UPS TNT buy may make it No. 1, but not in India

Written by Nikita Upadhyay | Nikita Upadhyay | Mumbai | Updated: Apr 4 2012, 09:00am hrs
Atlanta-based United Parcel Services (UPS) $6.85-billion bid to acquire Dutch company TNT Express will bring it closer to market leader Fedex Corporation internationally, but its presence in the fragmented express delivery segment in India will remain dwarfed unless it invests to grow scale through acquisitions, analysts say.

The acquisition will help it more in its global operations, not so much in India, said Manish Saigal, executive director and national industry head, transportation and logistics, KPMG India. TNT and UPS do not have much exposure to the ground express logistics business in India, instead are into international freight forwarding.

According to the Associated Chambers of Commerce and Industry of India, the air cargo industry is growing at an average rate of 12% over past five years.

Express industry in India is fragmented. Express companies, which move documents and parcels, need to build up an extensive ground fleet and air fleet, said Hemant Bhattbhatt, partner, Deloitte India. Global companies in India find it easier to buy an existing company with network rather than putting capital to build the network.

The $3.5-billion express segment in India includes delivery of documents and parcels. Leader Speed Post, owned by governments India Post, for express delivery of letters and documents now delivers parcel service within India under Express Parcel Post. In 2008, it tied up with DPDHL to deliver international express courier service Worldnet express. Blue Dart is the second largest player in the express delivery of letters and documents in India.

In the express delivery of parcels, Safexpress is the leader followed by Gati.

The competition will grow with consolidation. A merger of UPS and TNT will save many overhead costs primarily lease rentals and expand their customer reach. We have spent considerable time evaluating potential integration opportunities, UPS said in an e-mail response. UPS has experience of integrating businesses as it has acquired more than 50 companies since going public in 1999. We will pick a team of management from each company who will develop a consolidated integration plan, UPS said.

But companies need scale and reach to make a dent into the express market which has led companies to gain access to regional markets and specialised operations through acquisitions. A combined network will help facilitate the flow of trade, making customers more competitive not just in the US and European markets, but also in markets across Asia and Latin America helping to stimulate much needed economic growth, UPS added.

DPDHL Express had been one of the pioneers of this strategy. In November 2004, DPDHL Express acquired Indian courier company Blue Dart Express, cornering 45% market share in the Indian market. In February 2010, American Fedex took over rival AFL.

In February 2012, Bangalore-based Gati said it will enter into a 70:30 joint venture with Tokyo Stock Exchange-listed global logistic service major Kintetsu World Express to expand its global foothold in the express segment and to reduce debt. The newly formed company will be called Gati-Kintetsu Express and express distribution and supply chain (EDSC) business of Gati will move into the joint venture company through a business transfer agreement.

There is a lot of interest from global majors for M& A in the express segment, said Ashis Nain, MD Expressit. The express industry has grown at approximately 15% this year, compared to 20 % last year.

Last year in May, Belgian Post International (BPI), a business unit of Belgian Post, has entered the over-crowded and un-organised Indian logistics market by partnering with Expressit. With this partnership both companies have come together in a form of 50:50 joint venture to form a new international express mail delivery service called MailPlus which will have a presence across 180 countries.

A few of the key home-grown logistics service providers (LSPs), who have been growing at a rate of 30-40% year-on-year, are on the lookout for strategic partners or value acquisitions, said Subir Shah, senior consultant, Transportation & Logistics Practice, Frost & Sullivan South Asia, Middle East and North Africa. The main reason is that, these LSPs are now at an inflexion point and a global reach for their clients is the next logical step.

The revenue generators are also changing. Banking and financial service, the largest contributor, is now been slowly replaced by new sectors.

We believe that there are opportunities in several key industry sectors like e-commerce, pharmaceuticals and healthcare as well as gems and jewellery, which we think can propel the growth of express logistics industry in India, said Rakesh Shalia, managing director, marketing and communications, FedEx Express.

Survival for smaller companies will be tough unless acquired by bigger rivals. We do not see too many M&A deals in this space going ahead, said Bhattbhatt from Deloitte.