Delta

Pearl River Delta


14/19

13

The only way to justify higher prices is service and qual-

ity levels. The Chinese logistics market can be char-

acterized 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 chal-

lenges (topped only by 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 pri-

vate 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 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 com-panies 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 rapidly than edu-

cation 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 exam-

ple, FedEx is offering each employee up to USD 2,500

in tuition reimbursements for training and is following a

strategy of promoting internallymore than 90 percent

of management positions in Asia are filled by people

who 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 TNTs 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 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 any-

thing practical.

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 September 07, 2006)

48 hrs Delivery24 hrs Delivery0.5 kg

DHL

FedEx

UPS currently no Domestic service

currently no Domestic service

No Service (only 3 days)Crgo, min 5 kg

No Service (min 3 days)

No Service

TNT

EMS

CRE

CAE

ZJS

TTK

STO

SF

KEAS

DTW

5 kg 40 kg 0.5 kg 5 kg 40 kg

2 kg up (14.40) 27 170 40 40 78

28 39 121 3,10 14 35

4,10 10 58 4,10 10 58

45 54 161 4,40 13 101

18 18 42 14 14 35

10 19 98 1,30 5,30 41

2,50 7,60 52

6,30 11,30 55

11,30 25

2,50 9,30 62

5,30 11,70 8,80 8,80


15/19

14

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 protec-

tionism 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 success factor to

ensure future growth is to obtain the relevant operating

licenses to be able to offer international and domestic

express services.

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 have a deep

understanding of the various factors and a broad net-

work of local connections. DHL enjoy a certain advan-

tage in this area, with its strong JV partner Sinotransand 18,000 employees. If TNT does a good job of man-

aging the Hoau integration, that companys 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 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, espe-

cially the electronics and computing and the automo-

tive and transportation industries. These fast growing

industry verticals offer an attractive segment to furtherexpand local operations as customers require nation-

wide, expedited transportation services at high quality,

Exhibit 11

Required Enterprise Licenses and Certificates for International and Domestic Air Express

XXEnterprise Legal Person Business License

XImport/Export Express Operator

XCustoms Supervised Export Warehouse Certificate

XImport Export Quarantine Agent

XQuarantine Inspection Declaration of Import/Export Express Operator

XInt. Freight Forwarding Enterprise Certificate of Approval

XXPostal Entrustment

XClass 1 Cargo Sales Agent

XAir Express Permit

XCustoms Declaration Agent Certificate

Customs Bonded Warehouse Certificate

XXEnterprise Establishment License

DomesticInternationalEnterprise Licenses and Certificates

Source: Booz Allen Hamilton Market Research

X


16/19

15

but also rely on international coverage (e.g., for over-seas on-time deliveries). Players with additional supply

chain logistics servicelike the big fourshould be able

to differentiate themselves and move out of the low-

cost priced market by focusing on time sensitive verti-

cals that explicitly ask for value added services such as

after-market logistics capabilities, inventory manage-

ment, and other 3PL solutions.

Conclusion

Looking at the development of Chinas 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 aggres-

sive growth strategies in the region.

In the international market, the global players have

been quite successful in using their existing networks

and multinational customer bases to divide the mar-ket mostly among themselves. The only significant

Chinese competitor is China Posts EMS service. Similar

to postal operators in other countries, EMS offers a

product that cannot directly compete with the compre-

hensive services of the integrators, and therefore is

Exhibit 12

Comparison of Economic Express Delivery Models Across Different Industry Verticals

-10%

-5%

0%

5%

10%

-30% -20% -10% 0% 10% 20% 30% 40%

Average Weight per Consignment higherlower

later

earlier

DeliveryTime1)

Financial

Services

Machinery & Equipment

Electronics & Computing

Retail

Building & Construction

Wholesale

Chemical

Automotive

Pharma /

Health Care

Food, Beverages,

& Tobacco

Public

Sector

Other

ServicesTextile

Metal

Products

Trans-

port

Professional

Services Paper, Publishing

& Printing

1) Difference in % vs. weighted average across all industries

Source: Booz Allen Hamilton Market Research

Source: WTO, Global Insight, China Statistics Yearbook: Booz Allen Hamilton Estimates

Textiles & Apparel

Automotive & Transport

Consumer Products

Electronics & Computing

9-10%

12-13%

8-9%

13-14%

China GDP

Exhibit 13

Estimated Growth of Selected Industry Verticals in China


17/19

16

viewed as filling a limited market niche in Chinas inter-

national express segment. Looking forward, we do not

expect any major shifts driven by developments within

the market; changes will primarily result from global

strategies or from the domestic business the integra-

tors builda 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.

