A dramatic shift in supply and demand has put many logistics companies in hazardous positions. But up-and-coming market segments and technology could present new opportunities for the industry.

For AmCham Taiwan: https://topics.amcham.com.tw/author/jenskastner/

Taiwan’s logistic sector has been finding itself at a turning point as a pandemic-driven bonanza has come to its end, and the outlook seems to worsen by the day.

From the beginning of 2020 until the first quarter of this year, both ocean and air cargo space were limited by a wide array of factors, ranging from the quarantining of Chinese port truckers to the grounding of thousands of passenger planes that ordinarily also carry cargo. This caused freight rates to increase tremendously, leading all of Taiwan’s three major steamship carriers, Evergreen Marine Corp., Yang Ming Marine Transport Corp., and Wan Hai Lines, to gain unprecedented operating profits in 2021.

But in the second quarter of 2022, the situation reversed. Soaring global inflation, the ongoing Russia-Ukraine war, droughts, and China’s slowdown have reduced global demand for commodities. An imbalance between supply and demand in ocean and air cargo space has caused market rates to trend down monthly. In July, Evergreen, Yang Ming, and Wan Hai all registered significant revenue declines.

“In 2021, our customers had to battle through a global container circulation problem, as booming exports from Asia to North America and Europe were not matched by East-bound shipping,” says Schnell Jeng, executive director of the Taipei Airfreight Forwarders & Logistics Association of Taiwan (TAFLA). Jeng notes that these developments “resulted in whopping ocean shipping rates of over US$10,000 per FEU (Forty-foot Equivalent Unit).”

“Since the second quarter of 2022, electronic exports from Taiwan began to decrease because U.S. buyers have been overstocked,” he adds. “Due to the inventory overstock, a lot of them are taking their time to pick up their containers from the destination terminals, as they effectively are using the terminals as secondary storage.”

Jeng explains that the slump in demand has brought down shipping rates to below US$4,000 per FEU as of last month. With the widespread easing of border restrictions, air freight market rates have trended down as passenger air traffic recovered.

Taiwan’s freight forwarders now face a divergence between fixed rates and market spot rates. The fixed rates, which forwarders agree to pay carriers for certain volumes, were negotiated when prices were much higher. Now, because of the reduced market spot rates, the forwarders are under pressure to cut prices. Failure to honor the volumes initially promised to carriers could result in contractual penalties for forwarders.

As of mid-September, TAFLA’s outlook for Taiwan export volumes is bleak. The organization expects a steady decline in export volume for both air and ocean products from the second half of 2022 through 2023. This projection follows a 10% drop in air export and a 2.1% drop in ocean export containers year-on-year in the January-July period.

But the picture is more varied when looking at different product segments – even within the same logistics company. Tonglit Logistics, which provides automotive added-value logistics in the Port of Taipei’s Free Trade Zone, saw its exports of finished cars, or completed build-up units (CBUs), hardly affected by the global container shortages during the pandemic. These cars are shipped on roll on/roll off vessels, which have not suffered capacity shortages.

Tonglit mainly ships Japanese-branded cars to the Middle East after assembly in Taiwan, and imports finished European and Japanese cars for Taiwan’s domestic market. But it also handles imports and exports of car parts and auto accessories, which are shipped in containers.

“The widespread factory closures in China due to the pandemic and the high container shipping rates affected local manufacturers, as they source many car parts from China,” says Alex Shih, a senior manager of Tonglit. “Also, exports of parts for the U.S. car after-sales market suffered, leading to high inventory in our warehouses, as customers could not find empty containers.”

Shih notes that the number of cars imported through Tonglit decreased by about 30% year-on-year in 2021 due to the persistent chip shortage and global auto manufacturing bottlenecks. But he still projects a bright future for the company thanks to the shift in Taiwan’s domestic market toward electric vehicles (EVs). Tonglit has recently leased around 60 acres of land at Taipei Port for a CO2-neutral logistic park meant to serve only the EV sector.

“We do not know how many Taiwanese companies in the auto supply chain will survive the auto industry’s shift to EV, but we do know that the shift will change the current ratio of imported cars versus locally assembled cars to the benefit of the former,” says Shih.

