FedEx Takes on UPS in China With Longest-Range Cargo Jets: Freight Markets
FedEx Corp. handles China deliveries with a local partner bought for $400 million and uses long-range freighters to fly to the U.S. nonstop. United Parcel Service Inc. seeks to build its own network and operates bigger jets.
They’re chasing the same goal: taking advantage of Chinese regulators’ moves to welcome more foreign companies into a market for express shipments that may be valued at $7.5 billion.
The prize for FedEx, operator of the largest cargo airline, and UPS, No. 1 in package deliveries, is wider access to the world’s fastest-growing major economy. China’s 9.6 percent annual expansion in gross domestic product is more than three times the pace in the U.S.
“If you’re an international logistics provider, which they both are, you’ve got to be big in China,” Kevin Sterling, a BB&T Capital Markets analyst, said in an interview. “You have to go after it and fight for it or you’re in trouble.”
China’s import/export market for express carriers is probably about $2.5 billion, with UPS and Memphis, Tennessee- based FedEx together accounting for about a third of sales, estimated Satish Jindel, president of SJ Consulting Group Inc. The biggest share, about a third, is held by Deutsche Post AG’s DHL, Jindel said.
The domestic express market is about $2 billion to $5 billion, Jindel said. Neither Atlanta-based UPS nor FedEx breaks out China sales or volumes. UPS has about 5,000 employees there, compared with 8,000 for FedEx and 13,000 for DHL.
China’s State Post Bureau still has a monopoly for domestic mail and is the biggest mover of express packages, followed by state-backed firms such as Sinotrans & CSC Holdings Co., said Jindel, who is based in Sewickley, Pennsylvania. Thousands of smaller companies also jockey for that business, UPS said.
“China’s new policies go to the heart of what FedEx and UPS are trying to do, and that’s bringing new competition,” said Christopher McNally, a political economist at the East-West Center in Honolulu. “There are still local distribution monopolies on a county or province basis, where one company is doing foodstuff and another is doing light manufacturing and another is doing technology. That’s all about to change.”
For FedEx and UPS, failure to create a local network would be a “significant disadvantage” in just a few years, said BB&T’s Sterling, who is based in Richmond, Virginia, and recommends buying shares of both companies.
Overseas markets are critical to both companies. FedEx’s international priority shipments rose 11 percent in the three months that ended in November, compared with 3 percent in the U.S. UPS’s third-quarter gains were 13 percent and 3.6 percent.
FedEx took in an average of $54.54 per international priority package in the quarter ended in November, compared with $15.19 for parcels in the U.S. Average revenue at UPS in those categories for the quarter ended Sept. 30 was $35.76 and $8.95.
After entering China in 1989 by buying the Flying Tigers freight airline to gain routes to 21 Asian countries, FedEx spent $400 million in 2007 to take over a joint venture with Tianjin Datian W. Group Co., also called DTW. That deal offered access to China’s domestic market to FedEx, which then had to apply for the rights again last year under new postal rules.
UPS filed its application in September, and Chief Executive Officer Scott Davis met with Chinese Vice Premier Wang Qishan in Beijing on Nov. 30 to discuss the mutual benefits of trade.
“FedEx is already operating domestically by buying a company with local licenses, and it would be hard to imagine they don’t let UPS also do the same,” said McNally, who expects the companies to receive their approvals this year.
UPS has permission only for certain domestic deliveries for customers between major cities. The company plans to build a local network “whether we do it organically or organically with some acquisitions,” Chief Financial Officer Kurt Kuehn said.
Growth in China’s express market is spurred in part by Chinese who have lived elsewhere and return home to open businesses, only to find that logistics costs are “double those of more developed countries,” said Dan Brutto, head of international operations for UPS.
“They’re coming back to China and saying, ‘We need a UPS,’” Brutto said in an interview. “There are well over 10,000 carriers in China today and China wants to move away from that, from state-owned enterprises.”
China already is home to air hubs for each company’s international operations. UPS’s intra-Asia hub is located in Shenzhen. FedEx’s Guangzhou facility opened in 2009 and is its largest outside the U.S. Both companies also send packages via Hong Kong, which may be poised to eclipse FedEx’s hometown hub in Memphis as the world’s busiest for cargo.
FedEx began using Boeing 777 freighters, the longest-range twin-engine cargo jet, last year on flights between cities such as Shanghai and Memphis, which require less-than-capacity payloads so the plane can fly 7,428 miles (11,952 kilometers) without refueling.
The trade-off is worth it, because customers get a cutoff time for shipments that’s two hours later than UPS’s while FedEx can stuff the 777s with lighter, more-profitable packages, said David Cunningham, president of FedEx Express Asia-Pacific.
“It’s the high-value technology and time-sensitive types of goods, whether it be iPhones or iPads or computers or garment samples,” Cunningham said in an interview. “These aircraft are full.”
UPS favors four-engine Boeing 747s able to carry 249,000 pounds (113,000 kilograms). While that is about 40 percent more than on FedEx’s nonstop 777s, according to Boeing’s data, the 747s need a refueling stop in Alaska of as long as 90 minutes. UPS still reaps a “substantial advantage” in efficiency on most routes, CFO Kuehn said.
“We could do direct flights also, but you give up some payload,” Kuehn said in an interview. “That goes back to keeping our costs low so we’re price-attractive and generating higher returns to capital.”
UPS surged 27 percent in 2010, more than twice the 13 percent gain for the Standard & Poor’s 500 Index and FedEx’s 11 percent advance. UPS rose 30 cents to $72.25 at 4:15 p.m. in New York Stock Exchange composite trading, and FedEx added 63 cents to $95.63, the highest closing price since May 2008.
Buying carriers already serving China fits FedEx’s record of relying on acquisitions to grow, according to BB&T Capital Markets’ Sterling.
Founded in 1971, FedEx has made purchases including trucker Caliber System Inc. for $2.25 billion in 1998 and the $2.4 billion buyout of the Kinko’s copy-center chain in 2004.
A partnership with Sinotrans gave UPS a toehold in China in 1988, and the company later won government approval to become the first U.S. cargo carrier to fly its own jets to China.
While UPS bought trucker Overnite Corp. for $1.2 billion in 2005 and freight forwarder and customs broker Fritz Cos. for $456 million in 2001, most of its network was built from scratch since the company’s founding in 1907.
“Both strategies work,” Sterling said. “FedEx probably has a little bit of a leg up in China because they bought DTW. But UPS won’t be far behind.”
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