UPS, FedEx receive limited domestic delivery licenses in China

According to a Wall Street Journal report, the Chinese government has granted both companies the green light to provide intra-China express package services.

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Being prohibited to conduct domestic delivery services in China has commonly been viewed as a hindrance for transportation and logistics bellwethers UPS and FedEx.

But according to a Wall Street Journal (WSJ) report, the Chinese government has granted both companies the green light to provide intra-China express package services.

The reason neither UPS nor FedEx has been able to set up shop in China for domestic delivery services 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.

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.

The WSJ report said that FedEx was granted rights to serve eight cities in China: Shanghai, Guangzhou, Shenzhen, Hangzhou, Tianjin, Dalian, Zhengzhou, and Chengdu.

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.

FedEx officials have previously told LM that the company has applied for a domestic license in China, explaining that they would continue to work closely with Chinese authorities as that application was being processed. And since being given intra-China access in a limited capacity, the company says it will continue to focus on expanding in China.

“For our customers, there is no change at all,” said Shea Leordeanu, FedEx spokesperson, in an interview. “FedEx is committed to China and remains focused on growing our business together with our customers. We are aware of the September 7 notice on the State Postal Bureau website. For FedEx and our customers, it is business as usual for our international and domestic services in China.”

The report said that UPS was granted rights to serve five cities in China: Shanghai, Guangzhou, Shenzhen, Hangzhou, Tianjin, Dalian, Zhengzhou, and Chengdu.
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. And 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.

UPS spokesman Norman Black told LM that while this license initially covers domestic service to five large cities, UPS is looking forward to expanding its service to customers in China’s domestic express market over the coming years and connecting those customers to the world through our global network.  Ands he added that UPS will announce further details of its domestic rollout plans in the near future.

Jerry Hempstead, president of Hempstead Consulting, said that this decision just relegates UPS and FedEx to competition with the local messenger companies.

“Ground delivery in China is very fragmented,” he told LM. “For all intents, anyone who has a bicycle is a courier company in China and as a result pricing is extremely competitive (to the point of ridiculous), customer loyalty unheard of, non-payment for services rendered a norm, and so on.
What is lacking in China, and will continue so with this ruling, is that there is no real effective national hub and spoke ubiquitous surface network with custodial care within the confines of one provider.”

What’s more, he explained that the Chinese prefer that the network be developed by a Chinese firm and not a foreign national like DHL, UPS or FedEx. Domestic China is not where the money is, but where the future is, and Hempstead said “the Chinese will always give the edge to the Chinese.”

The WSJ report said that China Postal Express & Logistics Co., whom is preparing for an IPO in China, is the largest player in the fragmented domestic China express market, and it also noted that while FedEx and UPS declined to comment on the potential size of China’s domestic delivery market, FedEx has forecast that the market would grow to $26.3 billion on 2020 from $5.1 billion in 2010.

Hempstead said China Postal Express & Logistics Co. is the story to watch, because it is privatizing and that’s who will be given the edge by the government. Bloomberg reported that the company has about 30 percent of market share for domestic Chine express delivery.

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

“It looks like (highly profitable) document traffic (packages <1 lb) will still be off-limits,” said 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.”

About the Author

Jeff Berman, Group News Editor
Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. Contact Jeff Berman

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