Fedex moving forward on South China Hub

UNCLAS SECTION 01 OF 03 GUANGZHOU 000206 SIPDIS SENSITIVE SIPDIS USDOC FOR 4410/ITA/MAC/MCQUEEN STATE ALSO PASS USTR/CHINA OFFICE USPACOM FOR FPA E.O. 12958: N/A TAGS: EAIR ECON EINV ETRD CH SUBJECT: Fedex moving forward on South China Hub THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED. IT CONTAINS SENSITIVE BUSINESS INFORMATION. IT SHOULD NOT BE DISSEMINATED OUTSIDE OF U.S. GOVERNMENT CHANNELS OR IN ANY PUBLIC FORUM WITHOUT THE WRITTEN CONCURRENCE OF THE ORIGINATOR. IT SHOULD NOT BE POSTED ON THE INTERNET. ¶1. (SBU) Summary. Fedex is moving strongly forward on both of its China hubs: one in Hangzhou for domestic operations and the other in Guangzhou to serve as its Asia Pacific Headquarters and international hub. A key draw for Guangzhou officials is the proven ability Fedex has demonstrated to attract millions of dollars of new high-tech multinational investment. Fedex's hubs will accelerate China's logistical market growth and hasten Guangdong's transition to a high-tech market. Challenges remain in the new postal and transportation laws (the former limits shipments of under 150 grams to the post office, while the latter is a challenge to what constitutes express delivery service); these limit Fedex's ability to provide complete services. End Summary. Hub Opening in 2008 -------------- ¶2. (SBU) Fedex General Manager Alex Yim, Fedex South China's Regional Manager Robert Chu, and Fedex Sales Manager Barry Feng outlined for visiting USDOC General Counsel John Sullivan, the Consul General and an Embassy/consulate team Fedex's China business development plan and benchmarks leading up to 2012, the scheduled completion data of Fedex's new Guangzhou hub. After completing several business studies, Fedex realized in 2004 that its current hub in Subic Bay, Philippines, would be inadequate to handle future package flows past 2012. Drawn by China's rapid economic development, Fedex decided to build its Asia-Pacific hub at Guangzhou's new Baiyun airport. The Guangzhou hub is expected to serve seventeen major cities in the Asia-Pacific region, including Tokyo, Los Angeles, Sydney, and Singapore as well as support a second hub in Hangzhou, which will serve China's domestic market. ¶3. (SBU) China has agreed to a number of incentives Fedex had sought, including a several year exemption from business and income taxes, discounts on certain aviation fees as well as two critical concessions: self-handling rights (a first for a foreign express mail company in China) and freedom of transshipments (meaning packages can transship Guangzhou with no Customs interference). The Guangzhou Construction Bureau will build all necessary infrastructure. ¶4. (SBU) The hub will open for business in 2008 with a thirty year lease that can be extended to fifty years covering all costs. With 63 hectares (156 acres) Fedex is confident that the site can grow with its needs. The company plans to begin with 1,000 employees and is spending USD 250 million to bring the operation to reality. As part of the deal, the Guangzhou government relocated 1,250 families, building them a new village and providing compensation. Fedex meets with the villagers every two weeks, primarily to ensure that the village numbers do not suddenly inflate, increasing the compensation bill. A Proven Investment Multiplier -------------- ¶5. (SBU) A key sales point for Guangzhou and Guangdong is the proven benefit that a new Fedex hub will generate: millions of dollars of investment from high-tech multinational corporations coming as a result of access to efficient logistical connections worldwide. Fedex has spent time on educating officials on the value of its hub project. Both Fedex and its governmental counterparts see the new hub as accelerating the PRD business transition to high-tech industries and moving low-tech, labor intensive industries inland. Yim pointed out that the National Development and Reform Commission (NDRC) is looking to expedite the whole industrial process, enabling a quicker return on investments. According to Yim, Fedex's China competitors take an average of 28 days to move a package, while Fedex would take no more than three. He gave the example of shipping I-PODS from Apple OEM supplier Foxconn, based in Shenzhen. Fedex currently ships 250,000 pieces annually and expects to reach 300,000 by the end of 2007. Fedex delivers the I-PODS to their destination within two days of pickup, accelerating the entire manufacturing and logistics process. Problems and Challenges -------------- ¶6. (SBU) When asked about possible problems and issues of transparency by General Counsel Sullivan, Fedex officials responded GUANGZHOU 00000206 002 OF 003 that the Guangdong government was progressive in its response to change but the company still faced hurdles with rules and regulations not always being transparent. Chu attributed the increased openness in Guangzhou and Guangdong to the influence of Hong Kong. As a result, officials are comparatively easier to talk with and their reaction time is quicker. Chu and Yim gave the local Party Secretary high marks for being action oriented and credited him with moving the process along. The Fedex officials stated that they were generally pleased with the Civil Aviation Administration of China (CAAC) as the agency seemed to be driven by business and practical reality, in part due to influence from the U.S. Federal Aviation Administration (FAA) and the need to move people and products. ¶7. (SBU) Yim and Chu both highlighted the problems Fedex faces due to the gap between central government policy and local government practices. In general, managing the Fedex-China relationship is a balancing act; while Fedex takes a business view, its Chinese official counterparts often do not. Yim said that Fedex has learned that it needs to develop relationships with each official with whom it deals, have careful planning before embarking on negotiations, be willing to compromise but be firm on its critical issues, and have a back-up plan. One way to avoid problems with various government entities is to make sure Fedex communicates with and between the central, regional, and local government agencies, which often do not speak to each other. ¶8. (SBU) Fedex works closely with government agencies to make its work smoother. Nonetheless, it still faces problems with how Chinese Customs manages its score system for problem shipments. Fedex currently handles 10,000 shipments each day in South China and Customs counts each package as a separate shipment. In 2006, Customs found eight problem packages in Fedex and counted each as a violation in its scoring system. Trucking firms, on the other hand, have their shipments counted per truck load, regardless of the number of individual packages being shipped. Fedex is working with Customs to help draft a Customs clearance handbook. The first draft will be out in two months and will be field tested by Customs at Fedex's Hangzhou hub. Fedex also finds working with the State Administration of Industry and Commerce (SAIC) a challenge at times, given the view by bureaucrats there that it is their interpretation of policy that counts, not necessarily the intent of the policy itself. As the agency which issues many licenses, Fedex runs into conflicts between national policy and local interpretation, making the process of getting a license time consuming and difficult. ¶9. (SBU) Fedex faces a number of other problems, several of which are contained within the transportation regulations and postal laws which prohibit them from sending express mail deliveries into the city. Postal laws favor the State-owned competitor and are being written behind closed doors. Under the transportation regulations, cargo vans cannot enter the city while passenger vans can enter but cannot carry cargo. Yim noted that Hong Kong has similar rules but allows more flexibility and controls business traffic at different times of the day. China is strict on this issue. This rule only applies to express delivery services, but not normal cargo firms, and appears to be designed to protect China Post's Express Mail Service (EMS). In this case the regulator is the competitor. Despite agreeing not to deliver letters or packages less than 150 grams, the Postal Service still sends inspectors to check Fedex's sorting facilities, which stops operations until the inspectors are finished, slowing deliveries. ¶10. (SBU) Buying out its joint venture partner DTW, to be announced and finalized on 1 March, should solve some problems as Fedex will also acquire Da Tian W. Group's (DTW) Class One transportation license to operate its own ground fleet and do domestic deliveries but it will not fix the underlying legal issues and favoritism shown to China Post's EMS. Fedex will need to register all of DTW's former branches and will convert DTW's vehicle delivery fleet to the Fedex logo. It will increase the number of employees to 6,300 and improve service to China's secondary and tertiary cities. Chu said that this deal was delayed by a MOFCOM