Deutsche Post to Spin-off its German Parcel Business
American Shipper, May, 2001
by Satish Jindel
Last month, The European Commission concluded its antitrust investigation into Deutsche Post AG (DPAG) with a decision finding that the German postal operator, a beneficiary of letter monopoly, had abused its dominant position by granting fidelity rebates and engaging in predatory pricing in the market for business parcel services.
In arriving at this decision, the commission investigated two critical issues:
- There was cross-subsidy between letter monopoly area and competitive parcel activities. The commission looked to see if the parcel service provided by DPAG in open competition covered at least the additional or incremental cost incurred in branching out in to the competitive parcel sector. The Commission considered any cost coverage below this level as predatory pricing. The Commission investigation revealed that DPAG, for a period of five years, did not cover the incremental cost of providing the mail order delivery service.
- DPAG's pricing below cost blocked market entry by efficient competitors and therefore prevented the shipping public from receiving a broader array of services at better prices. The commission investigation revealed that from 1974 through October 2000, DPAG gave substantial discounts to its large mail order customers on the condition that the customer sent its entire mail order parcel business or at least a sizable proportion thereof via DPAG. The commission felt that such a system of "fidelity" rebates precluded any private carrier from reaching the critical mass to successfully enter the German mail-order delivery market. It supported this conclusion in part by the fact that from 1990 to 1999, DPAG had an 85-percent share of the mail order parcel volume in Germany, estimated at 100 million parcels per year.
The implication of this ruling is that DPAG has agreed to separate its parcel business in Germany from the postal monopoly business with the creation of "Newco" within nine months of the ruling date. While Newco will operate as a stand alone company, DPAG is expected to provide many operational services (particularly delivery services) to this new parcel carrier. In doing so, DPAG will be required to make those services available to other carriers (Newco's competitors) on same terms and conditions.
It appears that both cross-subsidy and lack of competition in mail order delivery market were relevant to the decision largely because DPAG is a beneficiary of postal monopoly. Hence, if Newco or any of its private competitors are able to offer equally attractive prices and gain 85 percent of the mail order market, the cross subsidies will be accepted as "bundled pricing" and fidelity rebates as "threshold incentives."
In the U.S. market, DPAG's counterpart, the U.S. Postal Service has avoided both situations by offering the same prices to all shippers and by being subjected to an exhaustive 10 month rate justification process with the Postal Rate Commission. An example of one such initiative was the introduction of Destination Bulk Mail Center or hub (DBMC) service and rates to encourage zone skipping.
In late 1980s, when USPS was experiencing competitive pressures from UPS in the Parcel Post business, USPS elected to implement options to increase the marketability of its service. It did so by offering very attractive rates that were supported by transferring certain high cost functions (e.g. sortation and linehaul transportation) to nonunion and more productive workers at consolidators. This helped private carriers reduce the overall cost of the service and provide faster transit times.
By offering DBMC rates, USPS facilitated growth of private parcel carriers (consolidators), and reversed the declining trend for its Parcel Post business. Just as the commission is requiring of DPAG, these special rates of USPS are available to all carriers including competitors like UPS and FedEx Ground. In fact, FedEx Ground (as RPS) used the DBMC service of USPS in early 1990s for deliveries to rural ZIP codes in western states.
Postal agencies around the world are facing similar challenges. The long-term implications of the European Commission ruling will not be limited to Germany and Europe. As USPS lobbies for changes in its corporate structure, U.S. Congress may be the first to take this ruling into consideration. Though in the near term, the marketing and operational capabilities transferred to Newco in this restructuring will have an immediate impact on the prospects of the new company and other private parcel competitors.
In the German market, if Newco is established mainly as a marketing and sales company, it could lose market share to domestic business parcel service carriers like Deutscher Paket Dienst and German Parcel. For business parcel service, these private carriers are better positioned, as they already handle all operational functions. For mail-order delivery service, these carriers will gain equal access to the lower cost residential deliveries via DPAG. Without building some in-house operational capabilities, Newco will also lack control over on-time performance, rate increases, volume discounts and introduction of new services. Thus the competition could benefit from this ruling to a greater extent than Newco.
On a global scale, Newco will lack the capabilities of other private carriers like UPS, DHL, FedEx and TNT. To be successful against such global competitors, Newco will need to rapidly develop alliances, make acquisitions or merge with carriers that can offer a broader portfolio of services.
While DPAG has preferred to retain its postal monopoly and spinoff the parcel delivery business, USPS is taking a different approach. It is offering to give up the letter monopoly in exchange for freedom to compete openly with services and volume based pricing to withstand aggressive competition from private carriers in the parcel business and from technology companies in the letter/document business.
Irrespective of whether or how well Newco, DP or competitors like UPS succeed in this new environment, it is almost certain that the shippers and consignees will be presented with more shipping options, new services and pricing features. For global carriers that lack presence and looking to offer an alternative to UPS in the German market, Newco presents another opportunity for acquisition, merger or alliance.
Satish Jindel is a principal of SJ Consulting Group, Inc. During his 18 years in the transportation industry, Jindel has played a significant role in the start-up and expansion of RPS (FedEx Ground) and lead numerous strategic assignments for SJC Clients.