FedEx Delivers in China

The global transportation leader hopes to tap into China’s growing domestic express delivery market.As a global leader in the transportation and information industry, Federal Express Corp. handles more than 8.5 million shipments for express, ground, freight, and expedited delivery service every day in more than 220 countries, and it employs more than 290,000 team members worldwide. FedEx’s operating companies include FedEx Office, FedEx Supply Chain, FedEx Ground, and FedEx Express. As the world’s largest express transportation company, FedEx Express delivers about 3.5 million packages and 11.5 million pounds of freight a day.

One of FedEx’s fastest growing markets is the Asia-Pacific region, in particular China. Revenue in China’s express delivery market is expected to grow 30 percent in 2011, three times as fast as China’s overall economic growth, according to the China Express Associaton. Currently, FedEx employs more than 16,000 staff and serves more than 30 countries in the region. David L. Cunningham Jr., president of Asia Pacific FedEx Express, which is headquarted in Hong Kong, recently spoke with CBR Associate Editor Ben Baden about FedEx’s history and plans for its business in China.

When, where, and how did FedEx first enter the Chinese market? Where does FedEx operate now?

Cunningham: FedEx entered mainland China in 1984. Since then, we have expanded our international and domestic service to reach more than 400 cities in China. We operate as a wholly foreign-owned enterprise, which allows FedEx operational and business flexibility on the ground.

There have been a number of business milestones for FedEx in China. FedEx was the first all-cargo carrier to hold rights to fly into and out of mainland China. In 2005, we were first to launch a direct air cargo flight from mainland China to Europe and an overnight connection from mainland China to India. Our FedEx Asia Pacific hub, which opened in February 2009, is located at Guangzhou’s Baiyun International Airport in southern China. We currently operate more than 225 weekly flights in and out of China.

FedEx established a domestic business in China in May 2007, which is supported by our China Regional Hub based at Hangzhou International Airport. Currently, FedEx has more than 100 operations stations in megacities like Beijing and Shanghai as well as other provincial capitals and smaller western and inland cities across China, and we continue to invest in both our infrastructure and domestic portfolio offerings for customers.

How does the express delivery market in China compare with the United States and other markets?

Cunningham: China is as sophisticated as the US and European markets in terms of demand for reliable express delivery. Companies in China require access to time-definite shipping, later cut-off times, earlier delivery times, and a comprehensive portfolio of services. Both markets play an integral role in our global network.

Where China once lagged behind the United States and Europe in terms of infrastructure, the Chinese government is making great strides to enhance the “hardware” such as airports, roads, and rail. These infrastructure upgrades are resulting in a migration of manufacturers inland away from the eastern seaboard. As China better connects itself and western cities continue to grow, the express delivery market will need to meet market demand. By 2025, China is expected to have 221 cities with more than 1 million residents, eight of which will have a population of more than 10 million.

While government-led infrastructure initiatives like highway construction undoubtedly benefit the express industry, we also need to continue making our own investments. For example, to better meet client needs, we invested in our FedEx Asia Pacific Hub located in Guangzhou, south China’s biggest and busiest airport, and recently upgraded our Wuhan customer service facility in central China’s Hubei province.

The size of China’s logistics industry as a whole has seen a significant expansion. In 2011, the total value of the industry rose 12.3 percent year on year to ¥158.4 trillion ($25.1 trillion). And the growth momentum is expected to continue. There is tremendous potential in both the international and domestic express delivery markets and our established networks and experience has put FedEx in a strong position.

Besides the express delivery market, what other services do you provide for companies in China and around the world?

Cunningham: In addition to our international and domestic shipping, we have also introduced customized services to meet and anticipate changing customer demands.

• In January 2010, FedEx Express domestic service expanded its scope to include FedEx General Delivery, an ideal choice for shipping medium (heavier than 5kg), large (heavier than 60kg), and non time-definite packages.
• FedEx Critical Inventory Logistics services was launched last year. We provide an integrated logistics solution that enables customers to more efficiently manage high-value and time-critical inventory throughout the supply chain.
• FedEx Trade Networks, a subsidiary of FedEx Corp., provides international freight forwarding services, customs brokerage, trade, and customs advisory services and access to new products and markets for customers from 10 locations in mainland China. These include Beijing; Guangzhou and Shenzhen, Guangdong; Qingdao, Shandong; Shanghai; Xiamen, Fujian; Tianjin; Ningbo, Zhejiang; Dalian, Liaoning; and Chengdu, Sichuan.

FedEx supports all levels of China’s economic development, helping to keep Chinese companies competitive in the global marketplace, to advance infrastructure investment, and to sustain the country’s economic growth.

What distribution and logistics challenges do foreign companies in China and exporting to China face? How can FedEx help manage these issues?

