The opportunity is there however I sincerely believe that the air cargo market has to transform and has to innovate accordingly, ” said Syed Ali Ridha Madihid, regional director (operations & supply chain), ZALORA Southeast Asia. Zalora which started in late 2011 as part of Rocket Internet’s venture into Southeast Asia is primarily a B2B2C company with a small B2C component, involved in the online fashion and apparel space.
In particular, the industry needs to move while e-commerce is still in its infancy, particularly in Southeast Asia where Internet penetration is only at eight per cent and e-commerce penetration is only a mere three per cent. “Th e potential for service providers like airlines, airport operators, ground handlers and freight forwarders to collaborate is massive, however you need to adapt fast, ” Madihid said, adding that one year for the air cargo sector is equivalent to one month in the fast moving e-commerce realm.
“We are shifting things much faster than you, so if you don’t innovate fast enough we will basically do things on our own – we will become the service provider, we will become the last mile provider and eventually we may even buy airports. So what I’m trying to say is that the opportunity is there for the industry, but it needs to understand and adapt as fast possible. ”
But understanding it may be easier said than done. From the perspective of an integrator, Ingrid Sidiadinoto, managing director, United Parcel Service (UPS) Singapore noted that even for UPS the e-commerce world is moving very fast.
In the past we’ve always been very B2B focused – our customers were mostly B2B and in the past several years we’ve realised that we really need to do something to understand the B2C market because it’s moving whether we like it or not and if we don’t get on the train, we will be left behind. ”
Customer centric
A key theme of e-commerce is that customers are firmly at the centre of the equation, with the added regional spin that customers in Asia are much more demanding than in the West, noted Sundi Aiyer, a supply chain & operations management consultant with the Aiyer Group which is active in the e-commerce sector.
Th is need to better understand the evolving e-commerce marketplace prompted UPS in 2012, to begin undertaking an annual e-commerce survey titled, ‘UPS Pulse of the Online Shopper, ’ aiming to gain a better understanding of what customers were seeking in order to come up with more optimal logistics solutions for shippers active in this space.
Among the findings was that a customer will dump their virtual shopping cart even if they selected half-a-dozen items, if there’s no clear information about the returns service that the provider is able to give them.
Rajiv Shah, CEO of IT solutions provider, IBS Group highlighted the fact that consumers have far more information at their disposal than the e-commerce sector typically realises and it’s important to bear this in mind. “We have to accept that consumers have more information than we do most of the time. We get engrossed in our businesses, but the consumer has a lot of information from various sources. ”
“Th ey tell you instead of this particular warehouse, can you store it here which gives me my shipment faster, or can you send this particular delivery person that you sent last time. Th ey have this whole analytical mind where they have captured the data and they have knowledge of which company is better to work with etc., ” said Shah.
Th ey have all this information from various sources, he notes, saying it is important to realise that “we have to be as knowledgeable about what the customer wants as possible and I think we have to accept the fact that they have more information, that they have access to more data and how we utilise that knowledge and information for us to really deliver the goods, is crucial. ”
Th is fact was underscored in the UPS survey which showed what customers really want is information. Th ey want to know where their packages are at all times, so there has to be a high level of integration between provider and the customer themselves. And Sidiadinoto adds they want to be able to choose whether they can get it the next day, or if they don’t need it for a few days they’ll go that route if its cheaper. And many are also willing to wait longer if it includes free shipping.
Th ey also want to be able to have a place they can go to and exchange goods they don’t like them. Th is she adds sometimes results in additional buys when they are returning the items, provided there is the ability for them to make further purchases.
In agreement, Madihid notes that previously consumers wanted speed, but now it has moved more from speed to what he refers to as knowledgebase. “If you say you’re going to deliver a package in three days, you need to deliver on that promise because the customer will track it all the way. ”
An important facet of this business is the virtual relationship with customers, says Madihid. “Basically the relationship with a customer, even though there’s no physical presence, is almost a spiritual relationship and it’s a long term relationship built on trust, ” he says.
