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Monday, 1 April 2013

The fish is trying to lure the fisherman: Dutch courier service TNT Express is turning itself into a ‘lean and mean’ takeover candidate, by firing 4000 employees and withdrawing from China and Brazil.

The following story is a little bit older, as I didn’t have the opportunity to write upon it yet.

On 25 March 2013, the Dutch, globally operating, courier service TNT Express NV (TNTE.AE) – a sister company of the Dutch (formerly state) postal service PostNL (PNL:NA) – spread two news messages:
  • The company planned to withdraw from China and Brazil, in favour of continuing and perhaps even expanding its operations in Europe.
  • TNT is also planning to dismiss 4000 personnel members, due to the difficult market circumstances. 
Both news stories have been published by Het Financieele Dagblad, in collaboration with Dow Jones, The Netherlands. Here are the pertinent snips from both stories:

This Monday, TNT Express NV (TNTE.AE) reduced its targets for Europe. The company is planning to scrap 4000 FTE’s (full-time equivalents) and sell its activities in China and Brazil.

The courier service suffers from the difficult economic circumstances in Europe and, after the European Commission tackled the plans of United Parcel Service (UPS) to take over TNT Express, the pressure increased to reduce costs and streamline the international organization.

In Europe, the biggest market for TNT, many customers choose for the slower, but much cheaper possibility of parcel delivery over the road, instead of by air. On the international stage, the company is struggling to compete with its main competitors UPS, DHL (part of Deutsche Post AG (DPW:GR)) and FedEx Corp (FDX). TNT also has a hard time in profiting from its foreign investments; the losses in Brazil and China added to the increasing pressure from TNT’s shareholders – with among them PostNL – to put the company for sale.

On Monday, TNT came with a strategic update and stated that it wanted to save €220 million in expenses through lay-offs and reduction of the international air-traffic capacity. By doing so, the company wants to arm itself against the continuing economic headwinds for the remainder of this year.

TNT Express is going to restructure its organization in order to improve profitability. This will have negative consequences for 4000 FTE’s at TNT Express, of which 65% will be canceled within Europe. On top of this, the company started with the sale of domestic activities in China and Brazil

This Monday, the courier service stated that, with this new strategy, the company is looking for ways to save €220 million in expenses for 2015, at the latest.

The company also disclosed that it wants to sell its domestic activities in China and Brazil. The sales process in China is in an advanced stadium, according to TNT, and an outcome may be published shortly. Preparations have also started for Brazil.

Within the new strategy, TNT will invest about €200 million until 2015: in optimization of its network and the ICT infrastructure of its warehouses and hubs, and in the support of the business world and its ICT customers.

Concerning the economic circumstances, the company states that uncertainty endures and visibility is reduced.

Many investors undoubtedly approved of the mass lay-offs, as this reduces TNT Express’ costs in the current, difficult market and thus increases the possibilities for profits, after the one-off costs of reducing the workforce have been processed in the results.

Few investors, however, understood why the company has been withdrawing from the Chinese and Brazilian markets. China and Brazil are the most prominent members of the BRIC-countries (with Russia and India) and the annual growth rates of both markets are almost legendary. Why would TNT withdraw from these markets?!

Research by the Wharton University sheds a clear light on this enigma, when it comes to China. Here are the pertinent snips from this research:

But in China, where the courier market is flourishing amid the backdrop of a fast-growing economy, international courier giants such as UPS are not as aggressive as they are in international markets. Due to persistently high costs and difficulties in developing networks, they are either on the sidelines or are exploring the market on a small scale. Some have even seen declines in business.

TNT, which at one point aggressively offered domestic courier services, signed up 50 new partners in 2005.  But it announced recently that it would no longer develop new partners. In addition, TNT has stopped some regional development programs. At the same time, TNT (China) has overhauled its structure and merged its international and domestic courier services.

Currently, TNT's domestic courier services cater mainly to multinationals -- offering them both international and domestic courier services. Fees are settled weekly or even monthly. And single parcels are seldom processed. TNT has a network of 4,500 stores, 1,300 mail boxes and 17,000 franchisees in the U.S., its home country. In contrast, in China, TNT only signs contracts with a few clients.

According to Ken McCall, former CEO of TNT China, TNT had analyzed and planned the domestic courier business after having developed partners in China for a year. TNT found that the scale of Chinese courier services is not big and the market is not mature. As a result, TNT considered a low-key approach. "The domestic courier business is very small -– an infant in our big family," he notes.

Chen Xianbao, executive vice president of ZJS Express, a private courier service company, says that DHL had suffered huge losses since it started domestic courier services due to small volume and high operating costs. Daily courier volume originating from Shanghai, for example, was just tens of kilograms. Private courier companies tend to have several times larger sales. EMS of China Post delivers more than 100,000 pieces a day.

Jin Xiao Xun, vice director of Courier International Division of Shanghai Post, suggests that although the domestic courier market had been fully opened, international giants were still experimenting with the market. On prices and coverage, they don't have any advantages compared to private courier companies and China Post.

Consider the Shanghai to Beijing courier route as an example.  S.F. Express and Tian Tian Express charge 20 RMB and 15 RMB per kg respectively and 10 RMB for every extra kg. EMS charges 26 RMB per kg and 12 RMB for every extra kg. In contrast, FedEx's Next-Morning Delivery charges 135 RMB for 2kg, and 90 RMB for Next-Day Delivery.

High operating costs might be a major reason for these high fees. According to Xu Yong, former operating director with FedEx East China and former president of Tian Tian Express, human resources, management and operating expenses for international courier companies are three to five times higher than those of their private counterparts.

For private and foreign courier companies, the uncertainty of the Postal Law of PRC has been their number one headache.

