The economic toll of Covid-19 is expected to unfold from April onward, putting the Q2 performance of shippers in a high-risk state of affairs.
By YANG Xia
In early March, Shenzhen Baiyi Logistics dispatched 8 tons of Amazon goods to the UK. While the goods were on their way to the domestic warehouse, Baiyi’s founder Xu Lumei was told that the freight rate had risen by 16 yuan (US$2.30) per kilo. As the cabin space was already booked and the price agreed with the client, the logistics company must absorb the extra cost.
"It cost us 128,000 yuan," said Xu, describing it as the worst her company had ever taken. Because of volatility in freight prices, almost every shipment in March made a loss.
In the long chain of global trade has many links: agents, airlines, airports, customs brokers, drivers, freight forwarders, ports, shipping companies, truck collection teams… In the era of COVID-19, everyone in cross-border logistics faces extreme uncertainty, with the most brutal test still ahead.
The rates of major freight carriers have fluctuated erratically, with air-freight prices soaring as capacity sank like a stone.
Xu told reporters that at the end of March, air freight to Europe and America was more expensive than ever, with the cost per kilo rising from 20 yuan to more than 60 yuan, and sometimes as much as 120 yuan.
“In the past we gave our clients a monthly quote. Now we try to do it every day and even at that we cannot cope. Flights have been routinely cancelled or prices raised,” Xu said.
In logistics for over a decade, Xu has been forced to refuse orders and is operating at less than 15 percent of her normal level. As a result, her company lost around 300,000 yuan in March, and she expects to lose around 200,000 yuan a month until May at the earliest.
Since March, road freight has suffered both plunging loads and prices.
Wang Wentao, founder of trucking platform Yundao, has a small-scale fleet carrying goods between factories and Shanghai’s Yangshan Port. Wang chose not to cut prices, but even if he had, he suspects there would have been no goods to ship. Business last month was only 20 percent of usual.
"I don't expect to make a profit this year, I just want survive," he told Jiemian News, saying that many of his competitors feel the same.
By contrast, shipping by sea, which accounts for about 80 percent of international freight, has held stable.
Shanghai Hantang Logistics ships bulk industrial commodities such as steel to all parts of the world. Chairman Fan Jinsheng said that the sea-freight rate rose by 20 percent in the first half of March, but has now dropped to the previous level.
Zhou Shihao, the founder and CEO of logistics platform YunQuNa, expects that considering the serious situation abroad, demand will reduce, putting pressure on sea-freight prices in April.
In terms of air freight, the price now is at least three times higher than before the epidemic. With international flights slashed last week, prices are expected to remain high in April with further increases.
"Price fluctuations during the epidemic are still about simple supply and demand," said Li Linhai, secretary of the Shanghai International Freight Agency Association. He believes that if rates change, especially large, short-term swings, it will do no one in international trade any good. Although carriers such as shipping companies and airlines may make some extra profit from increases in capacity in the short term, the amounts are small.
Since March, weak external demand and reduced orders have been the norm. A Shenzhen exporter of luggage, kitchen and home appliances told Jiemian News that since early March, orders for these kinds of goods have nosedived by 50 percent - 80 percent.
Baiyi Logistics' exports mainly come from Amazon sellers or serve B2B bound for South America. In February, no goods could be shipped. In March, rates surged and the company reduced orders. B2B was affected by epidemic policies in Brazil and other countries.
Not only is delivery to ports unimpeded, but more importantly, foreign manufacturing has shut down. Demand for raw materials may decline, and customer orders have already slumped. Hantang Logistics’ Fan predicts that after April, business will be halved. The same applies to the trucking sector, being the first or last mile of logistics.
Wang Wentao said that as the epidemic broke out during Spring Festival, many drivers had returned to their hometowns, and could not return to resume work as usual. Containers piled up in terminals, causing congestion.
In the end, Ningbo and other places sent long-haul buses to pick up the drivers, but then, orders from overseas decreased, and trucks were left idle. In Shanghai, trucking orders fell by an average of 30 percent in March, and are expected to fall further in April.