review as well as varying local practices in each locale, particularly for license applications, opening company bank accounts in each city, vehicle registration fees, and even advertising fees for the Fedex logo on each delivery vehicle. Land use issues remain a concern. Fedex has been trying to open a station in Dongguan for four years but has not been able to obtain a land use certificate. The local government, a district in Dongguan, told Fedex there would not be a problem but without a legal use certificate, that verbal permission entails legal risk. Another potential issue is how China Southern Airlines, China's largest airline, will react to the new Fedex hub in its backyard and the possible impact on China Southern's cargo business, GUANGZHOU 00000206 003 OF 003 though Yim said that over the years China Southern has become "more" reasonable. One problem Fedex cannot solve is the shortage of air traffic controllers. Yim said that China produces only 120 controllers each year when it needs at least 400. Hub Facts in Guangzhou: Transportation Links are Key -------------- -------------- ¶11. (SBU) To support the expected growth of the logistics market and increased air traffic, Guangzhou will in turn accelerate the construction of its third runway. The airport wanted Fedex to pay for the runway but Fedex is happier sharing it with other airlines. Baiyun Airport will have a total of five runways once its Phase II construction is completed by 2010. In keeping with its business model, Fedex aircraft will fly only at night, a factor which will also keep conflicts with passenger aircraft to a minimum. ¶12. (SBU) Fedex currently has plans for a 24,000 square meter sorting facility, expandable to 48,000 sq. mtr. The facility will have 24 gates capable of handling wide-body aircraft and four feeder aircraft gates and can expand up to 37 gates. Located 2.5 miles away from the main passenger terminal, Fedex also achieved another first, obtaining approval to operate its own ramp control with its own ramp control tower. Yim said it is unusual for a private company to get such approval - restricted only to the ramp - but it will help Fedex manage its flights efficiently before handing them off to the main control tower. Still to be worked out is how the hand off to the ramp tower will take place. ¶13. (SBU) In China, trucking will play a big role in package delivery. Connecting the airport hub to the Zhuhai-Beijing highway, trucks will roll down "Fedex Road" if the package is to be delivered within 350 km. Between 350-500 km, packages will go by feeder aircraft, and over 500 km, packages will go by wide-body freighters. Fedex currently lacks the ability to facilitate intra-China transfers. As a result it has helped OKAY Airlines, a low cost carrier, finance the acquisition and conversion of two Boeing 737 aircraft. OKAY will operate out of the Hangzhou hub. ¶14. (SBU) Fedex is exploring rail options in discussions with the Kowloon-Canton Railway (KCR),which is planning to extend a rail line beyond Guangzhou to the airport in the next several years. A subway line will also be built to the airport in 2009. Guangzhou is building a new rail center in Panyu and a high-speed rail line connecting Hong Kong to Panyu. Fedex officials noted that Hong Kong is studying rail and cross-border trucking and Customs clearance procedures in order to promote Hong Kong as a freight destination, however the Hong Kong government is not interested in cooperating with Fedex at this time, fearing job losses in Hong Kong. Go West? -------------- ¶15. (SBU) Fedex started its China operations in 1984 and entered into a joint venture with DTW in November 1999 with 300 employees. Fedex China now has 3,200 employees. In addition to its Beijing office, Fedex has 26 branches and three gateways. East and South China represent over 80% of Fedex's volume in China. Fedex currently serves 200 cities through its JV partner. For the moment, Fedex is content to develop its two hubs but is planning its expansion into western China once the business is there to support it. Once it raises its shipping volumes and is operating the hubs smoothly, it plans to develop a series of 22 airport spokes in China to be served by the hubs. These would include major cities across China, including Urumuqi, Chengdu, and Xian. Yim is confident that Fedex will improve the efficiency of China's logistics industry, helping the Develop the West Program with the efficient movement of parts and products in and out of western China. GOLDBERG