To Keep FedEx-Like Margins, China Logistics Firm Plans Cuts

ZTO Express

ZTO Express Inc., the first Chinese package-delivery company to list in the United States, said it needs to cut costs in China to maintain profit margins that exceed FedEx Corp.’s.

The Shanghai-based firm will increase automation at sorting hubs and invest in higher-capacity trucks that cost less per- parcel to operate, ZTO’s Chief Financial Officer James Guo said in an interview. The company’s shares slid 35% through Dec. 27 since an October IPO raised $1.4 billion, the largest by a U.S.-based Chinese company this year.

FedEx ranks No. 2 on the Transport Topics Top 100 list of the largest U.S. and Canadian for-hire carriers.

ZTO, which counts on Alibaba Group Holding Ltd. for about 74% of parcel volume, is seeking greater scale and efficiency in a market where none of the five biggest express delivery firms has more than a 15% market share, according to the company’s IPO prospectus. Competition in the industry is focusing on capacity, service quality and technology, Guo said.

YTO Express Group Co. had the industry’s biggest market share with a 14.7%, while ZTO had 14.3%, according to the filing, which cited data from iResearch and State Post Bureau of China.

ZTO had a gross margin of 36% in the quarter ended Sept. 30. Memphis, Tennessee-based FedEx had a margin of 22.6% in the quarter ended Nov. 30, matching that of Atlanta- based rival UPS Inc. in the three months ended September.

UPS ranks No. 1 on the Transport Topics Top 100 list of the largest U.S. and Canadian for-hire carriers.

ZTO Express

ZTO is also considering acquiring a cargo aircraft fleet to expand outside China as the next phase of growth, CEO Lai Meisong said in an interview earlier this month. He didn’t give a time frame for buying planes.

Rivals including SF Express Group Co., YTO, STO Express Co. and Shanghai Yunda Express Co. have sought back-door listings on domestic exchanges this year as competition intensifies. Fresh funds will help a consolidation drive in the industry that could leave the three largest players with more than 20% market share each, Guo said.

"The competition going forward will become more rational as major players come under greater pressure to deliver revenue and profit as they become public companies," Guo said.

China’s express-delivery companies are also putting pressure on margins as the dwindling size of each parcel and the adoption of electronic waybills means revenue declines while volume increases, Guo said. Volume may reach 700 million units by 2020, more than double the 300 million units already delivered so far this year, he said.