DHL's entry into China

Introduction

About DHL

Adrian Dalsey, Larry Hillblom and Robert Lynn (D, H, and L) founded DHL in 1969 while delivering bills of lading between San Francisco and Honolulu by air.  In 1971 it decided to move international and it entered the market of Philippines. Then it started its operation in Latin America, Saudi Arabia, Africa and middle-east in 1978. Innovation and proactive thinking is what separated DHL from other competitors. It was first company to bring international express service in china and also innovations like mobile van in San Francisco. It was awarded in 1998 as best technological innovative company by information week.

Today, DHL is the world's largest and most experienced international air express network with service to 120,000 destinations in more than 220 countries and territories and More than 4,400 offices support DHL's extensive worldwide coverage. Of that total, over two-thirds are owned and operated by DHL, far greater than any other company in the air express industry.

(DHL International Ltd, date unknown)

About Sinotrans

China National Foreign Trade Transportation (Group) Corporation (SINOTRANS) is the largest international freight forwarding company and the leading integrated logistics service provider in China. Comprehensive logistics and service capacity of SINOTRANS come from an intensive network covering China and the rest of the world, supported by advanced information technology. (CNET Networks, Inc.,2006)

Analysis of case study

The following case study analyzes the success story of DHL-Sinotrans joint venture and its reasons for achieving it. Then further on it explains the various implications on China’s economy after being the member of the WTO, as a result of which, many foreign investors started entering the Chinese market. Proactive and innovative thinking made DHL-Sinotrans the market leader in the industry.  

Success of DHL-Sinotrans

DHL is a Belgium based company which entered the Chinese market in 1986 with a joint venture of 50:50 with sinotrans as their local partner and also the only way of entering the Chinese market. Sinotrans were identified as their potential partner as they had deep knowledge of the local Chinese foreign trade and export market. During 1980 each company wanted to enter the Chinese market because of the increase in import and export market and moreover it had an inefficient logistics infrastructure, insufficient and unreliable highway system and overstressed civil aviation system. Sinotrans were very important for DHL’s success in china because it provided them with a readymade domestic market and huge network in china. The mix of local knowledge and advanced technology of DHL-Sinotrans worked very well for each other. (Hill, 2007, pg. 528, 531/GC-1 – 531/GC-6)

DHL’s relationship with Sinotrans helped them in developing their presence into various parts of china. The rapid growth of China's economy provided business players with tremendous opportunities amid a boom in the express and logistics industry. The 20-year successful partnership has led to DHL-Sinotrans' average annual growth rate of 35% to 45% in the past few years.

 So it was very easy for DHL to set up their offices in different parts of china as Sinotrans had very deep knowledge of it. Success of DHL in china would not have been possible without Sinotrans as it is very important for any foreign company to have a very good local partner to be successful as each country has its own taste and preferences, culture and tradition. So DHL would not have a similar level of success by going it alone. (Malone, 2006)

Implications of China’s entry into the World Trade Organization

China’s decision to become a member of the WTO led to the opening up of the Chinese market for the foreign investors. Since China becoming a WTO member, foreign logistics providers have entered into China one after another, with 2/3 of the world top 10 retailers settled in China, and their purchase centers established. (CEInet Data Co., Ltd., 2003) From the given case study we come to know that between 2001 and 2003 almost all the logistics service providers witnessed growth of 30% on year on year basis. This indicates that china’s logistics industry was rising at a rapid rate. The reason behind the china’s logistics growth story was increase of international trade, changing consumer preferences, and technological developments, competition among domestic players led to huge demand for sophisticated and quicker service of goods. (Hill, 2007, pg.531/GC-6–531/GC-7)

Following are rules and regulations on air cargo logistics related sector before WTO accession.

( et al, 2005)

Initially the only way of entering the Chinese market was through joint venture with a local company but later on it all changed with entry of china into WTO which resulted into no ownership limitations for the foreign companies. Simultaneously continuous domestic demand forced the government to open the market as it knew that in order to continue the growth story it would need foreign investors investing in the economy. Before china’s entry into WTO accession many barriers were put on foreign companies like they have to obtain various types of licenses to engage in ground transportation, bonded warehousing, customs clearance, and related services. With China's accession into the WTO, the gradual opening-up of its service trade sector, the sustained heating-up of the international trade, and especially the international manufacturing center's shifting into China, the Chinese logistic market rapidly exhibiting its huge potential, which has attracted the attention of various international logistics giants. (Jing, 2004)

According to many people china would have adverse impact for short term on social inequality between urban and rural people, cut off in jobs and it has also affected the business of many local people and job which has led to closure of many local businesses.

