Deutsche Post World Net USA May 2003

DHL Worldwide Express Does Not Compete

Unfairly in the U.S. Parcel and Express Delivery Market.

Introduction

DHL Worldwide Express, Inc. (“DHLWE”), a Delaware corporation, is a U.S.-based freight forwarder that currently has a 1% share of the U.S. parcel and express delivery market. DHLWE currently employs more than 10,000 American men and women. Its major competitors, United Parcel Service (“UPS”) and Federal Express (“FedEx”) control almost 80% of that market and are pulling out all stops to ensure that DHLWE does not make any significant inroads into the near duopoly market the two incumbents have enjoyed for some time—to the detriment of U.S. consumers and commercial shippers.

The strategy they have seized on is to claim that DHLWE competes unfairly in the U.S. parcel and express delivery market — because it is an indirect wholly-owned subsidiary of Deutsche Post World Net (“DPWN”), which operates Germany’s national postal service, and it allegedly receives a cross-subsidy from DPWN. Furthermore, according to UPS and FedEx, DPWN itself allegedly receives subsidies from the German government. Combining these two allegations, UPS and FedEx contend that the German government effectively is subsidizing DHLWE, allowing it to compete unfairly in the U.S. market.

These claims are absolutely unfounded. DHLWE does not receive funds from the German government to finance its operations in the United States or elsewhere.

To the contrary, as discussed below, DPWN is subject to rigorous oversight and regulation in its home markets and has implemented a new organizational structure under which any attempt at cross-subsidization would quickly become apparent. Moreover, cross-subsidizing DHLWE would be economically irrational for a profit-maximizing publicly-owned company like DPWN.

 

In addition, DPWN and DHLWE are subject to intense scrutiny in the United States. If there were even a hint of possible cross-subsidization, its market-dominant competitors would be sure to sound the alarm—as they do even when there is nothing to complain about. Yet, as the U.S. Department of Transportation (DOT) explicitly found, there is absolutely no evidence to support the allegations made by UPS that DPWN has subsidized DHLWE’s U.S. operations or caused it to act in a manner that harms competition in the United States.

  

The truth is, rather than being subsidized by DPWN, DHLWE has struggled to establish itself as a viable competitor to UPS and FedEx in the U.S. domestic market, providing an alternative to the service and pricing structure that these two dominant companies have long been able to impose on U.S. customers.

Deutsche Post World Net <www.dpwn.com>

 

Prior to 1995, the old Deutsche Post was an agency of the German government responsible primarily for Germany’s domestic mail service. In 1995, DP was transformed from a government agency into a joint stock corporation, wholly owned by the German government and legally bound by the “German statute for stock corporations”. Four years later, DPWN successfully completed an initial public offering (“IPO”) of 31% of its shares, becoming a publicly owned and listed corporation that is a model for postal privatization around the world. The privitazation took place without any layoffs.

As soon as market conditions allow, the German government will proceed with its announced plans to divest itself of majority ownership in the company.

Deutsche Post World Net is required by law to provide universal postal service throughout Germany, and—for the time being—it has an exclusive license to provide basic letter mail service. At the same time, much like the situation in the U.S., the German government actively regulates the postal rates DPWN is permitted to charge. Indeed, just last year, the regulator ordered a 7.5% reduction in those rates.

While domestic postal service remains an important part of its operations, in recent years, DPWN has diversified horizontally into related businesses, so that it now is a provider of express, logistics, and financial services as well. Each of its four divisions accounts for roughly 20% – 30% of overall revenue, broken down as follows: Domestic Mail Services 27.7%; Express Services 29.6%; Logistics 21.7%; and Financial Services 21.0%. Moreover, the importance of DPWN’s exclusive domestic mail license is steadily diminishing. In 2003, the license has been cut from providing service for all letters under 200 grams to all letters under 100 grams. In 2006, the license will be further reduced to letters under 50 grams. And after 2007, the exclusive license is scheduled to expire completely, thereby opening all of the German postal services market to full competition. None of Deutsche Post World Net’s four divisions receives financial backing from the German government.

The German and European parcel and express delivery markets are (and for a long time have been) open to domestic and foreign competition—including competition from U.S. companies such as UPS and FedEx. The German parcel market is highly competitive with many providers present. DPWN’s market share is less than 25%. Furthermore, DP is required to afford its express delivery competitors, including UPS and FedEx, access to its postal network. So its temporary exclusive license to provide domestic letter service affords DPWN no advantage in that regard.

Deutsche Post World Net’s Investment in DHL Worldwide Express

DHL International (“DHLI”), the parent company of DHL Worldwide Express (DHLWE), has been active in the market for time-critical parcel deliveries for more than 30 years and currently operates the world’s most extensive international parcel delivery network, providing service to 120,000 destinations in more than 220 countries and territories.