Important factors in the domestic express market are

price competitiveness, service quality, staff exper-

tise, and local connections. Along those dimensions,

it should be noted that a number of strategic initia-

tives may in the end decide ultimate market success.

Provided below are some examples of these initiatives:

Brand Marketing:UPS is currently showing the mostconsistent 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 con-

tact. 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

Service Differentiation:Targeting very specific cus-

tomer segments is one way to maintain profit margins

in the low-price Chinese market. An example for this

is TNTs Clinical Express product for the clinical trial

diagnostics market. Even though there are many labs

in China, for special examinations valuable speci-

mens often have to be transported to diagnostic cen-

ters 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 pas-

senger flights. With Clinical Express, TNT takes careof 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!

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 agree-

ment with China Southern airlines. Very little informa-

tion 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 last-mile transportation

infrastructure and a global player with the interna-

tional network, seems to be quite natural, although it

is possible that the cooperation model is simply over-

shadowed 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 deliv-

er a service, it is an even more straightforward choiceto 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 TNTs express product. While some of

the acquisitions may not add significant operational

assets and capabilities, they can help build the cus-

tomer base and add volume into the acquisitions net-

work.

At the moment, no single operator has shown a signifi-

cant 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 players 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 therenow it needs to be captured!


18/19

17

What Booz Allen Hamilton Brings

Booz Allen Hamilton has been at the forefront of man-

agement consulting for businesses and governments

for more than 90 years. Integrating the full range ofconsulting capabilities, Booz Allen is the one firm that

helps clients solve their toughest problems, working

by their side to help them achieve their missions. Booz

Allen is committed to delivering results that endure.

With 18,000 employees on six continents, the firm

generates annual sales that exceed $3.7 billion. Booz

Allen has been recognized as a consultant and an

employer of choice. In 2005 and in 2006, Fortune

magazine named Booz Allen one of The 100 Best

Companies to Work For, and for the past seven years,Working Mother has ranked the firm among its 100

Best Companies for Working Mothers.

To learn more about the firm, visit the Booz Allen Web

site at www.boozallen.com. To learn more about the

best ideas in business, visit www.strategy-business.

com, the Web site for strategy+business, a

quarterly journal sponsored by Booz Allen.

Japan

Akira Uchida

Booz Allen Hamilton (Japan) Inc.

Shiroyama Hills 18F

4-3-1 Toranomon, Minato-ku

Tokyo 105-6018 Japan

Phone: +81-3-3436-8600

[email protected]

Asia-Pacific

Simon Gillies

Booz Allen Hamilton (Australia) Ltd.

Level 7

7 Macquarie Place

Sydney NSW 2000 Australia

Phone: +61-2-9321-1900

[email protected]

Latin America

Paolo Pigorini

Booz Allen Hamilton do BrazilPraia de Botafogo, 228 sl 512

Rio de Janeiro RJ 22359-900 Brazil

Phone: +55-21-2237-8400

[email protected]

For more information on Booz Allens capabilities in

Express Services, Freight, Postal and Logistics, and

Transportation Know-how, please see our Web site at

www.boozallen.com or contact one of our local offices.

Alexander Niehues is a vice president in Booz Allens

Munich office in Germany. He leads the European

Postal, Freight & Logistics practice and has led major

assignments at the worlds leading postal, express, and

contract logistics operators.

Justin Zubrod is a vice president in Booz Allens

Washington office. He leads Booz Allens U.S. Postal,

Freight & Logistics practice and has conducted a mul-

titude of assignments for international transportation

clients.

Edward Tse is the managing partner for Booz Allens

Greater China practice. The partner-in-charge of the

first authorized office in mainland China among all

international strategy consulting firms in the early

1990s, Dr. Tse has consulted to hundreds of foreign

and Chinese clients, including transport and logisticsproviders.

China

Dr. Edward Tse

Booz Allen Hamilton (China) LLC

Suite 2511, One Corporate Ave

222 Hu Bin Road

Shanghai 200021

Phone: +86-21-6340-6633

[email protected]

Europe

Alexander Niehues

Booz Allen Hamilton GmbH

Lenbachplatz 3

Munich 80333 Germany

Phone: +49-89-54525-0

[email protected]

United States

Justin Zubrod

Booz Allen Hamilton Inc.

Hamilton Building8283 Greensboro Drive

McLean, VA 22102 United States

Phone: +1-703-902-5000

[email protected]


19/19

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