DHL – The Market Leader

This case study refers back to year 2003-04. As we all know that till 1980 china was a closed economy therefore it was very difficult for a foreign company to enter. But soon in mid 1980 china liberialised its economy as result of it many foreign investors started pouring in various sectors and logistics was one of them. The boom in international trade and growing domestic business attracted many foreign investors. The biggest hindrance for many industries was the logistics of the country. Looking at this opportunity and the economy many foreign investors like Fedex, UPS, DHL entered the market in collaboration with domestic company.

Continuous increase in export and import led to huge demand for logistics industry. As on 2000 there were top five logistics companies operating in china and they were china courier service company, DHL-Sinotrans, Federal express corporation, UPS and TNT Skypak-Sinotrans LTD. These were the top companies in terms of market share in china. The main reason for the success of foreign logistics players was their proactive use of technology, global communication, better customer service and efficient management skills. The difference between the domestic Chinese company and foreign players was their e-business and logistics services. By the end of 2003, these four companies held about 80 percent of china’s international express delivery market.

Following are the various reasons that made DHL the market leader in china’s logistics industry:

1. Its partnership with sinotrans helped DHL in gaining the local Chinese foreign trade and export market.
2. It had a great expertise in the global air express industry.
3. DHL always believed in innovation and technology up gradation.
4. Strategies were very well planned which included product and service offerings, customer service standards, long term vision.
5. Innovative services like import express for Chinese importers, e-solutions like DHL Web designing and DHL sms tracking, time definite delivery etc led to overtake its competitors like Fedex, UPS and TNT.

This is how DHL emerged as market leader in china.

(Hill, 2007, pg. 528 - 531/GC-8)

Further Analysis

DHL is a Belgium based company who is into business of logistics which started with an idea of sending documents for importers so that importing of goods is quick. Till 1982 it had presence in more than 30 countries. In mid 1980 it decided to enter the Chinese market as its economy was opening up slowly and various other reasons as follows:

1. Chinese market: Decision to enter the Chinese market was led by its increase in foreign trade and its growing consumer demand. The Chinese economy was considered to be very strong because of its increasing foreign trade and its liberialsized economy. It had a very good long term future because of its huge population, very cheap labour force and new opportunities. (Hill, 2007, pg. 480-481)

2. Timing of market: DHL’s timing to enter the Chinese market was perfect as it was slowly opening up the market for foreign players. Before DHL there was another foreign players like Fedex which entered the market in 1984. So DHL was not the first foreign company to enter the Chinese market. This might have given DHL the confidence to enter the market. In mid 1980 chinese economy was inviting logistics companies to enter their growing market to develop the infrastructure and logistics system. They were allowed to enter the market through a joint venture with a local company. The timing of entry was perfect as the infrastructure, roads; ports were not developed compared to increasing foreign trade. So this provided many logistics company an opportunity to develop their business.(Hill, 2007, pg. 481-483)

3. Scale of entry: it is very important for any foreign company to decide its scale of entry in a new market as a huge scale of entry involves a huge amount of resources and risk. So in terms of this point, DHL entered the Chinese market with minimum resources as it was a new market for them and moreover it had an joint venture with sinotrans which had a deep insights of local market.(Hill, 2007, pg. 484-485)
4. Modes of entry: Mode of entry refers to way of entering any new market for any new company. Different modes of entry like franchising, licensing, turnkey projects, joint venture etc all of them has its own advantages and disadvantages moreover the selection of mode also depends upon the country to which it is entering because not all the country has same rules and regulations. Eg: India is a developing country so its policies are bit stringent compared to a developed country like Australia.

 According to the rules in 1980, a foreign company needs to have 50:50 joint ventures with a local company to enter the market. Therefore DHL entered the Chinese market with a local company Sinotrans which had a very good network in the domestic market. This provided DHL with various positives like access to local companies’ knowledge and network, clients and resources. It also reduced its cost and risk of entering a new market and most important easy political acceptance. (Hill, 2007, pg. 491)

5. Core competency: Each firm has its own core competency in market which separates him from other players. Some firm have technical competency, managerial competency or huge network or skilled workforce etc. So many times the mode of entry in a country depends upon its core competencies. Some companies don’t like to reveal their competencies therefore they never enter into partnerships and joint venture etc. but in the end it all depends on the company and its policies. DHL’s core competency was its innovative ideas, technical know-how and risk taking ability. Their success in china or say in many countries is mainly because of their innovative ideas and risk taking ability.

