1he Race is On

1he fight among UPS, IedLx, and DHL has gone beyond the delivery of packages.
Now, they're competing in logistics outsourcing. 1he battle is joined.
By Criselda Uy and Heinz Bulos
November 2003

heir trucks are ubiquitous. In the
let corner, in chocolate brown, is
the world`s largest package deliery
company. In the right corner, in blue and
orange stripes, is the world`s largest air
express transportation company. And
right smack center, in bright yellow and
red, is the largest carrier in the world.

In the arena o global commerce, the
competition in the package deliery
industry is a ierce and ascinating one.
And with recent deelopments, it has
become een more intense.

1he Market
lL remains the global market
leader in the international air
express industry, ahead o the
two other largest parcel shipping giants,
United Parcel Serice, Inc. ,UPS, and
ledLx Corporation ,ledLx,. DlL
operates in oer 230 countries and
territories, linking 120,000 destinations.
1he company, ormed in 1969, pioneered
the air express industry with its irst route
rom San lrancisco to lonolulu.

In the transportation business, express
deliery has become one o the biggest
and most important segments. 1he
demands or global commerce require the
express deliery o documents, packages,
and goods oernight or within two days
,deerred` in industry parlance,. And the
quickest way is obiously by air ,albeit air
serice` is not necessarily done ia
airplanes, especially or short-distance
shipments,.

But in the US, which represents around
40 o the global market, ledLx and
UPS dominate, with a combined market
share o 9 ,46 or ledLx and 33
or UPS,, and are considered a duopoly.
Now that DlL acquired the third largest
player in the US air express market,
Airborne Inc., or oer >1 billion, the
market dynamics hae drastically changed.

Under the agreement, DlL acquired
Airborne`s ground operations, while its
airline operations was spun o as an
independent company called ABX Air
Inc., with DlL as its main customer
,under US laws, oreign companies can
only own up to 25 o US airlines,. 1his
practically opened wide the >50 billion US
air express deliery market to DlL, which
preiously only had 2 market share.
\ith Airborne`s 19, this allowed DlL
to capture a more signiicant 21 share.

DlL itsel was acquired in 2002 by the
German company Deutsche Post \orld
Net ,DP\N,, which in turn is 0
owned by the German goernment.
DP\N has since reorganized into our
business diisions: Mail, which uses the
Deutsche Post brand, Lxpress and
Logistics, which both adopted the DlL
brand, and linancial Serices, which uses
the Postbank brand.

1he industry can be segmented into
oernight letters, ground parcel, packets,
and air reight. A US surey by 1he
Colography Group reealed that
oernight letters accounted or nearly
55 o all orervigbt air olume in 2002, and
that ledLx has 44 share in that market
segment, ollowed by UPS with 30.6.
Len or oernight deliery o packets, i.e.
packages under two pounds, ledLx rules.
1
D
So, when it comes to oernight deliery
,\hen it absolutely, positiely has to be
there oernight.`,, which ledLx
pioneered, in the US and in the rest o the
world, it`s ledLx which is the market
leader. \orldwide, it employs around
138,000 people, operates in 214 countries,
and deliers more than 3.1 million
packages eeryday.

On the other hand, in the grovva parcel
deliery business, i.e., packages weighing
between 2 to 0 pounds deliered ia
trucks, UPS dominates with 63.4,
ollowed by the US Postal Serice ,USPS,
with 19, and ledLx Ground, with 12.
1he combined DlL,Airborne only has
1.

In this segment, UPS in its long history
has built the most extensie ground
deliery serice network, with its iconic
Pullman brown trucks. By integrating
oernight deliery with its ground
transportation network, it has gained a
cost adantage oer ledLx.

But ledLx is ast catching up. It also has
proen nimble and lexible. \hereas UPS
relies on its well-regarded but unionized
driers, ledLx through ledLx Ground
hires independent, non-unionized
truckers. Now, it`s shiting more packages
to ground deliery and charging more or
air express as a premium serice. Still, it
will be long beore it een comes near
UPS in this segment.

DlL, on the other hand, with the
acquisition o Airborne`s unimpressie
ground deliery business, still has a long
way to go. Len in the packets segment,
i.e. packages less than 2 pounds but
excluding letters, UPS leads with 45,
with USPS second with a 36.3 share. In
the air reight market, goods oer 0
pounds, there`s no clear market leader.
Among the three, only ledLx has a
signiicant enough share o the market,
around 11 in 2000.

