UPS, FedEx receive more licenses for domestic express package services in China

In recent years, transportation and logistics titans UPS and FedEx have only been able to provide domestic delivery service in China on a limited basis. But a Reuters report is signaling that is changing, saying that both companies now have obtained licenses from the Chinese government to extend domestic express package services to Beijing and other Chinese cities and not have to rely on joint-venture partners to deliver packages within China.

The report said that with these licenses UPS and FedEx now have increased access to the second largest global market behind the United States, and due largely to e-commerce, the Chinese market is seeing a 60 percent annual growth rate in 2014 and could be worth up to $46 billion in 2015, based on data from Deloitte.  And it added that each license “permits the holder to operate B2C (business-to-consumer) domestic express package services within a single city and between cities for which a license is also held. “

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 excluded 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.

With these new licenses, UPS now has 33 licenses in China, with 14 of them approved by the Chines government in May, according to Reuters, while FedEx received 21 licenses in May and now again has 58 licenses, which is the number it had prior to the 2009 China postal law’s passing.

In September 2012, the Chinese government granted both companies the green light to provide intra-China express package services and essentially re-apply for licenses. 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. 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. 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.

Prior to these licenses being granted in recent years, UPS and FedEx were very limited as to what they could do for movements within China, according to Jerry Hempstead, president of Hempstead Consulting.

“The Chinese government wanted Chinese transport companies to grow to be able to support the logistics needs of the Chinese and not rely on foreign firms,” he told LM. “As a result, certain impediments were put on the foreign firms to give an advantage to their own. These restrictions have now been lifted and FedEx and UPS can take off running. Both firms already have tremendous investments there in hubs, terminals, trucks and people. This ruling, however, does not give any foreign firm the rights to fly within the country just as the U.S. does not allow DHL to operate planes here.”

And he told LM in a previous interview that ground delivery in China is very fragmented.

“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,” he explained. What is lacking in China…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.”

Stifel Nicolaus analyst David Ross said in 2012 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.”