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FedEx China losing money to gain market share

By Nie Peng (chinadaily.com.cn)
Updated: 2008-09-28 17:11

FedEx Express has witnessed an apparent rise of its market share in China since June when, for the third time in a row within a year, it slashed prices for domestic services despite soaring costs.

The company's delivery volume in China has quadrupled since the price cut, The Economic Observer said.

A source told the newspaper that FedEx's American headquarters had allowed its China service to lose money for a maximum of three years in hopes of increasing market share to further tap the large potential in China.

FedEx China's monthly loss in its domestic service was estimated at over 50 million yuan ($7.30 million), the report said.

China's express delivery companies, which were planning to raise prices to offset increasing costs, are now watching closely for FedEx's next move. Some said they expected foreign rivals to take control of the China market within the next five years, according to the newspaper.

The Ministry of Commerce has launched an investigation into claimed damages done to Chinese express delivery firms by FedEx's alleged "dumping activity", the newspaper reported.

Wrong target leads to price slashes?

FedEx entered the Chinese market in June 2007. At the time it offered delivery services of high value-added products for customers who underlined efficiency and reliability, according to Eddy Chan, head of FedEx China.

"Correspondingly, the company adopted a high pricing strategy and its services were far more expensive than EMS (China Post Express Mail Service) and services by private delivery companies that were well-known for their low prices," said Chan.

However, the company found the strategy was given the cold shoulder by most of its customers, who had gotten used to the low price services offered on the buoyant private courier market. Price then was the most important factor in customers' decision, so long as the service quality was basically guaranteed and the time requirement roughly met.

FedEx cut service prices in October 2007 and early this year, and in June it further axed prices by up to more than 40 percent.

Currently, its domestic service prices are lower than EMS and almost the same as that of the country's private delivery companies.

"By quoting more preferential prices, we hope more Chinese customers can use our services to optimize their supply chain," said Jimmy Chen, regional vice president of FedEx China's domestic service.

Xu Yong, an analyst with the China Express Consultant website and a former employee with FedEx China, said FedEx's manual and operating costs were three to five times that of Chinese private delivery companies. With huge spending on hardware, the company's China domestic service can hardly make ends meet, Xu told The Economic Observer.

Xu said FedEx adopted a high pricing strategy when it first entered the Chinese market because it wanted to control the service scope for fear of failing to guarantee service quality in an unfamiliar market.

Now that it has gained experience and has the potential to offer more services, the company again took advantage of the price leverage to enlarge its business scale in order to reduce costs and increase revenues, he said.

Panic among Chinese rivals

FedEx's move to axe service prices has surprised and caused concerns among its Chinese rivals.

Yuan Guoli, director of the delivery bureau of China Post, said the move by FedEx against the backdrop of rising costs had put great pressure on EMS.

An executive of S.F. Express, China's largest private express delivery company, said important changes would take place within five years if FedEx stuck to its low-price strategy in the long run.

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