A baptism: the end of the era of distribution and the reshaping of the global logistics chain

In the global e-commerce landscape, Chinese cross-border e-commerce platforms such as Temu, TikTok Shop and SHEIN are reshaping the market at an astonishing speed. They have brought a new shopping experience to global consumers with the C2M model, content-driven e-commerce format and small order fast return model. However, with the end of the era of distribution, these platforms are also facing the challenge of reshaping the global logistics chain. This article delves into the logistics challenges and opportunities behind the rise of Chinese cross-border e-commerce platforms and how they affect the future of global e-commerce.

"Somali e-commerce" is Temu's nickname. When sellers first hear this name, most of them think it is very humorous. But when they think of it as a description of Temu, it seems reasonable - fast speed, low price, strong marketing strategy, and everything is consumer-centric, this is the impression left by this cross-border e-commerce platform that is running wildly around the world with the C2M model.

In just two years, Temu has more than 150 million monthly active users, covering more than 90% of e-commerce users in the United States, and its number of global unique visitors is second only to Amazon. The BBC cited this data in a report in March this year, titled "How Temu is shaking up the world of online shopping"①.

Not only Temu, but Chinese cross-border e-commerce platforms are also washing the global e-commerce market with their own colors. For example, since the official launch of the US store in September last year, almost one-third (33%) of Americans have purchased goods on TikTok Shop. The content e-commerce format of TikTok Shop is different from platform-based e-commerce. The online celebrity model and seasonal order demand are called "pulse", which once again challenges the global supply chain. SHEIN, which created the small order fast return model, and more and more brands that choose the independent station model have also added new demands to this change.

A baptism from "Amazon antitrust" to "Amazon facing the challenge of Chinese e-commerce" is taking place. The growth rate and novel e-commerce models of Chinese newcomers are reshaping a more decentralized and rapidly changing global online shopping landscape.

Behind the rapid growth, it is worth noting that according to industry rules, for every additional US$10 billion in transaction volume, e-commerce platforms will need to add one million square meters of overseas warehouses to provide logistics services.

The temporary victory of China's cross-border e-commerce platform lies in its emphasis on operations. Faced with a growing market, how the cross-border logistics chain will keep up with the gradually expanding business flow is the key factor in solving the unknown answer in the next stage.

1. Can the logistics keep up with TEMU’s adventurer game?

Old D's day starts at 4 a.m. in Los Angeles. His company is mainly responsible for the customs clearance link in the cross-border logistics chain. In order to facilitate work, he wakes up from a large industrial warehouse every day. In the night, he can roughly distinguish what categories are stored in each warehouse, and then some rustling sounds slowly come in from the night. As the thick night of Los Angeles is dyed by the sun, a convoy drives over from the port. In the endless global logistics chain, the node they are responsible for has lit up the green light for business.

Day after day, without stopping.

Old D's hometown is in Shanxi. After coming to Los Angeles, he met people of different skin colors and faces, and also felt different cultures. "Once, a black driver was about 100 meters away from delivering the goods to the warehouse, but he suddenly stopped and pointed at his watch. I saw that it was time for them to get off work, and he turned off the engine in front of me." Old D said, "This is their work and lifestyle, and also their operational efficiency."

In 2023, a survey of cross-border e-commerce shoppers in 41 countries by IPC and Dynata showed that 48% of respondents said they would receive cross-border packages seven days after placing an order. Compared with mature e-commerce markets, this speed still affects consumers' shopping experience.

Overseas warehouses are a good way to improve services. They bring goods closer to consumers and enable local delivery. The only factor affecting delivery time becomes the warehouse logistics company's in-warehouse operation efficiency. Overseas warehouses have made significant achievements in improving fulfillment time. According to the "Cross-border Eye Observation Report 2024 Overseas Warehouse Blue Book", in 2023, 54% of third-party warehousing and logistics service providers said that they generally complete a series of in-warehouse processes such as "picking-weighing-labeling-shipping" within 60 minutes. Amazon also attaches great importance to logistics and improves the consumer shopping experience by improving the fulfillment time, leaving behind competitors such as Walmart.

