Post poses tough challenge for Monti

Date: 02/09/1999

By Bruce Barnard

NOVICE Competition Commissioner Mario Monti faces a baptism of fire as he starts work on an investigation which pushed his tough predecessor, Karel van Miert, to the limit.

After five years of tiptoeing through a legal minefield, Van Miert's officials decided on the eve of the summer break to open a politically sensitive official investigation into a complaint that Deutsche Post, the giant German postal authority, has used profits from its lucrative mail monopoly to subsidise its loss-incurring parcels operations.

The long delay in taking up the 1994 complaint by US parcels carrier United Parcel Service makes the European Commission's investigation appear like an ancient history lesson.

For the once-plodding postal business has changed out of all recognition in the past five years, with the pace of change accelerating in the few weeks since the Commission announced it intended to investigate Deutsche Post - and almost all of the changes have taken place in the EU.

Europe's top postal companies are transforming themselves into broadly based logistics operators at a speed which has unnerved companies such as UPS whose territories they have invaded.

UPS' original complaint against Deutsche Post appeared almost surreal as the German firm embarked on a multi-billion-euro expansion program 18 months ago which has created a pan-European transport network topped up by a strategic 25% stake in DHL, a leading global express delivery company which competes head on with UPS. Its rival has raised competition concerns almost every time Deutsche Post unveiled a new takeover.

The Commission is examining the way Europe's postal monopolies are buying up private operators and has succeeded in scotching some planned deals - Deutsche Post itself withdrew a bid for control of German parcel company Trans-O-Flex when it learned that the Commission was poised to block the move.

Some industry watchers say the post offices rushed into takeovers to keep ahead of the Commission's competition authorities. It is already too late for the Commission to unravel the scores of deals which have created a new breed of postal operator including Deutsche Post, La Poste of France, TNTPost Group of the Netherlands and the UK's Royal Mail.

These companies began casting around a couple of years ago for new businesses which would blunt the impact of the loss of their letter monopolies. Although EU governments have fought a rearguard action against full-scale postal liberalisation, the monopolies know their days are numbered.

The search for new businesses coincided with a boom in demand for related transport activities such as parcel and express delivery and, more recently, third-party logistics for large companies. These markets were largely the preserve of the 'big four' global players: UPS, Federal Express, DHL and TNTPost.

With the US market saturated, these firms looked to the emerging European market to continue their traditional double digit growth rates. But it was also an obvious investment outlet for Europe's postal authorities to spend their monopoly revenues - Deutsche Post's letter charges are among the world's highest - and to add value to their extensive networks.

KPN, the privatised Dutch postal and telecoms group, showed with its €1.56-billion takeover of Australian express carrier TNT that the monopolies could survive in the cut-throat world of UPS, FedEx and DHL.

But Deutsche Post has ratcheted up the challenge by moving into a broad spread of activities from air express (DHL) to parcels (50% of the UK's Securicor Omega), trucking (Nedlloyd European Distribution), and general transport (Danzas of Switzerland).

Deutsche Post's spread of acquisitions highlights the blurring between different transport sectors and the emergence of a totally new business - global logistics services for multinational companies.

The group says the contracting out by firms of transport and warehousing services has made this its top-performing business, growing by more than 15% a year.

Companies such as UPS and FedEx have also been branching out from their core activities into new areas such as conventional air freight, applying their sophisticated door-to-door delivery techniques to heavier loads traditionally carried by scheduled airlines on an airport-to-airport basis. But the airlines are fighting back, teaming up with large freight forwarders to offer large corporate customers a seamless service, while Lufthansa Cargo has bought into its rivals' market with its 25% stake in DHL.

Europe offers better pickings than the US for this emerging group of superlogistics companies. More than a quarter of transport in Europe is outsourced to specialist firms, compared with only 15% in the US, and the contract logistics market is set to grow by 7-8% a year until 2003, when it will be worth more than €59.28 billion, according

to British consultancy Datamonitor. Outsourced logistics will rise from 26% of all spending to 30%.

Europe's post offices want a slice of this market and so do an increasing number of US companies. UPS has set up a separate logistics business aimed at multinationals, General Electric is creating a pan-European distribution network which has targeted a €520-million annual turnover, and Denver-based Prologis is building a continental chain of giant warehouses - Europe's first.

The industry has continued to evolve since the Commission announced its probe of Deutsche Post. The German company itself made an acquisition, in Spain, in the same week and is expected to unveil new deals shortly. UPS, meanwhile, has moved deeper into heavy freight by acquiring Challenge Air, a US carrier with flight rights to 13 Latin American countries.

For the first time in its 92-year history, UPS is also preparing to sell shares to the public, with a 10% disposal raising more than €3.12 billion in the biggest ever IPO (Initial Public Offering). This has sparked speculation that it is on the prowl for an acquisition, with TNTPost Group viewed as a possible prey.

It is all a far cry from the day in 1994 when UPS' complaint dropped through the letter box of the Commission's Directorate-General for competition.

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