How Can AliExpress Offer Free Shipping for 1 Dollar Goods?

Many daily necessities in life come from China, which is why China is called the “factory of the world”. 

These goods from China are very cheap, and their quality is getting better and better in recent years. But the inevitable problem for consumers in Europe and America is that they always seem to have a high freight. After all, these $1 worth of goods needs to go halfway around the world to appear in front of consumers. 

In theory, whether by train, ship, or plane, the fuel and manpower consumed in the process alone have exceeded the value of the commodity. 

However, if you buy goods from China on AliExpress, an e-commerce site run by the Chinese company Alibaba, then in many cases it does not charge any postage. 

Some people say that this is just a long-term preferential policy of AliExpress, which forms the habit of consumers shopping on it by covering postage at a loss. But this may not be the case. AliExpress, or Chinese merchants, is likely to make no loss when providing free shipping services.

On Zhihu (China’s Quora) some Chinese exporters have explained how to make a profit by providing free shipping for $1 goods:

First of all, goods sold for $1 on overseas e-commerce platforms are often the leftover stock from Chinese factories, if it sells $1 to U.S. consumers, its purchase price is likely to be less than￥1, which provides businesses with a gross profit margin of about 7 times. These gross profit margins have become a key factor in exempting postage.

Then, the operating cost of operating the store maybe about 1 yuan per order, while the postage accounts for 4 yuan in each order. This makes each product selling at 1 USD can bring about a net profit of about 1 CNY (about $0.15) for the business.

Although the net profit is very low, it is still a good business because of the huge sales volume of this kind of goods.

But the question is, why does a package from the Chinese warehouse to American consumers cost only 4 CNY(about 0.59 USD)? 

“There is no such thing as a free lunch.” How do AliExpress and the merchants on it do this?

We have learned some potential reasons from the public information:

Front warehouse

The front warehouse is an important method to reduce logistics and warehousing in the traditional retail industry. It means building warehouses closer to consumers rather than factories. 

This model is extremely used in Chinese e-commerce companies. 

In China, we often hear the news that on the day of Singles’ Day, China’s e-commerce festival, people snapped up bargains at 0:00 AM, and then some consumers received parcels at 01:00 AM on the same day. 

This is due to the fact that e-commerce sites logistics those orders that have not yet occurred in advance to the front positions near consumers by reading the records in the “shopping cart” and the historical consumption behavior of users.

Due to the existence of front warehouse and artificial intelligence, express delivery in China runs much faster than overseas, while the cost is much lower than overseas. So on the whole, free delivery on AliExpress comes as no surprise to the Chinese.

In cross-border e-commerce, the front warehouse is generally established in China’s main cargo ports.

After the goods are produced from the factory, they are shipped directly to these warehouses regardless of whether there is an order or not, so that they do not need to be stored in the dealer’s warehouse, resulting in the cost of secondary transportation. It has greatly reduced the transportation and storage costs of these goods in China. 

In addition, Alibaba began to set up overseas front positions in 2016, which means that some goods have been shipped to target countries before they are put on the shelves.

“Boarding gate upgrade”

We know that there is a discount in the aviation field called boarding gate upgrade:

If you buy a ticket for a flight directly, you will find that the economy class is 1000 yuan and the first-class price is 2000 yuan. But if you first buy an economy class ticket for this flight, and then you can buy a 200 yuan “boarding gate upgrade” service an hour before boarding. 

This means that by upgrading at the boarding gate, you can buy a first-class ticket that would have cost 2000 yuan for 1200 yuan. 

The reason why airlines provide boarding gate upgrade service is to make more profits when first-class tickets are not sold out at the last minute. 

This pattern also exists in the field of international trade and transportation, where you can pile up goods in a warehouse at an airport or port and wait for a major customer on a flight or freighter to cancel the order and release room. The front warehouse strategy mentioned above makes this possible. 

As flights and freighters are nearing departure, the shipping company is likely to lose money if the vacant seats are not sold at a discount. At this point, you can send the goods waiting in the warehouse to the plane or freighter at a very low price.

This seems to digest most of AliExpress Standard Free Shipping’s orders.

You may have noticed the problem with this model. You never know when a cargo ship or aircraft will have a “bleeding promotion”, so the cargo must wait at the port or airport for a very long time. This is why it usually takes 1-2 months for AliExpress Free Shipping to arrive.

Note that although this means that the shipping cost can be reduced to the original 1/10, it is still not free. But because its price has become very low, so the merchants on AliExpress and AliExpress bear this part of the freight.

