Return to Sender: Is Europe’s cross-border e-commerce boom about to fizzle?

The engines of an ASL Airlines Belgium 747 freighter are cooling down on the tarmac at Liege Airport (LGG), where the aircraft is resting after an 11-hour flight from Ürümqi Diwopu Airport (URC) in China’s far-western Xinjiang province. A crew of neon-vested ground handlers quickly whisk a mix of pallets and containers off the massive aircraft. Much of the cargo is comprised of tightly packed bags of miscellaneous, individually packaged products – telltale signs that most of the cargo is e-commerce-related.

Once the aircraft is unloaded, and the contents clear customs, transitory e-commerce consignments are sequestered to a nearby facility, where workers standby to process the parcels. Within a matter of hours, preaddressed packages have been manually sorted and are ready to be handed off to the next leg of the journey – whether it be final-mile delivery, or intra-Europe post.

Across many European countries, air-to-final-mile has been a winning combination for e-commerce. This had long been the case in Sweden where, like in many European Union (E.U.) countries, e-commerce continues to grow at double-digit rates. PostNord handles the final-mile for most inbound flows to the country by connecting air imports to the post’s last-mile delivery network. During peak periods in 2017, such as lead up to Christmas, the postal operator processed more than 160,000 parcels per day, according to Expressen.

As Sweden witnessed in Spring 2018, however, incessant cross-border growth e-commerce growth is not unstoppable. In March 2018, import airmail processing volumes suddenly slowed to a trickle at the post’s Stockholm facility, and by mid-April PostNord had amassed more than 400,000 refused packages, most of which needed to be returned to China.

The cause of the hiccup? A bold political move, it turns out. On March 1, 2018, Sweden began assessing a value-added-tax (VAT) on all postal items arriving from non-E.U. countries. Customers caught off-guard by the measure, which was announced just weeks prior, suddenly found themselves owing VAT and postal service fees – in some cases equating to more than the value of the parcels’ contents. The Swedish experience should be heeded as a warning of what could happen elsewhere, particularly as new legislation from the E.U. Commission now threatens to burst the E.U. cross-border e-commerce bubble.

Leveling the playing field

A China-based e-tailer told Air Cargo World that the revision to Sweden’s VAT policy reduced the platform’s sales to the Scandinavian country, particularly for low-value goods. For costlier exports, the e-tailer which declined to be named, typically declares goods from China in a second E.U. country before transferring them into Sweden “tax free.”

Currently, when merchants outside of the E.U. import packages to member countries that are valued at less than €22, the shipment is exempt from VAT while parcels valued at less than €150 are free from duty. Austrian retail association Handelsverband estimates that some 97% of the 560 million parcels shipped from China to the E.U each year are delivered without any VAT or duty being collected. Although many of the items are low-value goods truly valued at below the €22 threshold, a number of parcels are misclassified – which has many European tax authorities worried they are missing out on millions in VAT revenue.

This loophole could soon close following a directive published last spring by the E.U. Commission which will abolish the €22 exemption in January 2021. Austria, following Sweden’s lead, will implement the policy a full-year earlier in 2020. Once regulations are harmonized, it will no longer be possible for shippers to avoid paying on e-commerce imports into the E.U. “Online companies will have to collect VAT even if the transactions take place through warehouses based in the EU,” said Andy Hsu president Greater China, Dimerco Express Group. In an instant, this will mean customs authorities will find themselves having to assess VAT on millions more items.

Implementing the new tax, especially by the 2021 target date, will likely be “challenging,” added Hsu. The good news is, where there are obstacles, there are digital innovators with proposed solutions. Handelsverband says that implementation of an E.U.-wide VAT scheme for inbound cross-border shipments will require “a digital customs clearance with pre-dispatch messages according to the Swiss model.” Such a model, “can be implemented even if there are few human resources in the customs authorities,” according to the association.

Customs to take the lead

Although shippers have varying levels of familiarity with the tax scheme, at least one consortium of ports and Airports in Belgium are banking on a new digital initiative being developed by the country’s Ministry of Finances, which oversees customs. According to an introduction to the service published by the ministry, BE-Gate aims to simplify data exchange by enabling e-commerce stakeholders, including importers, exporters, transporters and declarants, to share a number of notifications through a single transaction. Data is exchanged in a “customs-approved” data format, and can easily be shared with the ministry of Finance, and other stakeholders.

Cleared goods are released immediately upon arrival, while customs officers are presented with any pre-submitted information for packages requiring additional screening. Steven Verhasselt, commercial director at Liege Airport, is optimistic that early use of BE-Gate will allow shippers to familiarize themselves with the system before the €22 exemption is annexed and all e-commerce imports are subject to VAT.

With an overarching customs framework in place, software-as-a-service (SaaS) companies are also working to help airlines and forwarders configure their IT systems to interface with platforms like BE-Gate.

