Fidelity is in dialogue with China’s no.1 express delivery company to set the course for more sustainable growth.
Containment aimed at curbing the spread of Covid-19 has spawned a boom in e-commerce globally, particularly in China. The country’s leading delivery company, ZTO Express, saw its business jump 40% last year, a rate similar to that seen in the UK and US. The volumes are nonetheless staggering: ZTO delivered around 47 million packages per day, which is as much as FedEx, DHL and UPS combined.
The manufacturing production and shipping of all those envelopes and parcels has increased the consumption of fuel, paper and plastic, a clear cause for concern to sustainability-minded investors. Nonetheless, the industry is experiencing fierce competition and the resulting price war is forcing many Chinese delivery companies to cut corners.
In this context, Fidelity International’s management team has had regular discussions with ZTO executives over the past two years, a dialogue that has prompted this company to demonstrate greater transparency with regard to the environmental, social and governance impact. (ESG) of its activities, which are experiencing rapid growth. ZTO has thus become the first Chinese express delivery company to regularly publish specific reports on sustainable development and to link the remuneration of its directors to sustainability objectives. Other companies in the sector have taken note of ZTO’s commitment to sustainability and are starting to follow suit.
“When market leaders innovate by using biodegradable boxes or more fuel-efficient trucks, it has a ripple effect on other players in a very competitive industry,” said Terence Tsai, equity analyst at Fidelity International. We feel that by getting a market leader to move first, it is possible to gain buy-in from across the industry. ”
The pioneer advantage
At the start of 2019, Terence Tsai first approached ZTO executives to discuss an unfavorable ESG report from an independent rating agency. The poor rating given by the latter to ZTO was partly explained by the lack of information relating to sustainable development communicated by the company. Sifting through the report, our analyst explained global ESG standards to company officials, stressing the importance of publishing regular, quality information.
The company’s reaction came as a surprise to Terence Tsai, who was not expecting wonders from these early discussions given the fierce competition in China’s express delivery industry. The escalating price war threatened the financial health and even the viability of smaller players, even though ZTO managed to remain profitable. The company increased its market share to around 20% last year thanks to the noticeable boom in e-commerce, but its gross margin fell to 22.5%, from 29.2% in 2019.
“You might think that when a company is struggling for survival, ESG issues are of secondary importance to priorities such as market share and profitability,” observes Terence Tsai. “I was very surprised to see the market leader take ESG issues seriously, an attitude that seems encouraging to me.”
The president and founder of ZTO, a former carpenter turned billionaire, then showed us in numerous meetings that he has the long-term vision necessary for high ambitions in ESG areas, despite a difficult business environment. .
At the end of 2019, ZTO published its first ESG report, setting an example. SF Holding and Best were quick to follow suit. In addition, ZTO management passed a motion last year advocating the integration of more sustainable practices into day-to-day operations and their consideration in executive compensation, in line with our recommendation.
From an environmental standpoint, reducing paper documents has been one of the major improvements ZTO has made over the past two years. Fidelity advised the company on this point and the change was also spurred on by another shareholder, namely Cainiao, the logistics business of e-commerce giant Alibaba, which disseminated its best practices in this area. The introduction of dematerialized waybills and smaller sheets of paper for printed documents has enabled ZTO to reduce its paper consumption per package by 70%, resulting in savings of around 50,000 tonnes of paper per year. . This equates to 850,000 preserved trees and 500,000 tonnes of CO emissions.2 avoided. In addition, the company has started recycling packaging materials and testing the use of vehicles running on new energies. The company has acquired a fleet of more than 7,000 large-capacity trucks to replace less efficient vehicles, which consume two liters less fuel per 100 km, resulting in a 15-tonne reduction in emissions. annual CO2.
When it comes to social and governance issues, ZTO also sets itself apart from its competitors by the convergence of interests between its various stakeholders. Like most of its competitors (including STO Express, YTO Express and Yunda Holding), ZTO uses franchisees to cope with the unbridled growth of e-commerce in China, although SF Holding is an exception with its focused model. on direct control. Franchisees often take care of last mile pickup and delivery, while companies like ZTO operate a more scalable network of sorting centers. The uniqueness of STO lies in the fact that a good number of its franchisees are among its shareholders, which limits disputes relating to profit sharing. Having franchisee shareholders allows the company to better control the working conditions of delivery people. This model probably allowed the company to escape the strike movements that affected some of its competitors last year, whose service providers were paid late.
Workplace accidents are a real industry-wide topic given the emphasis on speed and the large number of agency workers, who are often recruited to deal with seasonal peaks in activity dictated by large corporations. good dates for shopping in China, such as November 11. The “Singles Day” celebrated on this day is considered to be the world’s biggest e-commerce event. Last year, the Chinese industry giants achieved a combined turnover of close to 1 trillion renminbi (or 152 billion dollars). On the advice of Fidelity, ZTO took measures to reduce the risk of workplace accidents as much as possible, in particular with thousands of hours of training open to its permanent and temporary employees.
A cradle of the delivery giants
ZTO President Lai Meisong established the company in the early 2000s in Tonglu County, eastern China, which is home to no less than four express delivery giants who control more than half of the market today. Contrary to certain assumptions that family businesses lack a long-term vision, Lai Meisong says he is building an empire that he is destined to bequeath to subsequent generations and aspires not only to be the market leader. in China, but also to become a world leader, like FedEx and UPS.
It is true that the progress observed at ZTO in terms of sustainable development is only a small step forward for the sector. For most Chinese delivery companies, the development of their turnover and profits remains the priority, especially as they face stiff competition and the general public does not care much about it. Sustainable development. They still have a long way to go to catch up with global industry leaders like FedEx and DHL, who are aiming for carbon neutrality by 2040 and 2050, respectively.
With 83 billion express parcels sent to all corners of China last year, the Chinese delivery market has become a strategic battleground for achieving carbon neutrality globally in the decades to come. Working towards sustainable development in this area will therefore have positive repercussions for society, which go beyond financial performance and ZTO appears to have helped to initiate a positive chain reaction in this regard.
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