The market now will have to rethink the future of China's express delivery sector after the "price markup tide" in the winter of 2009 and the collapse of DDS, a private logistics company based in Shenzhen, in early 2010. The express delivery has become an important channel of the commodity circulation in the society after years of fast development. Amid the poor service quality and weak core competitiveness, it will become an inevitable choice to advance the integration and restructuring of the express delivery sector through M&A and thus promote its sustainable and healthy development.
I. Current Status of Express Delivery Sector in China
As to the definition of express delivery, the revised Postal Law identifies express delivery as an activity of delivering letters, parcels, printed matters and other objects safely and quickly to specific individual or institutional recipients within the committed time in line with the name and address indicated on the package. However, express delivery considerably differs from the traditional postal business in transported object. The latter mainly transmits letters, and thus belongs to the transmission of information flow in nature, while the former mainly falls into the scope of material flow. For this reason, the express delivery sector is more similar to the logistics sector. However, in general, the goods transported by the express delivery sector are lighter in weight and smaller in size, and poses higher requirement in time than the logistics sector. Therefore, the express delivery sector is an emerging industry that is relatively independent of the logistics sector and the traditional postal sector.
The rise of the international express delivery sector can be traced back to the late 1960s in the United States, and the first express delivery company in China was only founded in 1979. With the deepening of reform and opening up in China, the quicker and safer goods transmission service was needed amid the increasingly fierce competition environment, and also made possible by the improving traffic condition and IT management technology. As a result, the express delivery sector in China has so taken shape. In 1980, China Post launched the global postal express delivery service (EMS). Later, international express delivery giants have made their presence in China's market through joint venture, agency and other means. The Postal Law promulgated in 1986 stipulates that the posting business of letters and other articles featuring letters in nature should be exclusively handled by the postal carrier, unless otherwise specified by the State Council. The postal enterprise can no longer meet the demand of the foreign trade sector for the express delivery of customs declaration documents and samples, and private express delivery enterprises have quickly emerged in this background. In 1993, SF Express and Shentong Express were created in the Pearl River Delta and Yangtze River Delta respectively. In early 1994, ZJS Express opened business in Beijing. In December 2005, China fully opened up the logistics sector and the express delivery sector to foreign capital according to the agreement with the WTO. In September, 2007, the express delivery service was published as a postal industry standard, which has established the regular service standard for the sector. In July, 2008, the Measures for the Management of the Express Delivery Market was formally implemented. On October 1, 2009, the Measures for the Management of the Express Delivery Business Licensing and the newly amended Postal Law were implemented at the same pace, which has first defined the legal status of express delivery enterprises and set the access threshold for the express delivery sector.
After more than 30 years of development, the express delivery sector has grown into a vast industry in China. In 2008, China had more than 5,000 registered express delivery enterprises, with 231,000 people engaged in this business. In 2009, the express delivery enterprises above the designated size handled 1.86 billion articles, up 22.8% year on year, and achieved a combined income of RMB47.90B, an increase of 17.3% from a year earlier. In the year, the intracity express delivery, the interregional express delivery and the international express delivery (including Hong Kong, Macao and Taiwan) contributed 7.3%, 55.7% and 31.7% of the total business incomes respectively, and 23.5%, 70.4% and 6.1% of the total business volume separately.
The express delivery enterprises may be divided into four categories in terms of nature and size. The first category is foreign express delivery enterprises, including FedEx, DHL, TNT and UPS, which own rich experience, powerful funds and developed global networks. The second is state-owned express delivery carriers, such as China Post (EMS), CAE and CRE, which take a leading position in the domestic express delivery market because of their background advantage and sound domestic networks. The third is large private express delivery enterprises, including SF Express, ZJS Express and Shentong Express, which are expanding across the country after taking a foothold in regional markets. The last is small private express delivery enterprises, which are characterized with small sizes and flexible management, but relatively poor management. These enterprises mainly operate intracity and intra-provincial express delivery business.
II. Motives behind M&A of Express Delivery Sector
The legal position of the express delivery sector was not defined before the promulgation of the new Postal Law. Instead, the express delivery enterprises had existed as "illegal" organizations under the Postal Law 1986. With the expanding of the express delivery market and the implementation of the new Postal Law, the conditions for the M&A and integration in the express delivery sector have gradually become mature.
1. Industry Prospect Provides Motives for M&A
The sustainable and steady growth of the domestic economy provides a good economic foundation for the express delivery sector. In 2007-2008, the express delivery market scale expanded by about 2.0% when the GDP of China grew by 1.0%. The global financial crisis has reduced the international express delivery volume. However, the express delivery market has demonstrated an obvious momentum to pick up in the context of the gradual recovery of the world economy and the robust rebound of China's economy. By the end of Q3, 2009, the express delivery volume nationwide had exceeded that in the same period of 2008.
The express delivery sector has embraced a new business growth area after the online shopping emerged in recent years. According to the statistics, in 2008, the parcel volume generated by e-commerce topped 500 million in China, about one third of the total express delivery volume. Online shopping has developed by leaps and bounds amid the financial crisis. The China Online Shopping Industry Research Report 2009, published by CNNIC, the Internet administration in China, shows that in H1'09, the national online shopping amount totaled RMB119.52B, representing 2.0% of the total social consumer retail volume, while the C2C shopping expenditure accounted for 89.0% of the total online shopping amount. Online shopping, particularly C2C transactions, usually chooses third-party express delivery enterprises to deliver goods, so it serves as a good business source for the express delivery sector. More than 60.0% of the business volumes of Shentong Express, Yuantong Express and other express delivery operators that maintain the close business relations with Taobao.com, the largest C2C marketplace in China, come from online shopping transactions.