“The need to capture as much customs data early in the supply chain and to efficiently transmit the required data from seller to broker and customs is not only an opportunity to reduce costs but almost becomes an operational necessity,” said Martin Meacock, director of product management and customs for Descartes’ European region.

The trendy features like order-tracking that SaaS companies provide not only appeal to customers, but can also help forwarders cut down the time it takes to book a shipment with instant-capacity booking options, which is a boon to a time-sensitive e-commerce shipment’s supply chain.

Regarding changes to the VAT exemption, some forwarders are making attempts to get ahead of changes to exemption.

“It gets really difficult [for shippers] to deal with in a lot of ways,” said Rick Keller, CEO of U-Freight America. “There’s a certain valuation of commercial goods that can ship with no duty or tax, but the VAT amounts don’t apply at the same dollar amount or euro amount, and then your VAT percentages can vary.” Rates fluctuate between 17 and 27 percent depending on the country and are known to change. “It’s hard when you have 5,000 people with 5,000 packages,” he said.

U-Freight has done well in pivoting its value proposition to become more accommodating to small- and medium-sized enterprises (SMEs) in 2018. Last year was the busiest to date for the U-Freight Group’s cross-border e-commerce segment, largely due to its new partnerships with companies like online e-commerce platform Easyship, which caters to smaller merchants.

Worth the hassle?

While SMEs are all-in when it comes to penetrating new overseas markets, other links in the air cargo supply chain aren’t convinced cross-border e-commerce is worth the effort. Rogier Spoel, policy manager of air-and oceanfreight at both Evofenedex and the European Shippers Council, said that an industry player’s choice to engage in the e-commerce game is a situation of “picking your battles,” because, for carriers, the cargo’s unpredictable size and weight could make it more trouble than it’s actually worth, in terms of profit.

“Like the iPhone cases coming from China,” he explained, “those are not really the high-yield goods,” when compared to commodities like pharmaceuticals or even machinery parts. “You have to ask yourself… ‘Do I want those streams that do not add a lot of value, or should I focus on specific markets?’”

During a roundtable panel discussion at Cargo Facts Asia, Kersti Krepp, vice president of sales and marketing for the Asia-Pacific region at Polar Air Cargo Worldwide, noted that for an all-cargo carrier, it’s all about balance between speed requirements, weight and volume. “Not all e-commerce demands 2-3 day service,” Krepp said. It’s necessary, “To put the right product on the right network at the right price.”

So, e-commerce may not be as viable an option for freighter operators as airlines, which are accustomed to dealing with homogenous pallets of freight, but rather, is better suited for smaller airlines or combination-carriers which are less concerned about their cargo strategy or whether not they are filling the bellies of their aircraft.

As some carriers debate where the typically low-yield e-commerce product should fit into a portfolio with higher-yield commodities, many actors in the supply chain are taking the plunge and making investments accordingly. Budapest Airport (BUD) is another European airport vying to position itself as an e-commerce hub. BUD’s director for property and cargo, René Droese, said the airport considered the requirements of e-commerce cargo in the design process of its hub renovation. As e-commerce becomes increasingly popular, airports that have made the initial investment will be the hubs attracting the attention of carriers and e-tailers – especially, said Droese.

Still, making room for the e-commerce boom requires more from airports than simply clearing out warehouse space. “You need to install functional and efficient screening technologies, such as high capacity x-rays and other screening methods to fulfill short handling-time expectations,” Droese said, which can start to really drive up a project’s budget.

Michel Fiorani, the chief operations officer at Swissport Cargo Belgium, whose clients include Alibaba-partnered carriers ASL Airlines and Qatar Airways, refers to e-commerce as “the cargo type of the future,” but expressed some of the challenges that the parcels present from a ground-handler’s perspective.

“We have to look at it as a business opportunity,” Fiorani said. However, he added, e-commerce shipments are not employees’ “favorite” to deal with, nor are they the most profitable for logistics companies, compared to traditional freight.

Unlike dense, palletized freight, e-commerce cargo are packed tightly with heavy bags of miscellaneous parcels with their own distinctive destinations that must be broken down at the airport and sent off within a tight time frame in order to meet the end-consumers’ standards for fast shipping.

“It’s a different type of operation, that’s for sure,” Fiorani said. “It’s heavier, it’s more labor-intensive, but that’s what we have to get used to, I’m afraid, for the future.”

Fiorani said that, in coming years, Swissport plans to find ways to better handle e-commerce cargo and increase operational efficiency and productivity. But it seems that, for the time being, optimal operational efficiency is still yet to be achieved in ground handling operations.

Looking ahead to 2021, air cargo will likely be better equipped to handle e-commerce, and even when assessed VAT, e-commerce isn’t going to fade away anytime soon. Overall, “these rules and regulations will help mature the e-commerce market in general,” said Dimerco’s Hsu.

Verhasselt ultimately expects the increased scrutiny over cross-border imports will further drive digitization. While it will mean slightly steeper prices for the consumer, he said, the scheme will ultimately, “Level the playing field for the many e-tailers that [already] play by the book.”

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