Challenges
It is clearly sector fraught with challenges, particularly in a market like Asia which lacks the uniformity of North America or even Europe. “We talk about e-commerce as if it’s a homogenous concept and I know we all know this, but it challenges us to think about some of the nitty-gritty issues on the ground, ” added Aiyer.
He went on to highlight that credit card penetration in online transactions in the region is even lower than e-commerce penetration, both as a result of much smaller credit card usage and also mistrust of using credit cards online.
Because of this many payments are made upon delivery and multiple payment preferences such as cash, debit cards, mobile phone payments, etc., all complicate the process. Aiyer also notes the dangers delivery drivers face when making deliveries of, for example iPhones in the Philippines which could result in final mile delivery drivers carrying millions of peso, making them a target for robbery. Theft is another potential headache in the less developed markets of the region, particularly for high value goods like smart phones.
Aiyer adds however that the payment aspect is one area where e-commerce providers can potentially leapfrog some of the issues, much in the way that cell phones leapfrogged the problem of lack of land-line infrastructure in parts of Asia.
Th ere is also the problem with returns because of the associated costs involved and in many instances the customer is off ered this service for free. “How do you factor in from a logistics perspective, not just a free delivery cost, but also the returns that are killing your margins? And how do you doing in a cost-effective manner well still meeting the customer expectations?, asks Aiyer.
These are of course key areas of concern for traditional players looking to get further into the e-commerce business, other than being a handler of bulk cargo or provider of capacity to the integrators and postal companies.
“Th is is one area that we are very concerned about, ” said Vivien Lau, speaking from the ground handling and logistics perspective as executive director of Hactl & managing director of Hacis in Hong Kong. “If someone asks for product to ship by air freight, by its nature it should be demanding a relatively higher price on flying by air. When e-commerce first emerged we were still talking about a fairly decent shipping rate that people were willing to pay. But now people are asking for the free shipping, but nothing is free in this world so somehow this cost as being absorbed. Th is is the question as a logistics player we keep asking, is it being integrated on the part of the retailer and where is the dollar being made? ”
While there are many challenges on the customer fulfillment side, there are also many on the supplier side as well, notes Aiyer, citing the example of moving Xiaomi phones from Shenzhen to Hong Kong to Manila and then to domestic distribution in Philippines. “Th ere are so many issues around customs clearance that we face and around theft – these are very real things around the world, but certainly in this part of the world. ”
In full agreement Madihid added: “Th e culture of Customs organsiations is a problem in Asia, it’s something very difficult to workout, that’s the reality of it.
Th is is particularly a problem in countries where corruption runs rampant, such as the Philippines, Indonesia, Thailand and Vietnam, amongst others.
Unfortunately, most consumers are blithely unware of these problems. When they purchase something – whether it ships out of a local distribution centre or internationally – they don’t care about what happens in between.
And he is not confident that the coming ASEAN Economic Community (AEC) will help in the short, to medium term despite a key focus being on cross border trade liberalisation. “Th e AEC looks good on paper, but the reality I assure you, in the next 3-5 years, or even 10 years, is going to be very tough to fully implement down to the ground because cross-border customs is still very complicated, ” he says.
Sidiadinoto pointed to the recent signing of the Trans-Pacific Partnership (TPP) which is aimed at liberalising trade amongst 12 signatories on either side of the Pacific. Although it will take up to two years to be ratified by national governments, “I think that once a pact like this starts working it becomes an example for the AEC, for countries in the region to move towards that space, ” she said.
E-commerce providers’ needs
Noting there is a huge misconception that e-commerce buyers only use integrators or postal services, with ALI saying Zalora uses the integrators’ forwarding arm for much of its B2B2C business in the region.
But the problem for Madihid, is that while the integrators provide the services they need, they come at a high cost. “So the integrator has it, but they’re too pricey. Postal offers competitive pricing but they’re too slow, ” he says. For traditional air cargo service providers, the e-commerce opportunity offers up an infl ection point: “You need to innovate, you need to come up with a new product that is basically not too expensive, but not too long also in terms of turnaround time and can also handle the final mile. ”
For Sidiadinoto the nascent e-commerce pie is big enough to provide an opportunity for traditional air cargo service providers. In part, this is because there are so many different product types, customers and markets that all have diff erent levels of service requirements. And because there are different needs there is opportunity for other players, she said.
