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Cablegate: Express Delivery Hubs Find New Home in South China, but Not

VZCZCXRO5958
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0704/01 3620107
ZNR UUUUU ZZH
R 280107Z DEC 09
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 1215
INFO RUEHOO/CHINA POSTS COLLECTIVE 0402
RUEHBJ/AMEMBASSY BEIJING 0976
RUEHGH/AMCONSUL SHANGHAI 0329
RUEHCN/AMCONSUL CHENGDU 0330
RUEHSH/AMCONSUL SHENYANG 0339
RUEHHK/AMCONSUL HONG KONG 0393
RUEHIN/AIT TAIPEI 0294
RUEHML/AMEMBASSY MANILA 0032
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC 0125
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC 0023
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0218

UNCLAS SECTION 01 OF 03 GUANGZHOU 000704

SENSITIVE
SIPDIS

STATE FOR EAP/CM, EEB/TRA/OTP AND EEB/TRA/AN
STATE PASS TO USTR AMAIN
DEPT OF TRANSPORTATION PASS TO SMCDERMOTT, JSZABAT, KGLATZ

E.O. 12958: N/A
TAGS: ECPS EAIR EINV ELTN ECON ETRD PGOV CH
SUBJECT: Express Delivery Hubs Find New Home in South China, But Not
Without Challenges

REF: Beijing 795

GUANGZHOU 00000704 001.2 OF 003


(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED. IT SHOULD NOT BE
DISSEMINATED OUTSIDE 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: Situated within three hours flight time from most
major cities in the Asia-Pacific region, the Pearl River Delta (PRD)
is an excellent hub for logistic companies serving this part of the
world, according to express delivery firms. FedEx and UPS are both
positioning themselves to enhance their logistic networks in Asia
and further penetrate the growing China market by establishing
Asia-Pacific hubs in the PRD. Despite support from local
governments for the new hubs, the two firms face multiple regulatory
challenges. In addition to China's new Postal Law, which ostensibly
limits the business scope of delivery service firms, FedEx and UPS
have also encountered difficulties related to flight schedules and
ground transport restrictions that affect their hub operations. End
summary.

Express Delivery Hubs Sprout in the PRD
---------------------------------------

2. (SBU) South China is very attractive for the logistics business
because it is the world's manufacturing base, said FedEx Managing
Director for South China Robert Chu. Chu told the Consul General
and ConGenOffs that the PRD offers international opportunities that
surpass even the Yangtze River Delta, which has only one
international airport in Shanghai versus the three (Hong Kong,
Guangzhou, and Shenzhen) that service the PRD. For these and other
reasons, FedEx moved its Asia-Pacific hub from Subic Bay,
Philippines to Guangzhou's Baiyun Airport in February 2009, said
Chu.

3. (SBU) UPS is also moving its intra-Asia hub from Clark,
Philippines to Shenzhen. Centrally located for intra-Asia logistic
transport, UPS expects the hub to improve service efficiency and
reduce network costs. The new hub will take over as UPS's gateway
to south China, said company executives. UPS Director for South
China Ivy Yang told the Consul General that the hub is on schedule
to begin operations in the first quarter of 2010. Besides FedEx and
UPS, Dutch parcel delivery company TNT is also investing in a new
hub in Hong Kong, according to industry experts.

Local Governments Cooperative
-----------------------------

4. (SBU) With no previously established laws or regulations
specifically governing hub operations in Guangzhou, FedEx worked
closely with the local government and customs authorities to develop
related regulations for its new hub, said Chu. He explained that
the government was willing to learn about FedEx's operations and
experiences at other hubs. Similarly, UPS Asia-Pacific Region Vice
President Steven Okun expressed that he had been impressed by the
level of cooperation shown by the Shenzhen government towards UPS
throughout the establishment of the hub. Additionally, UPS
executives said that the Shenzhen government had also been
supportive of UPS's position on several outstanding issues related
to flight schedules and business registration status.

In the "Right Market"
---------------------

5. (SBU) FedEx is optimistic about the logistics market in south
China. The Chinese government is investing a lot to boost domestic
spending, so the situation is quite good, said Chu. FedEx's China
business is actually outperforming its international service in
terms of growth. Internationally, volumes are slowly returning to
pre-downturn levels for the company, and the trend is expected to be
stable through the Lunar New Year Holiday, according to Chu. The
rebound in the last few months has been V-shaped both in terms of
volume and customer growth, he said. (Comment: This trend is likely
due in large part to businesses' efforts to maintain inventories
ahead of Christmas and Chinese New Year. Whether the growth is
sustainable after February 2010 will largely depend on U.S.

GUANGZHOU 00000704 002.2 OF 003


inventory levels at that time. End comment.) "We are in the right
market," Chu repeatedly said to the Consul General, adding that the
Asia-Pacific market is solid, especially China.

