Ocean freight to be a critical link in e-commerce supply chains

Turloch Mooney, Senior Editor, Global Ports | May 17, 2016 9:18AM EDT

'E-commerce' remains the dominant buzzword in the transportation and supply chain sector in Asia. Industry players from logistics service providers to container lines and air cargo airlines correctly see it as a trend that, more than any other, will drive change in traditional supply chain processes and have a transformational effect on the way goods are connected to consumers.

It is one thing knowing that change is underway, it is quite another to project how that change will manifest itself and how to be in the right place to benefit from the opportunities it brings. Industry executives are largely unsure about what is required, where investments should be made and how quickly, and on the whole struggle to create a picture of what the goods transportation landscape is going to look like in five to 10 years as a result of this phenomenon.

Growth in e-commerce is tied very closely to consumption growth in the region as developing economies make the gradual shift from growth by manufacturing for export to higher levels of consumption by expanding middle classes. IHS forecasts consumption in Asia-Pacific as a share of world consumption will rise from 27 percent in 2016 to 39 percent by 2035, driven primarily by growing middle classes in the large emerging economies of China, India and Indonesia.

In China, cross-border e-commerce transactions are already thought to account for up to 20 percent of total import and export trading volumes. Online retail transactions in the country grew by over one-third in 2015, to 3.88 trillion yuan ($622.5 billion), accounting for 12.9 percent of total social retail sales. In the first quarter they reached $158 billion, up 27.8 percent year-over-year.

Elsewhere in the region, the size of e-commerce-related business is much smaller, but the growth is also rapid. In India e-commerce sales are expected to hit $40 billion this year, up from $4 billion in 2009.  First-quarter sales of smartphones in India grew 23 percent year-over-year, with Indian consumers becoming avid users of these devices to make online purchases. The Indonesian e-commerce market is expected to be worth $6 billion in 2016, albeit for now comprising mostly sales of services such as travel for airlines and hotels.

Air versus ocean

The lack of transportation and supply chain infrastructure and services geared specifically for e-commerce is one of the reasons the sector currently tends to be associated more with air cargo than ocean shipments. This is despite the fact that with the volumes of goods involved, ocean transport must already play a significant part in these supply chains.

The speed advantage offered by air cargo for the transportation leg of the supply chain is a good fit for the e-commerce model. Indeed for some products such as high-tech consumer electronics and fashion items, the acute time sensitivity and rapid loss of value between production and delivery for use means air cargo will most likely remain the preferred mode of transportation, whether it is an e-commerce transaction or not.

For multiple other product categories, establishing forward inventory systems close to markets where goods will be consumed is shaping up to be the preferred e-commerce supply chain model. It is more cost-effective, and allows for speedy delivery and the provision of e-commerce-specific services that are integrated better with the logistics process. This means that for a multitude of less time-sensitive products, including for example household goods and furniture, ocean freight can be built into the e-commerce supply chains.

The way forward

Government policy to nurture the sector in China recognizes these facts and seeks to establish integrated supply chain support bases for e-commerce located in port-centric free trade zones including Tianjin and Shanghai. Here the idea is companies can capitalize on streamlined customs clearance and preferential tax policies, including allowing inventory for projected online sales to be stored in a bonded environment. The aim is to foster better integration of retail, trade and logistics services for fast and efficient distribution that includes the provision of cross-border e-commerce-related services such as quality checks, cost-effective handling of returned items, and efficient and robust compliance management.

To support both cross-border and domestic e-commerce transactions the development of modern and logistics facilities and networks inland to efficiently handle order fulfillment, sorting, distribution and returns is critical. There is a dearth of such facilities in China and the rest of emerging Asia where inland regions have experienced limited direct investment in logistics networks, particularly on the part of foreign logistics companies. This is changing in China where opportunities from growth in consumption and online sales are gradually resulting in the development of more comprehensive and integrated goods-handling and distribution systems away from coastal areas.

Given the size of the market and the relative level of development of its trade infrastructure, China currently leads Asia’s large emerging economies in developing the right kind of solutions for e-commerce-related goods distribution. India and to a greater extent Indonesia are grappling with building adequate basic transportation infrastructure and it will be some time before they reach the relative level of maturity China has reached in this regard. This is an important reason behind the more limited level of development of the e-commerce sector in these markets as very high logistics costs eat into the profits of e-commerce companies.

E-commerce is changing sales, distribution and consumption patterns in Asia. The extent of the impact on the transportation and supply chain industry continues to unfold, but a basic pattern is emerging that points to the development of strategic distribution support centers for both cross-border and domestic e-commerce transactions. As well as driving the development of modern facilities and improved technological systems to better integrate retail, trade and logistics processes, this model supports ocean freight as the dominant mode of transportation in the cross-border e-commerce supply chains of the future.