Week of April 22, 2002
  Snapshot from the Field
New Rules Could Create Major Logistical Logjams
China's Express-Mail Limits
Have Foreign Firms Fuming,
Threatening Pullout
By JACK LYNE, Site Selection Executive Editor of Interactive Publishing

Celebrating China's entry into the WTO.
Patrons in a bar in Changchun, capital of northeast China's Jilin province, toasted China's entry into the WTO. Now, though, the nation's express-mail limits are violating the spirit of the WTO agreement, some China watchers charge.
BEIJING — Imagine contemporary China, that much-publicized new addition to the World Trade Organization, without private-sector express-mail service. That prospect – operating without the likes of UPS and Federal Express – is guaranteed to generate sizable nightmares among many of the estimated 400,000 foreign-funded businesses operating in China.
        That unsettling outlook, however, could become reality as soon as May 6, if not sooner. China Post, the central government arm that regulates the national postal industry, sent out a March 6 directive setting a May 6 deadline for private express-mail firms operating in China to "register for entrustment."
        Registrations are, in fact, requests to conduct certain types of delivery operations. The state postal arm can approve or disapprove those requests. Companies that don't register risk losing the right to operate in the People's Republic of China.
China Post
Chinese postal authorities say that their actions have legal precedent in a 1987 law that says, “The delivery of letters and other goods that have functions of letters should be exclusively operated by China Post.”

        Registering companies, however, are still looking at a business deck that's been radically shuffled - and, private express-mail companies contend, stacked. China Post is planning to limit express deliveries by approved private firms to articles that weigh less than 1.1 pounds (500 grams). Private companies' prices must also be higher than China Post's. In addition, private express-mail firms are prohibited from direct home delivery, as well as the delivery of official documents of the Chinese Communist Party, the central government and the national army.
        Express mailers haven't been shy about expressing industrial-strength discontent. Some have even suggested that they may pull out of China if the new rules go into effect.
        Federal Express, DHL Worldwide Express, UPS and TNT International Express, for example, recently sent a joint letter to the Ministry of Foreign Trade and Economic Cooperation (MOFTEC), urging it to reject the China Post proposal. "The effects on China's international trade, investment and diplomatic relations could be catastrophic, as the industry carries billions of dollars worth of goods and employs tens of thousands of employees," said the letter. The restrictions could "possibly close down the air-freight industry at the end of April," the message warned China's trade ministry.

$1.2 Billion Business in Play

Those restrictions, if enacted, will likely pack a punishing financial wallop. More than 60 percent of private firms' Chinese express-mail deliveries weigh less than 1.1 pound, according to Li Limou, general secretary of the China International Freight Forwarders' Assn. (CIFA).
        "If we register, we'll lose half of our business. If we don't register, we'll lose everything after May 6," said one attendee at an April forum of global express-shipping agencies in Beijing.
        And there's a lot to lose. China's international express-delivery market is a US$1.2-billion-a-year business that's annually growing by 30 to 50 percent, according to CIFA estimates.
        China Post's own express-mail service, which was initiated in 1995, controls about one-third of the nation's market. Five global companies - FedEx, DHL, OCS, UPS and TNT - hold the rest. But they're steadily eating into China Post's market share, particularly in larger Chinese cities, where the nation's postal arm makes the lion's share of its revenues.

1998 Breakup Prompts Tactics,
But Do They Violate WTO Principles?
“The [express-mail] limits could impose a major logjam in China's ports and airports," says Denis Fred Simon (pictured), president of Beijing-based Monitor China. "Customs will be overloaded, as there will not be a smooth process in place for simply allowing easy-to-approve items such as documents to go through. It could cause lots of headaches.”