Crumbling demand is the primary challenge for everyone in the export and import chains, both in the short and longer terms.
"The biggest worry at the moment is not shipping, but whether customers' businesses will return to normal. If they have problems, we will suffer. One non-payment can lead to the collapse of an international enterprise," Xu said.
If a shipper sends the goods but the receiver cannot pick them up, the goods stay in the port, leading to payment arrears, and intermediate companies are most likely to bear the brunt of any delay. Xu has heard that many of her competitors, mainly those with less than 200 employees, have capital shortages. As customers postpone their payments, companies must make bad debt allowances.
Demand for masks and ventilators grew rapidly during the epidemic. Xu said that masks to a value of 2 million yuan were being shipped to Germany and the United States when the aircraft were seized by third-party governments while transiting the country. The manufacturer could therefore not collect the final payment and the logistics company has to wait.
Some customers now charter direct flights which are obviously more expensive, and freight forwarders are requesting cash settlement. Companies like Baiyi are stepping up payment collection. By Xu’s calculation, she had around 2 million yuan in accounts receivable before Spring Festival at the end of January. By the end of March, the amount had almost doubled.
As the situation persists and accounts cannot be collected, pressure grows with each order.
At each end of the chains, trucking companies traditionally settle their bills with freight forwarders every three to six months, and the billing period is even longer. A 10-truck fleet brings in about 2 million yuan each year and many companies are locked into long-term loans for truck purchases. During the epidemic pause, these loans were superimposed on receivables and bad debt risks, strangling cash flow.
The financial health of cross-border logistics has customarily been target market, business size and management. Today, cash flow has supplanted all others to become the prime indicator of efficiency.
Recently, Amazon issued a notice giving temporary warehouse priority to daily necessities, medical supplies and high-demand products. Other products cannot be sent via Amazon depots opening the platform to third-party sellers.
This measure has seriously affected well-established sellers. Baiyi was forced to make adjustments including shipping directly to overseas warehouses, incurring costs such as warehouse fees, but also meaning that shippers are operating in the dark with little knowledge of receiving facilities.
With reduced revenue, fixed costs such as labor and rental have become even bigger headaches. In November last year, Baiyi recruited new staff. After the Spring Festival, the new employees were at work, but unable to visit customers and increase sales.
In addition, excluding overseas warehousing, the rent of Baiyi Logistics' warehouses and offices in Shenzhen is 60,000 yuan per month. For larger logistics companies, this fixed cost can be huge - Hantang Logistics' rent is nearly 400,000 yuan.
The overseas situation is still very grim, leading to falls in both demand and supply. In the second quarter, foreign trade could be in dire straits.
Before 2012, China's foreign trade growth was in double digits. However, in 2019 it slowed significantly as growth of major developed economies declined and pressure on emerging economies increased. Last year, foreign trade increased by only 3.4 percent.
Li said that emergencies may change the immediate trajectory of the economy but not the overall trend. Trade will continue to expand in Asia and China's industrial structure will adjust, gradually becoming a major importer and gaining a greater say at the international-trade table. Operational models must move to keep pace with these changes. This pressure is already urgent across all aspects of cross-border logistics.
Already victim to international trade friction and pressure on the global economy, truckers must find ways to be more environmentally friendly and compete with sea, rail and river transit. These alternatives bring down demand for trucks in an industry with low entry barriers and punishing price competition. Wang plans to shrink the company fleet and make better use of digital resources to increase efficiency.
“This is just the start. The next 6-10 months will be very tough for the entire industry." Wang Wentao said, "However, in the long run, the industrial chain will improve. We will come out of this stronger, with new opportunities. "
China's status as a manufacturer will not weaken and the world will need more of all kinds of commodities produced there. If the pandemic can be contained in Q2, the entire logistics industry will rebound strongly in the second half.
"The international freight forwarding industry cannot be eliminated by the market," Xu told reporters, claiming that 95 percent of businesses in Shenzhen are involved in foreign trade.
Demand, at some level, shines on, however dimly, and will be rekindled after the epidemic. The test now is one of financial resilience and the ability to come out of the darkness ready to face the light.