Cunningham: Efficient logistics, especially express airfreight relies on “hardware” in the form of physical infrastructure, such as airports and motorways mentioned earlier, as well as “software” in the form of regulations and procedures that govern the use of those assets and the flow of goods.

Hardware makes a huge impact on the overall logistics industry development, and it is essential in ensuring theflow of goods. While China has been rapidly resolving the hardware issue over the past decades, improvements to the software issue continue to be a challenge for corporations, not just foreign companies. Streamlining bureaucracy, simplifying licensing and permit applications, and eliminating duplication of procedures at both the national and regional level are important.

With more than 27 years of experience in China, FedEx has been providing consistent quality and reliability in express delivery within, into, and out of China. This provides an exemplified operational model, supporting the overall development of the transportation industry in China. In addition, our provision of transparent tracking systems and customs clearance helps both domestic as well as foreign corporations meet their business needs.

What are your plans for the domestic market in China?

Cunningham: FedEx established domestic services as a wholly foreign-owned entity in mainland China in May 2007. As mentioned, FedEx serves more than 400 Chinese cities from 114 operation stations across the country, and our domestic service includes next-day delivery and second-day delivery service commitments.

In 2010, FedEx launched a domestic general delivery service for inter-province, long-distance deliveries reaching major cities in China. This service is a reliable, cost-effective solution for medium- and large-sized shipments that do not need to arrive at a specific time.

Over the past five years, China’s express delivery business has nearly doubled from ¥30 billion ($4.7 billion) in 2006 to ¥57.4 billion ($9.1 billion) in 2010. FedEx will continue to enhance our existing operational network and further strengthen our domestic and international services to grow with the China market.

What challenges does FedEx face in the domestic delivery market in China?

Cunningham: The domestic delivery market is very competitive with a large number of strong local players. Those local firms have grown up with the market, they have strong ties in the community, and everyone in China is pulling for domestic companies to succeed. Although we have years of international experience and have been operating in China since 1984, we are a relative newcomer to the domestic market.

A second challenge is the size and complexity of the market. Think about China’s geography: While the country as a whole is larger than the United States, most of the population—and an even greater portion of the higher-value added industrial and consumer activity—is squeezed into an area that is about the size of Western Europe. The challenge is capacity, which at the moment is unable to meet demand. These capacity issues can be anything from the availability of slots at an airport to congestion on roads and railways. Transportation and infrastructure are also undeveloped in the areas outside of major cities. This makes it difficult for domestic delivery.

Different regions have very different habits and preferences. Regulation of key elements of our business, such as trucking, is intensely local, which makes building and operating a nationwide network very challenging. China is not one national market, but a collection of regional markets.

Infrastructure also continues to be a challenge. As I mentioned earlier, efficient logistics relies on the physical “hardware” as well as the regulatory “software.” Ensuring access to markets is essential for the continued growth and competitiveness of the Chinese economy. The removal of regulatory barriers, physical access to suppliers, customers, and partners through hard infrastructure, and the removal of trade and market entry barriers both domestically and internationally will ensure China’s competitiveness.

FedEx operates the “hub and spokes” distribution model, which is a system of connections arranged like a chariot wheel in which all traffic moves along spokes connected to the hub at the center. FedEx pioneered the hub-and-spokes concept in its US operations and has implemented a similar strategy in its international operations. However, many of the “spoke” airports in China are not yet ready to accommodate the domestic delivery industry. This is in part due to China’s low airport density. In China, there are 1.6 airports every 100,000 square kilometers. Many airports also remain underutilized as a result of airspace constraints and difficulties in forming and supporting regional air markets. These constraints can result in unnecessary downtime at airports, which impacts the airfreight express industry. We are working closely with the regulatory authorities to address some of these challenges and maximize the opportunities.

What key trends do you see in distribution and logistics in China in the future?

Cunningham: The development of the logistics industry in China is being fuelled by the continual growth of its economy. In 2010, China surpassed Japan as the second largest economy in the world. The nation’s GDP growth rate stood at 9.2 percent in 2011.

With the country’s expanding affluent middle class, we are witnessing the trend of a growing demand for domestic delivery with the rapid development of e-commerce in China. China currently has more than 500 million internet users, representing the world’s biggest online population. Of the 513 million internet users in China, 28 percent, or 145 million shop online.

In addition, more and more companies in China are moving their manufacturing base from the coastal cities to western China. There are growing shipping demands for fast and reliable international express service in the second- and third-tier cities in western China.

We have also witnessed the rapid development of high- end products entering the Chinese market. The products include electronic goods and components and products with short life cycles, such as textiles and high fashion goods. They are coming largely from the United States and Europe. This represents another opportunity for the logistics industry in China. It is important to have a trusted transportation partner to ensure the reliability, security, and flexibility to meet the increasing demands of customers.