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China Last Mile Differences

The 5 things that make China’s Last Mile Delivery so unique

We’ve all heard of the explosive growth in e-commerce in China, and this year it continues, growing at 28% to reach $2 trillion in sales.  What is less known is how the parcel companies have coped with this growth and how different their solutions are to the West.

The two largest e-commerce companies in China are Alibaba and JD.com,  with 55% and 17% market share respectively. They both consider the last mile to be critical, and have invested heavily in the logistics sector.  Alibaba is a majority investor in STO, and a significant investor in YTO, ZTO and Best Express.  These are four of the largest courier companies in China, all operating similar services of same day and next day service.Alibaba represents over 70% of their volume.  JD.com has taken a different approach, and developed their own in-house logistics company, JD.com logistics, which recently raised $2.5 billion from private investors.

To cope with the growth, many of the courier companies have IPO’ed in the last few years in order to raise expansion capital.  The best known of these is SF Express, considered the premier courier company in China.  Others that have IPO’ed are ZTO, STO, YTO, Yunda and Best Express.

Differences

  1. Growth is explosive

China accounts for 59% of all parcels globally and their share is growing. In 2018, total parcel volume reached 51 billion, and this represented  more volume than the combined annual volume of UPS, FedEx and DHL. The Chinese volume is more than 3 times the USA volume, but due to the very low prices the value of those parcels is still lower than the US.  It is expected that the price decline in China will reverse, while the prices in the US will grow at a slower rate than in the past,



This growth requires continuous investment in people, infrastructure and technology, and unlike the west where there is a structured approach to capital investment with a sophisticated network planning process, this has not been the case in China.  When growth was at the 50% rate, companies simply had to “Do It”.  The mandate was to provide service, and optimising the network was not possible.  Hence, they now find themselves with a situation with multiple subscale hubs in major cities, that simply “popped up” in order to provide the service.  This is not a model that is necessarily good business practice, but in the face of extraordinary growth, it was what they had to do.

As the growth is now a more manageable 25%, consolidation is under way with more sophisticated automated sorting systems.  SF Express is building the worlds largest express air hub in Ezhou at a cost of $5.9 billion.  It is a greenfield site requiring the building of an airport in addition to the hub.

  1. Prices are decreasing

The average price per parcel in China is $1.82 and has decreased from $4.38 in 2007.  This is a average growth rate of minus 8.4%….and they are profitable at this price!  For comparison the average price in the USA is estimated at $10.50 and has increased at 5.3% every year, for the last 10 years, while inflation was 1.8% during this period.

The competition in China is intense, driving these price declines, while in the US the duopoly of UPS and FedEx offers no incentive for price competition.

In addition, the fact that Alibaba is a significant shareholder in most of the top courier companies, and gives them up to 70% of their volume, provides them huge pricing power and influence.

The price declines in China have slowed down the last couple of years, and will likely start increasing soon.  The competition for courier drivers and the resulting increase in wages can no longer be absorbed by productivity increases, as had been possible in the past.  As the courier companies grew, they introduced technology and optimization processes which increased productivity, hence they were able to reduce prices. They are now working on robotics to deliver the last mile, but this is still a few years away. 



  1. As soon as possible commitment

As an industrial engineer, with years of experience in network planning, one of the first things I asked clients in China, SF Express, DTW and Deppon,was for a copy of their time in transit.  This is what they commit to their customers and plan their network to deliver.  They all said they didn’t have one, and quite frankly it was hard for me to believe that.  I asked the question in various ways, thinking there was a language barrier, but that was not the case.

They simply don’t have a defined time in transit, and the best way to explain their service commitment is “as soon as possible”.  This may sound a bit vague, but they really do mean it.  The competition is so intense, that sooner is always better than later, except when it’s not possible.  Thisis usually related to some network capacity being exceeded, and no additional capacity being available at that moment.

This doesn’t mean they don’t have a network plan.  It just means that the plan is not a fixed commitment, but they endeavour to create real time alternatives to achieve the “as soon as possible” expectation.

