The Big Sell | Is China’s courier price war reaching a tipping point?

Over the past two years, the vicious price war among Chinese delivery companies has taken a toll on an industry that’s often referred to as the “backbone” of the country’s e-commerce boom. Recently, signs have emerged that the grueling battle may finally be reaching a breaking point.

Beginning in September, six delivery services started to charge an extra RMB 0.1 ($0.02) per parcel, a major change in pricing strategy, given that courier companies have charged less than delivery costs for years in pursuit of capturing market share. 

The companies that joined the price increase are some of the biggest in the sector: ZTO Express, YTO Express, STO Express, Yunda Express, Best Express, and J&T Express. All pledged to use the extra money to boost delivery worker incomes and protect their rights. 

The change is mainly a response to intensifying regulatory pressure to improve conditions for delivery workers. But there are other, perhaps more pressing motivations for Chinese courier companies to use this shift to mark the beginning of the end for a price war that has had an impact on the long-term and sustainable development of the industry.

“The price war shows signs of easing, but there’s still a long way for the whole industry to get back on track to healthy development,” Lei Zhongnan, CEO of logistics tracking platform Kuaidi 100, told Chinese media recently.

Express delivery is no longer a lucrative business: Data from China’s National Post Bureau (NPB) shows that the volume of parcels delivered in China surged 40.1% year on year to 67.3 billion in the first eight months of this year. That’s already 81% of last year’s volume of 83 billion units. 

• However, the expansion in volume comes on top of a much slower revenue growth. Revenue generated from the sector climbed 23.4% year on year to RMB 650.9 billion over the first eight months, or 74% of 2020’s RMB 875 billion total revenue, NPB data shows.
  
• China’s express delivery market is a highly concentrated one that’s dominated by a few top players including SF Express, Alibaba-backed Best Express, and a number of couriers collectively known as “Tongda Operators” — ZTO Express, YTO Express, STO Express, and Yunda Express. The six operators represented more than 80% of China’s express delivery market in 2020, according to data from market intelligence platform askci.com.
  
• In a crowded market, the companies, mostly offering the same services, had been relying more and more on lowering prices to gain market share. Per parcel delivery price dropped 13.1% year on year to RMB 9.8 ($1.5) in the first half of this year.

The negative impact of the price war is explicit in the gloomy financial reports of the major players, as courier companies see their revenue skyrocket while profits sink. Six out of the seven listed courier businesses achieved double-digit revenue growth in the first half of this year; YTO and ZTO lead the group with an over 30% year-on-year revenue jump. But net profits slumped across the board, with STO suffering the steepest plunge of more than 300%. STO and BEST Express are recording losses.

• Delivery companies are less willing to bleed for market share. In August, per parcel delivery price of YTO Express increased 5.45% month on month, or a 0.95% increase compared with a year ago. 
  
• Similarly, SF Express and Yunda Express increased per parcel price by less than one percent month on month, although the figures still represent year on year drops. 

How the war began: Despite competitive tensions, there was a delicate balance among major courier companies before 2019. But that balance was disrupted by the entrance of Southeast Asian delivery upstart J&T in 2020. Founded by a Chinese entrepreneur in Indonesia, J&T Express expanded to China later after becoming a quick success in the Southeast Asian market in 2015.

• The company expanded rapidly, reaching the 20 million parcel per day milestone within 10 months of entering China, a feat that took rivals like STO, YTO, ZTO, and Yunda Express more than a decade to achieve. Its most effective weapon is, of course, price cuts.
• In one of its fiercest campaigns, which took place in March last year, J&T offered nationwide delivery for just RMB 0.80 per parcel for users in Yiwu, China’s eastern commodity center, compared with the RMB 1.2 to RMB 1.3 per parcel offered by rivals.
• Similar to “Tongda” couriers’ early boom being driven by orders from Alibaba marketplaces, J&T’s initial boom in China has mainly been driven by delivery for e-commerce upstart Pinduoduo, which accounts for around 80% of its orders. 

Price wars in the China tech arena are generally fueled by venture capital and express delivery is no exception. J&T has received multiple hefty rounds of investment over the past two years at sky-rocketing valuations.

