China Cracks its Doors to Salivating Shippers
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Chinese Alibaba is blazing hot – and executives are basking in the glory.
Alibaba expects to expand its sales to a whopping $473 billion within the next five to seven years. For perspective, that number beats both Amazon (NASDAQ: AMZN) and eBay – combined. Amazon, America’s largest online retailer, has been expanding rapidly into the Chinese market. Further, the company could see a huge sales boost by employing its new Amazon Lockers strategy in highly populated areas.
Furthermore, Amazon is after China’s 193 million online consumers, and that number is growing daily.
However, the retail industry is just one business area that gains from the Chinese move online. Shippers also benefit.
Currently 16 million packages ship in China each day. According to FedEx’s (NYSE: FDX) Annual Report, FedEx ships a mere 7 million globally per day.
Shipping giants FedEx and UPS (NYSE: UPS) have long hoped to crack the Chinese market. Now the Chinese have finally opened the door.
China Opens Up
FedEx already has a small presence in China. FedEx operates in 400 cities, but only through joint ventures because the Chinese have not permitted the company to compete head-on with China’s China Postal Express & Logistics, which is expected to IPO soon.
Times are different now. China has permitted FedEx to operate in eight Chinese cities and gave UPS a license to operate in five cities. Taking control of their own distribution allows shipping companies to better control their efficiency, costs, and quality.
Furthermore, the Chinese market has been fragmented by the large number of joint ventures, potentially opening up hubs for the two giant shippers to operate. While the initial move into China is quite small, it presents an initial foray into something big.
Major Growth Abroad
According to China Postal Express & Logistics’ prospectus, The Wall Street Journal reports that the “intra-Chinese market for document and package express delivery is expected to grow at 20% a year.”
FedEx, however, is eying a much higher number. FedEx expects the tiny $5.1 billion 2010 Chinese shipping market to explode 400% by 2020 to $26.3 billion. If the Chinese market were to grow at 20% per year for just five more years through 2025, the market size eclipses $65.4 billion, a number in which FedEx and UPS both hope to control sizable stakes.
Also, both firms hope to grow in two other ways. First, the companies hope to invest more into hubs, giving the companies the ability to provide express air transportation, which is seen as more profitable to ground transportation. Next, the companies hope to capitalize on China’s organic growth.
As aforementioned, Alibaba expects to accrue an astonishing $473 billion in sales within five to seven years as Chinese consumers begin to immigrate to online platforms from retail shops. Alibaba is similar to Amazon in that it must ship its product, and who better to deliver that product quickly and with high quality other than FedEx and UPS?
Neither firm cares if Alibaba beats Amazon and eBay or if the U.S. retailers triumph over the Chinese – all that counts is that the Chinese shipping market continues to explode in growth, and that FedEx and UPS have the necessary licenses to reap the rewards.
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ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com, FedEx, and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
