China’s courier and logistics sector has thrived in its huge market and become a cornerstone of global supply chains
By Xiao Xin
As China moves to fundamentally improve its virus response by downgrading COVID-19 management to Class B from top-level Class A, one sector that has remained crucial yet bruised by the three-year battle against the disease finally released a sigh of relief.
The country’s logistics prowess, which developed across years of e-commerce boom alongside broader economic sophistication, seems well-positioned to return in full.
Behind the courier and logistics services at the fingertips of Chinese people are a host of businesses that have thrived in a huge market featuring the world’s largest digital buyer population and crucial hubs of global supply chains.
Convenience and Competition
The convenience of courier and logistics services has become commonplace over the past decade, and now consumers face a daunting choice of services and providers.
A cursory search for tips on choosing the right couriers and logistics firms will return a galaxy of results on websites and social media platforms comparing various offerings by immediate availability, cost to value, and proof of delivery, among other key factors to be considered.
Such convenience, albeit vulnerable to virus-inflicted disruptions in recent years, testifies to the intensity of competition in the market.
As of 2021, China’s logistics sector employed more than 50 million people. Nearly 8,000 logistics firms operated in the A or above category, and more than 2,000 major logistics industrial parks served firms across the country, according to data from the China Federation of Logistics and Purchasing (CFLP). A 5A category rating for a logistics firm indicates the strongest capacity to meet a dozen commitments ranging from business operations, asset conditions, equipment and facilities, and management and services to quality of personnel and level of digitization. From there, the next scores range from A to 4A.
The courier sector transported over 100 billion parcels in 2021, per CFLP numbers.
The most indicative trait of the competitive landscape of express delivery services is the vast array of players.
In the first nine months of 2022, courier service firms handled a total of 80.01 billion parcels, according to data from the State Post Bureau.
According to major A-share listed firms’ monthly operating numbers, Shenzhen-based SF Express delivered 7.92 billion parcels during the period, 9.9 percent of the total. With 9.33 billion parcel deliveries, Shanghaibased STO Express’ share of the market hit 11.65 percent. YTO Express, also headquartered in Shanghai, tallied 12.68 billion parcels, or 15.84 percent of the total, while its crosstown rival Yunda Express logged a share of 16.39 percent with 13.11 billion parcels delivered.
As measured by profits, SF Express remains unchallenged, with net profits making up 60 percent of the combined earnings of the four listed firms in the third quarter.
The continued growth of the couriers hardly masks an increasingly scorched competitive mindset.
A typical disrupter was J&T Express, which launched a price war against the established brand names. Originally founded in Indonesia in August 2015, the logistics and express delivery firm started operations in China in March 2020, just after COVID-19 broke out.
The price war in the Chinese market was certainly not J&T Express’ first trip to the rodeo. In the summer of 2019, STO Express became known for starting a price war in Yiwu, Zhejiang Province, home to the world’s largest small commodities market, by lowering shipping rates to less than 1 yuan (14 cents) per parcel.
Fierce rivalry severely cut into parcel delivery profits. Between 2012 and 2018, the average cost of delivering parcels in the country dropped by 36 percent, according to media reports citing Morgan Stanley.
Desperate to claw back to its former eminence, STO Express, once the top player in the market, sought to establish a dominant position in Yiwu, the sourcing epicenter for low-cost merchandise. Rates at less than 1 yuan each, however, fell well below the normal price setting. The delivery of a parcel entails fixed costs of around 3 yuan, not including facility rentals, employee wages, and utility bills, according to industry insiders.
The price war at all costs reportedly quickly crippled STO Express’ operations in Yiwu. Its rivals were strangled as well. Later that summer, executives at other major couriers based in Shanghai and Hangzhou reportedly met in Yiwu to agree on a ceasefire.
Two noteworthy developments emerged that year. In March 2019, Alibaba bought into STO Express, investing 4.66 billion yuan (US$688 million) in the courier’s parent firm in exchange for 14.65 percent stake in STO Express. In July 2019, the two sides announced an acquisition deal under which Alibaba or its designated third party would be allowed to purchase stakes up to around 31.35 percent from STO Express’ two largest shareholders within three years.
Prior to the acquisition, Alibaba had secured a stake in YTO Express, Best Express, and ZTO Express, another Shanghai-based express service listed in both the US and Hong Kong.
Understandably, the e-commerce giant’s penetration into the courier sector complemented the intricacies of the domestic express delivery market in relation to e-commerce. E-commerce-generated purchases make up the lion’s share of all express parcels.
According to Yunda’s annual fiscal disclosure for 2019, Alibaba also became one of its shareholders with a 2 percent stake.
The other side of the competition coin saw SF Express, the long-term premium express delivery firm, opting to sacrifice part of its earnings for a larger slice of the market against the Alibaba-backed fleet of couriers. After joining the price war in June 2019, SF Express’ per parcel revenues declined for 29 months in a row, media reports said.
And neither side saw the new challenge from J&T Express coming. Its foray into the Chinese market in early 2020, when the price war had just faded from sight, ended up triggering an even fiercer battle.
