When 70-year-old Qian Yongfang of Nanjing in eastern China opened a package of mooncakes her daughter had sent by express delivery, two boxes of the sweet pastries were missing.

When He Ling, an online clothes seller, receives orders at peak seasons, she has to warn customers that what usually is a three-day delivery could take up to two weeks.

And when college student Ma Kun, 21, received a jar of preserved prunes sent by her parents, it was broken during delivery.

I've learned to lower my expectations of Chinese delivery companies, Ma said.

Such complaints plague China's fragmented but booming express delivery industry, where delay, damage and outright loss of packages persistently erode Chinese operators' reliability and reputations.

This should be a huge business opportunity for foreign companies such as FedEx Corp and United Parcel Service Inc, which have vast experience in delivering packages around the planet and high-tech tracking and quality-assurance processes. But they are sparsely represented in China.

Foreign firms can deliver packages from abroad to destinations in China, but Chinese law forbids them from domestic delivery, packages sent between locations in China.

This year, however, some are hoping to take a bigger bite out of this expanding pie, applying for licenses for parcel delivery in the Chinese market.

The annual Lunar New Year, a week-long holiday that officially began on Monday, is one of the bigger annual headaches for the industry, with more than 200 million people traveling to hometowns across the country, jamming traffic and leaving express companies understaffed.

With the new year around the corner, our orders are bound to soar with increasing demand from e-commerce and traditional business, said Cao Zhen, manager of corporate planning at STO Express, a Chinese delivery company with more than a quarter of the domestic market by volume. But at the same time, we're severely short-handed, which creates even greater pressure.

China's express delivery business has seen phenomenal growth in the past five years, reaching 57.4 billion yuan ($9.1 billion) in 2010, almost twice the 30 billion yuan of 2006.

Revenue is expected to grow 30 percent in 2011, three times as fast as China's overall economic growth, says Shao Zhonglin, deputy secretary general of the China Express Association.

E-COMMERCE AS ENGINE

China's surging e-commerce is a major force behind that growth, though it's also behind its malfunction in peak seasons.

Shao expects the volume of express delivery to grow 60 percent in 2011 from 2.3 billion packages in 2010, more than half coming from online shopping orders, especially Taobao, China's top e-commerce platform.

Taobao is a unit of Alibaba Group, partly owned by Yahoo Inc.

Last November an online campaign by Taobao racked up orders worth more than 5.2 billion yuan in one day, or six days' worth of retail business in all of Hong Kong.

That was equivalent to an average of about 10,000 packages generated by Taobao per minute on that day, saddling delivery carriers with a two-week backlog.

Such online sales events are usually followed by many days of delay and missing orders, which then is inevitably followed by angry complaints from customers, said Lu Zhengyuan, an e-commerce equities analyst.

A key reason is the fragmented nature of the Chinese market, which has more than 7,000 local express operators, mostly franchises of 12 big companies. Some local operators, swamped with packages, even mobilise relatives to handle delivery.

Final delivery to customers is by small businesses, where speed, a unified system and standard service can hardly be guaranteed, Lu said.

FOREIGN GIANTS READY

FedEx, UPS and other international express companies such as DHL Worldwide Express BV and TNT Express NV, currently are not active in the burgeoning domestic Chinese market, but want a slice of the pie in 2012.

DHL-Sinotrans, a DHL joint venture, was granted a domestic delivery license in 2010, making DHL the only foreign firm in the market.

However, DHL decided last July to sell its subsidiaries in China and withdrew from the domestic delivery business.

The ban on foreign companies delivering packages and documents within China was one factor behind the decision, DHL said.

DHL will consider a return to the domestic market when the industry matures through consolidation and customers start to place more emphasis on quality services, DHL said in a statement emailed to Reuters.

Cut-throat price competition among Chinese companies also makes it tough for foreign operators to turn profits.

FedEx and UPS filed for licenses in 2010 to offer domestic express service, and a decision is expected within weeks.

Seeking domestic delivery in China is a reaction to demands from clients, UPS said in an email to Reuters.

Foreign express companies can provide a complete supply chain, with finance and storage services unrivaled by most Chinese companies, said one industry source who spoke on condition of anonymity.

Instead of a new round of price competition, they will bring a useful complement to the market.

Foreign companies entering the domestic market are unlikely to have much influence on Chinese operators, said Cao, the STO manager, noting his company's local network and familiarity of the market.

They're still fumbling about.

People such as college student Ma, however, don't think foreign competition would make much difference. They won't have much advantage in cost-to-quality ratio. They're so expensive that delivery would cost as much as I spend online.

Nonetheless, Ma said she bought some clothes on Taobao two months ago, but the package has already been lost twice.

I don't think it can arrive by the end of Chinese New Year, if it ever arrives at all.

($1 = 6.3390 yuan)

(Reporting by Beijing newsroom; Writing by Terril Yue Jones; Editing by Ken Wills)

China Fedex China Fedex