“There is such a big opportunity because products are different – a Xiaomi or iPhone that has a higher value, people might be willing to put more money into shipping for the security of the product, more so then something that is lower in value.
“In that sense I think we have to look at the fact that there are options that we all have to be able to innovate to, depending on the product, depending on the customer because different customers require different value add propositions that will support them. ”
Madihid adds that one trend Zalora is seeing is for the various service providers to collaborate. “They bring freight into the country, do the custom brokerage and then they hand over to a last mile service provider such as Ninja Van in Singapore, GO-JEK in Indonesia, or Grab Bike in Philippines.
“So as an industry you need to come up with your product which is integrated – the opportunity is there, but you need to understand e-commerce and come up with your product, ” he said, adding that pricing was key.
“Th e per kilo rate for e-commerce doesn’t work. We want you to charge us per package because at of the end of the day the weight of our packages is almost always the same, ” he said. With a full 57 per cent of e-commerce transactions involving fashion and apparel, according to Madihid, this puts pressure on shipping costs, he says. And while buyers of e-commerce luxury products seldom quibble with the costs associated with same day delivery using the integrators, apparel platforms selling $20 shirts cannot afford next day delivery, he says.
“At $14 per kilo with a 0.5 kg shipment it doesn’t make sense at all, so that’s why we go back to traditional service providers and we do consolidated shipments, bulk shipments to our distribution centres where we break bulk and use the final mile service providers.
Zalora moves about 50 tonnes of air freight a week, largely through UPS’ forwarding arm and has regional distribution centres in Singapore and Malaysia and five national distribution centres located in emerging markets like Indonesia, the Phillippines, Thailand and Vietnam.
“But at the end of the day for us is very frustrating because we’re not dealing with one or two service providers we’re doing with three or four service providers, so that is why I say the opportunity there is for you but you need to collaborate, ” Madihid said.
An e-commerce product
One of the problems for traditional logistics players notes Lau is due to the fact many logistics players are used to serving the traditional B2B market, not the e-commerce B2B and certainly not the B2C portion. Where the e-commerce platforms, integrators and postal companies have direct contact with consumers this, says Lau, gives them the “advantage of being innovative – you are free to be innovative – but for us we’ve been in the logistics industry for a long time and our business model has been molded a certain way, ” focused on the traditional general cargo market where is shipping in bulk and typically high-value.
“But I fully agree innovation what we need to breakthrough all our old practices and that’s why you can see at Hactl we are trying to break free from some of those old practices, ” she added. At the end the end of the day it’s how all the traditional players can integrate better, she says. Th e airlines, freight forwarders, ground handlers and trucking companies need to get closer together because the customers just want want the product, “what happens in the middle don’t really care, but in the middle actually a lot of things happen”.
Some of these traditional players are making a move into the e-commerce logistics space she notes, for example freight forwarders may try to do more by bypassing some of the parties, or on the other hand it could be the airlines talking with other parties like trucking companies or local ground handlers to provide some integrated solution, again by bypassing one or two parties.
“But I think at the end of the day if we are working in this logistics industry we don’t want to be sacrificed along the supply chain and so I think the key is how we can collaborate. What we are talking about it is a common platform so that we can just simplify it so that everyone is achieving efficiency without sacrificing the other’s benefits. It brings up the key point of collaboration – we are looking for a win-win solution and not survival of the fittest. ”
Lau foresees, something in between general cargo and express – “a new product, or a new model will emerge that can fulfill this B2B or B2B2C e-commerce requirement and that product with be at a price between the express cargo, where consumers are willing to pay a high price, but that will also be higher than the traditional general cargo market, because they’re requiring a higher service standard. I think this is the area that most of us are now looking at, how we can create this new product – not express and not general cargo, but an e-commerce product. ”