Foreign Entry into Chinese Express Delivery Sector

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Market Outlook

            The Chinese government has used the last few years to begin transitioning their economy from an export-led to domestic consumer fueled model. Throughout this period, the logistics sector has been undergoing perhaps the largest transition of all, as it shifts from international-focused infrastructure, technology, and employee training to a domestic-focused market. Speeding this transition is the boom of online ecommerce companies like Alibaba’s Taobao, JD, and Yihaodian.

Ecommerce Total Retail           China’s ecommerce sales equaled 5.66 trillion yuan ($912 billion) for the first half of 2014, a 30.1% increase year-on-year. Of total sales, 1.1 trillion yuan ($176 billion) was in B2C deals, up 33.4% year-on-year. Ecommerce sales in this period accounted for 8.4% of the nation’s overall retail sales.

China’s logistics market has begun to respond in turn. The rapid transition from high volume, low frequency manufacturing based cargo transport to low volume, high frequency consumer good transport has left most state-owned firms behind. Firms like Cosco Container Lines and Sinotrans are struggling to maintain profitability and have recently been forced to close regional offices in the US and issue stock, respectively.

Conversely, more specialized and generally privately owned courier companies have developed to satisfy consumer needs. Companies like EMS, S.F. Express, and Shentong Express have begun conquering the consumer driven market and drawn investment both from within and outside of China. Citic Capital recently purchased a 25% stake in S.F. Express and Carlyle Group has invested in seventeen warehouses that will be rented to companies operating in the ecommerce sector.

Rise of the Express Courier

Company Market Share
EMS 22%
S.F. Express 18%
Shentong Express 12%
Yuantong Express

9%

Zhongtang Express 9%
Huitong Express 9%

According to the State Post Bureau, the express delivery market in China reported revenues of 89.8 billion yuan ($14.5 billion) in the first half of 2014. This is an increase of 42.5% year-on-year. The express delivery now constitutes nearly 60% of the nation’s mail sector revenues.

Barriers to Entry

            Due to government restrictions on foreign involvement in some areas of delivery services, foreign firms’ participation in the express courier market is subject to some barriers. Most noticeable among these restrictions is the ruling against a foreign entity being the majority owner of a transport airplane company, heavily guarded rail and water transport sectors, and a completely restricted post sector. However, these restrictions should not fully extinguish the hopes of a foreign express delivery firm.

While the market may appear near impossible to enter via green field investment, joint venture and acquisition both have the potential to offer high returns.

Merger and Acquisition Rationale

            Express Delivery MarketAlthough the fastest growing segment of express deliveries is that which is within the same city, the largest segment by total revenue is that which is between cities. Unfortunately, due to Chinese foreign investment restrictions the most efficient methods of intercity transport are off limits to foreign express delivery firms operating in China. Therefore, it seems foreign express transport firms’ green field ambitions are limited to either the localized and highly competitive same city delivery market, or the slower growing international delivery market.

            A closer inspection of the domestic market leaders indicates a lack of express delivery management systems, technology, and capital. Only EMS, SF Express, and Yuantong Express fully own cargo aircraft. The other major players have chartered planes, although they risk losing significant market share as the two leaders continue to expand their fleet. SF Express plans to purchase eleven more planes by the end of 2015 and China Postal Airlines, owned by EMS, signed a contract for five more converted Boeing freighters in September of 2013.

            In an attempt to keep the industry responsible to a certain level of customer satisfaction, the State Postal Bureau publishes a monthly listing of complaints filed against express delivery organizations. The speed with which the express delivery sector has developed in China has left it sorely lacking for proper management and customer service.

Company Complaints Packages Delayed Packages Lost Dissatisfied with Service
EMS 10.48% 3.94% 1.18% 4.25%
SF Express 6.68% 1.64% 0.53% 2.63%
Shentong Express 28.01% 6.71% 5.14% 11.59%
Yuantong Express 6.17% 1.37% 1.52% 2.30%
Zhongtong Express 9.72% 1.42% 1.99% 4.35%
Huitong Express 16.19% 5.69% 3.42% 5.10%

             Lastly, in order to keep up with the two market leaders the other express delivery firms require capital investment. EMS is a state-owned entity and its website boasts capital reserves of 8 billion yuan, the same amount that Citic Capital, Oriza Holdings, and China Merchant’s Group recently invested in SF Express.

            All three problems facing the lesser players can be resolved through foreign investment in the form of either a joint venture or acquisition. Foreign companies have been competing in Europe and the US express delivery markets for fifteen or more years. These companies have developed the management structure and warehouse and logistics technology that Chinese firms desire. In return, Chinese firms have local expertise, established distribution channels, brand recognition, and permission to use necessary transport channels for success in the express delivery industry.

Exit Opportunities

            Foreign firms may be wary of entering a foreign investment sensitive industry during a period of economic transition. However, the current economic situation offers various potential exit opportunities. Recent stock market successes in the Hang Seng, NASDAQ, and New York Stock Exchange have created potentially lucrative IPO markets. Opportunities for a successful exit also exist in the private equity sector as Citic Capital, Oriza Holdings, China Merchant’s Group, and Carlyle Group’s recent investments indicate. Lastly, given that each of these companies is competitive evidenced by all currently holding more than eight percent market share, each would be able to successfully continue operations if forced to spin-off.

Conclusion

             In summary, it appears that the current Chinese express delivery market is primed for foreign investment in the form of joint ventures or acquisitions. The primary reason for foreign firms to consider these two forms of market entry instead of green field investment is the strict government control over key aspects of the industry. The key reasons for Chinese firms to consider partnering or being purchased by foreign companies are foreign companies have considerable expertise in creating effective management structures within the industry, foreign firms have access to advanced warehouse and logistics technology that can help to make the delivery process more effective and increase margins, and foreign firms have excess capital that Chinese firms will need as competition increases and market share becomes more concentrated.

Sources:

http://www.mofcom.gov.cn/article/ae/ai/201407/20140700678380.shtml

http://www.moc.gov.cn/zhuzhan/tongjigongbao/tongjishuju/index.html

https://www.tradingfloor.com/posts/market-preview-earnings-season-ahead-us-housing-data-in-focus-1098030

http://www.joc.com/maritime-news/container-lines/cosco/cosco-shutter-regional-us-offices_20140708.html

http://usa.chinadaily.com.cn/epaper/2014-04/09/content_17419752.htm

http://www.spb.gov.cn/dtxx_15079/201407/t20140714_334955.html

http://www.spb.gov.cn/dtxx_15079/201407/t20140715_335389.html

http://www.lek.com/sites/default/files/L.E.K.__Express_Logistics_Investment_EURObiz.pdf

http://www.ch-aviation.com/portal/airline/CYZ#al_profile_tab_fleet