Why UPS Is Expanding Its Presence In China

United Parcel Services(NYSE:UPS), a leading logistics service provider, recently announced the opening of its new “contract logistics” distribution facility in Beijing, China. ^[1] The 6,500 square feet facility is located 19 kilometers away from Beijing Capital International Airport and will help UPS deliver contract logistics orders within four hours in the metropolitan Beijing area. It will also be able to service next-business-day orders for other major cities in China.

Contract logistics is an outsourced service wherein companies such as UPS handle supply chain management activities including planning, warehousing, transporting and distributing goods, collecting payments and inventory management on behalf of clients.

The opening of the Beijing facility follows closely after the opening of contract logistics centers in Chengdu and Shanghai in 2013. In this article, we look at the factors driving UPS’s continued expansion in China.

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UPS Expansion Will Capitalize on China’s Shift Towards Domestic Consumption

China’s economy has traditionally been based on growth driven by exports and infrastructure investments. That is why in the past, UPS has mostly been focused on export packages from China. Realizing that exports and infrastructure investments cannot sustain long term growth in an economy, China has been trying to move towards a consumption oriented economy. ^[2] Domestic consumption offers a much stable and sustainable growth prospect.

In line with China’s move towards consumption, UPS is trying to expand its offerings for industries such as high-tech, industrial manufacturing, aerospace and retail that will drive consumption growth in the Chinese economy. These industries regularly require warehousing, packaging and delivery services, and mostly prefer to outsource such activities so that they can focus on their core business.

UPS is also looking to capitalize on the growing e-commerce industry in China. In 2013, China’s e-commerce sales grew 78.5% and are expected to grow 64% in 2014. ^[3] The convenience of shopping without having to visit a brick-and-mortar store is an attractive proposition for the growing Chinese population. The emergence of a strong middle class with high disposable incomes has also been supporting e-commerce sales growth. By 2016, China will overtake the U.S. in e-commerce spending and by 2017 it will account for three quarters of e-commerce sales within the Asia-Pacific region.

New and existing e-commerce companies find it difficult to set up their own distribution and warehousing facilities in China due to the extensive capital investment required. They prefer to outsource such services to logistics companies that have an established delivery and warehousing network. Outsourcing logistical services is also popular with foreign e-commerce companies trying to test waters in China. UPS will be able to offer its contract logistic services to these companies and provide timely pickup and delivery of packages with the help of its new distribution facilities in Beijing, Chengdu and Shanghai.

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1. UPS Continues to Expand Contract Logistics Reach in China to Serve Growing Demand, May 27 2014, www.ups.com [↩]
2. China’s Growth Quickens, but What About Consumption?, October 18 2013, blogs.wsj.com [↩]
3. Global B2C Ecommerce Sales to Hit $1.5 Trillion This Year Driven by Growth in Emerging Markets, February 3 2014, www.emarketer.com [↩]