Flying on its own

FedEx’s buy-out of its local partner should take its China business to new heights

Joint-venture partners have been the bugbear of many a foreign company in China. Forced to operate with one when they first arrived, companies would put a brave face on things—talking up their partners’ market knowledge, distribution network, access to raw materials or whatever else to soothe the myriad headaches caused by rickety teamwork. Little wonder then, given the chance, a growing number of businesses have been buying out their partners or acquiring majority control.

FedEx Corp, a US delivery company, joined the movement in January, when its courier arm, FedEx Express, announced it would spend USD400m to buy out the 50per cent stake held by its China joint-venture partner of the past seven years. Included in the deal was the latter’s nationwide domestic delivery network. The same month FedEx broke ground on a USD150m project to build its Asia hub at Guangzhou’s brand-new Baiyun airport, the biggest and busiest airport in south China. When completed in December 2008, FedEx’s new base will handle 30-35 flights daily in and out of Guangzhou, linking 24 cities across Asia in the company’s network to the US and Europe.

Even in China, more than half a billion dollars is a hefty sum to invest. But it is money FedEx can well afford. In the three months to the end of August, its worldwide net profits rose 40per cent to USD475m, with the company citing rising exports from China as one of the main reasons for this growth. All forecasts point to continued growth. A study by Boeing predicts that air freight from China to the US will grow at nearly 10per cent per year, and to Europe at around 9per cent for the next two decades. What is more, in August FedEx secured rights for another four flights each week from the US to China, to bring its total to 30, comfortably more than any other American carrier.

But the biggest issue facing the company is whether to begin delivery services within China. FedEx Express’s Asia Pacific president, David Cunningham, says no decision has been made. It is, however, hard to see the company choosing otherwise. The way forward in that direction was opened by China’s liberalisation of its transport industry. At the end of 2005 freight-forwarding was opened to wholly-foreign-owned enterprise, with courier services following in January. FedEx already reaches every major and second-tier city in the country via a network of 200 outlets, with another 100 in the pipeline.

FedEx may be reluctant to declare its intentions officially because the purchase of its Chinese partner, Tianjin Datian W Group, better known as DTW Group, is still going through the regulatory-approval process. The deal appears as good as done; still, it would be unwise to talk about one’s expansion plans in China at a time when Chinese pundits are increasingly questioning the large role foreign companies are playing in the domestic economy. Indeed, China Post is waging a bitter rear-guard battle to hold on to its current monopoly over the delivery of small packages. The most recent draft of a long-awaited postal law proposed that the state-owned company should retain a monopoly over the delivery of all packets weighting less than 150 g.

Another reason for FedEx’s reticence may simply be that it wants to wait until its infrastructure at Baiyun airport is completed. After all, speculating now on what will only be possible in another 15 months may be pointless. The company also likely needs some time to digest its acquisition. When FedEx established its joint venture with DTW Group in November 1999, the latter only operated branches in 16 cities; now it reaches 89. With DTW’s network as part of its China business, FedEx will also have to manage 6,000 employees—double the number now.

Operational freedom

But given the freedom to operate on its own, it is hard to imagine FedEx doing anything other than to push ahead with the domestic business it has acquired. That is exactly what one of its main competitors, UPS, another US delivery company, is doing. It has turned its joint venture into a wholly-owned operation by paying USD100m to its former partner, Sinotrans Group, one of China’s largest transport companies, at the end of 2004.

FedEx’s position in China today looks better than it has ever been. Thanks to its buy-out of its partner, it controls its own destiny if it wants to move into domestic deliveries. And domestic competition looks likely to remain weak for the foreseeable future. The fragmentation of China’s logistics industry means it will be hard for any company to build scale. Meanwhile, FedEx’s China hub is being built at the heart of one of China’s biggest export bases.

International deliveries, although they may grow more slowly than the domestic industry, are likely to remain a more prolific money spinner. There will certainly be competition from the other global delivery companies, but the market is so big that they probably can all expand rapidly together.

Of course, FedEx is not immune from risks. The trickiest aspect of doing business in China, says Mr Cunningham, is how the country is transforming itself on all fronts—regulatory, available infrastructure, and the demands and expectations of customers. There is also the matter of training and managing its staff. Besides those joining from DTW Group, another 1,200 employees will be added when FedEx opens its Guangzhou base. The company prides itself on nurturing its own people, but the human-resources challenge will be considerable, given the expectations of utmost reliability and global service standards that FedEx customers expect of it.

All the same, with a business model focused on doing one thing extremely well—getting documents and packages from one place to another as quickly and reliably as possible—and complete control over its operations in a country where transport infrastructure is improving in leaps and bounds, the company looks very nicely positioned. FedEx in China should be able to reap a fast return on that half-a-billion-dollar-plus investment—much like its deliveries.