May 31 2021

Post-Covid Hong Kong: Prospects for Cross-Border E-commerce Logistics

Source: HKTDC Research

In the past year, the Covid-19 pandemic has propelled the growth of e-commerce, with the air freight sector emerging as one winner under the ‘new normal’. In this connection, the HKTDC Research conducted a number of interviews in an attempt to find out from operators the reasons for the industry’s growth and how the pandemic can generate business opportunities for local e-commerce operators and related logistics service providers. 

Soaring Demand for Air Freight

During the pandemic, e-commerce business has boomed, bringing about a huge surge in demand for logistics services. Unfortunately, the sea freight industry has not benefitted from this growth trend. According to one of our interviewees, in the past various sectors – spanning retail, wholesale, and bulky items such as furniture – mainly used lower-cost marine transport, with e-commerce goods accounting for only a small share of the total. However, with the coronavirus outbreak causing the suspension of retail, catering and other services in many countries, demand for sea freight has fallen dramatically. As a result, the number of sailings has dropped.

Against this backdrop, the air freight sector has emerged triumphant. At present, e-commerce goods account for the bulk of air freight cargoes and volumes are growing. The reasons are, first of all, that air freight is quicker. By way of illustration, from the time a consumer places an order on an e-commerce platform and receives the product to the time the e-commerce operator collects payment from the platform, the whole process only takes one month. Using sea freight, however, the payment collection period would be extended by one to two months. Because of this, e-commerce operators prefer to pay higher air freight charges in exchange for shorter payment collection times.

Secondly, if an e-commerce operator uses sea freight, the cost of warehousing in overseas markets must be taken into account. In order to shorten delivery times, e-commerce operators tend to rent overseas warehouses for storing their goods, so that once an order is received the goods can be dispatched directly from the warehouse to the consumer. In other words, while the logistics costs of sea freight are lower, additional storage costs are incurred. Moreover, because e-commerce goods are often lighter in weight, the proportion of logistics costs in relation to overall costs is relatively small. The cost of air freight may not therefore be higher than the cost of sea freight plus overseas warehousing.

For the reasons cited above, e-commerce relies heavily on air freight and, consequently, traditional air-forwarding and courier service companies are allocating more resources to e-commerce. This has created a strong interdependence, bolstering the share of e-commerce goods in air freight and courier cargoes. However, one interviewee said some e-commerce goods would still benefit from using sea freight for transportation. For example, goods weighing more than two kilograms tend to be shipped by marine transport as the air transport costs would be too high. Moreover, for products which are expected to be popular, e-commerce operators may opt to use sea freight to ship large quantities to the target market and store them in warehouses there in order to lower unit logistics costs. 

Logistics Costs Spiral During Pandemic

Under normal circumstances, air freight and courier goods are carried both by passenger aircraft and cargo aircraft. However, as the movement of people around the world has plunged due to Covid-19, the vast majority of passenger aircraft have been grounded and only cargo aircraft continue to fly. During the pandemic, e-commerce has grown markedly and the volume of courier cargoes has increased at a staggering rate. Since the coronavirus first hit, various courier companies have raised their charges. Looking back at the past year, one interviewee used the term “roller coaster” to describe the trend in air freight costs. For instance, during March and April 2020 the rapid spread of the pandemic across the globe exerted great pressure on air cargo capacity; from July to September, when the pandemic eased off temporarily, the rise in air freight costs slowed down; however, by November, with the traditional year-end consumption peak season approaching, courier charges rocketed again, shooting up by 100%. However, despite the fact that the pandemic has pushed up air freight costs considerably, e-commerce operators find it easier than other businesses to control retail prices and profit margins. For example, unlike traditional retailers, e-commerce operators can transfer higher logistics costs to consumers as they serve end-users directly.

In terms of specific markets, many countries in Europe implemented social distancing and lockdown measures last year, which had a huge impact on logistics in the region. At the time, even if goods managed to arrive in a certain country with no hiccups, often they could not be forwarded to their final destination. One interviewee recalled: “The logistics situation in Spain and Italy was particularly dire, while the UK and Germany were better. As to the US market, although operating costs increased in the last year, logistics operations in the country never really stopped.” 

Local E-Commerce Solutions Set to Improve

Compared with mainland China and elsewhere in Asia, including Southeast Asia, Japan and South Korea, Hong Kong lags behind in its e-commerce development. However, respondents said they believe Covid-19 has generated significant opportunities for local e-commerce operators and related logistics service providers.

Take local e-commerce giant HKTVmall as an example. The average number of orders received by the company daily rose rapidly from 18,700 in December 2019 to 36,300 in December 2020, while the average monthly total transaction value of orders increased from HK$271 million to HK$571 million. (Note: these figures are unaudited.) One interviewee recalled: “In April and May last year when the pandemic all over the world was severe, e-commerce bloomed, with business turnover within a short quarter shooting up to nearly the annual total in past years.” Prior to the pandemic, there were not enough logistics companies in Hong Kong to meet market demand. During the last year, the number of logistics companies has risen sharply, however. Our interviewee said he expected local e-commerce solutions, including payment, delivery and marketing functions, to improve.

Nevertheless, one interviewee remarked that Hong Kong had already missed the opportunity for developing cross-border logistics. He said: “The size of the mainland market is huge and the volume of e-commerce business is tremendous. In recent years, mainland logistics companies have mushroomed and the entire industry chain has matured. On the contrary, the scale of the Hong Kong market is too small to support the growth of cross-border logistics.”

In summary, developing cross-border logistics requires enormous offshore resources such as warehousing and distribution networks. Since the number of cross-border e-commerce operators in Hong Kong is small, the advantages of local cross-border e-commerce logistics companies are not apparent.

Source: HKTDC Research