INVESTING IN CHINA: A dogfight for courier service dominance

When FedEx paid Dollars 880m for Flying Tigers, a cargo airline, in 1988, it was buying a piece of Chinese history. Flying Tigers was founded by, and named after, a group of American volunteer fighter pilots who flew for China against Japanese forces in the second world war.

FedEx, however, was more interested in the international cargo network that came with the deal – including access to China.

The acquisition helps explain why, nearly two decades later, FedEx operates more flights to China than any other express delivery company.

Next month, the company will add a further three flights, taking its weekly total to 26, and work is under way to relocate its regional hub from the Philippines to the southern Chinese city of Guangzhou.

But while FedEx enjoys aerial supremacy in to and out of China, inside the country it faces a much tougher dogfight with its rivals DHL, UPS and TNT. FedEx's need to strengthen its domestic capabilities explains why it agreed a Dollars 400m deal last month to take full control of its Chinese joint venture with Tianjin Datian W. Group.

The acquisition of its partner's 50 per cent stake will allow FedEx to integrate fully its domestic Chinese assets, including nearly 90 parcel-handling facilitiesand a 3,000-strong work-force, into its international network. "We've had a very good joint venture," says Fred Smith, FedEx chief executive, in an interview. "But by integrating our operations we can provide a more seamless service and become more nimble."

The FedEx deal is the latest in a series of big investments in China by the four leading international parcel couriers as they scramble for share of the fast-growing market.

UPS, FedEx's fierce US rival, paid Dollars 100m last year to take full control of its Chinese joint venture and has increased the number of its flights into the country to just five short of FedEx's weekly total. Last month, TNT, the Dutch post and package group, announced plans to acquire Hoau Logistics Group, one of China's largest freight and parcel carriers, strengthening its already formidable presence in the country.

Meanwhile, DHL, a unit of Germany's Deutsche Post, continues to expand its power­ful, market-leading joint venture with Sinotrans, the state-owned transportation behemoth.

Morgan Stanley estimates the size of the Chinese international express market at about Dollars 1bn-Dollars 1.5bn – just a fraction of the Dollars 50bn domestic US market.

But Merrill Lynch says the Chinese market is expanding at more than four times the global rate, with annual growth of 30 per cent, as the country grabs an ever-greater share of global trade.

Soaring growth in China is helping US and European couriers offset more sluggish sales in their home markets.

James Valentine, analyst at Morgan Stanley, says demand for express services is accelerating throughout Asia as manufacturers shift towards just-in-time supply chains that require speedy and reliable shipments.

"As a business economy develops it relies more heavily on moving shipments via parcel rather than the more traditional truck or even railroad, a trend that allows parcels to grow well in excess of the rate of the economy," he said in a recent report.

Typical express shipments out of China include everything from iPods and personal computers to shoes and clothing, while manufacturing components and machine parts move in the other direction.

Despite strengthening their domestic capabilities, the foreign express couriers are expected to remain focused on high-margin imports and exports because local competition makes shipments within China less attractive. Mr Smith says the initial role of FedEx's newly acquired domestic operation will be to pick up and deliver international shipments but an intra-China service is an option in the long-term.

He says FedEx aims to bring the same efficiencies to Chinese supply chains that the company pioneered in the US, noting that logistics costs remain four times higher in China than in the rest of the world. Heavy government investment in roads, railways and airports is increasing the potential for express delivery services throughout the country, according to Mr Smith.

"Infrastructure improvements are starting to spread to the western part of the country, where 50 per cent of the population lives," he says. "That opens up tremendous opportunities for us as parts of the economy that have not been connected well with the rest of the world, or even with the rest of China, become more accessible."