Over the past three years of the pandemic, the cross-border e-commerce logistics industry has experienced ups and downs, much like a roller coaster. However, looking back, we can see that the cross-border e-commerce logistics industry has many noteworthy aspects.

1. What are the reasons behind the tight air freight capacity and price increases?

The pandemic has fundamentally changed the shopping habits of consumers in China and overseas, especially overseas consumers.

Before the pandemic, domestic e-commerce in China had been developing for over 10 years, and almost all consumers who could shop online were doing so. With the widespread adoption of smartphones, even rural populations in China began shopping online. However, overseas e-commerce and online shopping were not as developed. Looking at the online retail penetration rate, before the pandemic, the U.S. had an online penetration rate of about 10%, which increased to 20-30% during the pandemic. The same trend was observed in Europe, where many countries had single-digit penetration rates before the pandemic, which rose to 10-30% after the pandemic, depending on the country.

The change in overseas consumer shopping habits and methods has expanded the share of cross-border e-commerce exports and led to changes in cross-border e-commerce platforms. The most notable example is the rise of China’s “Four Little Dragons” in e-commerce, including Pinduoduo’s international version TEMU, the fast fashion platform SHEIN, Alibaba’s AliExpress, and TikTok.

Represented by these four companies, Chinese e-commerce platforms have become world-class e-commerce platforms. Their collective expansion overseas has driven a rapid increase in cross-border e-commerce logistics orders. According to incomplete statistics, currently, over 10,000 tons of cross-border e-commerce packages are shipped out of China every day, all of which need to be transported by air.

In the past two to three years, the volume of air cargo has increased exponentially, with demand expanding rapidly in the short term, but the supply of air freight capacity has not kept pace.

Currently, there are about 200 all-cargo planes in China’s civil aviation fleet, with each long-haul wide-body freighter having a cargo capacity of about 100 tons per trip. If we consider routes to Europe and America, China has about 60 long-haul wide-body freighters. If each of these planes flies one trip per day, the total capacity would be about 6,000 tons per day.

However, the demand is for at least 10,000 tons of cross-border e-commerce packages to be transported daily, meaning there is a gap between the supply of and demand for at least 100 long-haul wide-body freighters each day.

Globally, according to Boeing’s data as of December 2023, there were 752 long-haul wide-body freighters, including those operated by international courier giants such as FedEx, UPS, and DHL. However, these freighters are not solely dedicated to transporting China’s cross-border e-commerce packages; they also need to transport high-value goods, project cargo, designated cargo, express parcels, and more.

Currently, the growth rate of cross-border e-commerce package orders far outpaces the increase in air freight capacity. The growth rate of long-haul wide-body freighters cannot keep up with the surge in cross-border e-commerce packages. As a result, China’s cross-border e-commerce exports face a problem: the limited capacity of upstream air freight is restricting the continuous development of cross-border e-commerce direct logistics. This imbalance between supply and demand in air freight capacity is likely to be a long-term issue for the next 5 to 10 years.

Some might wonder how this could affect the next 5 to 10 years. The reason is that manufacturing an aircraft is a slow process. It takes at least two years for companies to receive delivery after placing an order with Boeing or Airbus. Additionally, a new long-haul wide-body freighter costs billions of yuan, making it a very expensive mode of transport. Generally, only state-owned enterprises, central enterprises, or large publicly listed companies can afford to buy them. This makes the upstream air freight industry a heavy asset, high capital investment sector, with few new entrants. Therefore, the growth in air freight capacity is very slow from the supply side.

Furthermore, currently, the only manufacturers of large aircraft are Boeing and Airbus, with Boeing being the sole producer of large freighters, and Airbus only recently starting its freighter production line. This limits upstream capacity and supply.

The high degree of monopoly and limited supply upstream, combined with the rapidly increasing demand influenced by cross-border e-commerce downstream, has led to the current tightness in air freight space and the surge in prices.

In fact, the tightness and price hikes in air freight are not new and have occurred repeatedly in the past few years. For example, in November-December 2023, air freight rates on routes to Europe and America soared to 70-80 yuan/kg. In 2020, during the peak of the pandemic, air freight rates on these routes exceeded 100 yuan/kg, leading to logistics costs that far exceeded the value of the goods being shipped. This further hindered the growth of the direct shipping logistics model in cross-border e-commerce, where B2C packages are sent directly from China to overseas markets. The insufficient supply of upstream air freight capacity has restricted the development of the cross-border e-commerce logistics industry.

