If you’ve been following this blog, you know that the Chinese are coming to eat your dinner. Chinese Suppliers are increasingly selling on Amazon and other channels like eBay and their own websites. Amazon has been actively recruiting Chinese suppliers to use the FBA platform to ship and fulfill their orders from within the United States (a bare minimum requirement for most Prime customers).
But here’s a hard reality – Chinese vendors don’t even need to use FBA or other 3pls (third party logistics) within the United States to compete with you. They can ship directly from China to consumers in the United States and they’ll pay less for shipping than you will in many cases. Later in the article, I’ll show you exactly how much Suppliers in China pay to ship packages to the United States.
This is all thanks to a little agreement USPS and China Post entered into many year ago.
The Background – USPS Makes a Deal with USPS
In 2010-2011, USPS entered into an agreement with Hong Kong Post and China Post that came into effect in 2011 to offer a shipping option called “ePacket”. What an ePacket basically boils down to is that merchants in Hong Kong and mainland China could now ship packages up to 4.4 lbs, with tracking and 7-10 business day delivery times. But here’s the kicker – shipping a package from China to the U.S. is about $1 cheaper than from within the United States. That’s not a typo. It’s $1 cheaper to ship from China to the USA than from the USA to the USA.
USPS reports its loses, on average, to be $1.10 for each package it delivers from China. In fact, in 2014 USPS reported that they lost over $75 million delivering foreign mail. U.S. congress held meetings regarding the subject in 2015.
So why would USPS make such a stupid agreement? Well, it’s not necessarily USPS’ fault. USPS is bound by an agreement with the Universal Postal Union (ever heard of it? Me neither). The Universal Postal Union (UPU) is one of the oldest international organizations in the world dating back to the 19th century. Its original goal was to allow people and businesses to mail letters for a flat rate anywhere in the world and it also helps subsidize poorer countries’ mail delivery. Seems well intentioned right? Well, then ecommerce happened.
The UPU has fallen behind on times and hasn’t adjusted for the sudden surge in ecommerce or China’s new found wealth and unfortunately nothing is changing for at least a couple of years (see below for what may change in the future and what you can do in the mean time).
The agreement USPS made with China for ePacket wasn’t that stupid. USPS actually loses less money with ePacket than if Chinese Suppliers shipped with regular mail and the rates set by the UPU. However, ePacket provides exceptional tracking and delivery times – two critical demands of ecommerce consumers. Without ePacket, the total volume of packages coming from Chinese Suppliers would almost certainly be lower.
A Double Whammy – De Minimis Raised in 2016 to $800
But, wait. There’s more!
Not only do Chinese Suppliers get the benefit of shipping for cheaper than you can, they also get to ship their products to consumers duty free.
In 2016, the U.S. raised the de minimis value up to $800. This means any package shipped under $800 to the United States gets to enter duty free. So while other Chinese Suppliers can ship to other countries like Canada with reduced shipping rates the same way they would to the U.S., the de minimis value in Canada is closer to $100 meaning consumers get hit with annoying duties and taxes upon delivery for anything over this amount.
China Post ePacket vs USPS Rates
So here’s what most of you care about: what does it cost to ship an item from China compared to from within the U.S.? Below are the approximate rates (for USPS I calculated shipping an item from Washington State to Florida).
You can see from the above anything under 4 ounces is actually cheaper to ship from China. From 4 ounces to 8 ounces the rates are pretty comparable. Once you start hitting about 2 lbs, the prices from shipping within the U.S. start to get comparatively cheaper and cheaper than shipping from within China.
What Can You Do?
Depending on the type of products you sell, ePacket may or may not totally screw your business as there are some pretty strict dimensional requirements.
As you can see from the above table, items under one pound are the most susceptible to Chinese competition. Chinese Suppliers can simply ship items directly from China to consumers and pay less than you. Not to mention, they save on all the other transportation costs that domestic individuals/companies incur in getting products from China to the U.S. such as brokerage, duties, etc.
F0r packages over 4.4 lbs, these packages can’t be shipped via ePacket at all.
In 2018, the UPU is set to release new rates for member countries. China will be moved from poor country status to rich country (‘target country’) status then. However, experts believe this will result in 40-50% higher rates from China at the very most. So holding out for Donald Trump or USPS to save you probably isn’t a great strategy.
So here’s some obvious things to do:
- Really avoid undifferentiated items under 1 lb
- Try to avoid undifferentiated items from 1 to 4.4 lbs
- REALLY avoid items under 4.4 lbs that are not fulfilled by Amazon
If you’re selling undifferentiated items (cell phone accessories, small electronics, hair extensions, etc) that weigh under 4.4 lbs, in the long run it will be next to impossible to compete with Chinese Suppliers (at least if you don’t use Amazon FBA). I personally know of a Chinese Supplier in Beijing running a multi-million dollar ecommerce business targeted to Americans with a massive warehouse just outside of Beijing. They employ, as they describe it, ‘an army of peasants’ to do all of their order fulfillment. You can’t compete with this: they pay less in shipping rates and less in staffing and fulfillment costs.
There is one equalizer though: Amazon FBA. Many consumers will pay a heavy premium to have an order fulfilled and shipped via Amazon. This essentially renders any costs savings from ePacket useless. So it goes without saying, use Amazon FBA if you can. Of course, Chinese Suppliers are starting to use FBA as well, but at least you’re on a more even playing field with them.
But Donald Trump Will Get Tough on China, Right?
Donald Trump threatened to get tough on China. He threatened to increase duties and put the country on level playing fields. As I discussed in another blog post, this is virtually impossible unless the U.S. withdraws from the WTO (which ain’t happenin).
The United States and USPS’ hands are more or less tied when it comes to rates set by the UPU, so it’s very unlikely Donald Trump can save us private labelers. The UPU meets every 4 years to set rates for the next 4 years. They just met in 2016 to set the rates for 2018 to 2021. The rates haven’t been released yet, but as I mentioned previously, the rates are not expected to rise by much more than 50%.
Trump could apply pressure to China and/or USPS in regards to ePacket rates, but again, even without ePacket Chinese Suppliers can still ship to the U.S. for cheap thanks to the UPU.
Moreover, while ePacket sucks for private labelers, it’s arguably good for consumers. They get cheaper products. One might argue it hurts manufacturers (which would certainly grab Trump’s attention) but that correlation isn’t so clear. Long story short, things probably aren’t changing for a while.
ePacket is making it very difficult for private labelers to sell undifferentiated products under 4.4 lbs. This wasn’t such a problem in years past when Chinese Suppliers for the most part were not comfortable with selling on American marketplaces. Now as platforms like Amazon make it easier and easier to sell on, even for foreign sellers, it is becoming a much bigger problem.
In the long run, it is likely good strategy to avoid smaller items that conveniently fit into the ePacket requirements. This supports the growing trend by many ecommerce sellers to target larger, bulkier items, where there appears to still be some ‘meat left on the ecommerce bones’. Amazon FBA helps to even the playing field, but Chinese Suppliers still get some advantages.
What are your thoughts on Chinese Suppliers shipping from China directly to consumers? Have you seen C2C (China to Consumer) sales impact your business? If so, share your thoughts in the comments section below.