In terms o reenues, UPS is the largest
player in the US with >26 billion in US
reenues in 2002, both package deliery
and other serices, representing 84 o its
total reenues. ledLx generated some >16
billion in the US, o total reenues.
In contrast, DlL earned only >1 billion in
reenues in the US in 2002, or some 8
o the total reenues o the Lxpress
diision o its parent company, DP\N
,or just 3 o total DP\N reenues,.

But in both outside the US and in total
global reenues, the biggest remains DlL,
including reenues o DP\N ,which has
a huge Mail diision that seres Lurope,, a
close to >40 billion behemoth. In
international express, it has around 3
market share. DlL is under the Lxpress
diision, which generated >12 billion in
2002, 92 o that earned internationally.
UPS is second with >32 billion in global
reenues, but with only >4.9 billion earned
rom international package deliery.
ledLx comes in at third with >20 billion
total reenues, >4.6 billion generated
outside the US. UPS and ledLx are about
equal in international package deliery.

So it`s a dierent picture or DlL, which
has a weak position in the US but leads
outside o it. lor instance, it`s number one
in Latin America, Lurope, and Asia
Paciic. 1he US market is what it calls the
last jigsaw piece o the worldwide
puzzle`. It`s no wonder why it muscled
its way in by buying Airborne, and why
UPS and ledLx hae jointly and
ehemently opposed its entry.

Asia Pacific and the Philippines
sia Paciic, although it remains a
small express market-around
>20 billion-is the astest-growing
region, with intra-Asia express market
A
growing aster than intercontinental,
growing some 13 eery year.

DlL also leads in this region, generating
some t2 billion in 2002, representing
around 40 o the market, based on
DlL estimates. 1his is ollowed by
ledLx with 29, UPS with 19, and
1N1, with 12.

Based on a DlL presentation, the
Philippines is considered a mid-leel
market, described as deeloping
sophistication, increasing competition and
serice leels, and aried growth. 1his is
in contrast to mature markets such as
Singapore, long Kong, Japan, Korea,
1aiwan, Australia, and New Zealand, and
deeloping markets such as Vietnam,
Cambodia, Laos, and Myanmar. China has
its own classiication - unique.

In the Philippines, DlL operates under
DlL \orldwide Lxpress Philippines, a
40:60 joint enture between DlL
\orldwide Lxpress BV and \ide-\ide
\orld Lxpress Limited ,\\\LL,,
ormerly DlL Philippines Corporation,
owned by the group o Rod leliciano,
DlL`s local partner or more than 30
years. Up to December 31, 2001, DlL
Philippines Corporation as an
independent agent operated DlL`s air
express serice in the Philippines. Starting
2002, howeer, DlL bought into the
inancially troubled local operations and
entered into a serice agreement with
\\\LL. A whole new inrastructure
was established, including a new country
oice, our new serice centers, a leet o
new ehicles and state-o-the-art
communications inrastructure. In 2002, it
generated reenues o P944 million.

loweer, ledLx remains the biggest local
player, with 2002 reenues o P4.9 bittiov.
1he Philippine branch o lederal Lxpress
Corporation is a wholly-owned subsidiary
o ledLx. Its local partner which handles
all pick-up and deliery in the country is
Airreight 2100 Inc. ,Air 21,, which
became the sole licensee in 1989.

UPS began operating in the Philippines in
1998 by appointing Delbros Inc. as its
serice agent. In 199, the two companies
entered into a joint enture and
established UPS-Delbros International
Lxpress Ltd., Inc. ,UDL, to handle the
company`s ground operations in the
country.

It`s not really the local market the three
giants are ater. Ater all, reenues o their
local partners in last-mile deliery within
the country are relatiely small. 1he
importance o the Philippines to them is
its location as a critical hub or their Asia
Paciic network. It`s the only country in
the region where all the major Asian
markets are within our hours by air. It`s
not surprising then that ledLx and UPS
hae set up their intra-Asian hub in the
country. China is the key market in Asia
Paciic. ledLx, since 1996, has sole
aiation rights to China, until UPS won
the same rights in 2000.

ledLx`s Asia Paciic hub is in Subic Bay,
established in 1995, launching a
comprehensie intra-Asian oernight
serice through the ledLx AsiaOne
network, which connects 18 major
inancial centers in the region. 1here were
earlier talks o ledLx moing its hub
rom Subic to Guangzhou in China,
where the action is. 1he open skies issue
is also another consideration. Its lease at
Subic expires in 200, and ledLx oicials
reportedly gae the assurance that it has
no immediate plans to moe, but is
exploring sites or expansion.
Goernment oicials, howeer, clariied
that ledLx is actually looking at Clark or
its second hub.

