In the last newsletter of DigiDutch you were provided with a practical guide on selling online.

This time we will give you a glimpse on cross-border logistics in China, especially on bonded warehousing. Ever since the launch of DigiDutch last March by Prime Minister Rutte the warehousing landscape has been continuously changing.

Overview of the 7 cities which can offer crossborder e-commerce import

Overview of the 7 cities which can offer crossborder e-commerce import

Source: US Department of Commerce Global Markets

 

What makes bonded warehouses regarding e-commerce so special? As per the definition of cross-border e-commerce, the goods cannot be (cleared) in the country before the order and payment have taken place. Originally this meant that the goods had to be shipped from one country to another country and cleared upon arrival. By creating the cross-border bonded warehouses in designated Free Trade Zones (FTZ’s) goods can be shipped to China, but do not have to be immediately imported.

 

There are three separate actions that will take place:

  • The customers buys the product in the webshop;
  • The webshop sends the order to the bonded warehouse;
  • The warehouse does the pick & pack, prepares the documentation and sends a delivery document with all details of product and the buyer to the Customs.

At the same time the webshop sends also the order to the customs of the FTZ where the bonded warehouse is located, together with the payment confirmation. Once the customs receives the final document from the bonded warehouse it will check whether all the information is correct and calculates whether import duty or VAT will need to be paid. If all is ok, then the customs will allow the bonded warehouse to release the package for delivery to the Chinese consumer. Through all these steps the bonded warehouse has become a cross-border e-commerce e-fulfilment center.

 

Time to get you updated of what has happened during 2015 in this landscape. I have noticed three key developments that will put this topic in perspective.

Firstly, until this summer many import companies were sharing bonded warehouse space out of necessity. During the summer of 2015 most e-commerce import companies have desperately been trying to get hold of any building with a roof available inside a FTZ in order to have their own bonded warehouse. If you can’t afford to buy, you will have to find a partner to buy or rent it with you. A number of companies have collected venture capital and have claimed any available or near available bonded warehouse space in the market. Whether you have goods to put there or not yet is not the problem. The common shared assumption is that the goods will follow. It is the availability of warehouse space that is the bottleneck.

Secondly, having warehousing space doesn’t do the trick alone. Without a good relationship with the local government, local customs authorities and local logistic partners your warehouse is doomed to fail. I want to emphasize the word local, because fulfillment companies are currently more local heroes than national experts. Partnering with local entities in other FTZ’s looks like the model going forward for Chinese fulfillment companies, which want to expand to other FTZ’s. Each city has its own interpretation of the FTZ rules hence the word Pilot Free Trade Zones. Furthermore each FTZ is currently in a different stage of development. At the moment Hangzhou is considered the most mature, mainly due to the developments pushed by Alibaba Group. In the end what will and won’t work is open for discussion and final evaluation by the Chinese government. The outcome of this discussion will be based on the practical results and the efforts of entrepreneurs and the local authorities in the FTZs.

Finally, all the existing and upcoming platforms I have spoken to all focus on selling the same brands or as they like to call them ‘hot products’ [Hot Product is a product or brand which is recognized by the Chinese consumer as good and safe and therefore is in great demand by the Chinese consumer].  To become an established platform you need to generate traffic and this traffic comes with offering ‘hot products’ to Chinese consumers. This means that with a limited space and a select group of of hot products with limited availability it becomes an overly competitive market. Practically all the bonded warehouses contain the same products. None of them, platforms and webshops alike, are currently making any profit. They are only aiming for market share, maintain share value or if possible an IPO to boost company value.

What can we learn from the above is that if your product or brand is not a fast moving good or a ‘hot products’ it will be hard to find consumers to buy your product and a warehouse partner willing to stock your products in their bonded warehouses. An alternative is to keep stock in your own country and sent your goods from there to China. I would advise you, as brand owner, to first get a market scan on the products you wish to sell in China. And based on that to get a clear strategy. Then the logistics solution should be selected, developed and grow with your product based on the market demand. Make sure you are informed before you enter the Chinese online market and find a local partner as your team on the ground. Because putting products with a low stock turnover in a bonded warehouse might not be the best operating model to get the quality service you are looking for. So get informed about the market and products, before filling up your warehouse space in China. From a logistics point of view, there is as Roland Berger stated ‘…under this model, the key to effective operations will be accurate demand forecasting and inventory control.’

Advantages of a bonded warehouse in China

 

The use of a bonded warehouse has advantages for sellers and consumers. However it seems that the Chinese government is going to introduce new regulations in order to close this loop hole by introducing a new way of levying VAT and import on goods bought through cross-border e-commerce. Also there are still limitations, because not all goods can go through yet, such as fresh food products. Furthermore each parcel that leaves the bonded warehouse will have to contain the ID number of the buying consumer. Finally the local customs will have to approve the clearing of each parcel from the cross-border e-fulfillment center.

 

What is next?

Since this year crossborder e-commmerce in China is all about the bonded warehousing in the Free Trade Zones. As long as there is funding it is sustainable, but this money is going to run out one day and investors want to see results. My expectation is that this will have an impact on the logistics as well. So what is next? My personal opinion is that I see a shift in the logistics. You can’t store all the products in the world in bonded warehouses, but the need for imported products will be here for sure in the coming years. This means the logistic flow needs to be aligned on the customer needs. And that solution needs to be affordable and fast. The bonded warehouses are a great hub to receive and process parcels very fast and maybe even distribute to smaller hubs. This hub will be a perfect fit if you sent your goods already pre-packed and consolidated by air to a bonded warehouse. There the goods can be labeled, custom cleared and sent out by one of the last mile delivery partners. The local bonded warehouse operates as a hub for smooth and quick entry, without being stocked there for a long period of time. It is still a working theory, but it is being tested as we speak. And as we have learned from the past, things can change very quickly in China.

 

 

If you want to know more about this topic or related topics such as last-mile delivery, return handling, air freight vs. sea freight, postal vs. commercial, customs or any other related topic. Please feel free to contact us. 

Written by Simon de Raadt, Co-founder DigiDutch and General Manager Mains International