Japan: postal privatisation

From April, the big "four" providers of international express and delivery services will face a formidable new upstart in the Japanese market: Japan Post.

But the question is whether Japan Post can compete head-to-head against the established express mail and logistics providers.

FedEx, DHL and UPS all enjoy global economies of scale that they have built up over decades.

Though Japan Post has unparalleled domestic mail delivery operations, the move will mark its first foray into the international express delivery market. Until now, the "big four" providers – United Parcel Service (UPS), Federal Express (FedEx), DHL of Germany and TNT of the Netherlands – have dominated the Japanese market, with an estimated 70 per cent market share.

Minoru Hasegawa, the manager of Japan Post's business development division, says it is essential for the entity to expand its services as part of its privatisation process.

"The domestic mail market has been shrinking at a rate of around 2 per cent every year, due to email and other factors, and the trend will continue," says Mr Hasegawa.

"We needed to create a new business model to offset the decline in the domestic mail market."

The recently enacted postal privatisation law in Japan will allow Japan Post to enter the international distribution market from April 2006.

Japan Post has forged two crucial links as part of its efforts to build its international express operations.

First, it has formed a partnership with ANA, Japan's second-leading carrier, to create jointly a cargo airline that will act as an international express courier service, placing it head-to-head against established logistics companies such as DHL and FedEx. The two groups plan to focus on Asia, particularly the fast-growing market in China.

The new cargo airline will be owned two-thirds by ANA and one-third by Japan Post. Operations will begin in the first half of fiscal 2006.

Japan Post believes that its network of collection and delivery points throughout Japan – and the growing number of Japanese companies based in Asia – would help it to compete against more established logistics rivals. ANA plans to use its fleet of three Boeing 767s – two of which will be delivered by April of next year – for the new cargo airline.

Its fleet could expand to up to seven aircraft by 2009, including large, wide-body planes.

Demand for international air cargo services from Japan has grown at an average of 7.2 per cent over the past 20 years, according to the International Air Transport Association.

It is forecast to grow at an annual rate of 7.6 per cent until 2010. Cargo demand is particularly strong between Japan and China, with growth forecast at 16 per cent for services from Japan to China, and 14 per cent for services from China to Japan.

The second pillar of Japan Post's strategy for expanding into the international market is a tie-up with TNT, the provider of international express mail services.

From April, the two bodies will offer co-branded premium international express services to Japanese customers. Japan Post will utilise TNT's logistics and IT systems, and the two plan to build the business by taking advantage of Japan Post's strong home market position and reputation.

Market incumbents in Japan, such as DHL and FedEx, want to ensure that Japan Post does not enjoy any unfair advantages once it begins its international express operations in April.

"It is necessary for all the players in the express market to compete on an equal and transparent basis," says David Cunningham, the president of FedEx's Asia Pacific operations.

Mr Hasegawa of Japan Post says that it will be regulated as a private entity once it begins operations in April and will not enjoy unfair advantages over rivals.

Guenter Zorn, the president of DHL Japan, the current market leader in the country, says: "We do not see Japan Post as something that will change the market. We see it as a strong competitor."

DHL's Japan business has grown in the double digits every year since 2002. Over the past 5 years DHL has invested Dollars 200m in infrastructure and has built 42 service centres in Japan.

DHL has also expanded its logistics operations in Japan, and now manages third-party logistics for companies, which is a relatively new and growing market in the country.

"Logistics business will be a growth opportunity for us, since Japanese companies are only beginning to outsource," says Mr Zorn.

Mr Hasegawa at the Japan Post says that it might consider entering the logistics business at some point in the future, but it would first concentrate on building its international express delivery services.

But like Mr Cunningham at FedEx, as well as Mr Zorn of DHL, he believes that increased competition in the express delivery services sector will be in the best interest of Japanese consumers.

"Japan is not a saturated market yet," says Mr Zorn.

"The market can take another player."