Robust Asian growth for DHL Express
Despite the global economic slowdown, the Asian express industry is fueling healthy growth for DHL Express, as it adapts to the changing needs of its express customers.
September 1, 2008
By Donald Urquhart
Although the recent respite fromrecord-setting oil prices hastaken some of the pressure off,the mood in the air industry is gloomyto say the least.
But if there is one bright spot in theindustry, it can be found in the expressside of the business, especially in Asia.For DHL Express, Asia has been providing,since 2002, an average annual growthrate of nearly 18 per cent.
And while current global economicslowdown and record high fuel priceshave tempered this growth somewhat,the express giant is still managing a veryrespectable 12 per cent growth acrossthe region.
But it’s never-the-less a challengingtime, not simply because of the fuelprices or the global economic slowdown, but because the nature of theexpress business is also fundamentallychanging, according to Daniel McHugh,chief executive officer of DHL ExpressAsia Pacific.
A growing domestic business
“Concurrently with the internationalgrowth going from 18 to 12 per centwe’re seeing a double digit expansion ofdomestic express growth, in Australia,New Zealand, China and India,” saidMcHugh.
The reasons for this shift are straightforward. As the regional economies matureand become less export dependent- although still heavily export laden interms of percentage of their gross domesticproduct – the domestic consumptionwithin the countries rises which then createsa larger domestic express market.
“So the business itself is very healthy,but what we’re seeing is just a shift fromwhere the growth has all been internationalto a strong surge of domesticgrowth which is off setting a slower butstill very healthy international growth”he said.
And while domestic express is traditionallya lower margin business, it hasthe benefit of being a lower cost business.”One of our strategies is how dowe best leverage the infrastructure andfootprint of our domestic express businesswith our international. Premiumexpress is an expensive business model,while domestic the cost lines are muchsharper,” he says.
As an example McHugh points toDHL Express’ Express Courier Ltd (ECL)50-50 joint venture with New ZealandPost. “We are now moving our pick upand delivery on the international side intothe domestic engine, because our domesticpick up and delivery is much morecost effective than our international.”
It’s not an all or nothing scenario, hesaid, but rather a blending of the two, “sothe trick for us is how do we blend ourcritical mass where it makes the mostsense, so we reduce our overall costs.”
This is something that will eventuallyplay out as a strategy in every countryDHL operates, he reckons.
Changing customer demands
But this isn’t the only change that’staking place. There is, globally, a shiftin customers’ requirements for express.A shift from all-premium express topremium express and what McHughdescribes as “good-enough” express.
“We’re finding the market shiftingfrom premium express – the get it theretomorrow, or the next day, both becauseits important, vital and the customer feelsbetter knowing its going to be there fast- to customers who have really optimisedtheir supply chain and their spend, andthey’re able to say this part I need tomorrowbut these other five parts I can livewith in three days.”
But the ‘good-enough’ still has to haveall the bells and whistles, the pick up,delivery, the customs clearance, the trackand trace, he adds. “They just want it alittle slower and therefore at a lower priceand the challenge for all express providersis to provide both that premium expressand the good-enough and still do itwithin the customers’ price point.”
Alongside this is the associated trendof a shift from all air express to a moremulti-modal express model. McHughconfirms what many in the air freightindustry have feared – that some airfreight is shifting to the ocean carriers asthe industry becomes more competitivein short sea versus traditional air freightand express.
Similarly this multi-modal shift ispartly responsible for the difficultiesDHL has been experiencing in the US.While the problems there – which sawDHL lose an estimated US$1.3 billionin 2007 – are multifaceted, includingan uncompetitive cost base combinedwith an economic slowdown, customersare also moving from air to groundtransport.
DHL’s decision to outsource its transportationneeds to UPS marks part ofits structural changes aimed at regainingprofitability. “The market definitelywants three players and that’s healthy,”said McHugh.
On the ground in Asia
But does this shifting landscape portenda more significant shift to the groundwithin Asia. Some of DHL’s competitors,namely TNT, have invested heavily in astrategy centred around creating a pan-Asian road network.
“We’re doing a similar thing, but noton same scale,” said McHugh. “The issueis not being able to put a truck on theroad, the issue is being able to go seamlesslybetween countries and despite allthe best efforts of countries, customs,immigration authorities, etc, it’s still notseamless.”
It’s also an issue of when is the righttime to invest in any idea versus pilotingand testing it, he added. Currently DHL isrunning a pilot project involving movingcargo overland from Thailand and Malaysiathrough Singapore. “We’re testingthe idea and making sure we understandthe interface and how things can be moreseamless, but it will happen.”
But he cautions that while the idea ofbringing cargo from Beijing or Shanghaioverland to Singapore is very evocative,it’s still much easier to bring it by air orocean.
“It’ll be an adjunct, you’ll never seetranscontinental US or trans-Europeanvolumes moving across Asia. What is importantis that transportation companieshave to develop a portfolio of products,because you just can’t be a one trick ponyanymore, it’s about offering a portfolioof services and road will be part of theportfolio.”
“In Southeast Asia between Vietnam,Cambodia, Malaysia there’s going to be ahealthy business at a point of time, but thehuge volumes from China down to Singapore,I think that’s a ways away yet.
“Generally what’s happened over thelast 25 years is that the markets havemoved from singular exports to the USor to Europe to a much more integratedand healthy macro-economic environmentand that means that we’re findingthe transportation modes have also got toadjust and become more mature.”
But with more than 40 countries in theAsia-Pacific region from Pakistan to Japanand China to New Zealand, it’s a complexand varied situation on the ground.
