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UNCLAS SECTION 01 OF 03 GUANGZHOU 000206 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
USDOC FOR 4410/ITA/MAC/MCQUEEN 
STATE ALSO PASS USTR/CHINA OFFICE 
USPACOM FOR FPA 
 
E.O. 12958: N/A 
TAGS: EAIR ECON EINV ETRD CH
SUBJECT: Fedex moving forward on South China Hub 
 
THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED.  IT CONTAINS SENSITIVE 
BUSINESS INFORMATION.  IT SHOULD NOT BE DISSEMINATED OUTSIDE OF 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.  Fedex is moving strongly forward on both of its 
China hubs: one in Hangzhou for domestic operations and the other in 
Guangzhou to serve as its Asia Pacific Headquarters and 
international hub.  A key draw for Guangzhou officials is the proven 
ability Fedex has demonstrated to attract millions of dollars of new 
high-tech multinational investment.  Fedex's hubs will accelerate 
China's logistical market growth and hasten Guangdong's transition 
to a high-tech market.  Challenges remain in the new postal and 
transportation laws (the former limits shipments of under 150 grams 
to the post office, while the latter is a challenge to what 
constitutes express delivery service); these limit Fedex's ability 
to provide complete services.  End Summary. 
 
Hub Opening in 2008 
------------------- 
 
¶2.  (SBU) Fedex General Manager Alex Yim, Fedex South China's 
Regional Manager Robert Chu, and Fedex Sales Manager Barry Feng 
outlined for visiting USDOC General Counsel John Sullivan, the 
Consul General and an Embassy/consulate team Fedex's China business 
development plan and benchmarks leading up to 2012, the scheduled 
completion data of Fedex's new Guangzhou hub.  After completing 
several business studies, Fedex realized in 2004 that its current 
hub in Subic Bay, Philippines, would be inadequate to handle future 
package flows past 2012.  Drawn by China's rapid economic 
development, Fedex decided to build its Asia-Pacific hub at 
Guangzhou's new Baiyun airport.  The Guangzhou hub is expected to 
serve seventeen major cities in the Asia-Pacific region, including 
Tokyo, Los Angeles, Sydney, and Singapore as well as support a 
second hub in Hangzhou, which will serve China's domestic market. 
 
¶3.  (SBU) China has agreed to a number of incentives Fedex had 
sought, including a several year exemption from business and income 
taxes, discounts on certain aviation fees as well as two critical 
concessions: self-handling rights (a first for a foreign express 
mail company in China) and freedom of transshipments (meaning 
packages can transship Guangzhou with no Customs interference).  The 
Guangzhou Construction Bureau will build all necessary 
infrastructure. 
 
¶4.  (SBU) The hub will open for business in 2008 with a thirty year 
lease that can be extended to fifty years covering all costs.  With 
63 hectares (156 acres) Fedex is confident that the site can grow 
with its needs.  The company plans to begin with 1,000 employees and 
is spending USD 250 million to bring the operation to reality.  As 
part of the deal, the Guangzhou government relocated 1,250 families, 
building them a new village and providing compensation.  Fedex meets 
with the villagers every two weeks, primarily to ensure that the 
village numbers do not suddenly inflate, increasing the compensation 
bill. 
 
A Proven Investment Multiplier 
------------------------------ 
 
¶5.  (SBU) A key sales point for Guangzhou and Guangdong is the 
proven benefit that a new Fedex hub will generate: millions of 
dollars of investment from high-tech multinational corporations 
coming as a result of access to efficient logistical connections 
worldwide.  Fedex has spent time on educating officials on the value 
of its hub project.  Both Fedex and its governmental counterparts 
see the new hub as accelerating the PRD business transition to 
high-tech industries and moving low-tech, labor intensive industries 
inland.  Yim pointed out that the National Development and Reform 
Commission (NDRC) is looking to expedite the whole industrial 
process, enabling a quicker return on investments.  According to 
Yim, Fedex's China competitors take an average of 28 days to move a 
package, while Fedex would take no more than three.  He gave the 
example of shipping I-PODS from Apple OEM supplier Foxconn, based in 
Shenzhen.  Fedex currently ships 250,000 pieces annually and expects 
to reach 300,000 by the end of 2007.  Fedex delivers the I-PODS to 
their destination within two days of pickup, accelerating the entire 
manufacturing and logistics process. 
 
