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