EU mail giants moving in opposite directions

Fifteen years ago there wasn't much to distinguish between the German and French mail monopolies, Deutsche Post and La Poste, as they faced the distant prospect of deregulation of the Europe Union's postal industry. Today, with deregulation just a few years away, the two appear to have very little in common. On the day La Poste workers walked off the job in January to protest the impact of liberalization, Deutsche Post announced it had acquired Europe's biggest logistics contract, continuing a $9 billion expansion program that has transformed it into one of the world's biggest transport companies with interests ranging from express delivery to air and ocean freight forwarding. La Poste, by contrast, remains largely what it was — a mail monopoly with a few related activities awkwardly bolted on. The differences between the two companies goes to the heart of the problem facing the EU as struggles to reach its goal of overtaking the United States as the world's most dynamic economy.

Since the target was set in 2004 the EU has fallen further behind the U.S., largely due to its failure to deregulate its energy and transport sectors and reform its rigid labor markets, according to the European Commission, the EU's executive arm. The marked differences in the corporate profiles of the two companies reflects the fact that while Deutsche Post and its then-sole shareholder, the German government, started to prepare for deregulation of the domestic and EU postal markets, La Poste and its owner, the French government, buried their heads in the sand, believing the "evil" of competition could be held at bay indefinitely. The upshot is that while Deutsche Post is squaring up to UPS and FedEx Corp. to boost its share of the U.S. package delivery market, La Poste is battling with a workforce that is deeply suspicious of deregulation. France's protectionist instincts and delaying tactics during EU negotiations to deregulate monopoly sectors pays off sometimes. The country's gas and electricity utilities are simultaneously monopolies on their home turfs and aggressive players in other EU markets. La Poste wasn't so lucky. It is protected at home but has little presence in other EU markets and has had limited success in moving into other businesses such as express delivery and logistics.

While La Poste festered in its ring-fenced market, Deutsche Post underwent a complete makeover. Chairman Klaus Zumwinkel, a graduate of the Wharton Business School and a former partner at McKinsey Co., oversaw the integration of the East and West German postal services in 1990, the privatization of the combined group in 1995 and an initial public offering in 2000 coupled with a massive acquisition program that transformed it into the world's biggest transport company by revenues. Unlike La Poste, it has little to fear from the end of its domestic mail monopoly in 2007 as it generates more than 45 percent of revenues outside Germany and earnings growth is driven by express and logistics in its wholly owned DHL unit, not its letter delivery division.

Europe's other big winner is TPG, the Dutch mail company whose farsighted decision to buy TNT, the Australian express delivery company, in 1988, has transformed it into one of the world's top global logistics firms and freed it from dependence on a small domestic mail market of just 15 million consumers. The other big loser is Britain's Royal Mail which is paying the price for being the only state-owned company that escaped the wave of privatizations that began in the late 1980s and was copied across Europe. Royal Mail, like La Poste, has moved into the express delivery market in Europe, focusing mainly on Germany, but they remain bit players compared with Deutsche Post and TPG. As a result, it's not surprising that Deutsche Post and TPG are the favored candidates to acquire a 25-percent stake in the Danish postal service that will be sold in June. They are also expected to snap up stakes in the mail monopolies being privatized across Europe as governments seek larger partners to ensure their survival when the EU market is completely deregulated in 2009.

Some governments are opening up markets ahead of deregulation while others are still trying to decide how to help their postal services survive the loss of their monopolies. Royal Mail's monopoly is being eroded as rivals lure away some of its biggest corporate customers. TNT Mail is handling nearly 1 million items of business mail a week and DHL Global Mail which launches its own British business next week says it has signed up two major corporate customers. Deutsche Post continues to expand its DHL operation in the U.S., which claims just a seven-percent share of the American delivery market, compared to a combined 80 percent share for UPS and FedEx. But JP Morgan, the investment bank, reckons it could grab up to 18 percent by 2006 following a $1.2 billion investment program unveiled last year. Unlike conventional mail which faces competition from the growth of e-mail and electronic payment systems, transport and logistics are becoming a critical part of the international economy as supply chains straddle the globe. The giant transnational companies that dominate global commerce increasingly demand global solutions and there are only a handful of companies that can meet their needs. The success of TPG and Deutsche Post should serve as a lesson to laggard sectors that delaying or denying competition isn't an option anymore.