Taiwan’s logistics sector enters choppy waters
A drastic shift in supply and demand has put many logistics companies in dangerous positions. But emerging market segments and technology could present new opportunities for the industry.
Taiwan’s logistics sector is at a crossroads as a pandemic-induced bonanza draws to a close, and the outlook seems to be getting worse by the day.
From the beginning of 2020 until the first quarter of this year, sea and air cargo space has been limited by a wide range of factors, from the quarantine of Chinese port truckers to the grounding of thousands of planes. passengers who usually also carry freight. This has led to a dramatic increase in freight rates, leading Taiwan’s three major steamship carriers, Evergreen Marine Corp., Yang Ming Marine Transport Corp. and Wan Hai Lines, to achieve record operating profits in 2021.
But in the second quarter of 2022, the situation reversed. Soaring global inflation, the ongoing Russian-Ukrainian war, droughts and China’s slowdown have reduced global demand for commodities. An imbalance between supply and demand for sea and air cargo space led to a monthly drop in market rates. In July, Evergreen, Yang Ming and Wan Hai all saw significant revenue declines.
“In 2021, our customers faced a global container movement problem, as the boom in exports from Asia to North America and Europe was not matched by transport to the United States. ‘East,” says Schnell Jeng, executive director of the Taipei Airfreight Forwarders & Logistics Association. of Taiwan (TAFLA). Jeng notes that these developments “resulted in huge shipping rates of over US$10,000 per FEU (forty foot equivalent unit)”.
“Since the second quarter of 2022, electronic exports from Taiwan have started to decline as American buyers have been overstocked,” he adds. “Due to overstocking, many of them are taking their time picking up their containers from destination terminals, as they are effectively using the terminals as secondary storage.”
Jeng says lower demand caused shipping rates to drop below US$4,000 per FEU last month. With the widespread easing of border restrictions, air cargo market rates have come down as air passenger traffic has picked up.
Taiwan freight forwarders now face a divergence between fixed rates and market spot rates. Flat rates, which freight forwarders undertake to pay carriers for certain volumes, were negotiated when prices were much higher. Now, due to falling market spot rates, freight forwarders are under pressure to cut prices. Failure to meet the volumes initially promised to carriers could result in contractual penalties for freight forwarders.
As of mid-September, TAFLA’s outlook for Taiwan’s export volumes is bleak. The organization expects a steady decline in the volume of exports of air and maritime products in the second half of 2022 to 2023. This projection follows a 10% drop in air exports and a 2.1% drop in year-on-year sea export containers 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 value-added logistics in the Taipei Port Free Trade Zone, has seen its exports of finished cars, or completed building units (CBUs), barely affected by the global shortage of containers during the pandemic. These railcars are shipped on ro-ro ships, which have not experienced a capacity shortage.
Tonglit mainly ships Japanese brand cars to the Middle East after assembly in Taiwan, and imports finished European and Japanese cars for the domestic Taiwan market. But it also handles imports and exports of auto parts and auto accessories, which are shipped in containers.
“Wide factory closures in China due to the pandemic and high container shipping rates have affected local manufacturers as they source auto parts from China,” said Alex Shih, senior executive at Tonglit. “In addition, parts exports for the US automotive aftermarket suffered, leading to high inventories in our warehouses as customers could not find empty containers.”
Shih notes that the number of cars imported through Tonglit fell by about 30% year-on-year in 2021 due to the continued shortage of chips and global bottlenecks in auto manufacturing. But he still projects a bright future for the company thanks to the shift in Taiwan’s domestic market towards electric vehicles (EVs). Tonglit recently leased about 60 acres of land from the Port of Taipei for a CO2-neutral logistics park to serve the electric vehicle industry only.
“We don’t know how many Taiwanese companies in the automotive supply chain will survive the automotive industry‘s shift to electric vehicles, but we do know that this change will change the current ratio of imported cars to locally assembled cars to the benefit early ones,” Shih says.
