UPS Bets On China E-Commerce

By newsdoug on August 15, 2013

A year after winning a license for domestic parcel delivery in China, global giant UPS (NYSE: UPS) is rolling out a major expansion in the market in a bid to capitalize on the local boom in e-commerce. This kind of expansion could be especially profitable for UPS, as it could profit not only from an explosion in demand for delivery services, but also from demand for its highly profitable logistics services. E-commerce companies could welcome such third-party logistics services, as many are already building up their own networks of warehouses in a bid to deliver their goods more efficiently.

After years of lobbying, UPS and rival FedEx (NYSE: FDX) finally got permission about a year ago to deliver packages domestically in China, opening up a huge new opportunity for them. Before that, they had been limited to delivering packages between Chinese cities and global destinations. The new permits came just as China’s domestic parcel delivery market was booming, fueled by an explosion in e-commerce that is expected to result in around 1.85 trillion ($300 billion) in online sales this year alone, according to one estimate.

With its domestic delivery license now in hand, UPS has just announced a major China expansion that will see it open 2 massive new logistics centers, one in Shanghai and another in the interior city of Chengdu. (company announcement) The new Shanghai facility is the larger of the 2, containing a massive 70,000 square feet of space. The facility is UPS’ fourth in the area. Equally important, the new facility is close to Pudong Airport, giving it easy access to highways and other road networks that could make it well-placed for quick delivery times in the Shanghai area.

The second center in Chengdu is also quite large at 47,000 square feet. Like the new Shanghai facility, the Chengdu center is also close to the local international airport, again making deliveries to most locations in populous Sichuan province and other locations in Southwest China possible within a day.

UPS’ expansion closely mirrors a similar build-ups of warehousing operations in China by major e-commerce companies like Amazon (Nasdaq: AMZN), Tencent (HKEx: 700) and Jingdong. Those companies have spent much of the last 2 years opening vast networks of logistics centers around the country in a bid to shorten delivery times as they seek not only to compete with each other, but also with traditional retailers that can offer merchandise immediately to shoppers.

In May, media reported that Tencent’s 51Buy e-commerce service was trialing a delivery service that would allow some customers to get their goods in 2 hours or less after placing an order. (previous post) E-commerce leader Alibaba, which operates online shopping malls where merchants can rent space, also announced its own massive logistics investment in May. Under that plan, it said it would spend 100 billion yuan on logistics over the next few years to help its merchants delivery their goods more efficiently. (previous post)

Amid all this demand for logistics services, UPS’ expansion looks like a smart move to cater to companies that don’t want to build and operate their own logistics centers, which is costly and uses up major resources. I would expect that FedEx is making a similar build-up of its logistics capabilities, and that both companies could see strong demand for those services — especially among mid-sized e-commerce firms that don’t want to build their own warehouses. Look for UPS to continue its build up and get strong demand for both delivery and logistics services from these new centers, providing a valuable new profit center for the company’s global operations.

Bottom line: UPS’ addition of 2 major new warehouses looks like a smart build-up of its logistics capabilities that can cater to the domestic e-commerce market.