The current Postal Law was issued in 1986. In recent years, the Postal Law has been amended but not passed yet. The main issue is the range of weights under the monopoly of China Post and the administrative qualification standards for conducting courier business. China Post wishes to limit the competitive pressure on EMS from private and foreign courier services companies by setting the range so that it can continue its monopoly.

The Postal Law under revision has already seen nine drafts, and the latest one even bans foreign companies from delivering letters in China. Currently, four international courier giants have all entered the domestic courier market, and business letters are part of their businesses. If the ban takes effect, the business of the international courier companies will be dwelt a serious setback.

After reading this must-read research article, it becomes clear why TNT Express doesn’t see a future for its Chinese operations:
  • The uncertainty of the Chinese Postal Law-under-construction, which at this moment seems to be shaped to keep foreign competitors away from the most lucrative parts of this huge postal market, in advantage of domestic courier and postal services;
  • The need to deliver all non-local parcels by air in China, as the current road and railroad infrastructure and the sheer vastness of the country hamper cost-effective delivery by truck or train;
  • The fierce competition from the ‘local heroes’: local courier services that deliver their parcels at a fraction of the costs and in much larger numbers than TNT and its global competitors;
  • The high operational costs of TNT Express and its global peers, which exceed the costs of local entrepreneurs by a number of times;
  • The very limited size of TNT’s current operation, when compared to its Chinese private and state counterparts, and the high costs that are involved in expanding this Chinese operation; 

These are all reasons that make TNT’s current decision, to leave China for the time being, a very understandable one.

When it comes to Brazil, a report of TNT’s competitor DHL supplies us with some interesting information:

Brazil is one of the world’s fastest growing economies. But high logistics costs are endangering this growth. The costs are largely the result of regional differences in infrastructure, an underdeveloped rail network, high harbor fees and difficulties associated with the development of the Amazon region. The highway network plays a leading role in Brazil.

Expanses of rain forests in the lowlands of the Amazon in the north, plateaus and mountains in the south and the Andes in the west shape the geographic face of the South American country. As a result of the difficult terrain, the infrastructure in the rain-forest region of the north is poorly developed. In agricultural terms, the savannas in the mid-west are particularly important. But a large share of the country’s population lives along the Atlantic coast in the east.

Brazil’s transport infrastructure is characterized by strong regional differences. Several well-built highways are available in the economically powerful southwest and south. But the picture is completely different in the Amazon region in the north: Here, the opportunities are very limited - both in terms of density and in terms of the availability of various means of transport.

Brazil’s transport system is heavily dependent on the highway network. Sixty percent of total transport volume is handled by it. This applies especially to economically active regions, even though other means of transport are available there - particularly São Paulo. One major challenge is the long-term reduction of the high amount of road traffic. This will be possible only after a sufficient number of intermodular distribution centers have been set up.

Rail transport in Brazil cannot yet be measured by American or European standards in terms of quality and density. The 29,000 kilometer rail network is poorly developed, and parts of it are in bad condition. It is primarily based in the states of São Paulo, Minas Gerais, Rio de Janeiro and Rio Grande do Sul. Another problem is the different track gauges used in parts of Brazil.

Since 2003, Brazil’s economy and exports have been growing tremendously. But the resulting upswing is being endangered by disproportionately high logistics costs. These costs are estimated to be about 20 percent of gross domestic product, or twice as high as in OECD countries.

The global trend toward integrated logistics solutions in contract logistics can also be seen in Brazil. For instance, Just-in-time solutions are frequently sought by the automotive industry, prompting many service providers to offer them. But the efficient and cost-effective implementation of these solutions is being hindered by bureaucratic hurdles.

Just like China, Brazil is a vast country with many rural, mountainous and afforrested parts.

This article by DHL makes it very clear that, as soon as you leave the East and South-East part of the country where the majority of the people live and most economic activities take place, you enter a logistical nightmare with little and poorly maintained roads and railroads. 

Even the well-established, but probably very crowded highways in the South and South-East of Brazil require many miles of logistical traffic by TNT Express (and thus many trucks and delivery vans), in order to offer the 24-7 coverage that is required for services in popular demand, like Just-in-Time delivery.

To fully service Brazil, TNT would need a vast fleet of airplanes, trucks and delivery vans, of which the airplanes are notoriously expensive to operate, especially in these times of high fuel and service costs. These circumstances might be the reason that TNT Express threw the towel for this country too.

Summarizing, In The Netherlands there is an expression that could be applicable to TNT Express: Something is too big for a napkin, but too small for a tablecloth. TNT Express is not yet big enough to be a global player, which can operate at any market in the world.

At this very moment and under the current economic headwinds, Brazil and China have been clearly too big a bite to chew for an independent TNT Express, which must operate without the firepower of UPS and FedEx. This does not mean that for TNT Express, these countries will remain out-of-scope for eternity; just for now, they are, however.

What TNT Express does, is withdrawing to the densely crowded and relatively small continent Europe, with its 400 million inhabitants, its excellent infrastructure of highways and its hundreds of large cities, within a few thousand miles of range. 

In Europe, the company is among the market leaders and here it can easily deliver parcels by train or truck: a cost-effective service that is highly appreciated by the current frugal customers, who don’t want to pay one cent too much for delivery services.

By largely reducing its fleet of airplanes and by dismissing its excess workers, TNT Express is becoming lean-and-mean, as if the company is preparing to become a takeover candidate: like a fish that is luring a fisherman, instead of the other way around.

Nevertheless, it is a sad fact that this change-in-strategy has to come at the expense of so many workers, in such a difficult time.

1 comment:

  1. Yeah, they're now so lean their service is a shambles - even support can't get through to the depots - and also so mean that they are foisting two-man jobs for heavy items onto single drivers. Health and Safety?