Why is buying online from China so cheap?
There are a couple of questions that pop-up into everyone’s mind at least once in their life.
What is the meaning of life?
How were the pyramids built?
How is it possibly that these headphones from China cost 5€, with shipping included?!
Ok, maybe the last question hasn’t popped in yet, but you get what we’re saying.
How, and why, are online purchases from China usually so inexpensive when compared to European, or even national, purchases? That’s what we’re about to explain right now.
The two main factors behind China’s cheap online prices.
First of all, there are two very important factors to consider when it comes to selling products: production and distribution.
On this article, we will focus on the distribution aspect. But if you wish to better understand the main reasons behind the prices on the production side, we recommend “The Economics of the ‘China Price’”, a study by Peter Navarro. In this essay, the author explains brilliantly the eight main drivers of China’s production prices and the complexity of each issue.
Now onto the distribution side of things.
In October of 2018, President Trump announced that the United States would withdraw from the Universal Postal Union (UPU), the UN agency that ensures the cooperation between postal sector players and that coordinates postal policy around the globe. Basically, it’s the organization that allows consumers and companies to ship an item from Portugal to Russia, or from anywhere to anywhere else in the world.
But why are we bringing this up exactly? Because of the reason behind this decision.
According to the US government, the national postal service delivers Chinese goods at a 40% to 70% discount. Usually, it costs 20 dollars to mail a 4.4 pound package from one state to another, whilst the same package from China only costs about 5 dollars (17.73€ vs 4.43€ for a 2kg order). And this is because shipping rates, also known in this context as ‘international terminal dues’, are established by the UPU.
The Universal Postal Union determines shipping rates around the globe, and for that, it classifies its member countries into two groups: target or transition countries. Target countries pay the highest fees, like the USA, whilst transition countries, like Gabon, Fiji and China, pay lower rates. And here lies the ‘issue’.
The only way that it’s possible to have lower shipping rates for some countries, it’s due to the fact that these costs are subsidized by the country that receives said orders.
So, for China to be classified in this group – for its shipments to be subsidized by the USA – whilst they are the second-largest world economy, well… It can be seen as giving them an unfair advantage in global trade.
And before you ask if the USA is the only one country going through this situation, we suggest you keep reading because, spoiler alert: it’s not.
So what about the European Union?
Well, the same happens here.
According to the Financial Times, Retailers in the UK are also struggling with this situation, for example. They state it can be cheaper to send an item from Shenzhen to London, than from Sheffield, a town up-north of England.
And since other European countries are also listed as target countries by the UPU, like Germany for instance, we believe it’s safe to assume that most state-members are going through the same situation.
Why does this happen?
The UPU guidelines affirms that each country should be compensated by the sending country for the delivery of inbound packets, at a rate of 70% of domestic postage.
However, in the same Financial Times article, Jim Campbell, a US consultant and lawyer, says: “The reality is that industrialised countries are charging substantially less than 70% of domestic postage [price] for the delivery of inbound small packets”, because they want to keep their competitiveness and protect their position in the eCommerce delivery market.
What can be done about this situation?
We have some good news here: the system is being restructured.
In 2016, the UPU agreed to new terminal dues that will increase the costs of small packages from China and other middle-income countries, with the goal of applying these terms to all nations by 2021.
So, by that time, according to Royal Mail “China will pay similar rates to major European posts”.
But that’s not all. If the USA are successful in its negotiations with the Universal Postal Union, it might not leave the organization at all. It might just renegotiate the terms that it has with the UPU. And if the States have enough backing up from other members, these terms can even change for other countries as well.
Which can be very good news for eCommerces in the US and in Europe, because it means that the shipping playing field for national and Chinese online stores is being levelled out.
Conclusion: So, what will change?
This change in the UPU treaty seems to imply that the ‘cheap’ products that people ordered from China will get significantly more expensive.
Well, the thing is big Chinese players are not just standing by and watching. They are preparing for this change.
For example, according to Ecommerce News, JD.com will launch its eCommerce platform and delivery services in France this year by investing one billion euros over the course of two years. And according to the same article, the UK and Germany are next.
Meanwhile Alibaba is currently looking to improve and expand its own logistics in Europe. As of the end of last year, it stroke a deal with the Belgian government to create a trade hub in their country and it bought a warehouse in Liege, a Belgian city. Besides Belgium, the Chinese giant is also looking to open a logistical center in Germany and, according to Retail Detail, there are also rumours of Alibaba building a warehouse in Czech Republic and of other plans in Bulgaria.
Thus, by investing in infrastructure in Europe, these Chinese companies are adopting a similar logistical model to Amazon’s, where they are creating their own operational hubs, to be strategically placed near their clients. Simultaneously, by doing this, they are cutting as many steps in the value chain as they can – specifically, shipping related steps. Which means that they are losing their ‘dependence’ on UPU’s rules.
So yes, although the current advantage concerning shipping rates is going to disappear, things probably won’t stop coming in cheaply. It just means that instead of coming from China itself, it will come cheaply from some warehouse in a European country.