Problems and Challenges 
----------------------- 
 
¶6.  (SBU) When asked about possible problems and issues of 
transparency by General Counsel Sullivan, Fedex officials responded 
 
GUANGZHOU 00000206  002 OF 003 
 
 
that the Guangdong government was progressive in its response to 
change but the company still faced hurdles with rules and 
regulations not always being transparent.  Chu attributed the 
increased openness in Guangzhou and Guangdong to the influence of 
Hong Kong.  As a result, officials are comparatively easier to talk 
with and their reaction time is quicker.  Chu and Yim gave the local 
Party Secretary high marks for being action oriented and credited 
him with moving the process along.  The Fedex officials stated that 
they were generally pleased with the Civil Aviation Administration 
of China (CAAC) as the agency seemed to be driven by business  and 
practical reality, in part due to influence from the U.S. Federal 
Aviation Administration (FAA) and the need to move people and 
products. 
 
¶7.  (SBU) Yim and Chu both highlighted the problems Fedex faces due 
to the gap between central government policy and local government 
practices.  In general, managing the Fedex-China relationship is a 
balancing act; while Fedex takes a business view, its Chinese 
official counterparts often do not.  Yim said that Fedex has learned 
that it needs to develop relationships with each official with whom 
it deals, have careful planning before embarking on negotiations, be 
willing to compromise but be firm on its critical issues, and have a 
back-up plan.  One way to avoid problems with various government 
entities is to make sure Fedex communicates with and between the 
central, regional, and local government agencies, which often do not 
speak to each other. 
 
¶8. (SBU) Fedex works closely with government agencies to make its 
work smoother.  Nonetheless, it still faces problems with how 
Chinese Customs manages its score system for problem shipments. 
Fedex currently handles 10,000 shipments each day in South China and 
Customs counts each package as a separate shipment.  In 2006, 
Customs found eight problem packages in Fedex and counted each as a 
violation in its scoring system.  Trucking firms, on the other hand, 
have their shipments counted per truck load, regardless of the 
number of individual packages being shipped.  Fedex is working with 
Customs to help draft a Customs clearance handbook.  The first draft 
will be out in two months and will be field tested by Customs at 
Fedex's Hangzhou hub.  Fedex also finds working with the State 
Administration of Industry and Commerce (SAIC) a challenge at times, 
given the view by bureaucrats there that it is their interpretation 
of policy that counts, not necessarily the intent of the policy 
itself.  As the agency which issues many licenses, Fedex runs into 
conflicts between national policy and local interpretation, making 
the process of getting a license time consuming and difficult. 
 
¶9.  (SBU) Fedex faces a number of other problems, several of which 
are contained within the transportation regulations and postal laws 
which prohibit them from sending express mail deliveries into the 
city.  Postal laws favor the State-owned competitor and are being 
written behind closed doors.  Under the transportation regulations, 
cargo vans cannot enter the city while passenger vans can enter but 
cannot carry cargo.  Yim noted that Hong Kong has similar rules but 
allows more flexibility and controls business traffic at different 
times of the day.  China is strict on this issue.  This rule only 
applies to express delivery services, but not normal cargo firms, 
and appears to be designed to protect China Post's Express Mail 
Service (EMS).  In this case the regulator is the competitor. 
Despite agreeing not to deliver letters or packages less than 150 
grams, the Postal Service still sends inspectors to check Fedex's 
sorting facilities, which stops operations until the inspectors are 
finished, slowing deliveries. 
 
¶10.  (SBU) Buying out its joint venture partner DTW, to be announced 
and finalized on 1 March, should solve some problems as Fedex will 
also acquire Da Tian W. Group's (DTW) Class One transportation 
license to operate its own ground fleet and do domestic deliveries 
but it will not fix the underlying legal issues and favoritism shown 
to China Post's EMS.  Fedex will need to register all of DTW's 
former branches and will convert DTW's vehicle delivery fleet to the 
Fedex logo.  It will increase the number of employees to 6,300 and 
improve service to China's secondary and tertiary cities.  Chu said 
that this deal was delayed by a MOFCOM review as well as varying 
local practices in each locale, particularly for license 
applications, opening company bank accounts in each city, vehicle 
registration fees, and even advertising fees for the Fedex logo on 
each delivery vehicle.  Land use issues remain a concern.  Fedex has 
been trying to open a station in Dongguan for four years but has not 
been able to obtain a land use certificate.  The local government, a 
district in Dongguan, told Fedex there would not be a problem but 
without a legal use certificate, that verbal permission entails 
legal risk.  Another potential issue is how China Southern Airlines, 
China's largest airline, will react to the new Fedex hub in its 
backyard and the possible impact on China Southern's cargo business, 
 
