FedEx acquires joint venture in China, marking a trend of strategic buyouts

By Sarah Bowling, Web Editor -- Logistics Management, 1/30/2006

SHANGHAI, China—FedEx Corporation announced on January 24 that its FedEx Express unit has signed an agreement with Tianjin Datian W. Group Co., Ltd. (DTW Group) to buy out DTW Group’s 50 percent share of the joint venture and DTW Group’s domestic express network in China, for $400 million. FedEx and DTW entered into a joint venture agreement in 1999.

FedEx said it would take over local distribution from DTW, doubling FedEx’s workforce in the country to 6,000 and controlling the venture’s facilities in 89 locations throughout China.

The acquisition comes one year after United Parcel Service Inc (UPS) struck a similar deal with its Chinese joint venture partner; Sinotrans Ltd. UPS took control of the majority of delivery operations from Sinotrans in December 2004 and began using UPS-branded delivery trucks in China last February.

Chinese inroads

“This acquisition deepens our engagement with the China market,” said David L. Cunningham Jr., president, Asia Pacific, FedEx Express, in a company statement released last week. By taking over DTW, FedEx believes it can improve the speed and flexibility of its operations and give its brand a boost—especially in China’s less developed western provinces.

According to a Wall Street Journal article, FedEx, UPS, Dutch firm TNT, and DHL—a unit of Deutsche Post AG of Germany, all serve multinational firms in China and are attempting to make inroads with domestic Chinese companies to remain competitive.

Earlier in January, China reported that exports in 2005 reached a record $762 billion—an increase of 28 percent from 2004, and imports rose to $660 billion—an increase of nearly 18 percent over last year. China now ranks as the world’s third largest foreign trading power, and the second largest domestic air cargo market—expected to average more than 10 percent growth until 2023.

Mark of a trend

“In the past, companies like FedEx and UPS could only operate in China through a joint venture,” said Adrian Gonzalez, ARC Advisory Group analyst.

But, now that the regulatory environment has opened up, he said, FedEx and UPS are taking control and buying them out so they can better integrate operations strategically without having to consider the support of their partner.

FedEx has been operating in China for more than 20 years, and they now have the resources, capabilities, and experience to operate in China. “It is a smart, strategic option for companies who already have their feet wet,” said Gonzalez.

The logistics services industry in China is viewed as a large growth opportunity—but the fruits of these labors won’t materialize for years to come, said Gonzalez.

“Virtually every logistics services provider is looking at China as a risk and an opportunity,” he said, “The sooner you are in, the sooner you can develop your brand, and the better position you are in to capture market share and close out competitors. But the benefits won’t happen overnight.”