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Business

Yamato stands up to Amazon Japan on prices

Delivery companies left to suffer tiny margins as online retailer comes out winner

Yamato Transport is negotiating price hikes with one of its core clients, Amazon Japan.

TOKYO -- Yamato Transport is in the midst of protracted negotiations with Amazon Japan, a huge customer for the country's logistics leader, to accept price hikes for the delivery service it provides for Amazon shipments. 

News of the change in the relationship has highlighted the non-stop growth of parcel delivery traffic, serious shortage of delivery personnel and wafer-thin margins that can be made.

For the Yamato Holdings unit, it also signals the need for a new business model.

Busy for nothing

The way the Japan's online retail leader interacts with its parcel-delivery counterpart, and many others, is not unlike the relationship Intel once had with other PC parts suppliers -- in which there was only one winner.

In the 1990s, the U.S. chipmaker catapulted itself to dominance by leading the commoditization of PCs and boosting global growth in PC use.

At the time, companies like Fujitsu and NEC suffered a drop in prices after they focused on PC assembly and production of hard disk drives. In contrast, Intel maintained huge profits with its central processing units selling like hotcakes. It also forced technical specifications on companies making the rest of the machines -- which resulted in more companies entering the market and a cutthroat price war.

According to University of Tsukuba professor Hirofumi Tatsumoto, HDD prices fell over 60% between 1995 and 2003, as PC usage exploded -- much to the dismay of electronics makers.

While Intel kept customers drooling over increased processing speed, the likes of Fujitsu and NEC were left churning out products with constantly shrinking margins, and ended up downsizing.

Cheap delivery

Having grown by offering wide variety and reliable delivery, Amazon is now the Intel of online retail. It offers customers advantages like free shipping for purchases of 2,000 yen ($17.50) or more, even for non-subscribers. Amazon Prime membership, which costs 3,900 yen a year, offers services such as express and time-designated delivery at no extra cost.

Just as Intel left its Japanese rivals to produce PC parts at tiny margins, Yamato and co now find themselves chasing around Japan making Amazon's deliveries at rock-bottom prices.

Making matters worse, there is little a company can do to stand out from its rivals in the home delivery industry other than offering lower prices. In addition to major industry players such as Yamato, Sagawa Express and Japan Post Holdings, Amazon has used smaller companies such as Ecohai. As Amazon orders have grown, Yamato has been under pressure to showcase price advantages, just as Fujitsu and NEC once did.

An industry insider said the price Amazon pays Yamato for delivery of a single item is somewhere between 200 yen and 300 yen. At this level, Yamato will lose money on any parcel that requires more than one delivery attempt, they added.

Yamato Holdings faces a serious slump. It expects consolidated operating profit, which indicates how the core business is doing, to fall 14% on the year to just 30 billion yen in the year to March 2018 -- a significantly low level compared with the average of nearly 67 billion yen it achieved in the five years to March 2016.

Factors straining Yamato's finances include compensation for significant amounts of overtime it has failed to pay employees and the constant need to hire more drivers. Just as electronics makers rushed to invest on expanded production lines amid the PC boom, Yamato has spent huge amounts on logistics centers in anticipation of a growth in online shopping. These include Haneda Chronogate in the capital, one of the largest logistics centers in Japan, that went into operation in 2013. The depreciation expense for the facility alone stands at an annual 3 billion yen.

As fixed costs rise on staff, delivery companies, unable to raise prices, are forced to boost delivery counts even more to cover the higher costs. Amazon, however, is sitting pretty.

To find a breakthrough, Yamato's mission in the ongoing negotiations is to get its customer to accept prices it considers fair for the service it provides. The other dimension to the talks is for Yamato to establish a solid business model that stops it from falling into the same trap as Fujitsu and NEC.

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