Indignant China Postman, Wait a Minute

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On October 1st, 2009 the Chinese government enacted a law declaring that any parcels delivered using express services weighing 50g or less within a city, or 100g packages between cities, must be controlled exclusively by State-owned post offices. This explicit citation means foreign companies cannot invest in this part of the postal segment, and was met with a great deal of protest from major international players like DHL Worldwide Express Inc., FedEx Corp., and the United Parcel Service Inc.

A lot of this debate has been spent on whether or not China is violating WTO rules of National Treatment, which states that member countries present a level playing field to domestic and foreign entrants. But does the implementation of this new law really affect the big boys?

Despite their objections, this segment of the business represents a small sliver of revenue for the major international carriers. Their strength domestically lies in getting larger packages to their destinations quickly, securely, transparently and at a consistent price level. Right now groups like DHL or Fed-ex cannot costeffectively compete against local players in the express-letter delivery business, given the price sensitivity of the average Chinese consumer, whether private or commercial.

Before the enactment of the new law, the Stateowned service already controlled about 20% of the express letter market, which grew 21% in 2007 and 27% in 2008, according to the Wall Street Journal. The move actually seems more a part of an overall trend toward guojinmintui - literally, "the state advances as the private sector recedes" - than a specific jab at foreign-invested companies in the logistics sector. The State wanted a piece of the fast-growing action.

In reality it is local express carriers that will be hardest hit by the new law, which requires capitalization amounts that will literally close hundreds of small, domestic express services. In 2008 China had nearly 2,500 express delivery services supporting nearly 230,000 employees, many of whom ride scooters to deliver parcels as small as a letter to as large as - well, many of us have seen the elephantine- sized loads scooters in China are capable of carting.

Other, more mature delivery services, though, have provided real competition to the Chinese post office. "I've been really impressed with domestic carriers, especially Shunfeng," said Bhavesh Mistry, Managing Partner of EastWind Precision Engineering, based in Suzhou. "In the last eight months they've really grown rapidly and become quite reliable and professional." According to Mistry, groups like Shunfeng have computerized in the same way as the international carriers and have formed partnerships with small local players in towns so out-of-the-way that it is prohibitively expensive to use a FedEx. These carriers can also cost a fraction of what the international carriers charge in China.

Nevertheless, rising salary and fuel costs are already forcing domestic carriers to increase their rates. With the further development of inter-city infrastructure, customer requirements for quality of service and delivery time will imply further domestic industry consolidation. In two to four years, this actually may translate into new opportunities, as a greater number of mature domestic companies will be ripe for acquisition by foreign players who want to penetrate more deeply into the inland express market.

It will be during the acquisitions of these mature domestic companies that large international carriers will come up against another of China's new regulations: the anti-monopoly law. Already, Beijing has made judgements against Coca-Cola, Panasonic and General Motors which have deeply troubled multinationals across industries. When the major express carriers get to the point of wrangling with Beijing's idiosyncratic interpretations of the antimonopoly law, they may remember their earlier
frustrations with the new postal law as just a walk in the park.