In 1998, with the approval of the European Commission (“EC”), DPWN made an initial purchase of shares in DHLI. As a condition to securing Commission approval of the purchase, DPWN entered into “take-note undertakings” to ensure that it could not subsidize DHLI’s operations. Nonetheless, UPS challenged the legality of the acquisition. That challenge was dismissed both by the European Commission and by the European Court of First Instance, which found that DPWN’s investment in DHLI was entirely proper and specifically rejected UPS’ contentions that DPWN would improperly use profits from its postal service monopoly to cross subsidize DHLI’s operations. In its decision dated March 20, 2002, the Court ruled that UPS had not provided any evidence for its allegation that Deutsche Post has used profits from its postal monopoly to finance its investment in DHLI.

In 2002—with approval from the EU and several other national antitrust authorities around the world—DP acquired full ownership of DHLI. All necessary approvals from the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) for the step-by-step acquisition of DHLI were received through proper filings whenever required.

The Claims of Cross-Subsidization

Express and parcel delivery service is a global network business, and the United States is far and away the most important country in the world from a commercial perspective. Accordingly, DHLWE could not provide the global network services its customers demand if it did not serve the U.S. market, which it has done for over three decades. Thus, DHL’s presence in the U.S. is not the result of a plot hatched in Germany, though its competitors seek to portray it that way.

UPS and FedEx would like to eliminate DHLWE as a competitor in the U.S. market that they dominate so completely. Toward that end, they have repeatedly claimed that the German government, acting through DPWN, is subsidizing DHLWE’s operations in the U.S. parcel/express delivery market. Although lacking factual support for this claim, they seem to believe that repetition will make it true. But the facts are otherwise.

First, the actions of Deutsche Post World Net and its DHL subsidiaries are subject to close scrutiny by regulators in the United States, Germany and the European Union. Yet there has never been any evidence that DPWN has cross-subsidized the activities of DHLWE. In particular, in May 2001, the U.S. Department of Transportation (“DOT”) expressly rejected a petition filed by UPS against DHLWE asserting cross-subsidization. The DOT concluded there was no evidence whatsoever that DHLWE was competing unfairly or that Deutsche Post World Net was using postal revenues to cross subsidize DHLWE’s U.S. operations. As stated in the DOT order:

UPS has presented no evidence that Deutsche Post is subsidizing DHLWE’s operation or otherwise diverting its assets to DHLWE to provide it with an unfair competitive advantage over U.S. carriers. It is also significant that UPS has presented no evidence to support its allegations that DHLWE’s relationship with Deutsche Post is distorting competition. Indeed, the evidence of record does not support UPS’s allegations. It shows that DHLWE’s share of the domestic parcel and express market is about one half of one percent, and that UPS’s share of the market is roughly one hundred times greater than DHLWE’s. In addition, UPS’s suggestion that competition between private firms and Deutsche Post is necessarily unfair is contrary to the experience in our own country. UPS and FedEx have long competed with the United States Postal Service and have done so successfully.  

Second, it is important to stress that, as a publicly owned and listed company with separate divisions, DPWN must assure a high degree of accounting transparency that would render any cross-subsidization of one division by another evident to regulators, analysts, shareholders, and the general public.

Third, apart from the scrutiny that DPWN and its subsidiaries receive from regulatory agencies and the financial markets, the fact is that using profits from its German domestic postal service to cross-subsidize the U.S. operations of DHLWE would be an economically irrational action for DPWN to take. As was the case in Matsushita Electric Industrial Co, v. Zenith Radio Corp., 475 U.S. 574 (1986), DPWN has no rational motive to engage in the alleged cross-subsidization because the costs of providing the subsidy could never be adequately recovered, particularly since DHLWE has such a small market share (less than 1%) in the U.S.

Fourth, the market facts belie any claim of cross-subsidization. If DPWN has attempted to cross-subsidize DHLWE, its efforts have been singularly unsuccessful—because DHLWE’s share of the U.S. express/parcel delivery market has not increased during the period in which DPWN has owned and controlled DHLI. It was less than 1% at the time DPWN acquired DHLI, and it remains less than 1% today.

Finally, DHLWE’s competitors have repeatedly attempted to confuse the public by referring broadly to a number of competition-related claims that have been brought against Deutsche Post World Net in the EU. But those claims all related to activities that predated the completion of DPWN’s IPO in November 2000. And none of the claims involved alleged cross-subsidization of DHLWE’s operations in the U.S. Moreover, to the extent improper or questionable action was found to have occurred (some of which came to light through DPWN’s own internal investigation and self-disclosure), the actions were remedied and have not been repeated. Indeed, the remedies imposed by EU authorities in the competition proceedings ensure that cross-subsidization of DHLWE through the use of profits earned in DPWN’s German postal service operations cannot occur.  The principal cases are discussed more fully in Appendix A to this paper.