“We anticipate that by 2030 more than 50% of Taiwan’s cars imports will be EVs, so we are preparing the new logistic park to be ready by then,” he adds. “It will be equipped with solar panels and wind turbines, helping the auto-makers meet their CO2 reduction targets.”

Shih says both Tonglit and carriers will have a major technical task in handling large amounts of EV battery packs, which are classified as dangerous goods. He points out that when a ship fire destroyed thousands of new cars on the Atlantic Ocean in February 2022, the auto logistics world “was very closely watching what role the EV battery packs on board may have played.”

Seizing new opportunities

The bleak market outlook is not a deterrent for some logistics companies, which are expanding their businesses in the region. Contract logistics provider DHL Supply Chain Taiwan has in recent years increased its warehouse space to about 124,000 square meters spanning 15 operation sites, most of which are located close to Taiwan’s five major science parks. All these warehouses are close to Taiwanese semiconductor fabs to meet critical requirements and ensure timely delivery. DHL Supply Chain Taiwan plans to build three more sites with a total warehouse space of up to 175,000 square meters in aggregates by 2025.

According to Jeffrey Wen, senior manager of business development at DHL Supply Chain Taiwan, the company has multiple sizeable distribution center expansion plans in progress. DHL Supply Chain wants to create an extensive network across the island and support the growth of Taiwan’s vital semiconductor industry.

Wen explains that because of the U.S.-China trade dispute, manufacturers have needed to consider decentralizing their manufacturing locations, which were previously concentrated in China. As a consequence, supply chain demand in Taiwan has increased.

“Secondarily, the chip shortage compelled chipmakers to enlarge their production capacity in Taiwan as their response to rapidly increasing demand from customers like auto-makers and consumer electronics-makers,” says Wen. “Hence, we saw higher demand in the import of semiconductor equipment and raw materials as well as higher demand in the export of finished goods in the past three years. The higher transaction volume of semiconductor-related shipments has been growing our high-tech-based supply chain business significantly.”

DHL Supply Chain’s endeavor to add warehouse space in Taiwan is also tied to multinational companies’ response to longer transit time and higher air freight spending. The changes have prompted companies to lengthen the inventory holding days from between two and three months to over six months to supply goods to their Taiwanese customers on time.

“All space in our 15 warehouses is overrunning, and we are keen to find space to accommodate the overflow of shipments,” says Wen.

Meanwhile, logistics property developer ALP, which has since 2014 set up six state-of-the-art logistics parks and 14 logistics hubs in Taiwan, focuses on automation and expansion into Southeast Asia. The company is building a warehouse in Malaysia’s Bukit Raja targeted to be completed in 2024.

ALP equips some of its warehouses with automated storage and retrieval systems, with robots moving shelves around. Its specialty hub for beauty products comes with multi-temperature storage and fulfills small-volume, high-variety orders through automation. 

ALP’s warehousing space, automation solutions, and logistics services serve the domestic market in Taiwan for segments ranging from wine and pharmaceuticals to home appliances and industrial materials. Whereas warehouses in Taiwan typically have a height of 10-13 meters, ALP’s newest warehouses are around 40 meters high, reflecting the fact that automatized cranes are replacing the traditional forklifts. For the customer this means increased flexibility, as the spreading of pallets across vertical levels rather than horizontally arranged areas allows for quicker adjustments to inventories.

“When we started in 2014, Taiwan had already long been extremely tech-oriented, but the warehouses then were much more backward than those found in most Asian countries,” says Charlie Chang, CEO of ALP.

Chang notes that back in 2014, most of Taiwan’s warehouses were “illegally built supplements to factories, with no transparency in their operations whatsoever. This has posed a challenge for multinational companies wishing to serve the Taiwan market. Indeed, we have only recently been seeing the emergence of modern logistics parks on the island next to all the existing industrial parks, science parks, and so on.”

Nevertheless, Chang says ALP is expanding into Southeast Asia because Taiwan’s population and per capita consumer spending have essentially remained unchanged for many years, whereas Southeast Asian markets are still adding consumers with growing spending power. Labor is also still comparatively affordable in Southeast Asia. 

“In Southeast Asia, there is still always the question as to whether major investments into logistics automatization is worth it or if an increased headcount is better,” says Chang. “By contrast, investments into logistics automatization are definitely worth it in Taiwan, which increasingly suffers from serious labor shortage amid worsening demographics.”