By joining hands with Oppo, one of the top Chinese smartphone brands, and Pinduoduo, an upstart rival of Alibaba and JD.com, J&T Express used low prices and an ability to absorb huge losses upfront to fast-track its prominence in the Chinese market.
It only took 10 months to catapult its parcel delivery volume to 20 million by January 2021 from zero in March 2020, making itself the sixth largest courier by parcel volume, Chinese business news portal Late Post said in an article in late December.
In another major step, J&T Express finalized its purchase of Best’s express delivery business in China at approximately US$1.1 billion at the end of 2021. Previously, J&T Express’ peak parcel volume hit 40 million in June 2020, temporarily unseating STO Express to rank fourth largest in the country, according to Late Post. After passing its peak, J&T Express saw its parcel delivery range between 35 million and 37 million over the second half of 2022, in part due to fallout from virus flare-ups.
The newcomer’s quick rise came at a brutal price. With cash reserves of 8 billion yuan (US$1.18 billion) prior to the start of its Chinese operations, J&T Express gambled its prospects on intense subsidies to acquire new customers. Between 2019 and 2021, it hemorrhaged money to seize market share with delivery rates 30-50 percent lower than its competitors. In Yiwu and other major sources of parcels, the loss leader pricing resulted in parcel shipping costs of as low as 0.8 yuan each.
The ultra-low pricing prompted other couriers to respond with lower prices and even inspired boycotts against J&T Express. The Southeast Asia-based express delivery firm arrived as a thorn in the side of its well-established Chinese counterparts. For a vast number of delivery riders, the extremely low prices suggested that sustainable paychecks might be hard to come by.
More profoundly, the climax of the price wars eventually landed express delivery firms in the crosshairs of authorities amid regulatory toughening across different segments of the platform economy.
The race to the bottom was explicitly discouraged, an indication that the competitors would need to shift to more premium service to align with an economy aiming for healthier and more inclusive growth.
At a symposium in December 2021, Ma Junsheng, then director of the State Post Bureau, conversed with the heads of six major couriers: SF Express, ZTO Express, YTO Express, Yunda Express, STO Express, and J&T Express.
The price war was on the meeting agenda. In the words of Ma, such a race had to be resolutely opposed. He explained that unfair competition fosters other activities detrimental to the interests of the sector and employees.
Ma’s remarks followed a flurry of policy announcements at central and local government levels earlier in 2021 that set limits on pricing and volume and mandated improved protection of the rights and interests of delivery workers.
For instance, a regulation tailored to fostering the express delivery sector in Zhejiang Province came into force in March 2022, stipulating that without justified reasons, express delivery operators could not offer delivery services at below-cost prices.
The regulatory compliance requirements demand a more sophisticated approach to express delivery and logistics.
Alongside the aforementioned major players in the market, the logistics unit of JD.com and Cainiao Network, an online logistics platform founded in 2013 by Alibaba together with major express delivery firms including SF, STO, YTO, ZTO and Yunda, also tend to grab attention.
JD.com’s proprietary logistics operations are an indispensable part of the online retailer’s key selling point. Its self-operated merchandise is wellreputed to warrant fast and reliable delivery services, underpinned by its logistics arm.
Unlike JD.com’s in-house logistics network that relies on a massive number of delivery workers, Cainiao Network, majority-owned by Alibaba, allows for collaboration with a multitude of logistics partners and courier personnel.
Both e-commerce offshoots have in recent years sought to extend their global outreach by establishing local logistics warehouses and networks in overseas markets as they push for more growth opportunities away from home.
As for state-owned China Post, its express mail service EMS dates back to the 1980s, making it the oldest express delivery provider in the country. It hit a milestone of 10 million parcel deliveries a day during the Double 11 shopping bonanza in 2021.
Thus far, China Post’s EMS remains a stable component of the country’s parcel delivery offerings. Interestingly, China Post began diversifying into the coffee business in early 2022, opening a cafe chain and leveraging its staggering number of post offices across the country to grab some coffee earnings.
A broader vision for express delivery options and advances, as such, portrays a highly noticeable part of the overall logistics picture that has over the years evolved with the economy’s deeper involvement into global supply chains.
In a high-profile move, China Logistics Group, a new state-owned logistics giant, was established in late 2021. The State-owned Assets Supervision and Administration Commission owns a 38.9 percent stake in the new logistics group and China Chengtong Holdings Group, a state-owned assets operation firm, holds the same stake in the new company, according to state media.
The new giant also has three strategic investors: China Eastern Airlines, China COSCO Shipping Corp, and China Merchants Group. Together, they own a combined 22.2 percent stake.
In addition to business outlets nationwide, China Logistics Group has a presence across five continents and operates 120 special rail lines. It has set its sights on becoming a globally competitive world-class modern logistics group.
As the country emerges from a three-year battle against the epidemic, its logistics lifeline that has taken an inevitable hit should return to normal. Express delivery firms and myriad other businesses relying on the growth of China’s logistics prowess are expected to return at full strength, maintaining efficient flows of goods by air, sea, land, and water.