The COVID-19 pandemic has accelerated the development maturity of  China’s logistics market, which is already growing rapidly.For decades, China has been a key node in the supply chain of global companies.  For a long time, millions of couriers have been traveling through Chinese cities, delivering packages of all sizes. Although many customers in other countries only realized the convenience of online shopping and logistics delivery during the pandemic.

How did the Chinese logistics market perform during the epidemic, and what are the  prospects for 2022 and beyond? In this article, Domatters China Marketing Agency summarizes five trend points that global investors, logistics companies and shippers should be aware of, based on the McKinsey report.

2022 may be a harvest year for the logistics market

COVID-19 has had a direct dampening effect on China’s freight volumes. But by 2021, all delivery methods including road freight, container and air freight have rebounded and surpassed pre-pandemic levels. And there are higher volumes on some major trade routes between China and North America. People have more demand for physical goods, in part because they can’t spend that money on services like dining out, travel, or manicures. Globally, freight forwarders have profited more from surging demand and tight supply during the COVID-19 pandemic.

This will continue into 2022 and into the next two or three years, as supply chain challenges are unlikely to be resolved immediately. The emergence of Omicron and other potential coronavirus variants, along with China’s ongoing zero-case policy, means that China’s borders will remain largely closed. Congestion in the container supply chain and limited cargo space could keep logistics market providers at high profit margins in 2022, which is good news for some logistics investors and shareholders.

Or the continuous tide of integration of third-party logistics companies

In 2021, the investment and financing enthusiasm in various fields of China’s logistics market will continue to rise. Among them, the number of transactions in the field of logistics intelligence informatization once again leads the industry, and the rapid growth of cross-border trade under the epidemic has brought opportunities for mergers and acquisitions in the field of integrated logistics, and the transaction amount ranked first and set a new record.

Freight forwarders and third-party logistics market (3PL) providers have been desperately looking for ways to eliminate the seemingly insatiable thirst for their services. Many companies are looking to lock in long-term capacity, expand their digital capabilities, and turn to omnichannel integration. For example, China Logistics Group was formed by the merger of five state-owned enterprises, Caijin acquired the shares of Air China Cargo, and SF Holding acquired the shares of Jiayu Logistics as an international business platform, etc.

Internationally, Danish shipping company Foundation acquired Hong Kong-based contract logistics company LF Logistics to enhance its omni-channel fulfillment capabilities in the Asia-Pacific region. Kuehne+Nagel acquires Asia’s leading air freight forwarder, Apex, to offer customers a compelling proposition in the highly competitive Asian logistics industry, especially in e-commerce fulfillment, high-tech and e-mobility.

Intense price competition in the express delivery industry

Although the express delivery market has grown at an annual rate of 30% since the outbreak, fierce price competition has led to shrinking profits for most companies. The average cost to send a package is now $1.40, well below the average US delivery cost of $9.

Profit margins for many couriers have shrunk to less than 5% . China’s express delivery industry is becoming more integrated, with top players taking more and more market share. For example, ZTO Express has successfully maintained its market leadership by offering the lowest package. As a result, we will see continued consolidation, with smaller logistics players being acquired by larger groups, such as domestic logistics players, international players or e-commerce players looking to control their supply chain.

Air cargo demand is on the rise due to the supply chain logic of mass customization that supports minimization of inventory

The new UPU tariffs will lead to increases in many bilateral postal rates in China, thereby accelerating the transition from a postal to a direct model. E-commerce giants such as Wish, Lazada, Shoppe and Shein have promoted the direct model in China. Many Chinese companies, including JD Logistics, Caiyan, SF Express, YTO Express, are actively developing their cargo fleets. This suggests that as the market size of postal and express delivery models shrinks, direct mail models are gradually replacing them .

From 2016 to 2020, the demand for direct delivery increased by 84%.

As the direct flight model becomes more common in e-commerce, Domatters expects it to drive growth in air cargo demand in China. According to the report, it will account for 33% of the total outbound air cargo by 2025. In addition, air cargo is also expected to increase from 1.3 million tons in 2020 to nearly 2 million tons by mid-century. To deal with the staggering increase in direct flights, an additional 15 freighters may need to be dispatched from China each week.

Invest in warehouse automation and omnichannel digitalization

China is one of the countries with the highest degree of logistics automation, especially in the field of e-commerce. The normalization of online shopping, new consumption trends and the expectation of no reason to return or exchange goods are triggering new logistics challenges, such as whether omni-channels are effectively coordinated, whether orders can be sent in an intelligent and optimized way, providing more granular real-time cross-variety The channel’s inventory level tracking, as well as its reverse logistics capabilities.

More and more retailers are pursuing a straight-line distribution model for international distribution, and warehouse operations need to be updated in real time. Digitization of the end-to-end delivery chain can also help improve the financial reality of rising labor costs in China. Investing in warehouse automation and other digital technologies can help them optimize the use of space and reduce unnecessary rental costs. For example, Caishan and JD Logistics have invested heavily in warehouse automation.

JD Logistics has a three-dimensional automation system with a processing capacity of 1.6 million orders per day, which can organize more than 20 million medium-sized goods at the same time.

Domatters China Marketing Agency has some suggestions for China’s logistics market:

Understanding trends in China’s logistics market sector can help global investors, logistics providers and shippers make more informed decisions about where to invest, which Chinese market sub-sectors to enter, or how to plan their supply chain.

shipper. The risk of recurring COVID-19 outbreaks continues to threaten the supply of logistics services for air cargo, ocean and land deliveries. For shippers, diversification of suppliers and export ports is a prudent solution. Some large shippers may consider expanding their ownership of logistics assets. Domatters expects major e-commerce companies to buy air capacity and commit to long-term dedicated agreements.

logistics provider. Annual financial growth coexists with significant operational challenges. With supply chains constrained, logistics providers should double down on their investments in areas such as digitalization and automation to differentiate themselves by being flexible to meet customer needs. Smaller logistics players run the risk of being squeezed out. They may have to be extra entrepreneurial to seek the financial support (or the right partnership) they need to equip themselves with critical digital capabilities. Otherwise, their business needs to be ready to sell for the best valuation.

investor. 2022 offers a wide range of sale and investment opportunities. For those who have bought logistics assets before, 2022 could be a good year to sell at a lucrative rate, as many international and domestic logistics companies look for market consolidation opportunities. It is also a good investment opportunity. As mentioned earlier, smaller logistics players in the express market may seek financial support to digitize their business.

The pandemic has brought the Chinese logistics market into an interesting phase of development. While the five trends outlined here are occurring within China, their implications are far-reaching and global. Whether it’s doubling down on omnichannel and warehouse innovation or reassessing their supply chain for drop-shipping, stakeholders familiar with these trends should be informed in their decisions in 2022.