FEDEX CHINA PRICE CUTS IGNITE PANIC

AMONG LOCAL PLAYERS

Posted on: Mon, 23 Feb 2009 02:11:00 EST

Symbols: FDX
BEIJING, Feb 23, 2009 (AsiaPulse via COMTEX) --
FDX | Quote | Chart | News | PowerRating -- "FedEx China is losing money to
grab market shares by lowering its prices of domestic express
service in China by more than 70 per cent in a year to the
level set by domestic private companies," Chen Ping, former
president of the ZJS Express Co., a private express company in
China, told Xinhua.

Chen is among many executives of China's private express

companies grumbling over the foreign rival's price cuts as they
planned to raise service prices to offset rising cost pushed up
by oil and labor prices hikes.

They accused FedEx of conducting unfair competition, or

dumping, as they said FedEx's cost was much higher than
theirs.

Experts said FedEx's move had caused great pressure to the

domestic private express companies. However, Chen said there
were also other factors that could be blamed for their troubles
such as institutional restrictions and their own defects.

PANIC FROM PRICES CUTS

FedEx China slashed its prices for domestic delivery service

four times in between October 2007 and August of 2008 to a much
lower level nearing the prices set by the domestic private
companies.

For example, next morning delivery of a 2 kg package from

Shanghai to Beijing in 2007 was 135 yuan (US$19.74) and the
price after cuts was reduced by more than 70 per cent to 31.2
yuan.

FedEx China charges 21.6 yuan for next-morning express of a

1 kg package from Shanghai to Beijing, according to its Web
site. The prices of a similar service from domestic rivals, the
private Shenzhen-based S.F. Express, state-owned China EMS
Express and ZJS, were set at 22 yuan, 60 yuan, and 16 yuan,
respectively.

The price cuts incurred complaints -- and even panic --

among Chinese private enterprises because they believed the
prices adopted by FedEx were lower than cost, especially
against the backdrop of soaring energy and labor prices last
year.
The company didn't dwell on the cost or whether it was
losing money to seize bigger market shares in a statement to
Xinhua on February 12. The statement said "by quoting more
preferential prices, we hope we can offer our services to more
clients to help them improve their supply chain."

FedEx's strategy took effect as its market share of domestic

express rose dramatically from 0.8 per cent at the end of June
to 4.8 per cent at the end of September, according to the China
Federation of Logistics and Purchasing.

The rise of FedEx's market share in China made private

companies afraid that their foreign rivals would squeeze them
out of the market.

Currently, FedEx is the biggest holder of the China's

domestic express market share among the four foreign giants,
namely FedEx, UPS, DHL and TNT.

DHL and UPS declined to comment on the FedEx's price

discount strategy when contacted by Xinhua. However, experts
said that when the economy recovers, these international
express titans would probably set foot on the Chinese domestic
express market.

He Liming, vice chairman of the China Federation of

Logistics and Purchasing, told Xinhua many domestic express
firms suffered from the shrinking market share and rising labor
cost.

"If this situation continues, some companies will have to

cut the payroll," he added.

Chen Ping said China Post EMS and high-end private express
firms like S.F. Express, the country's largest private express
company, bore the brunt of FedEx's low price strategy.

The Chinese express shipping industry, which started late in

the 1980s, posted rapid growth pace in recent years with total
business revenue surging more than 20 per cent to 40.8 billion
yuan last year.

Experts held that the financial turmoil cast grave adverse

effects on the international express business, and that was
partly the reason why so many foreign-funded express giants
were so eager to get a slice of the Chinese market.

Now the four foreign-funded companies have clutched 80 per

cent of China's international express delivery market. It's a
matter of time before they will embark on the domestic express
service, the expert said.

FedEx entered China in the 1990s and started domestic

express services in June of 2007 after the acquisition of the
express assets of the Tianjin Datian W. Group Co. in 2006.

A top executive of a private express company, who declined

to be named, said several other events added to the woes of the
domestic express enterprises, such as the severe winter weather
in early last year, the devastating Sichuan earthquake in May,
the transport restriction in the Olympics period, the financial
crisis starting in September.

INADEQUATE REGULATIONS

The express industry enjoyed a robust growth in China with

the number of registered express companies hitting about 5,000
in 2008. Industry insiders estimated the actual figure would be
more than 10,000.

Most of them were small- and medium- sized companies

offering undesirable services due to the country's inadequate
industry regulations, said experts.

Private express companies in the country were previously

seen as illegal units and therefore lacked protection until the
complete separation of government administration from
enterprises management in 2007 in the country's postal
reform.

The unnamed executive told Xinhua that private express

companies gained legal identity after the reform and were still
in the infancy period. Hence, they were in no position to
compete with the foreign giants.

An analyst said on the condition of anonymity that laws,

regulations and industry standards in the sector failed to keep
pace with the rapid development of the express industry, which
hampered the healthy development of the private companies.

The issue of FedEx price cuts was a good example of

insufficient regulations as domestic companies could not find
evidence to justify their accusation of dumping by their
foreign competitors. There was no industry standard about price
limits.

FedEx's move dragged domestic companies in dilemma, he

added, noting that no matter whether they raise or ax their
service price, they would likely face losses.

The China Federation of Logistics and Purchasing and the

Ministry of Commerce jointly established an early warning
system for logistics industry on July 2 -- a step to protect
the industrial safety and the country's economic security.

At present, China's Postal Law, laid down in December of

1986, is going through revisions and will probably effected
later this year.

Both Chinese private express companies and foreign-funded

counterparts show great concerns over the amendments as they
expect the revised law would grant them equal rights and create
an environment for equal competition.

The Postal Law in China gives China Post's express arm EMS
the sole authority to handle documents weighing under 150
grams, which deprived other express companies of small-mail
delivery.

The unnamed analyst said domestic and foreign companies

would conduct legal businesses by law and compete on an equal
terms, which would help stimulate their development.

Yao Xin, chief Beijing representative of Conference of Asia

Pacific Express Carriers, echoed the view, saying fair
competition could encourage express companies to offer better
services at reasonably lower prices.

He expected the Chinese government and industrial

organizations would enhance management and supervision over the
industry, further open the market to all players and promote
fair competition. That would benefit the country's express
industry and the whole economy in the long run.

Yao said the government had made great efforts by having

issued several regulations in a bid to improve the industry. A
rule about entry permits for express companies will be issued
this year.

He added the government should continue to offer more

support to the country's private express companies, especially
the small- and medium- sized ones, by increasing financial aid,
simplifying the custom clearance procedure and easing
restrictions of freight vehicles to downtown areas.

SELF-UPGRADE

China vowed to open its express market after joining the

World Trade Organization. Therefore, it is certain that foreign
express companies will come and share the market of domestic
delivery service.

Experts said domestic express companies currently held more

than 95 per cent of the market of domestic express service, so
panic among them was unnecessary. However, they would face
growing pressure in the future.

Chen Ping said private express companies were less

competitive than their foreign peers in terms of facilities,
and capital flow and service. This makes it difficult to
predict future trends.

The unnamed analyst said the domestic private enterprises

should enhance their core competitiveness: The service, which,
according to a survey conducted by the country's State Post
Bureau about domestic express companies' service, had large
room for improvement.

The consumer complaint hotline and Web site for the

country's post industry handled 2,811 cases last year, about 80
per cent of which involved the express sector.

He said private express companies should compete for market

by better service rather than by lower prices.
"Domestic companies should upgrade their equipment. They
should also learn from their foreign peers about management."