Postal Law, Flight Schedules and Other Restrictions
--------------------------------------------- ------

6. (SBU) While market indicators are positive, the two companies
still face regulatory hurdles that limit operational efficiency in
south China. Besides the recently implemented national Postal Law,
which significantly limits the business scope and competitiveness of
foreign express delivery firms, other obstacles include flight
schedule approvals and ground transport restrictions, said the two
firms' executives.

7. (SBU) The Civil Aviation Authority of China (CAAC) continues to
deny co-terminalization--the right to serve two specified points on
the same flight and route in the territory of a party to an air
transport services agreement--for FedEx flights related to
Guangzhou, FedEx Vice President for International Affairs Alan
Turley told the Minister Counselor for Economic Affairs during a
December 2 visit to the new Guangzhou hub. The CAAC cites airspace
congestion between Zone 1 airports (Beijing, Shanghai, and
Guangzhou) as the reason for their decision, arguing that it is
warranted under the U.S.-China Air Transport Agreement (ATA) as a
technical measure, according to Turley. Furthermore, Turley said
the CAAC considered the FedEx co-terminalization flights it has
already approved to be a compromise, so the agency is holding firm
on its rejection of further co-terminalization requests. However,
FedEx believes that multiple co-terminalization is consistent with
the benefits of cargo hub status under the ATA. Without
co-terminalization for flights related to Guangzhou, FedEx
operations are significantly restricted, said Turley. (Note: State
EEB/TRA/AN and Department of Transportation held a second round of
consultations with CAAC on Dec. 2-3 in Beijing regarding the FedEx
co-terminalization issue.)

8. (SBU) Another challenge for FedEx's hub operation involves its
contract with the Guangzhou Airport Company, which leases the hub
facilities to FedEx. According to Turley, the contract is not final
because such status is contingent on the resolution of some
customs-related issues, which are still being worked out.
Consequently, fees and rates for the hub have not been established
and the Guangzhou Airport Company has been providing FedEx with
estimates. Turley said that FedEx would like to operate under a
finalized lease as soon as possible.

9. (SBU) With its hub opening target date approaching, UPS is also
awaiting approval from the CAAC for its requested slots at Shenzhen
Airport. According to UPS's Yang, the CAAC is reluctant to approve
UPS's schedule because Shenzhen Airport, which has only one runway,
has reached capacity in its daytime schedule, defined as 6am to 2am.
Because some UPS flights would arrive prior to 2am, some of the
requested slots are considered daytime slots by the CAAC. As an
alternative, UPS has also requested that the CAAC approve a transfer
of slots with Shenzhen Airlines whereby UPS gets a daytime slot at
Shenzhen Airport and Shenzhen Airlines gets UPS's slot at Guangzhou
Airport, said UPS's Okun in a separate meeting with ConGenOffs. If
approved, the transfer would be the first of its kind. Although
Okun said that Shenzhen's vice mayor supported the transfer
proposal, he also speculated that the CAAC would likely view it as a
policy issue and wish to avoid any indication that it was setting a
precedent for the commercialization of runway slots. (Note: UPS
has indicated it will invite the Ambassador to attend the formal
opening ceremony once dates are set.)

10. (SBU) Cross-border trucking and customs registration are two
other outstanding issues that UPS is working to resolve in order to
ensure its hub runs smoothly and effectively when it opens in early
2010. Yang told Consul General that UPS is trying to obtain permits
from the Guangdong government for cross-border trucking of parcels
between Hong Kong and Guangdong in an attempt to better connect its
Hong Kong network to the new hub. Shenzhen Customs has expressed
support for the trucking permit, according to Yang. However,
because foreign-operated trucks are not allowed on interstate
highways, the provincial government has yet to accommodate UPS's

GUANGZHOU 00000704 003.2 OF 003


request. Separately, Shenzhen Customs has said that it is unwilling
to accept the current UPS hub wholly-owned foreign enterprise
business scope as sufficient for UPS to run "terminal operations,"
said Yang. She added that the Shenzhen government had expressed
willingness to persuade Shenzhen Customs to accept this status.


UPS Recommendations to Guangdong Officials
------------------------------------------

11. (SBU) In light of these issues, UPS made recommendations to the
Guangdong government via the International Consultative Conference
on the Future Economic Development of Guangdong Province (ICCFED), a
meeting of senior provincial officials with international business
leaders held in Guangzhou in November, said Yang. Specifically,
Daniel Brutto, president of UPS International, lobbied for 1)
improvements to the hard and soft infrastructure of airports,
emphasizing the need to address the tight airspace in the PRD; 2)
strengthened integration between Guangdong and Hong Kong through
development of cross-border trucking services; 3) development of a
multi-modal transportation system by first addressing the issues of
daytime inner city access for express delivery vehicles and
temporary parking facilities; 4) strengthened customs facilitation
of goods movement in Guangdong; and 5) enhancement of logistics ties
with Taiwan by developing scheduled all-cargo service between the
island and airports in Guangdong. Yang said that the cross-border
trucking issue was specifically raised with Vice Governor Wan
Qinliang, who expressed willingness to bring the issue before other
Guangdong provincial officials.

GOLDBECK

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