“We expect that by 2030, more than 50 percent of Taiwan’s car imports will be electric vehicles, so we are preparing the new logistics park to be ready by then,” he added. “It will be equipped with solar panels and wind turbines, helping automakers meet their CO2 reduction targets.”
Shih says Tonglit and carriers will have a major technical task in handling large quantities of EV batteries, 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 automotive logistics world was “watching very closely what role onboard EV batteries might have played.”
Seize new opportunities
The bleak market outlook is not a deterrent to some logistics companies expanding their operations in the region. Contract logistics provider DHL Supply Chain Taiwan has in recent years increased its warehousing space to approximately 124,000 square meters across 15 operating sites, most of which are located near Taiwan’s five major science parks. All of these warehouses are close to Taiwanese semiconductor factories to meet critical requirements and ensure timely delivery. DHL Supply Chain Taiwan plans to build three additional sites with a total warehouse space of up to 175,000 square meters of aggregates by 2025.
According to Jeffrey Wen, Senior Business Development Manager at DHL Supply Chain Taiwan, the company has several major distribution center expansion projects underway. DHL Supply Chain wants to build a wide network across the island and support the growth of Taiwan’s vital semiconductor industry.
Wen explains that due to the trade dispute between the United States and China, manufacturers have had to consider decentralizing their manufacturing sites, which were previously concentrated in China. As a result, supply chain demand in Taiwan has increased.
“Secondarily, the chip shortage has forced chipmakers to expand their production capacity in Taiwan in response to growing demand from customers such as automakers and consumer electronics makers,” Wen said. “As a result, we have seen increased import demand for semiconductor equipment and raw materials as well as increased export demand for finished products over the past three years. The higher transaction volume of shipments related to semiconductors has significantly increased our high-tech based supply chain activity.
DHL Supply Chain’s efforts to add warehousing space in Taiwan are also tied to multinational companies’ response to longer transit times and increased air freight spending. The changes have prompted companies to extend inventory holding days from two to three months to more than six months to deliver goods to their Taiwanese customers on time.
“All the space in our 15 warehouses is saturated, and we are keen to find space to accommodate the overflow of shipments,” Wen explains.
Meanwhile, logistics real estate developer ALP, which has set up six state-of-the-art logistics parks and 14 logistics centers in Taiwan since 2014, is focusing on automation and expansion in Southeast Asia. The company is building a warehouse in Bukit Raja, Malaysia, which is expected to be completed in 2024.
ALP equips some of its warehouses with automated storage and retrieval systems, with robots moving the shelves. Its specialty center for beauty products comes with multi-temperature storage and caters to small-volume, high-variety orders through automation.
ALP’s warehousing space, automation solutions and logistics services serve Taiwan’s domestic market for segments ranging from wine and pharmaceuticals to home appliances and industrial materials. While warehouses in Taiwan are typically 10 to 13 meters high, ALP’s newest warehouses are around 40 meters high, reflecting the fact that automated cranes are replacing traditional forklifts. For the customer, this means increased flexibility, as the distribution of pallets on vertical levels rather than horizontally arranged areas allows for faster inventory adjustments.
“When we started in 2014, Taiwan had already been extremely tech-driven for a long time, but the warehouses then were much more backward than those found in most Asian countries,” says Charlie Chang, CEO of ALP. .
Chang notes that in 2014, most warehouses in Taiwan were “illegally built additions to factories, with no transparency in their operations. This posed a challenge for multinational companies wishing to serve the Taiwanese market. Indeed, it is only recently that we have witnessed the emergence of modern logistics parks on the island alongside all the industrial parks, science parks, etc. existing.
Nonetheless, Chang says ALP is growing in Southeast Asia because Taiwan’s population and per capita consumer spending have remained essentially flat for many years, while Southeast Asian markets continue. to add consumers with growing purchasing power. Labor is also still relatively affordable in Southeast Asia.
“In Southeast Asia, there are always questions about whether major investments in logistics automation are worth it or whether increased staffing levels are better,” says Chang. “In contrast, investments in logistics automation are definitely worth it in Taiwan, which is increasingly suffering from severe labor shortages amid deteriorating demographics.”