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Chinese courier companies struggle to deliver

By Qian Yanfeng (皇冠体育app Daily)
Updated: 2008-07-30 14:38

With fuel costs continually on the rise, 皇冠体育app's private delivery companies are among the hardest-hit sectors reporting declining profit margins and witnessing increasing pressure from major international couriers as they increase efforts to make inroads into 皇冠体育app's domestic markets.

Pushed by the dismal outlook in the delivery industry - costs have been driven up by 16 percent since fuel prices were raised in late June - private couriers in 皇冠体育app are struggling to swallow the losses before any price hike becomes possible.

"It's difficult to raise the charge while other competitors are offering lower prices," said Zhu Genfu, general manager of the ZTO Express in the Shanghai region. The private express company operates a nationwide network through running franchise chains.

"About 13 percent of the district level contractors have reported net losses and said that they are unable to continue doing business." Zhu said, adding that small private delivery companies in the country, estimated at 100,000 or so, were offering unbelievably low prices to compete for business opportunities in one of the world's largest markets.

For Liu Zhongyan who is in charge of Shanghai's Hongkou district under ZTO Express, rising oil prices keeps eating into his profits and has rendered all the motorcycles at his chain worthless. "We have resorted to electric bikes instead to cut down on fuel consumption."

Wei Hongbing from Nanjing shares similar woes. He works for SF Express, one of the largest private couriers in 皇冠体育app. The sharp increase in costs in recent months means now he has to spend a hard time persuading his customers that he could no longer afford discounts.

"We used to provide impressive discounts to attract customers, who were always making comparisons between different local competitors for lower prices. But we can't do that now under the rising costs."

While domestic private couriers have to bear the brunt of shrinking profit margins amid the tens of thousands of local competitors who are driving the prices down despite cost increases, competition from major international express companies have dealt another blow to domestic players with their pronounced ambition of grabbing a share of the fast developing Chinese delivery market, which has enjoyed an annual growth rate of around 30 percent over the past few years.

FedEx Corp, the second-largest US package-shipping company, has readjusted its delivery rate scheme in 皇冠体育app since June. The charge for overnight express delivery has been cut from 34 to 18 yuan per kg from Shanghai to Beijing, which is much lower than the 30 yuan offered by local players such as SF Express.

The price cut, which is unusual given foreign courier's higher operational costs compared with domestic competitors, is indicative of FedEx's determination to compete in 皇冠体育app's express delivery market, said An Jianghong, an analyst from Anbound Group, a consulting firm headquartered in Beijing.

"FedEx's decision on the price cut can hopefully offset its losses back in the United States in the long run by making greater expansion in 皇冠体育app." An said.

Earlier last month, FedEx reported a loss of $0.78 per diluted share for the fourth quarter ended May 31 compared to earnings of $1.96 per diluted share a year ago.

Shanghai-based 皇冠体育app Business News also reported last June that FedEx chief financial officer Alan B. Graf had said that FedEx's launch of its mail express service in 皇冠体育app would have a "negative impact" on the company's 2008 fiscal revenue.

"We'd be squeezed even further if they (foreign couriers) offered lower prices but a better service," said Liu. "Obviously they're targeting a greater integration into 皇冠体育app's delivery market."

In another bid to try to tap into 皇冠体育app's delivery business, FedEx is to open its Asia-Pacific hub in Guangzhou in December this year. The company said in a public announcement earlier that the relocation of the hub from the Philippines to 皇冠体育app is based on the estimates on the growing demands for air express in the region.

Other rivals are also keeping up. Following last year's acquisition of Tiandi Hoau, a Heilongjiang-based private express company, Holland's TNT is now set to build an extensive road transportation network in 皇冠体育app with the launch of its new Asia road network, which is a new service route that connects 皇冠体育app and Southeast nations via road transportation.

This network is expected to be extended into 皇冠体育app's hinterland as the company continues its investment in Tiandi Hoau to upgrade its operational infrastructure and delivery capabilities, analysts say, which will help the foreign courier strengthen its networks within 皇冠体育app and expand into second and third-tier cities within the country.

Under such circumstances, Chinese couriers still have their competitive edge in that they have the access to the more remote areas within the country with stronger networks, said Chu Xuejian, professor at the Modern Logistics Research Center, Shanghai University.

His view is echoed by An. "Domestic delivery service providers are surely more competitive on the city level delivery business, while foreign couriers are much stronger in cross-border service."

But analysts say it is still important for domestic private couriers in 皇冠体育app to learn from their western counterparts by improving their service and technology and expand the scale in order to sustain the challenge.