• J&T Express completed a $1.8 billion financing round at a valuation of $7.8 billion in April, higher than market cap for STO Express, Yunda Express, and YTO Express at the time.
• The company closed a $250 million strategic investment deal in August.
• J&T Express reportedly plans to raise over $1 billion from a U.S. initial public offering (IPO) as soon as the fourth quarter, at a $5 billion valuation.

Delivery workers are working more for less: Price wars have also led to lower incomes for delivery drivers who earn on per package delivery fees. As delivery drivers shift to other industries for better pay, the delivery worker shortage has become a serious problem for courier companies. 

• China had more than 4 million express delivery workers in 2020. But as a result of deteriorating working conditions and lower pay, the voluntary turnover rate of express logistics personnel climbed to 33.1%, the highest across all industries.
• Increased pay and better working conditions could solve the labor shortage, but for courier companies, higher pay for workers means increased costs, making their low-price model economically inefficient.

Regulators have recently stepped in to protect the rights of express and food delivery drivers as part of the state’s efforts to help lower-income workers amid the authorities’ declared aim of creating “common prosperity.” Local and central government agencies have rolled out rules trying to end unreasonable low-price deliveries.

• April 9: The municipal postal authority in Yiwu cracked down on delivery services J&T Express and Best Express for price-dumping, partially closing their distribution centers in the county-level city.
• April 22: Zhejiang provincial government issued a guideline forbidding courier companies from taking parcel orders at lower than the cost of delivery. E-commerce platform operators were also warned against using technological means to interfere with merchants’ choice of couriers.
• July 8: Seven central government regulators, including the Ministry of Transport, the State Post Bureau and the National Development and Reform Commission, issued guidelines to protect the rights of express delivery workers, including measures aimed at ensuring more reasonable salaries, having companies buy them social insurance, and clarifying the companies’ responsibilities to protect workers’ rights.

What’s next?

• Increased pay and improved welfare may alleviate the delivery force shortage to a certain extent. An experienced courier can handle 200 to 300 parcels per day, an anonymous delivery worker told local media. That means the RMB 0.1 per parcel increase would boost their average monthly income by about RMB500.
• Instead of providing similar services, the couriers are trying to expand their product lines. “Tongda” couriers have expanded into the high-end express delivery market, and SF Express has upped its investment in cold chain delivery and delivery installment services.  
• Some companies are ditching price wars altogether. Lan Haisong, CEO of ZTO Express, said it’s “irrational and unsustainable” to compete for market share with “unnecessary” price cuts. ZTO Express topped the seven major courier businesses with RMB 180 million net profit in Q1 this year.

Conclusion: Price wars have been a successful weapon for market entry for many delivery companies such as J&T. But such tactics are not likely to last. The state is tightening its regulation on irregular pricing, while there is renewed focus on the rights of delivery workers and the impact on the user experience. Increasing costs also mean that a number of major courier companies are now turning their backs on the delivery price wars. 

Also in the news

Investors bet on robot delivery: Increasing labor costs have propelled the growth of robotic delivery technologies recently. This month, investment has flocked to a bunch of business-faced startups ready to apply robotic delivery tech in various fields, from warehouse management to the service industry.

• Chinese service robot maker PuduTech announced a RMB 500 million ($78 million) investment on Sept. 14.
• Keenon Robotics made public the next day the completion of a $200 million Series D funding led by returning investor SoftBank.
• Hai Robotics, a Chinese warehouse robotics startup, announced on Sept. 22 two financing rounds totaling more than $200 million.

Alibaba expands community group-buy push amid rival startup fallout: Consolidation in China’s community group-buy market continues. As startup casualties increase, Alibaba is pushing further to fill the market gap left by the collapse of smaller rivals.

• Alibaba-backed online grocer Nice Tuan is reportedly downsizing its operations in August.
• Meicai, a Chinese app that supplies farm-to-table produce for restaurants, has been reducing its operations and laying off employees this month.
• Chengxin Youxuan, the community group-buy unit of Chinese ride-hailing giant Didi Global, shut down operations in 22 provinces, accounting for more than 60% of its service locations.

Alibaba rebranded its community group-buy unit to “Taocaicai” on Sept. 16 as some rivals have lost momentum after rounds of market consolidation. The new brand will incorporate Freshippo Market and Taobao Maicai, Alibaba’s two existing community grocery services.