China courier

The Big Sort — The Economist

Leave a Comment / August 11, 2020

Economist–

–

economist-china-first-capital–

–

“THE vultures all start circling, they’re whispering, ‘You’re out of time’…but I still rise!” Those lyrics, from a song by Katy Perry, an American pop star, sounded often at Hillary Clinton’s campaign rallies but will shortly ring out over a less serious event: a late-night party in Shenzhen to kick off “Singles’ Day”, an online shopping extravaganza that takes place in China on November 11th every year.

The event was not dreamt up by Alibaba, but the e-commerce giant dominates it. Shoppers spent $14.3bn through its portals during last year’s event. That figure, a rise of 60% on a year earlier, was over double the sales racked up on America’s two main retail dates, Black Friday and Cyber Monday, put together. Chinese consumers are still confident, so sales on this Singles’ Day should again break records.

It points to an intriguing question: how will all of those purchases get to consumers? Around 540m delivery orders were generated during the 24-hour spree last year. That is nearly ten times the average daily volume, but even a slow shopping day in China generates an enormous number. By the reckoning of the State Post Bureau, 21bn parcels were delivered during the first three quarters of this year.

The country’s express-delivery sector, accordingly, is doing well. In spite of a cooling economy, revenues rose by 43% year on year in the first eight months of 2016, to 234bn yuan ($36bn). And although the state’s grip on China’s economy is tightening, the private sector’s share of this market is actually growing. The state-run postal carrier once had a monopoly on all post and parcels. Now far more parcels are delivered than letters, and the share of the market that is commanded by the country’s private express-delivery firms far exceeds that of Express Mail Service, the state-owned courier.

China’s very biggest couriers have been rushing to go public on the back of the strong growth. Most of them started life as scrappy startups, and are privately held. But because of regulatory delays, which mean a big backlog of initial public offerings, many companies have resorted to other means. Last month, two of them, YTO Express and STO Express, used “reverse mergers”, in which a private company goes public by combining with a listed shell company, to list on local exchanges. In what looks to be the largest public flotation in America so far this year, another, ZTO Express, raised $1.4bn in New York on October 27th. Yet another, SF Express, China’s biggest courier, recently won approval to use a reverse merger too.

But investors could be in for a rocky ride. Shares in ZTO, for example, have plunged sharply since its flotation. That is because the breakneck growth of courier companies masks structural problems. For now, the industry is highly fragmented, with some 8,000 domestic competitors, and it is inefficient.

One reason is that regulation, inspired by a sort of regional protectionism, obliges delivery firms to maintain multiple local licences and offices. Cargoes are unpacked and repacked numerous times as they cross the country to satisfy local regulations. Firms therefore find it hard to build up national networks with scale and pricing power. All the competition has led to prices falling by over a third since 2011. The average freight rate for two-day ground delivery between distant cities in America is roughly $15 per kg, whereas in China it is a measly 60 cents, according to research by Peter Fuhrman of China First Capital, an advisory firm.

A handful of the biggest companies now aim to modernise the industry. Some are spending on advanced technology: SF Express’s new package-handling hub in Shanghai is thought to have greatly increased efficiency by replacing labour with expensive European sorting equipment. A semi-automated warehouse in nearby Suzhou run by Alog, a smaller courier in which Alibaba has a stake, seems behind by comparison but in fact Alog is a partner in Alibaba’s logistics coalition, which is known as Cainiao. The e-commerce firm has helped member companies to co-ordinate routes and to improve efficiency through big data.

Other investments are also under way. Yu Weijiao, the chairman of YTO, recalls visiting FedEx, a giant American courier, in Memphis at its so-called “aerotropolis” (an urban centre around an airport) in 2007. He was awed by the firm’s embrace of advanced technology. He returned to China and sought advice from IBM on how his company could follow suit. YTO is using the proceeds of its recent reverse merger to expand its fleet of aircraft, buy automatic parcel-sorting kit and introduce heavy-logistics capabilities for packages over 50kg.

There is as yet little sign that China’s regions will begin allowing packages to move freely, so regulation will remain a brake on the industry. More ominously, labour costs are rising. There are fewer migrant labourers today who are willing to work for a pittance delivering parcels. This week China Daily, a state-owned newspaper, reported that ahead of Singles’ Day, courier firms were offering salaries on the level of university graduates.

–

http://www.economist.com/news/business/21710004-chinas-express-delivery-sector-needs-consolidation-and-modernisation-big-sort

–

China’s Logistical Nightmare

1 Comment / November 14, 2013

China First Capital blog logistics in China

–

China is modeling itself after the wrong part of the American economy. The money, the rhetoric and the policies are all focused on trying to replicate America’s lead in high-technology and innovation. Instead, China would be long-term much better off and its citizens enjoy immediate higher living standards if it copied something far more mundane from the US,  its distribution and logistics.  If China’s $9 trillion economy has an Achilles Heel, this is it. It simply costs too much to get things into consumers’ hands.

Wholesale layer is piled onto wholesale layer, with margin and fees extracted at every step. Fixers, expediters, overlookers all take a cut. Trucks are too small, tolls too high, warehouses too small, and road traffic too congested in major cities. Commercial and retail rents are high, relative to per capita income level. In China, there is enough “friction” in every retail transaction to start a bonfire.

