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FEATURE STORY: Winner Takes All, The Battle of Global Logistics Giants
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BT 201604 040 06 Feature StoryWinner Takes All

The Battle of Global Logistics Giants

By Michael Dow

Until recently, the global logistics industry was dominated by the big Western multinationals. There was simply no way that rivals in the emerging markets could compete. These countries had neither the infrastructure nor the expertise to compete on a global scale. Back in 2014 an article in The Economist pointed out that in China "most warehouses are old and not yet highly mechanised. Goods are transferred up to a dozen times from vehicle to vehicle as they make their way across the country. There are no cargo hubs that help link freight from rail to road. The decrepit and overloaded lorries that ply the new highways are unable to find a return cargo on more than one-third of their trips". Moreover, "The industry is carved into niches, making it hard for integrated service providers to emerge. Sleepy state-owned enterprises such as Sinotrans and China Post control the markets for air freight and domestic post. Foreign express-delivery firms are salivating over the market, but FedEx and UPS, for example, have been granted only limited licences for domestic delivery".

However, even in the last couple of years China's infrastructure has come a hell of a long way and so too have domestic logistics firms. Nowadays the Chinese shipping and delivery companies are fast emerging as a force to be reckoned with, both domestically and internationally. Amongst the big players in are sector are Shunfeng Express, Yunda and YTO Express. Within a few short years these firms have come from the fringes of the industry to become multibillion dollar companies whose grip on the industry is strengthening by the day.

According to a recent report by China Daily, Shanghai YTO Express (Logistics) Co. Ltd. is now the largest express delivery business by market share in China after taking advantage of the booming e-commerce industry. According to the report, the company now employs up to 220,000 workers in 20,000 delivery centres across China. Yu Weijiao, YTO chairman, has turned the company into a driving force that has generated billions of yuan in revenue. YTO has 84 centres in Beijing alone, as the group takes advantage of the government's decision to realign the economy from cheap, mass-produced exports toward more sustainable consumer-fuelled domestic growth.

Ma Junsheng, chief of the State Post Bureau, said that companies such as YTO delivered 14 billion packages last year, as China surpassed the United States in the sector for the first time.

BT 201604 040 08 Feature StoryThe intense competition is fuelling a strong demand amongst these companies for working capital. In the future there is definitely going to be more IPOs coming out of the Chinese logistics sector. The next big one looks like it is going to be SF Express, the firm that already controls up to 30% of the Chinese delivery market. If the IPOs go well, then these firms will be in an even better position than they already are to expand domestically and internationally.

It goes without saying that the emergence of these Chinese logistics giants is a nightmare for the multinationals that are being edged further out of both the Chinese and global market. They have always been swimming against the tide while operating in China. Licenses have been granted to firms like DHL, FedEx and UPS, but there have been significant limitations that have reduced these firms' ability to come in and dominate the sector. They have historically had problems navigating their way through Chinese customs procedures, keeping up with local regulations and matching domestic rivals on delivery times. Above all else, it comes down to the huge disparity of operating costs between domestic and international logistics providers. Analysts have pointed out that the delivery of certain goods on the mainland can be done 50% cheaper by domestic companies than by the big multinationals.

BT 201604 040 07 Feature StoryDuring the recent annual gathering of China's most senior policy makers it became clear that the focus going forward will be on promoting the growth of domestic firms. The message from the central authorities was that foreign onlookers can expect to see increased competition from Chinese logistics companies. "The state champions will become particularly important as the economy slows and smaller firms get absorbed by bigger ones," said Andrew Collier, an independent analyst in Hong Kong and former president of Bank of China International USA. Furthermore, "In future Western firms are going to have to fight tooth and nail against the pro-China attitude that has permeated the upper echelons of the Chinese leadership."

This profound growth of big domestic players is forcing the multinationals which operate in China to have a serious rethink about their strategy going forward. Most importantly it is forcing them to consider whether or not to halt, or at least significantly reduce the amount of resources they plough into the China arm of their business. Reform of the nation's $18 trillion state sector will focus on making companies "bigger and better" with mergers and acquisitions pivotal, said the State-Owned Assets Supervision and Administration Commission in March. The plan to create national champions is undermining the confidence of European companies to put more investment in China, said Joerg Wuttke, president of the European Chamber of Commerce. Foreign direct investment has remained strong for decades as the outlook for robust growth in the Chinese market has been highly optimistic. Now however there are signs that multinationals are starting to change their tune, particularly those operating in the logistics sector that are seeing domestic rivals flourish.

BT 201604 040 09 Feature StoryUnfortunately for these Western companies though it is fast becoming a more global battleground. As the emerging Chinese giants get more working capital and more experience it looks like they will increasing be looking beyond the Middle Kingdom's borders. Yu Weijiao, chairman of YTO Express, has recently given strong indications that his booming business will be expanding internationally in the next few years. Last year, the group also set up an overseas business department and the company has registered its trademark in more than 100 countries. "About 20 overseas branches will be established next year, in countries including South Korea, Australia, the United States, Thailand, India, Russia and France," Yu said.

Who knows what the future holds in terms of the global picture. Although the Chinese firms are looking good at the moment it will be a whole different ball game when they have to compete with the established international behemoths in markets that don't afford them as much state support. One thing is for sure though, the way things are going this industry is shaping up to be one of the biggest commercial battlegrounds of the century. That isn't an exciting prospect if you are the CEO of a logistics company but it should ultimately mean lower costs and higher efficiency for consumers, which will in turn drive economic growth.


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