Chinese law delivers shipping controversy

Private express shipping companies, including U.S.-based giants FedEx, UPS and DHL, are facing a May 6 deadline to turn over the bulk of their business in China to the government-run postal service.

Under the order, private services may not deliver any letters or packages under 1.1 pounds, may not charge prices below those of China Post and may not deliver to private homes or major government offices. The restrictions would apply to shipments within China and those to or from other countries.

Li Limou, a spokesman for a trade group representing the delivery companies, says the rules would wipe out 60% of the business private express shippers do in China. In a letter sent to Chinese trade officials, industry executives warned the move could "disrupt and possibly close down the air freight industry."

They also say the order violates commitments China made when it entered the World Trade Organization in December.

China's postal officials declined to be interviewed but cited state media accounts that said the new rule was required by a Chinese law guaranteeing the post office a monopoly in delivery of "private letters." The reports also noted that China Post is required to provide service to all locations in the country, even places where it cannot make a profit. Private carriers face no such requirement.

Chinese officials also have invoked an anti-terrorism rationale for the restrictions, saying they are needed to make sure all deliveries are subjected to screening for anthrax and other poisons.

A FedEx spokesman says discussions with the Chinese government over the issue are at a very sensitive stage. He declined further comment.

Li says the government wants the companies to turn over all their small shipments to the postal service for delivery. "If (customers) all have to go through China Post, they won't be happy," he says.

As businesses enlarge their China operations, demand for express shipping is booming. UPS reported that volume in its China operation grew 45% in 2000 and China-related revenue was up 35% in the first half of 2001.

Andy Xie, the chief economist at Morgan Stanley in Hong Kong, says he expects the industry's China business to grow about 25% a year for the next few years. "As long as exports rise, this business will rise even faster," Xie says.

Xie says China Post faces the same problems government-run postal services in other countries have encountered. Private firms are winning the most lucrative business and leaving it with the costly and unprofitable obligation to deliver letters to private homes. "The private delivery services do cream-skimming," he says.

According to industry analysts, China Post has been unable to hold on to its market share as demand has grown, particularly for shipping to and from foreign locations. "The post is not competitive in this cross-border business at all," Xie says.

He says the move to restrict small shipments flouts WTO rules and predicted Chinese officials eventually will have to back down. "The state post has cash-flow problems and is always coming up with nutty ideas," Xie says.

Similar disputes have flared between the private firms and China Post on several occasions the past few years. "This is the most serious," the trade group's Li says.

While the companies have complained bitterly about the proposed Chinese restrictions, such limitations are not unique to China. In the USA, regulations remain in place requiring private express carriers to charge double first-class mail rates for certain shipments.

The dispute also is delicate for the companies involved because they depend on negotiations with the Chinese government to secure rights to fly to China. UPS began direct flights to China from the USA a year ago. FedEx has flown to mainland China since 1995 via its other hubs in Asia.

Industry sources say officials at the U.S. Embassy in Beijing have agreed to raise the disagreement with Chinese authorities. An embassy spokesman had no comment.

from ATLANTA JOURNAL AND CONSTITUTION (GA) 17th April 2002
CHINESE CURBS MIGHT HURT UPS

Beijing — In a major test of China's willingness to maintain free and open markets as a new member of the World Trade Organization, the state-run postal monopoly has issued an order that could virtually shut down the operations of United Parcel Service, Federal Express and other express mail companies in China.

China Post announced it would limit express delivery by private companies to articles more than 1.1 pounds, require all prices to be higher than the postal authority's and forbid delivery to offices of the government, military or Communist Party or of any item addressed to an individual. In a circular published last month, it gave companies until May 6 to register or risk losing the right to do business in China.

The move prompted protests by UPS and other delivery companies, which have warned Beijing the order could "possibly close down the air freight industry at the end of April."

UPS won rights to fly to China in late 2000 after a high-profile route case. It now operates six weekly cargo flights and recently opened a package-sorting hub in the Philippines, aiming to boost its intra-Asia service.

UPS made $200 million during the China flights' first full year of service, which began in April 2001. But it's unclear what effect the Chinese government's policy will have on UPS' financial performance in Asia.

John Flick, a spokesman at UPS headquarters in Sandy Springs, said China would hamstring its own exports if it followed through with the new policy.

"The express industry is vital to China's international trade ambitions," said Flick. "They'd be putting their own businesses at a major competitive disadvantage."

In a letter urging the trade ministry to reject the proposal, UPS, Federal Express, DHL Worldwide Express and TNT International Express wrote: "The effects on China's international trade, investment and diplomatic relations could be catastrophic, as the industry carries billions of dollars' worth of goods and employs tens of thousands of employees." Big money in express

It is also hugely profitable. The international express delivery market in China, an estimated $1.2 billion business, is growing by 30 to 50 percent annually, according to Li Limou, general secretary of the China International Freight Forwarders Association. Profits are growing just as quickly, he said.

China Post's EMS service, established in 1995, has one-third of the market and the rest is split among the five major international companies — UPS, FedEx, DHL, TNT and Japan-based OCS. But the foreign companies are steadily gaining on EMS, whose equipment, technology and service lag far behind, Li said.

The restrictions — announced by China Post in February — would affect 60 percent of all international express delivery. The May 6 deadline was published on March 6 in the state-run People's Daily, with no prior notification, according to Li.

Li, whose group has more than 500 members, including the international express companies, said he had tried to discuss the matter with China Post, to no avail. He warned that the impact on China's foreign trade and economic growth could be huge.

"This will directly harm the interests of the country and of clients," he said. "Foreign trade is one-fifth of our GDP. Without express delivery, rapid development of foreign trade is impossible."

In a series of articles from the state-run Xinhua News Agency defending its actions, China Post insists it is acting fully within its legal right to oversee all mail services. One spokesman said they were simply trying to standardize prices. Last week, Xinhua quoted an unnamed China Post spokesman as saying China's postal law does not differentiate between normal mail, over which it has a monopoly, and express mail, which is now under the administration of the foreign trade ministry. Li offers a sports analogy: "China Post wants to be the athlete, the coach and the referee all at once. It's not fair."

China Post also insists its actions do not violate any WTO agreements. It is true that while China agreed to open up many markets, no deal was made on the courier business.

However, Li argues that the attempt to restrict business breaks China's promise not to further limit any industry that has already been opened up and also violates WTO principles of nondiscrimination and fair competition. Beijing will settle issue

FedEx said in a statement that pegging prices to the postal service's competing business "leaves room for price manipulation by the postal authority." FedEx serves China with 11 weekly flights to Beijing, Shanghai and Shenzhen.

Li said China Post had refused all requests to meet with him or individually with the companies. Ultimately it probably will be the top leaders in Beijing who will decide the outcome. China Post reports directly to the State Council, China's Cabinet, which is headed by Premier Zhu Rongji. This is not the first dispute between private courier companies and postal authorities. There has been friction since the mid-1990s, when the market became more competitive as the multinational companies became more established.

However, previous disputes were limited to provincial or municipal postal agencies trying to restrict business operations. They were resolved with the intervention of the State Council or the foreign trade ministry. Li said this dispute is the first time China Post has been involved so directly. In one of the few instances when the state-run media have been given some latitude to report, most major media outlets have sided against China Post, accusing it of acting like an old-fashioned monopoly.

— Staff writer Dave Hirshman contributed to this article. Copyright 2002 Atlanta Newspapers Inc.