Logistical costs and bottlenecks are the single biggest reason why so many goods made in China are sold at higher prices than in the US. This has more real-world consequences for average Chinese consumers than the level of the dollar-Renminbi exchange rate. It is logistics costs, all the stickiness and expense of getting products to market, that is most to blame for holding back the buying power, and so spending impulses, of Chinese consumers. Middlemen live well in China. Consumers less so.

It is cheaper, in many cases, to get a product made in China onto a container ship in Shanghai, offload it in Long Beach, truck it across the US, and then stock it on a shelf at a Wal-Mart in Georgia then it is to put the same product in front of Chinese consumers in a Wal-Mart in China. High taxes don’t help. China’s VAT, applied to most things sold at retail,  is set at a higher level than most sales taxes in the US. Another factor: retail competition as Americans know it is also largely absent in China. Stores don’t compete much on price in China. Wal-Mart won’t say, but it’s a fair assumption its margins in China are at least double those in the US.

But, high consumer prices in China are mainly the product of the high handling charges. A simple example. I eat a lot of fruit.  Most fresh fruit grown in China costs as much or more in supermarkets here than the same fruit grown and sold in the US.

Apples sell for around Rmb 6 (95 cents) per pound and up in China. The apple farmer gets around Rmb 1 per pound. The rest is liberally spread among all those standing between apple tree and my mouth.

Adjusted for purchasing power, Chinese average income levels are around 1/6th the US’s. So, that Chinese apple sells for equivalent, in US terms, of $6 a pound. That amounts to a lot of money per apple being shared by people other than the grower and the eater. How much? Chinese eat a lot of apples. In fact, almost half of all apples grown in the world are eaten in China, ten times more than total US consumption.

I met the boss of one of China’s largest apple shipping and packaging companies. Outside of China, this is a razor-thin margin business. But, the Chinese apple packer and shipper has profit margins well above 10%.

One of the most expensive links in the Chinese domestic supply chain are road tolls. China’s are among the most costly, per kilometer traveled, anywhere in the world. Trucks carrying agricultural products don’t pay tolls. Anything else moving along China’s highway system pays full freight. Depending where you are in the country, tolls run as high as 25 cents a mile for passenger cars. Trucks pay triple that. It all, of course, ends up being passed along to consumers.

To amortize the tolls, truckers overload their vehicles. This burns more fuel, degrades roadways (justifying still higher tolls), and makes loading and unloading more time-consuming and so more costly. According to the boss of a large long-distance shipping company I talked to, his trucks are routinely pulled over by traffic police and made to pay various on-the-spot fines. This can double the amount paid in tolls.

Everything about the logistics industry in China acts as a sponge soaking up consumers’ cash. The one exception: Shunfeng Express （顺丰快递）.  Little known outside China, Shunfeng Express is China’s most successful private shipping and delivery companies. It alone proves that logistics in China doesn’t need to be wasteful, expensive and inefficient.

Shunfeng is modeled after Fedex, DHL and UPS, but operates on a scale, and at prices, that would be unimaginable to these global giants. Shunfeng is a secretive outfit. Not much is publicly disclosed. The founder lives in Hong Kong, but comes originally from the mainland.  It was started in 1993, and according to some media reports, its net income in 2010 of Rmb 13 billion ($2.1 billion). That may be a stretch, but Shunfeng is doing a lot right and deserves whatever profit it keeps.

Shunfeng picks up and delivers documents, packages and some bulk freight between cities in China. It charges a fraction of what Fedex or UPS do in the US. These US companies are mainly prohibited to operate in China’s domestic delivery market. I’m not sure they’d be so eager. For next-day document delivery within a city, Shunfeng charges under $2. Delivery to other cities: $3. If you want to move a few kilos of freight, Shunfeng not only ship it, but will come and package it for you. That part is free. The shipping usually works out to less than $5 a kilo.

One of the main reasons Alibaba’s Taobao has become so successful in China is that Shunfeng ships Taobao purchases cheaply and efficiently across China. Taobao, which operates like a cross between Amazon Marketplace and eBay, will likely facilitate transactions worth around USD$100 billion this year. A lot of that will get shipped and delivered by Shunfeng.

They have an army of delivery guys. Most larger office buildings in major cities have one permanently stationed inside. You call for a pickup and the Shunfeng guy arrives within minutes. Most letters and packages get moved around by either electric motorcycle or jet. It leases its own aircraft to fly stuff around within China.

Shunfeng doesn’t do cross-country trucking. This is one big reason Shunfeng are so efficient and so cheap. Anything that moves by truck in China is going to have multiple hands in the till, and so end up costing consumers too much.

Shunfeng has achieved its massive scale and now well-known brand in China without raising capital from the stock market, or bringing in outside professional investors until three months ago. There are few private companies in China I admire more, and who are doing more to benefit the average consumer in China. I wish I could invest. For the good of every consumer in China, Shunfeng should continue to grow, continue to expand the range of what it handles in China. That will do a lot to unstick China’s logistical logjam.