UPS, FedEx continue to play the waiting game for domestic express delivery clearance in China

While transportation and logistics bellwethers UPS and FedEx are well-established in all corners of the world, one area where their presences could be even greater felt is China.

But further inroads will have to wait for both companies, due to the fact that neither is allowed to conduct domestic express delivery services.

The reason for that is that as per Chinese law non-Chinese air providers are only permitted to fly in and out of China but not from point-to-point within China. So in order for FedEx or UPS to send an overnight package from Beijing to Shanghai, they have to fly the package on an aircraft that it is not theirs.

Even though neither company currently has domestic express service in China, they each have significant operations in place there.

FedEx entered the China market in 1984 and provides international and domestic service for shippers doing business in China. FedEx officials told LM that it operates as a wholly-owned enterprise in China and has direct custodial control of operations, allowing for flexibility and improved speed-to-market.

For international shipments, it operates to and from five cities in China: Guangzhou, Shanghai, Shenzhen, Beijing and Chengdu. The FedEx Asia Pacific Hub, which is located at the Guangzhou Baiyun International Airport is the center of an intra-Asia flight network connecting 22 major cities in Asia and linking these cities to more than 220 countries and territories in the FedEx global network. FedEx operates more than 225 weekly international flights in and out of China. And it has been operating a domestic delivery business in China since receiving an investment certificate from the Ministry of Commerce in December 2006 and a business license for domestic services from the State Administration of Industry and Commerce also received in December 2006. Its domestic air services are provided by YRE, Yangtze River Express, and its ground trucking operations are operated by FedEx in conjunction with local agents.

UPS has offered domestic services to shippers on a contract basis since 2005. In 2008, it opened a major hub in Shanghai in the Shanghai Pudong International Airport. It has 117 conveyor belts and 47 docking bays and has a package sorting capacity of 17,000 pieces per hour and is designed for simultaneous rapid processing of heavy freight, recognizing the different types of business done by importers and exporters in China. In July 2011, it began operating flights into Chengdu, China as part of an effort to expand its connections between Asia, Europe, and the United States. The UPS Chengdu flights connect Europe and Asia with a total of 24 weekly flights. UPS serves 330 cities in China and operates 200 weekly flights connecting China to markets around the world.

In October 2009, a new Chinese postal law took effect, which created a new permitting system for the express sector through the China State Postal Bureau (SPB).  This law excludes non-Chinese from competing in the domestic document and letter delivery market. The China postal law gives China Post a monopoly on letters and documents, with private carriers allowed to deliver inbound and outbound documents, but not intra China. The private carriers can deliver inbound and outbound documents, but not within China. In addition, foreign airlines can’t operate within the country.

FedEx Communications Advisor Sharon Young said in an interview that FedEx has applied for a domestic express permit.

“We will continue to work closely with the authorities as they process that application for our existing business,” she said. “FedEx is conducting business as usual at this time.”

As for UPS, company spokesman Norman Black said the company filed an application with the China SPB to provide competitive parcel delivery services within the Chinese domestic market in 2010. And, he said, the SPB issued to UPS an official notice of “acceptance” of UPS’s application on December 14, 2011, which was followed by a May 25, 2012 SPB-issued public notices explaining SPB would issue a domestic license to UPS for five cities: Shanghai, Shenzen, Guangzhou, Tianjin, and Xi’an. But at this point, discussions between the UPS and SPB continue, with no actual licensed having been issued yet.

“UPS believes that maintaining an open and competitive express market in China is best for our Chinese and international customers, as well as for the development of China’s express industry,” said Black. “We look forward to expanding our service to customers in the China domestic express market, and connecting those customers to the world through UPS’s global network. UPS is actively working together with Chinese authorities on the relevant approvals.”

Even though both FedEx and UPS are making inroads towards domestic express service in China it appears that progress is being made.

Domestic China parcel shipping is the next great opportunity out there, according to Jerry Hempstead, president of Hempstead Consulting.

“China today operates like the USA in the 70’s when it comes to domestic parcel movements. In the USA today we have several carriers, each of which has hundreds of thousands of trucks. In China you have hundreds of thousands of parcel chipping companies with one truck. Stuff gets picked up and delivered, but it’s not pretty and the domestic market is very fragmented and price driven.”

Hempstead opined that the Chinese government would prefer a Chinese company to become the FedEx or UPS of china rather then letting an American company do so. But the issue to date, he explained, is that no company has emerged yet to step up with a national hub and spoke integrated rational solution, adding that China’s postal service, China Post, operates EMS (express mail service) and Chinese legislation has done a lot to insulate and protect that business from competition from foreign companies like TNT, UPS, FedEx, and DHL.

What’s more, the Chinese market is extremely fragmented with literally thousands of carriers and highly competitive and very low prices, said Doug Caldwell, vice president, EMEA, for AFMS.

“That is a challenge for any carrier,” he said. “I am sure FedEx and UPS are looking for business, because they have so much business coming into and out of China and can move packages from Korea or Vietnam or Singapore, but the piece missing is moving things from factory to factory within China, which is what they are looking for.” 

A report in the China-based Global Times blasted the possibility of UPS and FedEx being granted domestic express licenses in China, quoting the China Air Transport Association (CATA) as saying it would amount to an infringement of China’s airspace and will impact the nation’s air cargo industry.

CATA said in the report if UPS and FedEx got approval it would be akin to them being granted what is known as the “Eighth Freedom”, which is the right to fly between two or more airports in a foreign country to carry passengers, mail and cargo, as part of a service from the home country. The organization said that China and the US have not opened up the Eighth Freedom to each other, explaining if FedEx and UPS were licensed to conduct domestic delivery business in China, it would break the principle of reciprocity of traffic rights and impact the country’s air cargo industry.

Stifel Nicolaus analyst David Ross said his firm is uncertain if shippers would even benefit much from UPS and FDX having domestic service—at least not in the near-term.

“Even if they get domestic operating licenses, it looks like (highly profitable) document traffic (packages <1 lb) will still be off-limits,” explained Ross. “Over time, FedEx and UPS, if they can build out domestic China networks, could potentially offer better service at a lower cost, but that would require significant density, and we are a long way away from that, in our view. We believe both companies should continue to grow China import/export business but should remain relatively non-existent in domestic China over the next few years.”