GUANGZHOU 00000206  003 OF 003 
 
 
though Yim said that over the years China Southern has become "more" 
reasonable.  One problem Fedex cannot solve is the shortage of air 
traffic controllers.  Yim said that China produces only 120 
controllers each year when it needs at least 400. 
 
Hub Facts in Guangzhou: Transportation Links are Key 
--------------------------------------------- ------- 
 
¶11.  (SBU) To support the expected growth of the logistics market 
and increased air traffic, Guangzhou will in turn accelerate the 
construction of its third runway.  The airport wanted Fedex to pay 
for the runway but Fedex is happier sharing it with other airlines. 
Baiyun Airport will have a total of five runways once its Phase II 
construction is completed by 2010.  In keeping with its business 
model, Fedex aircraft will fly only at night, a factor which will 
also keep conflicts with passenger aircraft to a minimum. 
 
¶12.  (SBU) Fedex currently has plans for a 24,000 square meter 
sorting facility, expandable to 48,000 sq. mtr.  The facility will 
have 24 gates capable of handling wide-body aircraft and four feeder 
aircraft gates and can expand up to 37 gates.  Located 2.5 miles 
away from the main passenger terminal, Fedex also achieved another 
first, obtaining approval to operate its own ramp control with its 
own ramp control tower.  Yim said it is unusual for a private 
company to get such approval - restricted only to the ramp - but it 
will help Fedex manage its flights efficiently before handing them 
off to the main control tower.  Still to be worked out is how the 
hand off to the ramp tower will take place. 
 
¶13.  (SBU) In China, trucking will play a big role in package 
delivery.  Connecting the airport hub to the Zhuhai-Beijing highway, 
trucks will roll down "Fedex Road" if the package is to be delivered 
within 350 km.  Between 350-500 km, packages will go by feeder 
aircraft, and over 500 km, packages will go by wide-body freighters. 
 Fedex currently lacks the ability to facilitate intra-China 
transfers.  As a result it has helped OKAY Airlines, a low cost 
carrier, finance the acquisition and conversion of two Boeing 737 
aircraft.  OKAY will operate out of the Hangzhou hub. 
 
¶14.  (SBU) Fedex is exploring rail options in discussions with the 
Kowloon-Canton Railway (KCR), which is planning to extend a rail 
line beyond Guangzhou to the airport in the next several years.  A 
subway line will also be built to the airport in 2009.  Guangzhou is 
building a new rail center in Panyu and a high-speed rail line 
connecting Hong Kong to Panyu.  Fedex officials noted that Hong Kong 
is studying rail and cross-border trucking and Customs clearance 
procedures in order to promote Hong Kong as a freight destination, 
however the Hong Kong government is not interested in cooperating 
with Fedex at this time, fearing job losses in Hong Kong. 
 
Go West? 
-------- 
 
¶15.  (SBU) Fedex started its China operations in 1984 and entered 
into a joint venture with DTW in November 1999 with 300 employees. 
Fedex China now has 3,200 employees.  In addition to its Beijing 
office, Fedex has 26 branches and three gateways.  East and South 
China represent over 80% of Fedex's volume in China.  Fedex 
currently serves 200 cities through its JV partner.  For the moment, 
Fedex is content to develop its two hubs but is planning its 
expansion into western China once the business is there to support 
it.  Once it raises its shipping volumes and is operating the hubs 
smoothly, it plans to develop a series of 22 airport spokes in China 
to be served by the hubs.  These would include major cities across 
China, including Urumuqi, Chengdu, and Xian.  Yim is confident that 
Fedex will improve the efficiency of China's logistics industry, 
helping the Develop the West Program with the efficient movement of 
parts and products in and out of western China. 
 
GOLDBERG