Even a Company as Legendary as SF Express Is Headed for Trouble If It Doesn't Change

If SF Express doesn't go public soon, it will be in danger.

Of course, the fact that one of the companies the capital markets most wanted to see listed kept putting it off became part of its "mystique."

So when it announced on February 19, 2016 that it planned an initial public offering on a domestic stock exchange, many people were surprised.

Those who were surprised probably still remember what Wang Wei said four or five years ago. The gist was that the point of going public is to raise money, and although SF Express was short of money too, it would not go public for the sake of money. Wang also said SF Express's goal was to keep the company growing over the long term.

If that goal still holds, there is only one possible reason for SF Express's sudden decision to list: it has hit resistance on the road to long-term growth, and it needs the capital markets to clear it.

Over the past 23 years, SF Express has been one of the few service companies in China with an almost spotless reputation. Two popular sayings sum up its standing. One goes, "There are two kinds of couriers: SF Express and everyone else." The other goes, "The odds of SF Express making a mistake are the odds of the other couriers not making one."

A company that needs cash may simply be one whose business is still growing and needs to expand further. But by now, the problems and challenges SF Express faces are plain to see.

Competitors are catching up with SF Express's edge in speed

2003 was the year that made SF Express the company you see today.

That year SARS was raging, and the airlines' business collapsed overnight. Taking advantage of plunging air freight rates, SF Express signed a deal with Yangtze River Express, then newly founded (and part of HNA Group), to lease five 737 freighters flying between three hubs: Guangzhou, Shanghai and Hangzhou. That made it the first private courier in China to move parcels by air.

At the same time, it signed agreements with several domestic airlines to use the belly holds on more than 230 routes to carry parcels between cities across the country. Back then SF Express charged 20 yuan for a parcel under 500 grams. That was not cheap, but reliable next-day delivery still won it a great many customers.

In 2009, SF Express finally won approval from the Civil Aviation Administration of China to set up its own airline, dedicated to air express, with its own fleet. As of January this year, SF Express owned 27 freighters, more than any other private courier in China.

But in Taobao's "Cainiao Express Index" — the spider-web score chart updated every month — SF Express's score for "delivery speed" has only just reached the industry average.

This shows that competitors are catching up with SF Express's traditional edge in speed. Its barrier to entry is high but not unclimbable: when it comes to delivering faster, rivals can easily copy its formula. After Alibaba took a stake in YTO Express in 2015, for example, YTO promptly announced it would buy 15 aircraft.

China's era of double-digit growth is over, and couriers may soon struggle to grow

According to figures available online, SF Express's sales were 1.3 billion yuan in 2004 and had reached 12 billion yuan by 2010, an average annual growth rate of more than 50%, with profit margins as high as 30%.

The rapid rise of SF Express, and of the whole courier industry over the past 10 years, rode on the rapid growth of China's economy. Between 2006 and 2013, China's parcel volume grew 36% a year on average; since 2010, driven by e-commerce, it has grown as much as 57% a year.

But the downward pressure on China's GDP growth keeps mounting, and the courier industry will be among the first to feel it.

Running a courier company used to be like driving fast: what counted was speed and nerve. That is why couriers, SF Express included, spent years building up infrastructure, staff and equipment ahead of time to keep pace with fast-growing demand.

Once the economy slows, these operations and resources will have nothing to do and will become waste. A workforce that grew too large will have to be trimmed through layoffs, which hurts morale. In fact, between the end of last year and the start of this year, SF Express already carried out large-scale layoffs, which set off a stream of speculation that its cash flow had broken down.

The same goes for infrastructure. How to make good use of the warehouse space built in earlier years, and how to coordinate transport capacity, are questions that SF Express, or any courier, will have to answer once the economic tailwind has gone.

Overseas markets could keep growth high, but SF Express has no clear advantage there yet

According to Deloitte's China Express Industry Development Report 2014, the four international express giants (DHL, UPS, FedEx and TNT) hold 75% of China's international express market. Add the state-owned EMS, and the share left for SF Express is not going to be large.

Compared with domestic delivery, the defining feature of international express is its high margins. That makes it an opportunity for SF Express, and a way to keep growth high. FedEx is a fine example. As early as 1984, when it was looking to expand, it turned first to international markets. After 2006, China's booming economy pushed FedEx to invest more in China-related business: it built a China-India next-day service and a global express network routed through the United States, linking Europe, India, China and Japan.

SF Express has two openings. One is to use its strong reputation at home to win the market for parcels sent from China to other countries. The other is to ride the boom in cross-border online shopping and win the market for parcels sent from abroad to China.

It has already made some moves. In July 2015, SF Express announced it would set up 20 warehouses around the world, covering four main target markets: North America, Europe, Russia and Australia. Masa, vice president of SF Express's international e-commerce business, has also said the company wants to provide warehousing and logistics for cross-border shopping platforms, leaving the platforms to do nothing but promote and display products.