  1. Same day service is the norm at the same price as next day

Currently approximately 60% of parcels in China are delivered same day, with JD.com the market leader delivering 80% same day.  How this evolved requires a bit of history.  15 years ago, there were no private parcel companies in China, and China Post was the only game in town.  Once the market opened up, the private companies that were small and local.  As a result, they developed local solutions with small service centres providing local same day service.  As they grew, they started connecting city to city service, but the small service centres stayed as the core of the pickup and delivery operation.  Today all the major courier companies will have between 50-100 service centres in the major cities where drivers are dispatched from.  These facilities are small between 1000 to 3000 sq ft, hence very fast to deploy and requiring minor investment.

Instead of using vans or trucks, electric motor bikes are used by the courier drivers, and they come back to the service centre 4-5 times per day.  Compare this to the classic western approach of having 1-2 large depots on the outskirts of the cities where vans and trucks are dispatched, leaving in the morning and returning in the evening.

These differences developed due to market and traffic conditions. The west operating model evolved over decades into a hub and spoke network that prioritised efficiency and consolidation, and the traffic conditions were manageable. In China, the model evolved at a much faster pace over the last 10-15 years, and congested traffic conditions dictated a different solution. Smaller vehicles, much nimbler in the congested cities, with multiple trips to the service centres scattered around the city. 

Technology plays a key role in making this Chinese urban logistics model function.  The system optimises the parcel flow, the courier delivery route, customer communications, mobile payments and forecasts operational requirements in a dynamic, real time fashion.

  1. Parcel lockers are huge 

China has by far, the world’s largest parcel locker network.  There are over 300,000 parcel locker locations, with 30 million doors, and growing.  In comparison, the next largest network is in Germany at 4,000 locations. Hive Box, the world’s largest parcel locker network operator, has over 150,000 locations.  The total number of locker locations in China is now over 400,000 and growing at 25% per year.

This came about, not surprising, due to the explosive growth.  The last mile delivery was causing huge operational issues, and backing up the entire networks.  SF Express led a consortium of the major courier companies to invest in an open parcel locker network that all carriers can use.  The fee for using the locker is paid by the courier using it, and it is a micro payment of 3 cents USD.  Couriers are paid per delivery; hence they make the economic decision whether to leave the parcel in a locker, or chasing down the customer to deliver the parcel.  

In a city like Shenzhen, similar in size to London, there are over 10,000 locker locations with over 1 million doors. These lockers are shared by all the major courier companies. This greatly increases the productivity of last mile deliveries, and consumers are quite happy to collect their parcels from lockers due to the very high density of locations.  They are located in most apartment buildings and office buildings, and the landlords see this as a value-added benefit to their tenants. 

Current Challenges

Even though growth has slowed down to a mere 25%, at the scale of China, this growth brings ongoing challenges.  An additional 300,000 courier drivers are required and 15,000 new service centres.  The next wave of innovation in China is all about reducing the human component.  Already robotics plays a huge role in the warehouse fulfillment solutions. AVG’s in sort centres, autonomous parcel lockers on wheels, drones, 3D, autonomous vehicles, AI, are all areas that are in early stage of deployment.

Can the West learn from China’s Experience?

The short answer is a definite yes.  The ongoing and increasing e-commerce growth, with increasing customer expectations, driven mainly by Amazon, will require a re-think of how parcels are delivered.  A new urban logistics model, using the template of China of many small service centres, small vehicles and bikes, shared parcel lockers, and technology linking and optimising this network, is in my view, an opportunity waiting to be developed and implemented.  Looking forward to it.

About Juan Sotolongo

Juan has extensive experience in the logistics and parcel sector, having worked globally with UPS where he was Director of Engineering in Europe, and more recently as founder of 722 Consulting.  Over the last few years, he has been advising clients in Asia, where the e-commerce growth has created very challenging operational issues, particularly in China.  

The areas of last mile logistics, network planning, route optimisation, hub sortation systems, data analytics and management training are ones he specialises in. His philosophy which he instills to his clients, is “it’s all about planning, and then execution.  Let’s not be firefighters, but fire preventers.” 

He has a degree in Industrial Engineering from the University of Miami, and lives in London where cooking with wine is his hobby.

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