You may have seen items on Aliexpress that is below $5, yet offered with free shipping from China to US. Shipping similar items within US to another US state costs $7.20 [1] and big question here is how does Ali manage to get lower shipment costs from China to US versus shipments within US.

Before starting, one thing needs to be cleared: there is no such thing as “free shipping”. Logistics is not that cheap for companies to cover and certainly not free; so companies are adding shipment cost per item to prices and label it as “free shipping”, this is a common practice.

China’s support on giant Ali is obvious, but government is not directly subsidizing their shipment costs. They support it in indirect ways, and Ali has ways to lower their costs.

Chinese government support on Alibaba

According to rumors on the market, Chinese government is fixing USD/RMB rate in favor of Ali to get their costs lower even Yuan is on floating rate. By doing that Ali can minimize its losses due to currency fluctuations. That was the easier and obvious one to get lower freight costs.

Universal Postal Union also has a part

There is a universal alliance for postal services, called Universal Postal Union (UPU). Established in 1874; UPU has 192 member counties and its primary function is to create a platform for all members courier services to cooperate [2]. Starting point of UPU was also an early example of disruptive innovation, because before UPU private messengers were taking goods/messages with them and going from origin to destination by themselves. This service was private and expensive, meanwhile local postal services were in operation in most countries. So, all countries came together to form UPU with their postal services and simply said to each other: “carry my parcels in your delivery network, I’ll carry yours in exchange”.

In each country they work with local postal companies (ie: Deutche Post for Germany, USPS for USA) Details on UPU and its history is all together another article’s subject.

There are 2 main components of shipping cost in UPU’s definition. Transit charges and terminal dues. Transit charges cover the cost from origin to destination’s harbors/customs while terminal dues are for cost of delivery within the destination country. So, If I were to send something from Istanbul to San Francisco, logistics costs within Turkey and delivering it to USA will be my transit charges and delivery within USA to San Francisco operated by USPS will be terminal dues [3].

In UPU, they work in exchange for delivery, and they have very complex schemes to calculate freight costs. Member countries also got listed into 5 categories based on their development and logistics infrastructure indexes. System takes this development status into consideration when calculating prices. Long story short if your origin is underdeveloped and destination is developed country, your Terminal Dues will be lower than a developed to developed delivery. This system favors undeveloped countries in global postal network.

While this rule applies to letter and simple post, e-commerce companies started to take advantage of that. Small parcels and packs are covered in this UPU rule, companies like Ali shipped their parcels and used this to lower their prices. And in this case, mostly, destination courier faces with the losses because their actual logistics costs is higher than received Terminal Due enforced by UPU. So, if anyone can get dirt cheap shipment prices into US from China, main reason is US Taxpayers are paying for it [4].

Recently, UPU has realised that subject is open to exploit and they didn’t wanted to shut this developed/non developed status. Increasing number of ecommerce parcels originating from China by using this subject forced UPU to take some precautions.

Instead of that shutting all system together, they took some measures like moving China’s status up in development scale and not accepting ecommerce parcels into that rule. This updates will be effective in 2018 [5]. But still, Ali and other giants can easily ship their daily parcels into an underdeveloped neighboring country and ship it via using their local couriers. I would say system is still open but more controlled .

Beyond all supports, Ali seeks to consolidate all of its shipments to use its enormous economies of scale

Ali also has invested a mind blowing 807 million usd into a Cainiao, a logistics company that founded purely for b2c ecommerce logistics [6]. Now, Alibaba can group all off their shipments -not only Aliexpress but also other Ali owned/managed ecommerce platforms as well, and consolidate it via using Cainiao, they still can get dirt cheap prices for freights considering the massive volume of shipments.

One way or another, international b2c shipments are very big part of the costs and especially if you are in a country which has a lower purchasing power currency against USD. The giants will always find a way to get their costs lower.





References

[1] USPS Padded Flat Rate Envelope Cost

[2] UPU

[3] About transit charges and terminal dues

[4] United Nations Helping Chinese Shipping

[5] UPU Press release about updated terminal dues system

[6] Ali investment in Cainiao

Additional reads on the subject

As U.S. Postage Rates Continue To Rise, The USPS Gives The Chinese A 'Free Ride'

Stop Subsidizing Foreign Postal Systems, for Economic Fairness and National Security

The Postal Service is losing millions a year to help you buy cheap stuff from China