In emerging markets like Vietnam,DHL is putting in significant “time, effortand a lot of strategic focus,” because ofthe clear potential there.
“We’re seeing a lot of our customersputting their next manufacturing plantnot in China but in Vietnam as they managetheir production portfolio. Vietnam isclearly a winner even with the challengesit has currently with both the currencyand inflation,” he added.
The India growth engine
But what’s most exciting for McHughis India, where DHL is enjoying 25 percent year-on-year growth. With a dominantmarket share, more than 40 per centand larger than all its competitors combined,McHugh is positively buoyant onthe prospects there.
DHL’s domestic business has beenhelped substantially by its investmentin the country’s top express company,Blue Dart. Two years ago the decisionwas made to establish a ground expressbusiness. “We decided it was better offgoing organic and we’re growing 37per cent year-on-year in our domesticground business, leveraging the groundinfrastructure of Blue Dart in terms offacilities, service centres, gateways, etc.”
The group is doing well on the rest ofthe subcontinent as well he said, citing adominant position in Pakistan along witha comprehensive footprint in the SouthAsia Regional Countries (SARC), includingSri Lanka and Bangladesh.
The SARC is managed out of Mumbaiwith a flourishing intra-SARC air net-work growing along side what McHughsays is the development of a very strongregional trading bloc.
China still the key focus
But it remains the China market wherethe greatest focus is for McHugh. “The focusnow is bedding down our dominancein China. It’s the hotbed of competition- not just our traditional competitorsFedEx, UPS and TNT who are all alsoinvesting heavily in this growth market,but we are also seeing the emergenceof newer competitors, smaller nicheoperators.
“The fact is that you don’t need tohave services to Africa or South Americain order to have a very good servicebetween Shanghai and Tokyo. We, thefour integrators, tout our global footprintand the fact that we’ve got the sameuniforms and same capabilities aroundthe world, but the fact is Japan and Chinais one of the largest and fastest growingtrade lanes in the world.”
“What that’s forcing us to do, is toreally prioritise and focus on leveragingour capability and at the same time stilldifferentiate ourselves and figure outhow to make a little bit of money forourselves at the same time .
“That’s top of mind for both DHLExpress and Sinotrans right now – makesure we bed down that capability inChina,” he said.
Sinotrans remains DHL’s key partnerin China, a hold-over from the pre-WTOdays when all the foreign companiesoperating in China had to have a localpartner. “We’re the last guy standingwith Sinotrans,” McHugh adds with alaugh.
“But it is a very conscious decision.Relationships matter and in Asiathey absolutely matter. These strongcorporate relationships are almost asacred trust between companies and wethink Sinotrans is a fantastic partner.
“If you look at a map of where we areand where our competitors are, we’vegot more dots on the map – we’ve gotmore density, more coverage and wewouldn’t be able to do that withoutour partnership with Sinotrans. Ourrelationship is very strong and it’s aconscious decision to stay together,”he added.
He also points to Sinotrans as anexample of the emerging Chinesemultinationals like Lenovo, or Haier.
For years these companies have beenpartnered with western firms, and havebenefitted greatly from technology andmanagement transfers and gaining anunderstanding of how the rest of theworld operates as well as being able totranslate how China operates to the restof the world.
“Now we are seeing these companies- absolutely world-class – able to standon their own with broad shoulders, hugeresources and global ambitions.”
DHL-parent Deutsche Post is bestserved in a relationship with Sinotrans,McHugh argues. “As Sinotrans wants togo global, who better to go global withthan the world’s largest transport andlogistics company,” he said. “I wouldenvision our relationship – which stillhas quite a number of years to go inthe joint venture agreement – willexpand outside of China and outsideof the traditional international expressbusiness,” he said.
In the meantime, top of the prioritylist for China, according to McHughis expanding DHL’s domestic expresscapability. “We already have a domesticexpress capability in 83 cities overnight,but we need to be able to develop a muchheavier weight and ground capability.”
He also wants to see a better leveragingof this China footprint to help supportsome of company’s business processesand functions like shared services andcall centres.
The partners are also busy expandingthe capacity of the China hubs asdemand is now outstripping capacity.Along with a new US$175 millionNorth Asia hub being built at ShanghaiPudong International Airport, DHLhas also expanded its Central Asiahub – doubling the size of it for a totalinvestment of about US$215 million.
The expansion, originally not planneduntil 2013, is evidence of the strength ofthe express business out of China as wellas the success of its joint venture withCathay-subsidiary Air Hong Kong withwhom DHL has a 50-50 joint venture.
One of the original impetuses forthe joint venture was that by makinguse of the Cathay group’s 5th freedomrights, DHL did not have to go out andnegotiate its own air rights.
Air Hong Kong’s A300-600s are fullyutilised with core express traffic on a fullfive out of nine key intra-Asia routes,McHugh said.
Currently all intercontinental flightshub out of Hong Kong, “but we have somuch volume now and need to improveservice levels to a sub-regional level thatwe needed the Shanghai hub.” Althoughnot as big as the Central Asia hub itwill also take in intercontinental flightsand will allow DHL to create a densernetwork for North Asia.
A surging Gulf market
Another promising area, althoughoutside of the scope of McHugh’sresponsibility, is the Gulf region. “TheGulf is just booming,” he says notingthat a major part of the group’s businessis being generated from the financialservices sector.
Although many would expect thatexpress companies no longer do muchbusiness moving documents, thiscouldn’t be more incorrect in the caseof Dubai and the Gulf region. Thegrowth of both Islamic finance andgeneral capital inflows into the regionhas actually provided DHL Express witha substantial and growing documentsbusiness.