On the other hand, overseas warehouses are also beneficial for cost control for merchants and platforms. Especially for large items, Minsheng Securities once made a calculation that the cost of warehouse delivery and direct delivery for 0.75KG auto parts from Guangzhou to the West Coast of the United States is similar; but for 3KG small household appliances, the cost of warehouse delivery is only 50% of that of direct delivery.

Therefore, some merchants or brands choose to build their own overseas warehouses. The smart home brand Leckey created its first warehouse in 2013 due to the demand for overseas warehouses for its own products. Later, as demand continued to expand, it transformed itself into a water seller. In 2018, it began to build public overseas warehouses. Since 2022, Leckey's warehousing and logistics business revenue has accounted for 15.28% of its main business. Similarly, a medium-sized DTC brand of goods set up a warehouse in the East and West regions of the United States at the beginning of its establishment. The main purpose was to provide consumers with a better logistics experience and a better return and exchange policy from the brand's perspective.

Therefore, even though the newcomers of China's cross-border e-commerce are running fast, the big brother Amazon seems to be taking it easy. The key is that Temu and SHEIN are running fast in terms of operational strategy, but whether the back-end logistics assets can keep up is still a huge question mark.

Therefore, Biaoge, a practitioner of overseas warehouse enterprises, told Xiaguangshe that the main reason why Chinese cross-border e-commerce companies are collectively focusing on semi-trusteeship is that the capacity is gradually unable to support the growth rate of business flow. Under the "full trusteeship" model, the platform sends goods from Chinese warehouses to overseas through air trunk logistics. In the early stage of going overseas, this is unlikely to affect the capacity of the entire traditional cross-border e-commerce. "100 tons may be a drop in the ocean in the entire air transport market, but it will get higher and higher as it goes up." Biaoge said.

Air freight prices are also rising. 36Kr has previously broken down Temu's costs, and its fulfillment costs in the US market accounted for nearly 30% of its total costs last year. Because the capacity of major airlines is becoming increasingly tight, Thomas Hong, director of cargo marketing at Boeing Commercial Airplane Group, said in an interview with China Business News that in December, the peak shipping season, SHEIN's daily shipments will reach 5,000 tons. Together with Temu, Alibaba, and Douyin, the four major platforms have a combined daily air cargo volume of about 10,800 tons.

Now, Chinese e-commerce platforms that want to scale the global market can achieve impressive operating figures, but their shipping capacity cannot keep up.

Therefore, in the first half of this year, various platforms have turned to the semi-hosted model. Although the policies of each platform are different, the similarity is that the platform tries to return the logistics link to the merchants. In contrast, under the "full-hosted" model, Temu's logistics time is 7-15 days, but after turning to semi-hosted, it is reported that about 100 of the 120 recommended products on Temu's homepage are shipped from US warehouses and can be delivered within five days, which directly helps Temu improve its competitiveness.

Another benefit is that "it can also leverage the resources of competitors, because mature merchants with certain fulfillment capabilities may already be big sellers on Amazon, and they are just adding another channel." Biaoge said. Some analysts also pointed out that TikTok Shop set the threshold of "annual sales on Amazon exceeding US$2 million" on the US site because this group of people have already prepared goods in Amazon's overseas warehouses in advance.

In the early stages of a new battlefield, young startups that make mistakes need to overcome difficulties. "In the fully managed stage, the platform can quickly recruit merchants, including many new merchants, merchants doing side jobs, and merchants who want to clear their stock. Then, when air transport capacity is insufficient, they start to leverage their competitors and overseas warehouses. So where will they leverage next? Probably sea transport," said Brother Biao.

2. The power struggle between platforms and logistics providers

The logistics capabilities of the local market are what the new Chinese e-commerce platforms lack the most. Another difficulty they need to face is that in their global exploration, the platforms need to rethink the relationship between merchants, service providers and platforms in the industry.

An industry consensus expressed by most overseas warehouse practitioners is that in order to achieve the goal of satisfying consumers, the requirements that Temu puts forward to logistics service providers are "too idealistic." For service providers that fail to meet the standards, such as failing to deliver within the stringent time limit, Temu will directly deduct money from the logistics service provider's backend.