The vast potential of the express delivery market offers an enormous space for express delivery carriers. These enterprises can quickly expand the market share by acquiring and merging existing counterparts, apart from developing the market through licensing and establishment of business outlets.
2. Industry Property Drives the Growth of M&A
The express delivery sector is characterized by economies of scale. Thus, integration among express delivery enterprises can generate the synergy effect in management in multiple ways. First, the M&As among express delivery enterprises can expand the market coverage, extend the express delivery network, and thus increase the business volume and the business income. Second, integration of express delivery enterprises can enhance the brand value of enterprises. In particular, after merging smaller players, large express delivery enterprises can make the most out of their intangible assets such as brand and reputation. Finally, integration among express delivery enterprises can optimize staff and vehicle allocation, improve the marketing and delivery efficiency and therefore reduce operating costs. The property of the express delivery sector means that this sector should be moderately concentrated, and the relatively low concentration at present will be enhanced through M&A and integration.
3. Policy Adjustment Provides Opportunity for M&A
The newly implemented Postal Law specifies that the express delivery business is subject to the business licensing mechanism, and the access threshold. The law provides that an express delivery enterprise must have a registered capital of no less than RMB500,000 if it operates within a province, autonomous region or municipality (hereinafter referred to province), no less than RMB1M if it operates across provinces, and no less than RMB2M if it operates international express delivery business; and that express delivery enterprises cannot operate the letter delivery business monopolized by the postal enterprise, or deliver official documents of state authorities. Although the scope of monopoly for the postal enterprise has not been defined yet, the Provisions on the Business Scope of Postal Enterprise (Draft) plans to allocate the business of delivering articles below 50g in the same city and those below 100g to other cities to the business scope of the postal enterprise.
At present, most of the 5,000-plus express delivery enterprises registered in China are small-sized, and the access threshold for the express delivery sector will exclude part of the operators out of the market. The defining of the business scope of the postal enterprises will also pose a risk to the survival of many small express delivery carriers. The express business with light weight and small dimension is just the butter on the profit cake of express delivery enterprises, and now takes up 40.0%-60.0% of the business volumes of some express delivery enterprises. The adjustment of the industry policy will strengthen the intention of some players to exit, and among them are part of enterprises with certain market positions and regular management. These enterprises will become suitable M&A targets of large players.
III. M&A Modes of Express Delivery Sector
The M&A motives and landscape of the express delivery sector mean that the integration in the express delivery sector will be carried out in two modes: horizontal and vertical M&As.
1. Horizontal M&A among Express Delivery Enterprises
The horizontal M&A means the integration among express delivery enterprises. Based on the current market landscape, two possibilities may exist. Large private express delivery enterprises acquire smaller private ones, and foreign express delivery enterprises buy private ones. At present, large private enterprises such as SF Express and Shentong Express mainly focus on first-tier cities in the economically affluent regions, running relatively weak networks in small and medium cities. Expanding to small and medium cities will become an inevitable choice of large express delivery enterprises amid the fiercer competition in first-tier cities and the growing demand for express delivery services in small and medium cities. The express delivery market in small and medium cities are mainly dominated by local small express delivery enterprises, which usually maintain extensive distribution networks in local markets. However, due to limited financial strengths, they face the risk of being forced out of the market after the adjustment of the industry policy. At this time, if large private express delivery enterprises acquire these small players, it will come as win-win deals. Acquirers will be able to improve network systems and acquired companies will obtain financial and technical supports.
Currently, foreign counterparts dominate the international express delivery market (including Hong Kong, Macao and Taiwan), and are shifting their attention to the vast domestic express delivery market, a big cake for them. The new Postal Law prohibits foreign investors from operating the domestic express delivery business handling letters, but does not define the concept of "foreign investors". Thus, foreign investors are still eager to enter this market. It may be a practical option for foreign express delivery enterprises to enter the domestic express delivery market indirectly by acquiring private express delivery enterprises with certain sizes. In H1'09, a widespread market rumor was that DHL intended to acquire Shanghai-based A Plus Express for RMB300M through its subsidiary in China DHL-Sinotrans. This may trigger a new round of expansion of foreign investors in China.
2. Vertical M&As among Express Delivery Enterprises
The vertical M&A in the express delivery sector means express delivery enterprises expand to the upstream and downstream of the industrial chain. The future horizontal M&A in this sector will mainly take the form of express delivery enterprises' integration of transport carriers. At present, the domestic express delivery enterprises are faced with certain barriers in express transportation except China Post. This has constrained the development of these enterprises. Transport of private express delivery enterprises is mainly road transport, and a small number of enterprises use air transport. The development experience of the international express delivery sector indicates that air transport is an important means to enhance the competitive strengths of express delivery enterprises. At the start of 2010, SF Aviation in which SF Express holds equity finished the virgin flight, suggesting private express delivery enterprises have formally engaged in the aviation express delivery market. As the domestic express delivery enterprises are building up strengths and the aviation sector is opening up, private enterprises will embrace increasingly mature conditions to buy in and control aviation enterprises.
As to the vertical integration of foreign express delivery enterprises in China's express delivery market, it will possibly focus on road transport operators. The strong financial conditions of foreign express delivery enterprises enable them to enjoy absolute advantage in the aviation express delivery area, but the road transport system supporting this area still remains the weak point of their development in China. Foreign express delivery enterprises are keen to improve their express delivery network system via road transport, thus expanding the coverage of the express delivery network. In March, 2007, TNT completed the acquisition of Hoau Group Co., Ltd, a leading road transport operator in China, to enhance its distribution ability in China.
To conclude, as the express delivery sector is developing at fast speed, the internal M&A and integration have become inevitable due to such factors as its inherent property and the policy adjustment. In the future integration, the major forms are expected to be the horizontal and vertical M&As launched by large private express delivery enterprises and foreign giants.