These all look like opportunities for SF Express, but its competitors have their eyes on them too, and SF Express has not yet built a clear advantage here. This, too, will take more capital.

Most of SF Express's attempts to move into new businesses have failed

Companies like Amazon, which run everything from online retail to logistics, are in fact SF Express's competitors too. And SF Express's several e-commerce ventures show that it also wants to expand in that direction.

In 2010 SF Express launched "SF E-Circle." A year later it launched "Zunlihui," a gifting platform for mid- to high-end business customers. Both fizzled out.

In 2012 SF Express launched its third e-commerce platform, "SF Best," focused on fresh food. Surprisingly, a year later the platform opened a store on Tmall. In 2014, SF Best's sales on Tmall rose 200% year on year. But this short-lived good news only exposed a grim reality once again: after two failed forays into e-commerce, SF Express still had not found a future as an e-commerce platform, and had been reduced to running a single shop. In Wang Wei's own words: "If SF Express does e-commerce logistics now, it dies. If SF Express doesn't do e-commerce logistics now, it may die later."

The failed e-commerce ventures sapped much of its strength. Meanwhile, e-commerce companies with internet roots, such as JD.com, have shown real momentum as they move into logistics.

SF Express is still exploring other options. Last October it invested in Shenzhen Zhihang UAV Co., Ltd., a young company whose drones can stay aloft for a long time and carry heavy loads, making them suited to demanding aerial work. But under China's current rules, delivering parcels by drone in crowded cities is still prohibited. This investment may take even longer to pay off.

SF Express sits on a mountain of data, but is still feeling its way toward more tailored services

In the United States, supply chain management for corporate customers is a major part of UPS's business. UPS spends more than $1 billion a year on data mining. It turns warehousing, distribution and logistics data from different industries into large numbers of mathematical models, and once it understands a corporate customer's needs, it offers a range of services such as asset forecasting, warehousing and allocation, helping companies grow step by step. UPS now offers such solutions to nine industries, including automotive, healthcare and retail.

With profits squeezed across the industry, SF Express is trying something similar.

In 2015, SF Express reorganized itself into five business groups: express delivery, commerce, supply chain, warehousing and distribution logistics, and financial services. The warehousing and distribution group offers e-commerce merchants services such as spreading inventory across warehouses, stocking and order picking. According to SF Express's website, its warehousing and distribution customers include Apple, Huawei, LeEco, Uniqlo and P&G.

Pan Yan, vice president of SF Express's warehousing and distribution logistics group, told the media last year that SF Express was concentrating on building up its warehousing services. "Our idea is that once an e-commerce company hands its products to an SF Express warehouse, the warehouse will use sales data to move stock along trunk routes in advance, so that orders are already near where the customers are," he said.

Every day, millions of parcels pass through the hands of SF Express staff and out of its warehouses, and behind each one lies a wealth of data. For SF Express today, finding faster ways to use this data, to make it do more and earn the company higher profits, is the most realistic of all its chances for a turnaround.

Crowdsourced delivery, which uses technology to solve problems, may well become a new rival for SF Express

Although SF Express built its business on services the internet created, it is still a traditional company. Compared with companies that grew up on the internet, it is slow, and it may hand over an opportunity before it has even noticed it.

A week ago UPS, the largest logistics company in the United States, announced an investment in a crowdsourced delivery startup. As the name suggests, crowdsourced delivery taps idle labor: once an order is posted, part-time drivers grab it through the system and carry the item from one side of the city to the other. Think of it as a Didi or Uber for couriers.

Similar companies have already sprung up in China, such as Dada, which delivers takeout and goods from local stores, and Shansong, which offers ultra-fast same-city delivery. JD.com has also launched a similar service called "JD Crowdsourcing."

These services do not compete head-on with SF Express's core business, but they share one trait — customers who need speed above all are willing to pay relatively high fees — and that could have been SF Express's way in.

So far, though, SF Express, lacking internet DNA, has not learned to use new technology to deploy its large workforce.

Of course, reputation is still SF Express's biggest advantage, and one that domestic rivals will find hard to match any time soon. To cite Taobao's "Cainiao Express Index" again, SF Express scores close to full marks for delivery service, brand reputation and customer reviews.

Still, no company can rest easy — not even those of Bill Gates or Li Ka-shing. Li has said he spends 90% of his time thinking about failure, and Gates said at Microsoft's peak that the company was only 18 months from bankruptcy. Even the healthiest company faces serious hidden risks.

SF Express's competitors are too strong, and it does not fully control its business in China. It may be doing well at the high end of the market, but its share of the much larger low end may not be high.

Whether you look at markets, lines of business, competitors or the changes that may come to the industry, all of them call for more investment. At this point, going public is a natural choice.

Graphics: Lin Yuyao

Cover image from Visual China