“In the early days, logistics service providers were attracted by the traffic and cooperated with Temu. Because the growth was so fast, everyone wanted to get on board, but in the end they were hurt.” The contracts changed frequently, several times a month, and then the service providers were told that the new contract only covered the previous few weeks. In the eyes of logistics service providers, Temu was a domineering platform.

A logistics service provider told Xiaguangshe that when they first started working with Temu, they would delay payment. "Many overseas supermarkets went bankrupt because of this, and some overseas warehouses lost tens of millions of yuan."

At the current point in time, many overseas warehouse service providers have affirmed that Temu’s terms and prices have become more reasonable, but for Temu, which is in its early stages of entrepreneurship, it is not just Temu that bears the risk of early market development.

The rapid development of China's cross-border e-commerce newcomers has indeed accelerated the growth of business flows. One obvious data is that in 2022, the global parcel transportation volume exceeded 161 billion pieces, which is double the number five years ago. Among them, the transportation volume of Chinese parcels accounted for 68.94% of the total global parcel transportation volume.

"Somali e-commerce" has brought more orders to service providers, but it has also limited their ability to make money. Overseas warehouses that are strongly tied to the platform will receive a certain amount of traffic from the platform, allowing overseas warehouse companies to stand in a visible position. But the other side of the coin is that the rules and regulations set to satisfy platform sellers have, to a certain extent, compressed the links that overseas warehouses can do.

This is contrary to the real way overseas warehouse companies make money: the more links overseas warehouse companies can do and the greater the control space, the more profit space they will have. In the future, they will be able to combine heavy asset resources of warehousing and light asset resources of freight forwarding, and earn the difference in the middle through scale effects in each link, which is the essence of overseas warehouse profits. This is exactly the cost part that Temu is trying to reduce for consumers.

In other words, the platform and overseas warehouse companies need each other. In a period when more orders can be brought in, the platform and service providers can achieve a win-win situation with the increasing business flow. However, when the scale effect comes, how to get rid of the role of becoming a platform worker is something that logistics service providers need to make assumptions in advance.

3. Platform certification accelerates the reshuffle of overseas warehouses

On the bright side, since the standards for platform-certified warehouses are similar, when the volume of goods is concentrated on large platforms, cross-border merchants will have better shipping channels, which will help reshuffle the overseas warehouse industry, which has been plagued by long-standing chaos.

Previously, a feature of the overseas warehouse industry was that there were many scattered companies in the peak season, while large-scale enterprises were more likely to get stable orders in the off-season. Logistics is closely related to business flow, and overseas warehouses are an industry with a low entry threshold but a difficult life. Small overseas warehouses that pursue profits during the peak season are actually very easy to build. 50.6% of overseas warehouse service providers in the world only operate 1-2 warehouses②. For example, near Los Angeles, there are many small overseas warehouses with dozens of customers. You only need to find an overseas warehouse certified by a local Chinese, set the lease period to two years, add a software system, and build two or three shelves. Sellers who have distribution needs in the rapidly rising business flow also need to sign orders immediately.

An employee of 4PX, a cross-border e-commerce supply chain service provider, shared with Xiaguangshe, "For example, a recently popular warehouse package system is to package a fully functional warehouse to the demander at a certain monthly rent. The demander can ask the warehouse owner to customize various needs, and it is more flexible than a standard overseas warehouse."

Therefore, "there is no cheapest in the overseas warehouse market in the United States, only cheaper, which means you can always find a cheaper price than this." Small overseas warehouses are cheaper. These new players brought 30% of new storage capacity to the entire industry from 2020 to 2021. However, they came and went quickly. In 2022, the industry began to reshuffle, and these players left the market one after another.

In contrast, large overseas warehouses need to scale up to reduce costs in order to survive longer and to fight against cycles and sudden price wars.

The opacity and confusion of the overseas warehouse industry may be another reason why Amazon next door is so fearless. In fact, in addition to launching low-price malls, Amazon has put more effort into logistics in the past two years and is trying to make its strengths even stronger.

For example, Amazon's supply chain solution (SCA) will be open to Chinese sellers at the end of 2023, covering multiple Amazon products such as Amazon Global Logistics, Amazon Warehouse Distribution Network (AWD), Amazon Logistics (FBA), and Amazon Multi-Channel Fulfillment (MCF), which can help sellers deliver goods directly from manufacturers to customers around the world;

In March of this year, Amazon launched the "splitting warehouse fees" policy, with the aim of allowing Amazon to make greater use of its warehouse capacity without increasing the FBA area.

