Bart Kuipers
Red Sea crisis puts China further away
Due to missile attacks by Houthis on sea vessels, sailing through the Red Sea, and thus through the Suez Canal, has currently become a major risk for shipping. Ships from China toward Europe and vice versa must therefore detour via the Cape of Good Hope in South Africa. This route costs ocean-going vessels from Chinese ports about ten days more sailing. China thus becomes ten days further away from a geographical perspective. Goods now take almost 80 days to sail from China to Northwest Europe, according to freight forwarder Flexport, based on a transit time that was still around 70 days during most of 2023. This transit time is calculated from the time the container becomes available from a producer in China until the container leaves the seaport toward a European destination, usually on its way to a distribution center. These 80 days, by the way, must be kept in perspective. At the time of the COVID-19 crisis, the most extreme case in early 2022 involved more than 120 days because of the major congestion in seaports both in China and in Europe, and on top of that came the temporary blockage of the Suez Canal by the container ship Ever Given.
But the longer 10-day transportation time we are now experiencing is also a problem. Not only does rerouting cost more fuel andCO2, but other costs are also increasing. The cargo aboard a container ship can be seen as part of a company’s inventory. And inventory correlates with capital consumption.
A company therefore wants to work with as little inventory as possible: this is the well-known “just-in-time” logistics. Stretching a chain by ten days can therefore cost a lot of money. Containers filled with precious high-tech cargo sometimes have a value of as much as half a million euros per container and are therefore highly sensitive to the cost of capital. Containers all look the same from the outside: some a little bigger than others or with a different color. But the contents of containers vary greatly in terms of value and economic or technological shelf life.
The main commodity group we import from China in Europe by value is computer equipment. During the corona period in particular, these computers were unstoppable because of the massive home-based work. The estimated 62 thousand containers of computers imported into our country from China in 2023 contained on average cargo worth about $282 thousand per standard container. For such goods, ten days of additional transportation time ticks quite a bit of boxes-especially if the value of the contents of this individual container must be multiplied by many more thousands of containers. In addition, high-tech cargo faces technological obsolescence. On average, high-tech cargo ages by about one percent every week. Consider the influence of Moore’s Law. Under this law, the number of transistors in a chip doubles every two years due to technological innovation. With 80 days lead time to Europe, a new product in China can thus technologically average about 11 percent more than the product that arrived in Europe-or can produce the original product at an average of 11 percent lower cost. This is obviously a rough measure but it indicates that the credo “time is money” is a major challenge for container shipping. It is not for nothing that the really advanced high-tech goes mostly by air and not in sea containers to and from Asia. The New Silk Road offered an alternative in which relatively expensive goods were transported from China to Europe via rail; a route that greatly reduced transit time. Russia’s invasion of Ukraine meant a sharp decline in these shipments, which, however, still continue at a low level.
But most of the containers coming from China contain less valuable cargo than computers, and that involves a value of about $30-60 thousand per container. Then most of them are consumer goods. The main types of goods expressed in numbers of containers coming from China are consumer goods for household and personal consumption, think of consumer electronics, garden furniture or sports equipment. Yet even an extra ten days for consumer goods is not pleasant. Because here, all in all, it is estimated that some $15 billion in import value will arrive at the port of Rotterdam in 2023. In addition, consumer goods always have a relationship with speed. When spring finally really gets going, the terraces are full and there is usually a sudden demand for garden furniture-and it must not be near the Cape of Good Hope by then.
2023 was a bad container year for the port of Rotterdam: mainly due to Asia
Total container throughput at the Port of Rotterdam declined by 6.8 percent in 2023, measured by weight of cargo, and by 7.0 percent expressed in TEUs: the standard unit of containers. The amount of containers arriving in Rotterdam from China decreased even more sharply in the past year: based on an estimate of preliminary figures, it went from 4.6 to 4.2 million containers: minus 8.7 percent. This is already the second year that container throughput has declined by such a hefty percentage. The causes are primarily to be found in macroeconomic developments in the Rotterdam port’s main foreland and hinterland: China and Germany. Both countries have entered a lower growth path. China and Germany have traditionally been strongly intertwined. But German business has traded China for the United States as a major destination for foreign direct investment in 2023, with the U.S. Inflation Reduction Act, among others, playing an important role.
A second reason behind this decline in goods has to do with the behavior of all of us as consumers. Consumer behavior showed a structural decline in the consumption of goods in favor of services during 2022 and much of 2023. However, producers had not anticipated this and anticipated continued growth in consumption of goods. They often even built up additional stocks so as not to be surprised by the large congestion in the container sector that was at play at the time of COVID-19. As a result, inventory levels in supply chains increased sharply. Saturated consumer demand is related to inflation, high interest rates and decreased consumer confidence. But also some market saturation after the big upturn in consumption in early 2021. And it has to do with possibly changed preferences in favor of personal experience rather than personal possession. Imports of household consumer goods, goods for personal consumption and clothing showed declines of 11, 14 and 13 percent, respectively, in 2023. This decline strongly affects the Netherlands. The Netherlands is the largest importer of Chinese goods in the EU, still ahead of Germany, with 116.9 billion euros, according to Eurostat figures. This is due to the high importance of re-exports in our country.
Re-exports refer to goods from China in particular that are imported into our country and then re-exported to other EU countries, especially Germany whose very weak economic situation has already been noted above. The Netherlands may be the largest importer, but that does not hide the fact that our country’s imports of Chinese goods decreased by a whopping 15.8 percent in value terms in 2023 compared to 2022. This decline includes air cargo but is also a major cause of the decline in container throughput at the Port of Rotterdam.
The ‘New Three’
However, there are also goods that actually showed strong growth in 2023 and escaped the malaise. These are the products of three sectors now referred to as the “New Three” in China: solar panels, batteries and electric cars. These goods showed spectacular growth: Chinese exports of battery-powered electric cars grew by 70 percent by 2023. Forty percent of these exports ended up in Europe. Chinese exports of solar panels and batteries showed growth of 26 and 19 percent through October 2023. The Netherlands was the largest importer of solar panels in Europe, due to the strength of Dutch re-exports. The Economist magazine recently noted that these “clean energy sectors” now contribute 40 percent of China’s gross national product growth. Chinese companies gained this position through cheap loans, subsidies and state contracts, according to The Economist, but also through hard work, foresight, innovation and economies of scale, as well as intense domestic competition among several electric car manufacturers. Reviews of these Chinese brands in my quality newspaper confirm the status. “This would make Musk restless,” Bas van Putten recently wrote in NRC about a model from China’s BYD.
Chinese electric car stores are not to be missed
I have to think about these strengths of Chinese car brands a lot when I cycle to work every day through the Meent, a street in Rotterdam, past stores of the Chinese brands NIO, Polestar and – with Chinese owner – Volvo. Every day I involuntarily think: I also want a car like that.
Where are the stores of electric models from Volkswagen or BMW? Wasn’t the former CEO of Volkswagen fired precisely because he also had such a forward-looking vision of electric mobility as Chinese manufacturers? These stores are an example of an innovative marketing strategy, with sustainable Chinese cars defining the streetscape of one of Rotterdam’s most dynamic shopping streets. And thereby getting closer and closer to me as a ‘happy consumer’!
Bart Kuipers is affiliated with the Erasmus center for Urban, Port and Transport economics