"China Post's actions are not untypical of the Chinese approach," asserts Denis Fred Simon, president of Beijing-based Monitor China. "And one of the realities of the Chinese market is that is characterized by a high degree of fluidity."
        The express-mail limits aren't part of some larger Chinese government strategy, according to Simon, who heads the Chinese consultancy business for the Cambridge, Mass.-based Monitor Group (www.monitor.com). The tougher approach, he said, stems instead from China's 1998 separation of state postal and telecom services.
        That separation stripped China Post of the sizable cash subsidies that it had been receiving from China's Ministry of Posts and Telecommunications (MPT, which became the Ministry of Information Industry as part of the reorganization). Owing to the last few decades' rich telecom revenues, MPT was flush with cash.
        With its cash well capped, China Post began its independent life with $2.2 billion in debt. What's more, the central government vowed to cut off subsidies after three years. (China Post narrowly made its three-year goal to get back in the black, recording a $7.2 million profit in 2001.)
        "This move reflects the fact that China Post, like other postal services around the world, is faced with a major challenge by the emergence of rapid delivery services, as well as the Internet," said Simon from his Beijing office. "China Post has been placed in a weakened position by being de-linked with the Ministry of Posts and Telecommunications. Now it has to fend for itself and is extremely concerned about revenue flows."
        The timing, however, seems particularly tricky. As a new WTO member, China has the whole world watching its willingness to maintain free and open markets.
        "China made no specific deal with the WTO to open up its express-mail market," Simon pointed out. "But it can also be said that this is not consistent with the spirit of WTO, as courier services are a service business. The express-mail limits in some respects violate the WTO's principles favoring non-discrimination and fair competition. I would like to think, though, that China Post is simply trying to buy some time to get its act together and reform its operations."

Logistical Logjams for Foreign Facilities?

Express-mail operations, however, definitely aren't the only firms deeply concerned about the postal restrictions. Many more firms with Chinese facilities are uneasily sorting through the possible scenarios that the new regulations might create.
        "The limits could impose a major logjam in China's ports and airports," Simon noted. "Customs will be overloaded, as there will not be a smooth process in place for simply allowing easy-to-approve items such as documents to go through.
        "It could cause lots of headaches," he continued. "Some companies, especially in high-tech areas, ship small parts and components, and they use these courier services. In addition, the just-in-time focus of much manufacturing makes it necessary to have speedy delivery and reliable delivery schedules. China Post is reliable, but it does not have the infrastructure and technology of FedEx or UPS. So companies in China will have to become concerned about logistics."
        Logistical hurdles notwithstanding, few observers expect an ebb in the business tidal wave into China. Annual foreign direct investment in China has topped $40 billion, and will top $50 billion in 2002, the United Nations forecasts.
        "No one will not come to China because of this," Simon said. "But they will have to create a logistics plan before making assumptions about delivery schedules."

Will a Compromise Materialize?

Just what shape that logistical planning should take, however, remains to be seen. Clarity seems to be coming fast, though, with the May 6 deadline bearing down.
        Publicly, at least, Chinese postal authorities haven't blinked, hewing to the hard line. WTO or no WTO, their actions, they maintain, have a clear legal precedent: the 1987 "Post Law of the People's Republic of China" passed by the sixth National People's Congress. Says the China Post Law; "The delivery of letters and other goods that have functions of letters should be exclusively operated by China Post."
        What that's meant in practice, though, has been a large bone of contention.
        Express-delivery companies have contended that their business falls outside the law's parameters. National postal officials, on the other hand, claim that private express-mail companies are violating the Post Law. And, they add, those firms have repeatedly been warned about the alleged violations.
        "You can't say just because the cow is running faster that it's not a cow and is not the responsibility of the cow-herder," a China Post spokesman recently told the state-run Xinhua News Agency.
        Simon, at least, foresees a settlement.
        "There is no guaranteed solution, just some room for maneuvering," he noted. "I believe we will see continued negotiation of the issues, with a big push for a new approach, as this is clearly a high-profile issue for all foreign courier services.
        "Every foreign firm knows that it must play by the rules or incur high risks," Simon continued. "[Private] express-mail companies . . . must be willing to give something to get something in return."
        "Look for a compromise to develop," he concluded. "Even in the darkest moment, something always does seem to get worked out."
        One possible compromise solution, Simon said, is a joint venture. Yes, one between China Post and one or more of the express-mail companies with which it's now so publicly squabbling.

sf0422bsf0422b ©2002 Conway Data, Inc. All rights reserved. Data is from many sources and is not warranted to be accurate or current.