4. Hold on to overseas warehouses and fight against the macro cycle

On the surface, the impact of Chinese newcomers such as Temu and SHEIN on Amazon is a competition in business flow, but the more substantial game behind it lies in the reshaping of the global supply chain.

Single companies always cultivate the ability to resist risks in the face of uncertainties. On July 11 this year, at the WAVE2024 Brand Globalization Conference held by Xiaguang Society, Li Cong, vice president of Zongteng Group, a global cross-border e-commerce infrastructure service provider, shared a view: In order to fight against economic uncertainty, Amazon's cash holdings continue to break through the upper limit. For example, Amazon used to have 6 weeks of inventory, but now it can only have 4 weeks of inventory. This change in management has led to higher logistics costs for merchants, but it has also increased the demand for overseas warehouses.

Amazon is trying to find a safe haven from the impact of the macro economy. This cautiousness seems to be completely different from the frenzy of Temu, but in fact, due to the differences in the soil and genes of corporate growth, they are trying to reduce risks from different angles.

For Chinese newcomers, large-scale construction is something that cannot be achieved in one day. Faced with the complex logistics chain, cooperating with third-party overseas warehouses is the fastest and easiest way to share risks, which brings new opportunities for overseas warehouse service providers.

In fact, entrusting logistics to third-party overseas warehouse service providers also gives them more advantages in logistics than the platform.

First, warehousing land and high-quality last-mile logistics accounts are scarce resources. Minsheng Securities pointed out that due to topographical and historical factors, the U.S. population is basically concentrated in the central and eastern regions and the western coastal areas, but the population in the east and west coasts is relatively dense, and industrial land resources that can be used as overseas warehouses are relatively scarce.

At the same time, land prices are also rising due to scarcity. Lechuang founder Xiang Lehong said, "In 2019, Lechuang bought a warehouse in Los Angeles. The 10,000-square-meter warehouse cost about 12 million U.S. dollars, but now it costs more than 30 million U.S. dollars." Therefore, he believes that the window for economically purchasing overseas warehouses and land has closed because the cost is too high.

On the other hand, high-quality last-mile logistics accounts are also scarce resources. Many small-scale overseas warehouse service providers choose to rent accounts from large service providers in order to enjoy the express fee discounts and transportation resources of high-level accounts, which has also triggered compliance reviews from multiple parties including platforms and express delivery companies.

Secondly, managing overseas warehouses requires dealing with the complex supply and demand relationships that are affected by cyclicality, peak and off-seasons, and inventory.

First, overseas warehouses are part of the global supply chain, and changes in supply and demand are affected by the rise and fall of shipping freight rates and the cargo transportation cycle.

In the long cross-border logistics chain, no company can accurately predict the future. Around 2021, affected by the black swan event, overseas shipping capacity was unstable. In order to maintain stable sales, sellers stocked up in large quantities in overseas warehouses. By 2022, ocean freight rates gradually returned to normal, and overseas warehouses entered the clearance stage, which caused the revenue of about 25% of overseas warehouse service providers to decline. Therefore, the new supply area of ​​the US warehousing market exceeded 1 billion square feet between 2022 and 2023, which led to the current oversupply of US warehousing.

In the first quarter of 2024, as overseas warehouses cleared their inventories, the average warehouse vacancy rate in the United States jumped to 5.2%. However, what followed was that after the inventory was cleared, domestic production capacity was transferred overseas, and overseas demand did not keep up in time, resulting in "fake warehouse explosions" caused by excessive inventory clearance.

Second, the demand for warehousing changes with the flow of business and is also affected by the off-season and peak season. In Europe and the United States, holidays such as Christmas and Black Friday are like Double Eleven in China, which is a large-scale shopping carnival. According to the "Cross-border Eye Observation Report 2024 Overseas Warehouse Blue Book", the sellers' overseas warehouse inventory during the peak season will increase by 50%-100% compared with weekdays, accounting for the largest proportion, reaching 42.86%, and the sellers whose inventory increased by more than 100% accounted for more than 30%.