2. What are the reasons behind the surge in demand and price increases in the ocean freight market?

Starting from May, the ocean freight market has experienced a surge in demand and a shortage of shipping containers, leading to a situation where securing a shipping container becomes extremely difficult. It is anticipated that many shipping companies will initiate another round of price hikes in the second half of this year, with the ocean freight price from China to the US West Coast expected to soon surpass $6000 USD. Therefore, we estimate that ocean freight prices may remain at a high level in the second half of 2024, primarily due to the following reasons:

Firstly, the impact of the Red Sea crisis. The conflict between Israel and Palestine and attacks by Houthi militants on ships passing through the Red Sea have forced vessels to detour around the Cape of Good Hope, resulting in extended voyages and delayed schedules. For instance, a sea freight container from China to Europe might normally take around twenty days, but after detouring around the Cape of Good Hope, it could add an additional seven to eight days, prolonging the entire voyage to thirty to forty days.

The increased voyage time directly leads to slower container turnover. Previously, a cycle might be completed within forty to fifty days, but now it might take seventy to eighty days or even longer, necessitating more containers to meet transportation demands. If the existing supply of containers is insufficient, it will inevitably lead to shortages and tensions.

The second reason involves emerging models and changes in cross-border e-commerce. Firstly, there's the adjustment in Amazon's policy. Since the beginning of this year, Amazon has introduced a policy called "split warehousing." In the past, Amazon sellers only needed to send goods (such as cups) to a certain Amazon warehouse in the US, and Amazon would be responsible for subsequent allocation. However, the current policy requires Amazon sellers to send goods in batches to FBA warehouses across the United States. Additionally, sellers need to ensure adequate inventory in each warehouse to avoid stockouts. As a result, the original volume of goods stocked by sellers for overseas markets has significantly increased, further complicating logistics.

The second change is the "semi-fulfillment" model. In the semi-fulfillment model, sellers on platforms can first send goods by sea to overseas warehouses in the US or Europe, where the goods are stored in overseas warehouses managed by logistics companies. When there are orders on the platform, sellers can directly ship from the overseas warehouse.

In this semi-fulfillment model, many sellers hoping to engage in cross-border e-commerce need to stock up goods overseas by sea, inadvertently increasing sea freight volume. As container turnover slows on the supply side and more ships need to detour, the cycle of ship operation slows down. On the demand side, due to Amazon's split warehousing policy and the introduction of the semi-fulfillment model by cross-border e-commerce platforms, ocean freight demand is further elevated. The combination of supply-side disruptions and demand-side increases has led to short-term spikes in ocean freight prices.

3. What are the risks behind the price surge and container shortage?

In light of various factors, ocean freight rates have been steadily increasing. The continuous rise in ocean freight rates, coupled with container shortages and a lack of available vessel space, has created unfavorable expectations for cross-border e-commerce sellers and logistics professionals. They fear that delayed shipments will incur even higher freight costs, prompting them to rush shipments before price hikes. As a result, warehouses of cross-border logistics companies in the US and Canada are overflowing, with shipping containers piling up at ports, and vessels sailing at full capacity.

While the industry may seem prosperous on the surface, we believe that behind this prosperity lie many crises and uncertainties.

Why do we say this? Because during concentrated phases of outbound shipments, we notice a phenomenon: large-scale stocking for overseas markets in the short term inevitably leads to an increase in overseas inventory levels. The retail industry focuses on inventory turnover ratios. When a large volume of goods is continuously shipped overseas, it effectively raises retail inventories overseas, which take time to be absorbed.

Once expectations of rising ocean freight rates form, everyone rushes to ship goods. Goods originally planned for shipment in July or August may now need to be shipped in May or June to avoid higher shipping costs in August. Or goods originally planned for shipment in October, before Christmas, may now need to be shipped in June or July, as concerns arise about both high shipping costs and lack of available space by year-end. Once manufacturing companies, foreign trade companies, and cross-border e-commerce companies develop expectations of price hikes, the entire overseas inventory is pushed up in the short term.

Looking ahead, this will lead to the "bullwhip effect" in the supply chain, where everyone engages in panic buying. Once overseas inventory piles up, there may be a dilemma of unsalable inventory a few months later, leading everyone to stop stocking up.

Why does this situation occur? Firstly, some goods have already been stocked in advance, so there is no need for additional stocking. Secondly, everyone needs to digest their inventory. Therefore, price fluctuations may occur in the future, similar to the stock market, but the industry's fluctuations, impacts, price changes, etc., bring opportunities for making money.

Therefore, our view on the price surge and container shortage is that there are both risks and opportunities. From a risk perspective, it is unfavorable for the long-term stable and healthy development of the entire supply chain and industry chain. But from an opportunity perspective, there may be some short-term money-making effects or opportunities for practitioners.

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WeChat Official Account: Cross-Border E-commerce Logistics Baixiaosheng