Amazon Hits Ocean Freight Market
Amazon is quite serious about expanding its delivery operation while making use of trucks, drones and jets to speed up its delivery service. And now the company is planning for ocean freight. Amazon’s China subsidiary Amazon China, has been granted a license to operate as an ocean freight forwarder in the U.S., according to the Flexport. The new move would give Amazon (NASDAQ:AMZN), one of the largest online retailers in the world even more control over the shipping products from China to the U.S.
This is Amazon’s first step toward entering the $350 billion ocean freight market. The registration is the latest indication that Amazon plans to expand its logistics reach to cut costs for its retail business and potentially provide third-party logistics services to other industries. Its new status as a freight forwarder, or “non-vessel operating common carrier,” gives Amazon, the world’s largest online retailer, a foothold in the $350 billion a year ocean freight business. Because this registration allows Amazon to sell shipment services, Amazon will be looking into providing logistics services for third-party companies. Contracting shipments from China to the U.S. would give Amazon an edge over competing suppliers. It could help the company cut shipping costs or open a huge new business that would compete against FedEx and UPS.
Freight rates for exports to Asia have been lower than usual this year because the strong dollar, which makes U.S. exports more costly overseas, has contributed to a steady decline in shipments to Asia. According to Drewry’s Benchmarking Club, a closed user group of multinational retailers and manufacturers which closely monitor their transpacific and Asia-Europe contract freight rates, average ocean freight rates for cargo moving under contracts on the major East-West trade routes saw a major reduction in the last quarter of 2015. According to the latest The Shanghai Containerized Freight Index (SCFI), ocean freight customers are paying $1400 to ship a 40-foot container from Shanghai to Los Angeles. With ocean freight itself so low, Amazon will be able to cut their costs significantly.
In 2015, Amazon shipped more than a billion packages, making them the largest shipper in the U.S. Amazon still relies heavily upon UPS, FedEx, and the Postal Service for the bulk of its package delivery needs, because profitably scaling up such logistics-intensive services isn’t easy. It’s estimated that Amazon runs about 35% of its packages through the U.S. Postal Service, 30% through UPS, and around 17% through FedEx. Regional shippers account for around 18% of the total.
For years, shipping costs—which reached more than $8 billion in 2015—have been cutting into Amazon’s profits. In 2015, Amazon shipped more than a billion packages, making them the largest shipper in the U.S. Finding ways to reduce costs is crucial. Alibaba is making inroads into the U.S., but Amazon’s move would allow manufacturers to sell directly to American consumers without a tortured delivery process. With the integration of its fulfillment centers and its expanding delivery operation, Amazon could build a solid logistics platform for Chinese manufacturers in the U.S.