Third, storage demand also changes with the inventory cycle, which includes a roughly 40-45 month cycle of active inventory increase, passive inventory increase, active inventory reduction, and passive inventory reduction. Li Cong, vice president of Zongteng Group, said at the WAVE2024 Brand Globalization Conference: "Each category is in a different position in the inventory cycle. They will enter this cycle at different stages and at different rhythms."

Image source: Zongteng Group

The inventory cycles of different categories of products are different, which also leads to changes in the supply and demand of overseas warehouses that can accept different categories of products. An overseas warehouse practitioner told Xiaguangshe that the flexibility of each warehouse to accept changes in product categories is not strong. For example, the warehouse shelves required for large items and the robot systems required for small and medium items are not the same. If you want to make adjustments to the items accepted in the warehouse, it takes a certain amount of time to change.

Chen Lei, founder of Yicang, a cross-border e-commerce full-ecosystem software service provider, told Xiaguangshe: "Some warehouses are designed for a single category, such as battery products and liquid products, which require special storage methods."

That is to say, in the global supply chain, different categories of overseas warehouses face different cyclicalities, and should be calculated by category, grasping the macro cycle as well as the small cycle of supply and demand changes. We cannot look at the problem as a whole, but must analyze specific problems specifically.

Therefore, in the face of the ever-changing business flows in 2024, the platform holding on to overseas warehouses is not an option, but an inevitable choice.

5. Polishing bills and effective methods to seize the bonus period

The market economy is fair but cruel. It requires every role in the industrial chain to learn to do business on their own.

From an investment perspective, overseas warehouses are long-term businesses that focus on economies of scale. Most overseas warehouse companies are also using a 10-year dimension to do math problems. Levo founder Xiang Lehong told Xiaguangshe: "The construction cost of a general warehouse is about $100 per square foot. A 100,000 square meter warehouse requires $100 million. Based on 39 years of depreciation, the annual depreciation cost is less than 20 million yuan. This is how the return on investment should be calculated."

Looking back, most of the service providers with a scale of 1 billion to 2 billion today started their overseas warehouse business around 2014, which is a 10-year cycle.

Therefore, overseas warehouse companies care more about the amount of profit rather than the profit margin, that is, making money from scale. "They will complain about how hard it is, while going downstairs and driving their Panamera home." An overseas warehouse practitioner said with a smile that every penny is hard to make, but after the scale is expanded, logistics is an unsexy but good-looking business.

In the environment of overall cost reduction and efficiency improvement in 2023, the profit levels of more than half of the service providers will remain basically unchanged or slightly decline, and the situation of "increased revenue but not increased profit" is inevitable.

In order to make the bills look better, overseas warehouse companies need to work on turnover rates and last-mile delivery costs.

Wen Biao, founder of Qianhe Logistics, likened the turnover rate of overseas warehouses to the table turnover rate of a restaurant. "The faster the turnover of goods, the more table turnovers there are in the same area, and I can make money from this."

Therefore, overseas warehouse companies are more willing to deal with small and medium-sized commodities. A statistical data for reference is that more than half of the turnover days of fashion categories, beauty and personal care, 3C electronics and other categories are less than 30 days, and a considerable part of them are less than 15 days; while the turnover days of jewelry accessories, food and health care products are mostly within 15 days; travel tools and accessories, home furnishings and gardening, other large commodities, etc., the main turnover days are 30-60 days.

This has led to more merchants selling large items choosing to set up their own overseas warehouses. On the one hand, it is difficult to combine warehouses due to low turnover rates, and on the other hand, it also allows them to control issues such as after-sales service themselves.

A typical example is Lege, which changed from needing overseas warehouses to selling water, mostly for better final-mile prices. The final-mile logistics costs are actually very high. In the United States, final-mile logistics is currently dominated by giants such as UPS, FedEx and USPS. "If a company's large-scale shipments exceed 10 million packages, then it will have a revenue of about 300 million US dollars, and annual sales will be 60 billion US dollars. In this way, it will become a global top 100 customer of the final-mile logistics service provider, and the price given by the logistics company must be very good." Xiang Lehong told Xiaguang Society.

