TNT's contrarian view

While other express carriers have built airfreight networks with numerous international flights, TNT is keeping its eyes on the ground. The Dutch integrated carrier is establishing a domestic ground network based on the acquisition of a large Chinese parcel and logistics operator, Hoau Logistics Group.

Hoau, established in 1995 and based in Heilongjiang, has more than 1,100 depots in China, along with more than 3,000 trucks and 12,000 employees. This gives TNT a huge footprint in the world's favorite growth market, but it is not an express network, admitted Marie Christine Lombard, managing director of TNT Express.

However, TNT figures that the Chinese market is not ready for premium, high-velocity express shipments that customers in North America and Europe are used to. "The type of product we sell in Europe is not what Chinese companies are buying," Lombard said. She said demand will evolve in that direction but that the immediate need is for a cheaper service that emphasizes fundamentals such as simplified tracking and tracing.

Peter Bakker, TNT chief executive, emphasized the difference between this approach and the strategy embraced by the other integrated express carriers with global reach, such as FedEx and UPS, which have concentrated on developing air links from China to North America and Europe. TNT sees richer pickings within the regions. The vast majority of traffic flows within the world's main geographic regions – Asia, Europe and the Americas.

"In Asia, you have a lot of international traffic, but the real growth will be in the domestic markets and between them," Bakker said. "That means we have to be on the continents, which have different requirements than intercontinental traffic. We're No. 1 in Europe because we have the lowest unit cost and the highest service quality."

This strategy makes it easier for TNT to live with the fact that in North America it has nowhere near the presence of its big rivals. "I don't need business in the U.S. for that. Whether I can deliver packages in Manhattan or not is irrelevant for that," Bakker said.

The emphasis on intra-regional flows does not mean that TNT has no ambitions in the intercontinental segment. It operates a leased Boeing 747 freighter nightly between New York and its European hub in Liege, Belgium, and ordered two 747Fs last year to link Europe with Asia. The first of these planes is scheduled for delivery in December 2007 and will fly between Liege and Shanghai. The routing of the second has yet to be decided.

Lombard insisted that North America does not represent a white spot on the map for TNT. It operates a ground network on the East Coast and has 12 U.S. offices and five in Canada. However, there are no plans for a significant expansion along the lines of what DHL has tried through its acquisition of Airborne Express.

"We can't build in North America," Bakker said. "A German company is handsomely proving that you can't. That's why we won't try."

He and the other TNT board members believe that an express carrier can be a major global operator without a full-fledged U.S. network. And they question the notion that TNT can't continue to grow without offering the gamut of logistics services, from small packages to warehousing and contract logistics.

"We've never believed in the one-stop concept," Bakker said. "We've tried to build benefits between our businesses, but never a one-stop shop."

DHL and UPS, however, have fully embraced that strategy and are busy trying to develop synergies between the various segments. Albert Saphir, owner of Atlanta-based ABS Consulting, has reservations. "I'm not a believer in the one-stop shop," he said. "I don't see much demand for it in the marketplace, unless you define the marketplace as the top 50, or maybe top 100 global accounts. I have not been able to see a true benefit for the companies where I've been involved." Saphir said most shippers have not structured their supply-chain management in line with a one-stop approach.

Ted Scherck, president of Colography Group, also doubts the appeal of the one-stop logistics provider. "Shippers simply don't believe they provide neutral advice. It's similar to a commissioned stockbroker," he said.

TNT announced last November that it would sell its logistics division to concentrate fully on the postal and express segments. In 2005, the express business generated 5.3 billion euros (6.8 billion USD) for TNT, the mail segment brought in 5 billion USD, and logistics added 4.5 billion USD. However, management views logistics as a distraction that generates lower margins than the mail and express sectors.

Saphir said the move makes sense, because there is little overlap between the company's logistics and express activities. "Their logistics division is apparently doing quite well. They keep signing on new customers," he said.

Bakker was tight-lipped about the state of negotiations with potential buyers of TNT's logistics unit, but said he expects a deal to be made by year-end. He also expressed confidence that the logistics business could be sold off in one piece.

He said the company has not decided whether to include TNT Freight Management, its forwarding arm, in the sale. "We are still assessing the synergies with our express business," he said.

While speculation about possible buyers for the logistics division continues, rumors have persisted of TNT itself being the target of a takeover. "Our shareholders decide, but we are not for sale," Lombard said. "We don't need anybody for our strategy. We can finance it; we can deliver it."