China to limit operations of UPS, FedEx, others

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 500 grams –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 has prompted protests from foreign companies, who have warned Beijing that the order could "possibly close down the air freight industry at the end of April."

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."

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 (CIFA). 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 has tried to discuss the matter with China Post, to no avail. He warns 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 on 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.

"You can't say just because the cow is running faster that it's not a cow and is not the responsibility of the cow-herder," he was quoted as saying.

But Li prefers 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 non-discrimination and fair competition.

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.

UPS referred all questions about the dispute to CIFA. After winning the right to fly to China last year, it now has six weekly flights, bringing in revenue of $200 million in its first year — twice its forecast. And in an effort to catch up with FedEx and DHL for intra-Asia service, it opened a new cargo hub in the Philippines earlier this month.

Li said China Post has refused all requests to meet with him or individually with the companies. Ultimately, it will likely be the top leadership 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, often by confiscating documents, demanding inspections or imposing excessive fines. 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 where the state-run media has been given some latitude to report, most of the major media outlets have sided against China Post, accusing it of acting like an old-fashioned monopoly.