Based on the above mentioned points we can conclude that DHL’s decision to enter the Chinese market in 1986 was perfect and also their joint venture with Sinotrans was a good decision based on the core competencies it had.

(Hill, 2007, pg.494-495)  

Latest Developments

• Logistics providers continue to focus on expansion in China

Chinese logistics firm Sinotrans has sold its stake in Exel-Sinotrans Freight Forwarding Co. to DHL for $90 million and it is also further expanding DHL's reach in the Chinese logistics market. The move is DHL’s latest expansion in the Chinese market its plan to spend $137 million to .

According to Tom Stanton, supply chain analyst at AFMS in Portland, Ore. said DHL is fighting with U.S. competitors FedEx and UPS for the market share in China. "All the major companies are investing massively into Chinese market."Each one of them is developing better hubs and delivery services in the Chinese market. They are competing and serving a number of cities and also branding to the local Asian customers as well as the multi-nationals in Asia."

(Hanon, 2007)

• DHL begins domestic express service in China

World-famous express delivery and logistic giant DHL announced in Shanghai to start their express service in China, the first foreign express company to open this business in China. DHL takes Asia Pacific region especially China as its development emphasis at headquarters located in Brussels and Belgium.

Since 2004 to 2008 DHL has planned to invest over 215 million US dollars in China so that it can develop its domestic express service and also improve its infrastructures in China which includes expanding four port operation centers, establishing 14 new branches, setting up three express logistic centers and 16 strategic spare parts centers. In southeastern Shanghai Municipality, DHL Denzas Air & Ocean will establish two logistics centers in Pudong District and Jiuting Town of Songjiang District respectively. China is considered to be the largest market for DHL in with an increment from 35 to 40% in recent years.  

Currently DHL is leader in air express industry covering 318 cities in china and with a market share of 40% of the total along with a leader in international air freight market. (Chinadaily.com.cn, 2004)

Conclusion:

It can be concluded by saying that foreign companies like DHL, Fedex, UPS, TNT made a very good decision of entering the Chinese market, as today we all can witness the growth of china.

China's WTO accession surely promises greater opportunities for foreign investors, allowing them to compete with domestic investors on an equal basis. (Li et. al, 2005)

 Even if China has yet to fully open its shipping industry, its trend is clearly in that direction. DHL has appointed Edward Hui as country manager Hong Kong, Macau and South China for DHL Global Forwarding. He will be responsible for developing and executing the company’s corporate strategies and operations in Hong Kong, Macau and South China and this indicates the opportunity in Chinese market. Therefore, all the major firms are investing a huge amount of money in china seeing its increasing foreign trade and tie ups with other countries. (Powell, 2008)

Now, as a full WTO member, China is embarked on another initiative, reform of its legal system, which should have an equally important impact on China's economy and society in the future. (Li et.al, 2005)

 

Recommendations

Looking at the current scenario and the position of DHL in china it can be recommended that the company have to be more innovative and need to expand its network in order to maintain its competitive advantage.

It is found that there are many local companies which provide small parcel delivery service very efficiently so DHL must also focus on that as there is huge gap between rural and urban people in china. It should invest more in the development of infrastructure like ports, customer service offices and after sale service. In today’s competitive world delivery of service is crucial in achieving the market share.

Currently DHL-Sinotrans are moving very good but it has to look after the above mentioned suggestions in order to expand further and also to maintain its goodwill.

Bibliography

• CEInet Data Co., Ltd. (2003) “China's Logistics Industry in 2003”   (accessed on 6th May, 2008)

• Chinadaily.com.cn (2004) “DHL begins domestic express service in China”  (accessed on 5th May, 2008)

• CNET Networks, Inc. (2006) “DHL Unveils First in China Strategy, Kicks off 20th Anniversary of Successful Joint Venture Partnership with Sinotrans; Investment in Building Flagship Express Headquarters Boosts Commitment to Greater China to Over US$900m”  (accessed on 6th May, 2008)

• DHL International Ltd( date unknown) “DHL: The Beginning”  (accessed on 4th May, 2008)

• , Michael Ka-Yiu. , Anming. , Lawrence Chi-Kin. , Japhet (2005) “The Air Cargo Industry in China: Implications of Globalization and WTO Accession”  . Vol. 44, Iss. 4; viewed 6 May, 2008.

• Hannon, Dave (2007) “DHL to expand in China through Sinotrans-Exel deal” ( (accessed on 6th May, 2008)

• Hill, Charles W.L (2007) “International Business, Competing in the Global Marketplace” New York, McGraw-Hill/Irwin.