As FedEx (FDX) draws the focus of Chinese regulators over a dispute with telecoms giant Huawei, key competitors could be poised to seize on the tenuous situation.
The U.S. based shipping giant is at risk of losing market share in the Chinese market that it has spent years building relationships in, as its very existence in the Chinese market comes into question after Huawei's incendiary allegations of package rerouting.
There are rising calls for China's postal service regulator to cut off Fedex from China market, as Huawei has accused the US express courier of diverting and rerouting its packages. (Photo: VCG) pic.twitter.com/42geohdhSL— Global Times (@globaltimesnews) May 28, 2019
FedEx is currently the king of the Chinese logistics market, occupying a 54.6% market share according to technographics provision firm Datanyze. The company's entry into the Chinese market came in 1984, far before many of its peers, and has paid dividends for its market share. The company's recent purchase of the Dutch-based TNT Express in 2016 cemented its dominance.
While there are a number of smaller domestic players in the region, headlined by the U.S.-listed and Alibaba (BABA) backed ZTO Express (ZTO) , the overall market is still dominated by American and German companies. According to a report, DHL (DPSGY) is the second largest player in the country with a 25.07% market share and United Parcel Service (UPS) rounds out the top three with a 16.94% market share.
Both UPS and DHL generate about 3.5% of their overall revenue from mainland China, or about half of the comparable revenue generated by FedEx.
What is hurting FedEx in terms of what Huawei expects is the direction by outside forces to cut off certain shipments and that could be an opportunity for each competitor to pick up the slack.
Trade War Fears Have a Far Reach
The outlook is somewhat more tenuous for Atlanta-based UPS given the fact that U.S. administrative restrictions on shipments would necessarily hit them just the same as FedEx.
For DHL, its Bonn, Germany headquarters could be a key advantage, as European restrictions have not been nearly as hawkish on Huawei as comparable U.S. directives.
DHL has also shown its intention to extend its reach to the region in recent years, extending a Vienna to China rail connection to Chengdu, China in mid-2018. The rail line offers the company significant inroads into inland and Western China that can accelerate deliveries sans port access.
The company also has a partnership over the next ten years alongside Chinese courier SF Express after selling supply chain units based in Beijing and Hong Kong that offer services across mainland China, Hong Kong and Macau.
"SF's local market expertise in China has real advantages for our customers across all industries including technology, health care, retail, automotive, and e-commerce," DHL CEO Frank Appel said in a statement. "Combined with our global operations standards and network support, the agreement provides a solid foundation to continue exploring further opportunities in China in the coming years."
Shares of the German logistics leader opened Tuesday's trading positively, in contrast to both UPS and FedEx.
Of course, nationalistic tendencies could prevent U.S. and international competitors more broadly from capitalizing on what many analysts propose will be the largest logistics market in the world in short order.
DHL's revenue sharing agreement with SF Express may insulate it from the fury of Chinese regulators, but there is still fear that Chinese regulators will overwhelmingly favor domestic options for shipping needs as the sector grows.
While there is a lack of a dominant domestic player and China is likely to lean on existing multi-nationals in the near term, longer term investors will need to be mindful of how regulatory frameworks and reciprocal restrictions are outlined by China and the movements of its most prominent couriers to scoop up market share in this potential vacuum.