6. Building your own moat is actually for better connection

The emergence of Chinese newcomers has made all parties in the cross-border e-commerce industry chain no longer focus solely on traffic and rely on Amazon's single platform, but instead return to the essence of business and recalculate their own bills.

Brands have shown a trend of turning to a multi-platform and multi-warehouse strategy. According to the data from the "Cross-border Eye Observation Report 2024 Overseas Warehouse Blue Book", 92.52% of sellers operate more than two platforms at the same time, and 97.51% of sellers operate more than two warehouses at the same time.

A medium-to-large-sized DTC brand decided to start deploying on the Amazon platform this year. In their bills, the cost difference between remote parcels and overseas warehouses is not much, almost 25% of the overall cost. After achieving a certain degree of brand recognition, they deployed a small part of their products on Amazon. Compared with controlling logistics themselves, although it affects timeliness to a certain extent, it can help them better control the payment period and further optimize cash flow.

The same narrative logic also occurs in emerging markets. Around 618 this year, more merchants began to do business globally. Qinshidai was the No. 1 merchant in the maternal and child category in Malaysia on TikTok Shop in the first half of the year. Before coming to Southeast Asia, they were doing the same category in China.

Compared with the domestic market where they were squeezed to only 3-4 cents, they thought the Southeast Asian market was not easy either, but the key was to make the math. When they first looked for overseas warehouses in Malaysia, they encountered the pitfall of "many overseas warehouse owners are middlemen, and no one cares when problems arise." For self-built warehouses, when the daily order volume reaches 1,500-2,000 orders, it can be considered the most ideal state for his category, which can cover the monthly self-built warehouse fee of 100,000-150,000. "This is also a fixed cost, and the price is about the same whether you do it yourself or with others."

Facing a larger and newer overseas market, the requirements are higher this time, and all merchants are being screened and selected. When he arrived in the Southeast Asian market, these trials and errors made him realize that no matter what market he faced, the support policies given by the platform were just tools. The founder of Qinshidai said: "Do your own business, and walk slowly step by step. The sales route combining online and offline is the future development direction."

The changes in e-commerce in the past have taught merchants one thing: the platform's traffic ceiling will come, the bonus period will end, and the previous status of relying solely on Amazon for distribution will also be broken. This has divided global merchants into two camps: one is the distribution merchants who rely on the platform to make quick money, but are also at the forefront of the reshuffle; the other is the brand owners who hold the bills in their own hands and can fight against the cycle. They know that after getting rid of the trap of e-commerce platform traffic, offline channels play a more important role in fighting against the cycle.

Under the trend of branding, the requirements for both overseas warehouses and platforms are becoming higher and higher, the differentiation between distributors and brands is becoming more and more obvious, and there is less and less middle ground between the two.

Cross-border e-commerce has always given people a sense of excitement, but only those who have experienced it know how much hardship there is. Every role facing the global market has stood on a new playing field, faced a new landscape, and learned to calculate their own business and cycles.

On the seemingly scattered side, platform traffic is no longer as attractive as in the past, and merchants and logistics companies have begun to focus more on their own business. In fact, the greater connection is that when all parties can focus on polishing themselves and building their own moats, it will bring more benign industry development.

The book "Industrial Chains of Great Powers" points out that the combination of economies of scale, consumption diversity and distance costs such as transportation means that the spatial distribution of industrial chains is unbalanced, and the world is not flat. Among them, transportation costs promote production close to consumption, limiting the concentration of production, but the concentration of economic activities brings economies of scale. If the benefits of economies of scale exceed transportation costs, enterprises will benefit from industrial agglomeration.

Interestingly, there are many Chinese people among the movers in North American warehouses. Their accents sound friendly, and you can tell they are from Henan. In Shenzhen Bantian, there are people working almost 24 hours a day. There are many cross-border merchants here, facing different markets around the world. The founder of Qinshidai mentioned, "After going overseas, we face different markets and different platforms, but our competitors are all Chinese merchants. The same is true for building warehouses. The big bosses are basically Chinese or Chinese behind the scenes to operate and invest."

This is the bigger change that Chinese explorers face.

References:

[1] Data collected by market analysis agency SimilarWeb

[2] "Cross-border Eyes Observation Report 2024 Overseas Warehouse Blue Book"

Author | Yang Zi Editor | Weber