AI collection and transportation

The “Boarding gate upgrade” strategy still doesn’t explain the free delivery of some ultra-low-priced goods-if you only buy a toothbrush for less than $1, the merchant must lose money as long as the shipping cost is more than $1. 

But in fact, on AliExpress and other Chinese e-commerce sites, such small items are not usually mailed as “separate parcels” in most processes. 

Traditionally, a consumer’s package should be mailed from the seller’s warehouse, and each seller fills in the recipient’s information in his own warehouse and then gives it to the logistics company. 

But in China, express delivery doesn’t work that way.

Alibaba and JD.com both have their own logistics companies in China, and they are deeply coupled with airlines, post offices, and other delivery companies, reducing the “context switching costs” of the transportation process to almost zero.

Take Alibaba as an example. Its own express company, Cainiao, has an intelligent system that matches various international shipping specifications. It can convert all the goods contained in orders on the AliExpress platform into sizes, and then piece them together and give them to other transportation companies.

Let’s take a fictional example to see how it works:

When an Australian consumer buys a $1 toothbrush, nothing actually happens, the system just adds a number to the counter. It generates a transportation demand with a 2cm x 20cm x 1cm. After calculation, its volume is 0.00004 cubic meters. 

This demand, along with 28750 other items of the same size (possibly a pile of toothbrushes and chopsticks), forms a dense EMS International Standard 2 package of 1.15m³. Because according to the regulations of China Post, the side length of each standard 2 packages is no more than 1.05 meters, and the maximum volume is 1.15m³.

Cainiao’s system also calculates the weight of these items after matching the volume, because the standard Ⅱ package cannot exceed 30kg when they are sent to Australia. Cainiao then gets a “standardⅡ package” that is perfect in terms of performance-to-price ratio. ou can’t put anything extra in this package without paying more for EMS.

It is not until this “perfect package” is calculated that everything will really begin to transmit. As a result, 28750 orders from Australia on AliExpress share an international postage of 3500 yuan, and the shipping cost of each order is reduced to 0.12 yuan ($0.018).

Of course, the process of repackaging may consume labor costs, which makes it impossible for everything to be as perfect as the numbers. But they are now using robots to improve efficiency and reduce costs, just like Amazon.

(in the above calculation, I used the 2014 EMS package standard as a reference. The price is not so cheap now, but I can’t find a clear price list. )

The Last Secret: UPU Terminal fee Agreement

OK, you may have one last question: who pays the postman who delivers the final delivery?

After all, even the freight costs of these goods in China and cross-border transportation can be technologically optimized to close to zero. But for European countries and North America, it costs a lot of money to ship a package just within their own countries.

The secret here is the UPU terminal fee agreement.

This is a complex postal reciprocal agreement designed to reduce the costs incurred by people in developing countries in sending parcels and mail to people in developed countries. We will not give a specific and complete explanation here. Simply put, it divides 192 members into four levels, with the Chinese mainland in the third and the United States in the first.

When a parcel is mailed from the third area to the first area, the post office of the latter can only charge limited postage during the delivery of the last leg of the journey. Even if it could cause the order to be a loss for the post office in the first area.

China Post is a member of the Universal Postal Union, which means that parcels sent through it will enjoy a preferential terminal fee. At the same time, Alibaba has held a stake in Singapore Post since 2014, allowing it to make better use of UPU’s preferential policies.

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Terminal fee agreements help to enhance international trade, but this may become unfair due to the advent of e-commerce. Therefore, at a special meeting of the UPU in 2019, they proposed a new reform plan for the terminal fee agreement.

In this scheme, members will have the right to set the terminal fee again without having to abide by the ladder pricing system of the terminal fee.

In addition, a series of price increase resolutions have been reached at this meeting, and the prices of the four gradients will rise. According to estimates, between 2020 and 2025, the terminal fee for China’s export of international packets will increase by 164% compared with 2019. In other words, by 2025, there may be fewer Chinese businesses offering free postage services to overseas consumers.

You may have noticed that, in addition to the terminal fee agreement concessions, all of these cost-reduction measures require large-scale logistics construction investment in the Chinese mainland.

This is why many merchants on AliExpress, which also come from China, can offer free postage services, while Amazon cannot. In fact, in the Chinese consumer market, you will find the opposite phenomenon: When Chinese consumers buy goods from the United States on Amazon, many of them are free shipping.

It is worth noting that AliExpress (and other Chinese e-commerce sites) will use the above different strategies to reduce transportation costs in different orders. This is why you can see many different postage rates on AliExpress, and different strategies will affect the length of time required for transportation and whether tracking is supported or not.

This means that even if packages from China no longer enjoy the preferential price of the terminal fee, you can still buy goods with free delivery or pay very low shipping charges.

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