Only DlL, which really only has just ery
recently taken oer the local operations,
has yet to put up a hub here. But it has
inused some >30 million to bee up its
local operations. It recently launched its
new gateway acility at the Ninoy Aquino
International Airport ,NAIA, at a cost o
around >5 million. It`s also looking at
additional inestments or its other
gateways in the country and or new
serice centers.

UPS has been operating in the Philippines
since 1988 when it appointed Delbros Inc.
as its serice agent. In 199, UPS and
Delbros Inc. entered a joint enture
agreement establishing UPS-Delbros
International Lxpress Ltd., Inc., tasked to
handle the company`s ground operations
within the Philippines. Last year, ater
winning rights to ly to China in 2000, it
inested oer >200 million to establish its
Asia Paciic hub at Clark, which links the
nine major markets in Asia, to compete
with that o ledLx. 1his is its ourth hub
in the region, ater long Kong,
Singapore, and 1aiwan. United Parcel
Serice Co. ,Philippine branch,, the entity
that operates the hub, generated P16
million in 2002.

Logistics
s i the competition in package
deliery is not ierce enough,
transportation companies hae
been reinenting themseles as so-called
third party logistics ,3PL, serice
proiders.

Logistics, also reerred to as supply chain
management, is an umbrella term that
includes such as serices as inentory and
warehouse management systems, spare
parts logistics, transportation
management, order management systems,
shipment tracking and tracing systems,
returns management systems, ulillment
serices, systems integration, and network
modeling and design.
1he market or logistics is huge. O the >3
trillion global logistics and supply chain
management market, 20 or around >600
billion is outsourced. A 2002 study rom
consulting irm Armstrong & Associates
reported that in 2002, or the eighth year
in a row, growth in outsourced logistics
,, outstripped US economic growth
,1.4 in the ourth quarter o last year,.
A 2003 study conducted by Cap Gemini
Lrnst & \oung US LLC, Georgia
Institute o 1echnology ,Georgia 1ech,,
and ledLx Supply Chain Serices,
inoling 400 logistics and supply chain
executies dierent countries reealed
than 8 o US, 9 o \estern
Luropean, and 58 o Asia-Paciic
respondents indicate they use 3PL
serices. It also ound out that the our
most requently outsourced actiities are
warehousing, outbound transportation,
customs brokerage, and inbound
transportation.
\orldwide, according to market analyst
1ransport Intelligence Ltd., the market
leaders in logistics are Lxcel with >3.
billion in reenues and 1N1 Logistics
with >3.4 billion. UPS is ith with >1.9
billion. DP\N is sixth at >1.6 billion.

ledLx, on the other hand, is not yet a
major player. ledLx Serices, which
includes sales, marketing, and I1 support,
as well as supply chain management
serices, alls under Other operations`,
which also lumps ledLx Custom Critical
and ledLx 1rade Networks. 1ogether,
they generated >609 million in 2002
,ledLx did not break down this igure,
which is a good indication that its logistics
business is not yet signiicant,.

A
In Asia Paciic, the size o the oerall
logistics market is around >550 billion.
According to DlL executies in another
report, the market or supply chain
management serices will be worth more
than >2. billion by 2006. 1here`s a
growing logistics outsourcing market in
more economically deeloped countries
such as Japan, Singapore, South Korea,
and 1aiwan. O course, China is the
hottest market.

In Southeast Asia, including the
Philippines, where there`s a huge base o
export manuacturing plants o
multinational companies, there is an
increasing trend towards 3PL. Still, it`s still
largely in its inancy, as many executies
are not aware or hae not gien priority to
logistics as a competitie tool. But many
experts beliee there`s no turning back.

DlL, UPS, and ledLx are making the
presence o their logistics business elt. So
ar, it`s UPS that`s gaining the most
ground, adopting the term Synchronizing
Commerce`. Ironically, ledLx is the
technology pioneer. In 199, it launched
COSMOS ,Customers, Operations and
Serices Master Online System,, a
centralized computer system to manage
people, packages, ehicles and weather
scenarios in real time. It also was the irst
to oer Internet package status tracking
serices ia edex.com in 1994. UPS took
15 years to come up with its own system,
but unlike ledLx`s proprietary system,
UPS`s logistical sotware worked with any
corporate system. Shaking o its staid
engineering culture, UPS set up its
logistics group in 1994, which has been
one o its astest-growing businesses.

1his is indeed a dynamic industry.
\hereas the US beore was dominated by
UPS and ledLx, now, DlL has taken a
major oothold. \hereas UPS dominated
ground parcel deliery, ledLx is beeing
up its business. \hereas ledLx used to
be the only one with aiation rights with
China, now UPS hae been granted the
same.

Just when you think the race is up, it really
only just began.