In the past year, SF Express, STO, YTO, and the other China express delivery giants have all hit the accelerator. Faced with mounting competitive threats, express delivery in the PRC has morphed into an arms race in capabilities and capital.

In Part 1, I explained what I think is behind the recent acceleration. In this part, I argue that 5 key actions will likely determine who will win – and become the “Fedex of China”.

First, a quick summary of Part 1:

• Chinese express delivery is an awesome market. As good a China story as you will find.
• But there is increasing competition, falling prices, increasing operating costs and increasing capital requirements.
• Additionally, there are some daunting threats on the horizon, most notably the e-commerce and internet giants (Alibaba, etc.). They have been moving into logistics and delivery from a position of strength.
• Faced with this, China’s express delivery giants are in a race to get to their most defensible position: superior marketshare and operational scale in cross-regional express delivery (i.e., delivery between cities). This, in theory, should enable rapid delivery to a national network of locations – at prices and delivery times others cannot match.

Based on this, I think five actions are going to largely determine which, if any, of the express delivery giants will win this race. The 5 actions are:

1: Go public ASAP.

Most of the delivery giants have gone public – or have announced plans to do so. And they are trying to do this as fast as possible, frequently by reverse merger.

STO Express did a reverse merger by buying Zhejiang IDC Fluid Control. Alibaba-backed YTO Express also listed by a reverse merger in Shanghai. ZTO has listed in the USA. And SF Express even has listed, a big reversal by founder Wang Wei on the whole idea of going public.

The goal is to get more capital ASAP. As mentioned in Part 1, the key to winning is not just to get big – but to be bigger than the others. So each competitor sees their rivals raising capital and doesn’t want to fall behind.

2: Build out cross-regional operations.

This raised cash will likely be used to build out operational platforms. This means lots of new warehouses, trucks, and distribution centers. This focus on cross-regional operations (i.e., deliveries between, not within, cities) is both about keeping up with the rapid market growth and trying to get bigger than rivals. They also might use the cash to buy market share, keep up with market growth and do some refinancing.

3: Make big investments in IT, automation and other geographically integrating intangible assets.

The goal is to create operations that both enable lower pricing and that are difficult or expensive to replicate. Fixed assets like warehouses meet the first criteria but are not that expensive or difficult to replicate. Especially if competitors are utilizing a franchise model which requires less capital (an important factor in this).

However, IT and automation can accomplish both criteria in a powerful way. Automated distribution hubs increase productivity and decrease labor costs (a big deal in delivery). This can move the needle for overall delivery costs. Additionally, automated logistics are more difficult to replicate. It’s no longer just a matter of spending money (i.e,. buying trucks and hiring staff).

4: Launch an owned airline.

Superior cross-regional operating scale (and capabilities) is about dropping costs and shortening delivery times across a national network of locations. Airplanes can have a big impact on this, especially for high volume routes. It’s a critical part of the ultimate operating platform.

Several of the express delivery companies are already building their own airlines.

• SF Express launched an airline back in 2010. They now have about 40 planes (2017), and has just raised cash to buy more.
• State-owned EMS operates an airline, albeit it in a more complicated SOE-type manner.
• YTO Express is launching an airline, initially to be based out of Hangzhou. They have a plan for 50 planes by 2020.

Recall, Federal Express did express delivery via airplane from literally its first day of operations. In 1973, they began by flying 14 small planes carrying 186 packages to 25 US cities. They only later built out their ground operations. DHL was similar, beginning operations with an overnight air service in 1969.

This is a contrast to UPS, today the world’s largest delivery company, which was originally a trucking company doing freight (they were founded before airplanes existed). They did not begin next-day-air until 1982. Similarly, TNT was launched in Australia in the 1940’s with a single truck.

All the major Western express delivery companies eventually converged on each others’ operating models (land plus air). So I expect to see a similar convergence in China, especially given its vast geography. A player without an airline will likely have increasing difficulty competing.

5: Increase cross-border delivery within Asia – but probably not much beyond.

Many of the leading China players are now expanding across Asia – offering express deliveries to Taiwan, Japan, Hong Kong and increasingly SE Asia. STO has its largest overseas logistics center in Hong Kong and can often deliver across Asia within 24 hours.

An Asia expansion makes sense for this strategy. But it raises the question of how international do you have to be to win in express delivery in China? Do you need to be global and offer delivery everywhere? Is Asia enough? Is Greater China enough?

Also keep in mind, international expansion puts the China companies in more direct competition with Fedex, DHL, and the others. This is a big deal. It means competing more with companies like UPS, which now delivers 18M pieces per day across 220 countries.

Final Point: All of this ultimately may not be enough.

The race to become the “Fedex of China” is on and is increasingly frantic. Probably 2-3 of the big express delivery companies will get to this type of superior marketshare and operating scale. At that point, the more they can drop their unit costs via fixed costs, tangible fixed assets (airplanes, trucks, etc.) and intangible assets / capabilities (IT, automation, etc.) the more protected they will be.

However, it is not clear to me whether this will ultimately protect them from the e-commerce leaders moving downstream. Or from large Chinese industrials that want into this attractive market. All this may not be enough.

Ultimately, the “Fedex of China” may not end up being anything like Fedex.

Thanks for reading. Any feedback below is much appreciated. Part 1 is here.

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I write and speak about “how rising Chinese consumers are disrupting global markets – with a special focus on digital China”.

Photo by Pablo García Saldaña on Unsplash