This is a good time to be in the package delivery business in China. Last year, Chinese bought 1.85 trillion yuan ($300 billion) worth of goods online. There were 9.2 billion deliveries in 2013, a 60 percent increase, worth 143 billion yuan, according to the Xinhua News Agency. Only the express delivery market in the U.S. is bigger.
All that activity should translate into business for United Parcel Service (UPS) and FedEx (FDX). Both have been building China operations for decades, with FedEx entering the market in 1984 and UPS following in 1988. By 2009, FedEx had 58 Chinese branches to UPS’s 33.
But the two have gone into reverse since then. Not only have they not opened new branches, but they also have had to seek reapproval for existing operations. After a new law governing the industry was passed in 2009, the State Post Bureau decided that all carriers, local and foreign, needed new licenses. FedEx and UPS are still waiting for the regulator to grant many of theirs. Neither has official approval for domestic operations in Beijing, though they can make deliveries between some other Chinese cities. “Instead of giving us one permit for all of our branches, they said, ‘We are going to grant you individual permits for each of your branches,’ ” says Alan Turley, FedEx’s vice president for international affairs, Asia Pacific. While FedEx received permits for international service in 2010, it was 2012 before it got eight permit renewals for domestic service. They said Beijing “was too sensitive, so they did not give us a permit,” Turley says. Last July, FedEx received 29 more licenses—again, not including Beijing. It is still waiting for the remaining 21 to get back to serving 58 branches.
“There’s little progress whatsoever,” says David Cunningham Jr., the company’s Hong Kong-based president for Asia Pacific. While FedEx waits, local competitors are getting much gentler treatment from the regulator, he says: “Domestic companies are able to get approval and have hundreds [of permits], but we are going through a long, arduous time frame to grow and expand.” The Post Bureau declined to comment.
The delays have given a boost to Suning Commerce Group, the Shenzhen-listed electronics retailer that also operates a domestic courier business covering 164 cities. Another beneficiary is S.F. Express, with revenue of more than 20 billion yuan, according to the Shenzhen Daily. Launched in 1993, S.F. now has more than 240,000 employees and 14 cargo planes, up from 100,000 and two planes in 2011.
The slow license renewals for UPS and FedEx look like an attempt to give homegrown companies a head start. “In cases where you have regulatory bodies coming after you, foreign companies can often be, if they are well-known brands, vulnerable targets,” says James Roy, associate principal at China Market Research Group in Shanghai.
State-owned China Central Television has broadcast many high-profile reports of multinationals such as Starbucks (SBUX) and Apple (AAPL) allegedly taking advantage of Chinese consumers. The government last year imposed price-fixing penalties on milk powder companies, focusing on foreign brands owned by Danone (BN:FP), Mead Johnson (MJN), and others. Another antimonopoly investigation targets Qualcomm (QCOM), the U.S. chipmaker revealed in November.
The problem is severe in cyberspace. China’s Great Firewall bans access to Facebook (FB) and Twitter (TWTR), carving an opening for local social media companies Renren (RENN) and Sina Weibo. World leader YouTube (GOOG) is off-limits, so local online video company Youku Tudou (YOKU) hasn’t had to compete with it. Since China has banned game consoles, kids who might have bugged their parents to buy Microsoft (MSFT) Xboxes or Sony (SNE) PlayStations instead play online games on local portals Tencent (700:HK) and NetEase (NTES).
Foreign companies are still welcome if they can offer technology transfer, special training, or superior service. But that advantage lasts only so long. “Once there’s momentum” for the local player, says Mark Natkin, managing director of Marbridge Consulting in Beijing, “then it’s very difficult to claw one’s way back in.”
FedEx and UPS haven’t given up. Scott Davis, the chief executive officer of UPS, traveled to China in November and met with Vice Premier Wang Yang. FedEx Chairman Fred Smith will be in Beijing later in March. UPS now has licenses for 19 branches out of its original 33. Brendan Canavan, UPS’s president for Asia Pacific, says he hopes to get the rest soon. FedEx’s Turley says the regulators have promised by May to respond to their request for the rest of the licenses.
FedEx is looking beyond China. It opened a hub in Singapore in 2012 and will open another in Osaka soon. They’ll connect the U.S. with the fast-growing economies of Southeast Asia. Global companies, Cunningham says, “may not be as China-centric as they used to be.”