Cut Throat Competition
OpenLife Nigeria reports that the harsh price war in the fast-growing Chinese express delivery sector is showing signs of tapering, with government policy heavily influenced by President Xi Jinping’s dictum of “common prosperity” among the factors that seem to have played a role.
Express delivery services have grown exponentially in the last decade, rising hand in hand with China’s flourishing e-commerce business. The number of delivered parcels has increased by 35.6 times since 2010, creating a business with annual revenue over $100 billion.
But the explosive growth has come with little in the way of profit. Couriers compete for business with merchants on major e-commerce platforms operated by Alibaba Group Holding, JD.com and others.
Alibaba has invested in four of the major listed express deliverers, but that does not guarantee winning orders. ZTO Express, the largest player by volume, warned investors in its latest annual report that despite holding a 10% stake in the company, “Alibaba may encourage merchants on its platforms to choose certain other investees’ services over ours for business reasons.”
The July-to-September quarterly results announced by the major listed express delivery companies in recent weeks showed prices were still falling, but the rate of decline is clearly decelerating.
“We now see an inflection point for price competition to ease amid rising industry concentration and tighter regulation,” said Parash Jain, a lead analyst of the Asian transport sector at HSBC.
The latest October statistics by the Chinese State Post Bureau underwrite that conclusion. The total parcel volume that month increased by 20.8% year-on-year to 9.95 billion units, while revenue growth was 12.1% at 90.9 billion Yuan ($14.2 billion), suggesting the average revenue per parcel dropped by around 7%. The rate of decline is about half of what it was a year ago.
The monthly disclosures by the four mainland-listed players — ZTO Express, SF Holding, Yunda Holding and YTO Express — showed the same trend. They were all suffering from double-digit falls in average delivery prices in January, but by October they were down to single digits — and for YTO, the trend has gone positive since August.
Among a series of regulations that brought about the inflection point was a joint policy, issued in July by seven central government departments and organizations, requiring employers to secure the legal rights of their delivery staff.
The cutthroat competition among express service providers was in turn depressing the wages of delivery staffers, since cutting wages was seen as a tactic for fighting the price war. Beijing’s approach has been to push the companies to spend more on wages and benefits for their employees and contract workers, leaving less room for management to continue with price cuts.
In the Chinese sociopolitical context, companies cannot ignore apparent action by the authorities.
“A rapid and firm growth of the express delivery sector is inseparable from the continuous guidance, assistance and support by governments at various levels,” said Lai Meisong, founding chairman and chief executive of New York-listed ZTO Express, during an online earnings call on Nov. 18.
July’s joint policy statement from the central government spelled out important goals such as “bringing the overall salaries and payments of express delivery personnel to a more reasonable level” and set out eight specific measures to improve “profit-sharing, labor remuneration, social security, working environment, corporate responsibility, standardized management, network stability and employment development.”
The statement could be interpreted as part of Xi’s “common prosperity” campaign. The central government’s official website described the statement as an embodiment of the spirit of Xi’s “important directive and instruction on caring and loving the delivery brothers.”
“Delivery brothers,” or kuaidi xiaoge in Chinese, have become a symbol of grassroots workers and a subject of praise in state propaganda since Xi publicly recognized them on Lunar New Year’s Eve two years ago, when he visited an SF Holding service depot in a traditional downtown Beijing neighborhood and commended them as “the most industrious laborers, working like small honeybees, serving for the convenience of all of us.” This was televised nationwide on a prime-time news show on state-owned CCTV.
There are no specific data readily available on deliverers’ wages, but cash flow statements of the four mainland-listed companies have revealed that the total cash paid to employees during the first nine months of the year added up to 24.52 billion yuan, or 17% more than in the same period last year.
The added labor cost pressure seems to have given a final push to weaker players to give up and consolidate.
New York-listed Best late last month agreed to sell its money-losing express delivery business to J&T Express, an Indonesia-based startup founded in 2015, for 6.8 billion Yuan. The transaction is expected to be completed by next March, subject to regulatory approval.
“We arrived at this decision after very thorough evaluation,” Johnny Chou, founding chairman and CEO of Best, explained at its online earnings call on Nov 17. Chou, also known as Zhou Shaoning, added, “As you must be all aware, the express [delivery] market in China has been in severe competition, with both leading players and new entrants [being] aggressive in their pricing strategies.”
Best’s third-quarter results reflected the damage inflicted by the price war. Revenue was down by 14.6% year-on-year to 6.81 billion yuan, while net loss widened to 654.9 million yuan from 565.9 million yuan a year ago. The express delivery business that is being sold was the main culprit; its revenue dropped 21.7% and the gross loss increased to 396.2 million yuan.
“This transaction enables us to focus on our core supply chain competency,” said Chou. The company pulled out of its loss-making Store+ business, which offered online merchandise sourcing and store management services for convenience stores, last year. The latest round of restructuring will “allow us to allocate resources more efficiently toward our integrated supply chain logistics, freight, and global supply chain and logistics services,” he added. Best has been building up its presence in Southeast Asian markets in recent years.
SF Holding is not leaving the domestic express delivery market but is moving in a similar direction as Best by shifting more of its resources beyond mainland China. At the end of September, it completed the acquisition of a 51.5% stake in the Hong Kong-listed pan-Asian logistics service provider Kerry Logistics Network. The 17.6 billion Hong Kong dollar ($2.26 billion) acquisition has added stress on SF’s balance sheet, but the company will spin off another business, Hangzhou SF Intra-city Industrial, in an upcoming Hong Kong listing on Dec. 14, raising up to 2.7 billion Hong Kong dollars ($348 million).
Ronald Keung, internet and logistics sector analyst at Goldman Sachs, reiterated his “buy” rating on SF based on “its unique domestic+global express, forwarding and integrated logistics capabilities.” Kerry has been fully consolidated into SF’s earnings from October.
ZTO’s Lai claimed that competition in the industry has reached a stage where profit growth can be expected to exceed volume growth — a long-awaited reversal. He said that “all second-and third- tier players have basically exited, while the top group has diverged in a very clear way.”
However, the market remains intensely competitive. Xie Wantao, chief financial officer at Yunda, told investors on Nov. 18 that “the market situation has become clearer,” including implementation of series of government policies and consolidation, but added that “the price has not recovered to the level last year.”
Results from YTO showed the depth of the impact of price competition, even though it has been able to raise prices on a monthly basis. Its third-quarter revenue grew by 25% but net profit dropped by 26% from the year before. Management admitted in its earnings disclosure that the price decline outpaced the cost-cutting, which led to a fall in profitability. Across the industry, all major players saw their top line grow, but the bottom line remained severely subdued or even bleeding red.
Adding to investor concern, explosive growth rates have begun an inevitable slowing. “Competition within the parcel-delivery industry remains intense, with declining pricing and slowing growth in parcel volumes,” said Clifford Kurz, analyst at S&P Global Ratings. In his latest report on SF in November, where he reinstated an “A-minus” rating on the company’s debt, he also pointed to rising fuel and labor costs that would squeeze the bottom line in the coming quarters.
Moody’s Investors Service reiterated an equivalent rating of “A3” on SF but its outlook is negative, meaning it is closer to a downgrade. On top of the acquisition cost of Kerry, Moody’s analyst Lina Choi said SF creditors should be wary of the “intense competition in China’s express delivery market.”
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