Conclusion

As the Supreme Court has observed, “the antitrust laws were passed for ‘the protection of competition, not competitors.’”  Ultimately the allegations of cross-subsidization leveled at DPWN and DHLWE boil down to complaints that DHLWE is (or has the potential to become) an effective competitor, not that it is behaving in such a way as to damage competition in the U.S. domestic market for express mail delivery services. Cross-subsidization of DHLWE’s activities in the U.S. market with profits derived from DPWN’s German domestic postal service would not be an economically rational act, and it would be easily detected by the regulatory agencies responsible for overseeing competition on both sides of the Atlantic. It simply is not occurring.

When all is said and done, the activities of DHLWE constitute nothing more than healthy competition in the U.S. parcel and express mail delivery market—competition that will generate jobs and benefit consumers. The fact that Deutsche Post World Net, through its subsidiaries, has invested in the U.S. economy does not amount to improper or illegal cross-subsidization. Such investment should be welcomed, not deplored. The U.S. has a highly developed system of antitrust law designed to protect consumers and competitors from possible unfair competitive practices. That body of law can be relied on to prevent DHLWE from acting improperly.

UPS and FedEx know full well that they cannot invoke the antitrust laws—because there is no evidence of any wrongdoing on the part of either DHLWE or its publicly owned parent company in Germany. Consequently, they have turned to political means to accomplish the same ends: to repress competition and preserve their dominant market shares at all cost.

This is a commercial fight for market share, not a matter of policy on which Members of Congress should take sides between competing U.S.-based employers. DHLWE makes a valuable contribution to the provision of competitive parcel and express mail services in the U.S. and today employs more than 10,000 American men and women. It should be allowed to continue to contribute without hindrance. 

 

Appendix A

EU Competition Cases

 

In the European Union competition proceedings against DPWN, there were allegations that the company’s domestic parcel delivery service operations had been subsidized between 1995 and 1998. The EU-Commission concluded that there was no cross-subsidization by DPWN in this market after 1995, when Deutsche Post was transformed from an administrative agency into a corporation constituted under private law. Moreover, while the EU-Commission found that fully allocated costs were not covered by prices during a period prior to 1996 (when DPWN incurred losses in the business parcel sector due to an investment and restructuring program), the EU-Commission did not find that DPWN had engaged in improper activities, and it did not impose any remedy or fine on the company.

In the course of this investigation, however, DPWN discovered that for some time, it had granted so-called “loyalty rebates” to certain customers in the mail order business who had threatened that otherwise they would handle their own parcel deliveries internally. Such rebates were consistent with German law at the time, but ultimately they where considered incompatible with competition rules under EU law. When they surfaced during the internal investigation, DPWN immediately brought such practices to an end and cooperated with the EU by fully disclosing the rebates. While these self-disclosed “loyalty rebates” resulted in a fine, this had nothing to do with cross-subsidization.

As a result of the EU-Commission proceedings, DPWN voluntarily agreed to transfer all its commercial parcel services to a separate company to ensure that cross-subsidization could not occur. In addition, it agreed to grant access to its logistics networks to all competitors, including U.S. companies such as UPS and FedEx. As a result, since 2001, all services that the Express Germany Business division purchases from Deutsche Post World Net are available to all competitors at the same prices and on the same terms and conditions as they are made available to DPWN’s Express Germany Business division.

In a subsequent proceeding, the EU-Commission claimed that the German government had impermissibly provided “state aid” to Deutsche Post from 1990-1994, when DP was still a government agency. The alleged “state aid” was provided as compensation for losses DP incurred in fulfilling its universal service obligation during that period. In a June 2002 decision, the EU-Commission determined that part of this money was used for cross-subsidizing the parcel business until 1998, and it ordered the Federal Republic of Germany to recover from DPWN the sum of EUR 572 million. (This amount plus interest was reimbursed by DPWN to the German government in January of this year) This decision totally neglects the undisputed fact that DP in turn had provided levies to the German government which more than offset the so-called “state aid”. Therefore, the decision is unfounded, and the German Government is supporting DPWN’s appeal to the European Court, seeking to overturn the EU-decision.

Notably, the EU-Commission has not claimed that DPWN received any state aid after 1995, and all of the activities complained of occurred before the year 2000, when DPWN’s express/parcel delivery line of business was set up as a free-standing corporate division (with its own transparent accounting structure) separate from the company’s domestic mail services. Thus, even if the EU-Commission’s “state aid” decision were correct, the activities complained of could not be repeated today.

Finally, it is important to emphasize that the foregoing proceedings did not in any way relate to DHLWE. As the U.S. Department of Transportation (DOT) has found, the EU-Commission investigations did not “involve DHLWE and . . . [there is no information showing] that DHLWE has benefited from improper state aid and cross-subsidization.” See DOT Order 2001-5-10 at 7.

For further information please contact:

Wolfgang Pordzik

Deutsche Post World Net USA, Inc.

1667 K Street, NW Suite 410

Washington, DC 20006

Tel: (202) 419 -1880

Fax: (202) 419 -1885