Many Paths Forward: Which Chinese carrier has the right e-commerce strategy?

A single brown box is plopped down on the doorstep of family home in a rural town in the southwest Chinese province of Sichuan. The driver, who owns a two-van operation distributing packages to area residents, is now on his way to deliver his next package in the adjacent village. It’s a five-and-a-half-hour drive to Chengdu, the closest major city in the region. Twenty-four hours earlier, the resident had placed an order for a week’s worth of groceries from Fruit Day, a popular online grocery platform backed by e-commerce giant JD.com. Eight hours after the resident clicked “complete check-out,” a box containing New England lobster and Peruvian blueberries was sitting on the stoop.

Prior to the delivery, the perishables had been expedited through an intricate network of cool-chain storage facilities and refrigerated trucks owned by JD Logistics, but before it was ever handed over to JD to assemble, the cargo would touch the metal of one of the country’s “Big Three” carriers, Air China Cargo, China Eastern Airlines or China Southern Airlines.

“Air cargo is costly, but has its benefits,” said Lori Chao, director of international communications at JD Logistics, “especially for some product categories. As a retailer shipping such a wide variety of products to such a large population, we will always have diverse transportation needs.”

Indeed, the Big Three carriers have done well in capitalizing on those needs. China Eastern and Air China Cargo both frequently work with JD, fulfilling the company’s need for capacity. China Eastern dominates Shanghai and the surrounding region for transporting perishables, while Air China Cargo operates mainly within the “JingJin-Ji” economic zone that encompasses the metro areas surrounding Beijing, Tianjin, and Hebei, in northern China. China Southern, on the other hand, has focused on fulfilling a need for capacity from local forwarders as a major source of business, as opposed to partnering directly with any of the e-commerce platforms.

Shippers of all types, including freight forwarders and express companies, rely on airfreight capacity from the Big Three – either on inbound widebody freighters, or in the bellies of the carriers’ passenger fleets. Unlike the comparable U.S. counterpart, Amazon.com, JD doesn’t have any plans to assemble a fleet of its own, it told Air Cargo World.

Brian Bourke, the vice president of marketing at SEKO Logistics, which frequently does business with China’s Big Three cargo carriers, acknowledged the Big Three’s market dominance, saying that if you want to ensure your client’s orders are delivered quickly – the key word being “quickly” – working with the Big Three is an absolute necessity.

“If you don’t make those two days, your brand and reputation suffers,” he said, echoing Alibaba CEO Jack Ma’s “72-hour goal,” which was minted back in April of 2017. Ray Lo, Air China Cargo’s vice president of service and operations, was more succinct: “The new services standard requirement is 24 hours domestically and 72 hours internationally.”

The expectation from consumers to receive shipments in less than three days – and preferably just one – is a standard that has forced shippers and forwarders into sending cargo by air whenever possible to ensure speedy delivery.

But which carrier should shippers use? If each of the Big Three carriers offered the same flights at the same times, would there be a clear choice regarding which carrier to ship with? What about the growing influence of the express carriers, such as YTO Airlines or SF Airlines?

Air Cargo World sought to answer this question by uncovering any distinctive features that a forwarder might consider when working with this growing array of options.

Geography rules

While each of the carriers has carved out somewhat discernable business models, at present, geography is the most important factor for decision makers. Apart from the standard flights the carriers each serve from hub to hub in China, their individual extended flight networks have evolved into respective zones that stretch into the more rural regions. To boil it down, it’s about location and flight frequency, as far as forwarders are concerned.

“Carrier selection is primarily a function of geography,” said Alex Zhang, general manager, commercial, for YTO Cargo Airlines. “In the Yangtze River Delta, for example, China Eastern Airlines has more capacity, and so our business with the carrier is greater than, say, Air China Cargo or China Southern Cargo.”

There’s a similar story in the Jing-Jin-Ji tri-provincial region, which surrounds Air China’s base of operations in Beijing, as well as Tianjin and Hebei. Guangzhou-based China Southern, meanwhile, has a stronghold in the Pearl River Delta of southern China.

“So far, there is no preference in terms of carrier selection, apart from the flights and capacity offered by carrier,” Zhang concluded, but the perceived lack of differentiation in service is likely to change as competition among the carriers intensifies.

 

A new hub redraws the lines

While all of the Big Three carriers have benefited from the increase in demand for e-commerce transportation, a variety of impending challenges will push them to re-strategize. One major factor that will reshape domestic cargo market dynamics in China is the opening of a second airport to serve the Beijing region.

Once operational in 2019, Beijing Daxing Airport will effectively remove Air China’s dominant foothold in the region – as both China Eastern Airlines and China Southern Airlines are expected to base hundreds of flights at the new airport. (China Eastern executives did not respond to several attempts by Air Cargo World to contact them.)

Fengsheng Zhao, senior vice president of China Southern Cargo, affirmed this prediction, saying that China Southern plans to make Daxing Airport its new hub, “with an objective to become the leading airline, having substantial market share at the new airport.”

In terms of capacity, Zhao said cargo handling facilities currently under construction will boast domestic annual handling capacity of 400,000 tonnes and an international annual handling capacity of 200,000 tonnes at Daxing by 2019.

Beyond the impending turf wars between the Big Three carriers, Zhao expects another dimension of competition to emerge from China’s homegrown express carriers, like YTO Airlines and SF Airlines, which are slowly starting to expand the reaches of their own freighter operations.

E-commerce blazes fresh trails

In the face of the impending changes to the micro-climate of trade in China, the emerging theme of e-commerce is being taken into account by members throughout the supply chain – the Big Three carriers included.

Ray Lo says that the transport of perishables via e-commerce will play a major role in the Air China Cargo’s future plans, as the carrier faces a disruption of its dominance of China’s northernmost hub. “Perishable foodstuff is a top product category,” he said. “Therefore, we have to develop our handling capability to process e-commerce cargo as cool chain product.”

China Southern is also looking at a change in dynamics, as express clients will become less dependent on them for international transit as they acquire their own larger aircraft. The carrier has a dedicated department for e-commerce within its cargo division and a partnership with JD.com, and plans to continue to focus on its services between New Zealand, Australia and Asia. Sophie Wang, a spokesperson from the carrier’s cargo division, adding, “The rapid growth of cross-border e-commerce has brought a lot of demand from cross-border airfreight. China Southern Cargo is aware of the potential of it.”

China Eastern Airlines’ plan of action remains unknown for the time being, but it’s likely that it will continue increasing its efforts in e-commerce in its own partnership with JD.com, which was formed in June of last year.

The previously described disruptions likely come as welcome news to forwarders that work with the Big Three, as the increased competition will enable them to be choosier about which carriers they do business with, but for the carriers themselves, the changes mean they have a lot to consider.

In the face of these imminent changes, it’s safe to say that the millions of enthusiastic e-commerce customers dispersed throughout rural China lend a literal significance to the term “new frontier,” as far as the future of commerce is concerned.

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