Are UPS, FedEx Tough Enough for China’s Competitive Courier Chaos?

(Updates to include comment from FedEx in the fifth paragraph and information about its Chinese subsidiary in the 14th paragraph.)

BEIJING (TheStreet) -- Online retailing has turned China’s city streets, alleys and sometimes sidewalks into freeways for frantic package couriers zipping around on electric bikes and three-wheel carts.

Rarely seen in China are the familiar mainstays of America’s package delivery business: the chocolate vans of United Parcel Service (UPS), and FedEx's (FDX) white vehicles.

READ MORE: Warren Buffett's Top 10 Dividend Stocks

That could change, however, because UPS and FedEx have reportedly won government permission to operate relatively independently in Beijing, Wuhan and scores of other Chinese cities. Reuters said Thursday that UPS has been licensed to deliver packages in 33 cities, while FedEx can serve 58.

Contacted by TheStreet Thursday, here's what FedEx said about the report:

FedEx domestic services in China help transform businesses and create opportunities through a reliable, flexible transportation network. After having received an investment certificate from the Ministry of Commerce on December 8, 2006, and a business license for domestic services from the State Administration of Industry and Commerce on Dec. 20, 2006, FedEx started operating a domestic delivery business in China in May 2007. Since China’s new postal law came into effect in October 2009 with the institution of a permitting system for the express business, we have been working closely with the relevant authorities to obtain the express delivery services permits for our business. FedEx complies with all laws and regulations. We are and will be operating the domestic business as usual in China.

A UPS representative was unavailable for comment.

If in fact UPS and FedEx drivers start muscling vans into crowded Shanghai alleys, investors may have a new way to capitalize on the Chinese consumer’s swing toward online shopping. UPS and FedEx stock in a portfolio could supplement – or even replace – shares in the lesser-known Chinese Internet companies that are relative newcomers to New York’s exchanges.

READ MORE: 10 Stocks Carl Icahn Loves in 2014

The consultancy McKinsey & Co. predicts China online retail sales could more than triple from recent levels to US$ 650 billion by 2020. That’s a lot of package deliveries.

Indeed, enormous growth in the domestic logistics industry in China has been driven in recent years by what are now standard, warehouse-to-apartment door deliveries of consumer goods bought through online retailers such as JD.com (JD), Vipshop (VIP) and soon-to-list Alibaba.

More than a dozen major delivery companies currently compete for this booming business, which can be both cutthroat and chaotic. Packages arrive every day of the year, and often late into the night, since a courier’s earnings can be pegged to the number of items delivered. Couriers have strong incentive to work fast and dodge traffic jams by driving their electric vehicles on sidewalks.

READ MORE: 8 Stocks George Soros Is Buying in 2014

Some online companies such as JD.com operate their own delivery services. But retailers selling through Alibaba’s Tmall or Taobao rely on Chinese logistics providers such as SF, ZTO, Shentong and YTO, depending on the origin and destination.

Because of fierce competition, package delivery prices are relatively low, even for express service. If you work in Beijing’s software developer district, for example, SF will carry your 1-kilogram box to downtown Shanghai within one day, door to door, for only $24.

To date, the much more lucrative international air shipping business has been the bread-and-butter for UPS and FedEx in China.

FedEx’s subsidiary Federal Express (China) Ltd. is based near the Beijing airport. The company stepped into China for the first time near Hong Kong more than a decade ago, started the industry’s first China-Europe direct flights in 2006 and launched deliveries in 2007. Today one of its 12 global air hubs is in Guangzhou.

READ MORE: Yahoo! Remains the Best Way to Play Alibaba IPO

UPS followed FedEx onto the mainland, starting air services in mid-2005 and cooperating with the domestic logistics company Sinotrans. A big boost came when UPS was named a sponsor for the 2008 Summer Olympics in Beijing.

In 2012, UPS opened a major air shipping facility in the east-central city of Zhengzhou with links to Seoul, South Korea. UPS also operates a regional hub at Shenzhen’s airport. And UPS recently started offering rail service between Zhengzhou and Hamburg, Germany, on the “New Silk Road” railroad between China and Europe.

READ MORE: Watch Out for a Swelling Wave of Exports From China to the World

UPS and FedEx have room to make business decisions in China, but they’re still closely regulated. Licenses are granted by the State Post Bureau, which runs the nation’s postal service as well as the state-owned express package delivery service EMS. EMS has been competing against the Americans for international air shipping since 2010.

Nevertheless, UPS and FedEx have been granted a degree of independence that’s unusual for a foreign company in China, where most foreigners must form a joint venture with a domestic partner. Companies from General Motors (GM) to Peabody Energy (BTU) have allowed these Chinese-controlled arrangements, often letting the partner set limits on management and product development, for access to the Chinese market.

The post bureau apparently sees UPS and FedEx as companies that fit government efforts to boost the consumer economy through online shopping.

READ MORE: Why Tuniu Bleeds Red Ink in China’s Red-Hot Online Travel Market

In May, for example, talks with UPS officials in Beijing prompted a post bureau official to say that the government "wants to work together with market participants at home and abroad, including UPS, to promote the sustainable and healthy development of China's express market... mainly due to the opportunities arising from the development of e-commerce."

UPS officials are used to negotiating in Beijing. Four years ago, for example, company Chairman and CEO Scott Davis held talks with China’s then-Vice Premier Wang Qishan. The two, smiling men were photographed during the conversation, and the photo can still be found posted on the Web site of the State Council, the nation’s cabinet.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

READ MORE: 4 Stocks Warren Buffett Is Selling in 2014

TheStreet Ratings team rates UNITED PARCEL SERVICE INC as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate UNITED PARCEL SERVICE INC (UPS) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • UPS's revenue growth has slightly outpaced the industry average of 4.7%. Since the same quarter one year prior, revenues slightly increased by 5.6%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • UNITED PARCEL SERVICE INC has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, UNITED PARCEL SERVICE INC increased its bottom line by earning $4.62 versus $0.80 in the prior year. This year, the market expects an improvement in earnings ($4.95 versus $4.62).
  • Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. Looking ahead, the stock's rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that the other strengths this company displays justify these higher price levels.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Air Freight & Logistics industry. The net income has significantly decreased by 57.6% when compared to the same quarter one year ago, falling from $1,071.00 million to $454.00 million.
  • The gross profit margin for UNITED PARCEL SERVICE INC is currently extremely low, coming in at 12.71%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of 3.18% trails that of the industry average.

More from Opinion

Time to Talk Tesla: What Happened This Week, Elon?

Time to Talk Tesla: What Happened This Week, Elon?

Apple Needs to Figure Out Its Self-Driving Vehicle Strategy

Apple Needs to Figure Out Its Self-Driving Vehicle Strategy

Throwback Thursday: Tesla, Chip Stocks, TheStreet's Picks

Throwback Thursday: Tesla, Chip Stocks, TheStreet's Picks

12 Stocks That Our Writers and Their Sources Recommend You Buy Here

12 Stocks That Our Writers and Their Sources Recommend You Buy Here

Musk Goes on Unoriginal Media Tirade

Musk Goes on Unoriginal Media Tirade