E-commerce hits roadblock after crackdown on migrants

They are the driving force behind the digital economy. Whizzing around on electric motorbikes and scooters, they tend to blur into the background of China’s major cities. But these human workhorses of consumerism are just as crucial as the technology which has fueled the boom in online shopping.

Every day in a 24-hour cycle, you can see them speeding down roads, and dodging pedestrians on sidewalks, in Beijing as they race to deliver a vast array of products from pizzas to perfumes.

Many are low-wage migrant workers and they were the cornerstone of the capital’s explosive e-commerce sector until they were suddenly evicted from their homes during a 40-day operation to demolish unsafe buildings.

“Beijing needs migrant workers to do all the low-cost efficient service jobs that middle-class Beijingers depend upon,” said Geoffrey Crothall, a spokesman for China Labor Bulletin, a non-government organization which promotes and defends workers’ rights.

“But if you push them out of the city altogether, then there is going to be no one to do those jobs [such as delivering goods],” he added.

Fire disaster spurred mass of evictions

The decision to launch a sweeping eviction campaign came after a fire in the Beijing district of Daxing killed 19 people, including eight children.

Immediately after the tragedy in November, the Beijing Work Safety Administration started a massive cleanup campaign, which saw tens of thousands of evictions, threatening the e-commence sector.

“As many delivery people are being cleaned out, it will get more and more difficult to hire them,” Huang Gang, a logistics expert at the China E-commerce Association, told the Financial Times. “Wages in logistics will increase.”

For Beijing, this could prove to be a major problem when you look at what is at stake. Already online retail sales in China are approaching US$1 trillion this year, which will make it the largest e-commerce market in the world, according to S&P Global Ratings.

The figure is based on record spending during the China’s Singles Day shopping spree in November, which topped a whopping 254 billion yuan ($38 billion), e-commerce data provider Syntun reported. In the next two years, the industry is expected to grow between 20 to 25%.

“Chinese online retailers still have enough space to [expand],” Shalynn Teo, an analyst at S&P, told the media. “More product categories will go online, and the increasing mobile penetration will promote the online sales momentum.”

Clearance campaign hitting delivery sector

But to produce double-digit growth in the online retail sector, China will need cheap migrant workers to deliver the goods at the end of a long logistics chain.

Last year, the Beijing municipal government announced plans to reduce the capital’s population to 23 million by 2020 and cut by 15% the number of people in six main districts.

Obviously, this will have a dramatic effect on China’s much vaunted “new economy” as migrant workers are the backbone of the sector, delivering everything from teaspoons to TVs.

What is impossible in a high-wage economy, such as transporting items like a cup of coffee and a blueberry muffin for 10 yuan, or $1.60, is viable because the drivers work for rock-bottom wages of around 4,500 yuan-a-month.

The knock on effect of the clearance campaign has also created shockwaves in the logistics operation.

Media reports estimated that more than 25 key distribution centers in Beijing were forced to close or operate at a lower capacity because of labor shortages.

“Many delivery companies have stopped receiving Beijing-bound packages because they don’t have the capacity to deal with them,” said Wang Fei, the chief executive of warehouse-sharing company Lianzhong Cloud Warehouse in Beijing. “Delivery companies face hundreds of millions of renminbi in losses.”

So far, the Chinese e-commerce, retail and technology conglomerate, Alibaba Group, has managed to weather this digital storm. But its logistics partners, such as ZTO Express and Best Logistics, have taken a hit.

Competition in the sector is ferocious with ZTO earning less than 30 cents per parcel. To keep costs down to their bare minimum, the company outsources the delivery work to migrant drivers. Naturally, this business model has been extremely profitable for Alibaba.

“Its net profit margin in the past 12 months to the end of September was about 31%, [while] its rival JD.com, which handles its own logistics, only just about breaks even, The Wall Street Journal reported.

“The Alibaba system, though, is vulnerable to shocks from events such as those [that happened] in Beijing, especially if the eviction of migrants spreads to other major cities,” the WSJ added.

Plight of migrant workers spurs condemnation

Whatever the financial ramifications, the plight of China’s migrant workers has become a distressing human drama and a wake-up call for investors in the seemingly unstoppable e-commerce industry.

As the evictions continued, more than 100 prominent Chinese intellectuals circulated an open letter online, criticizing the municipal government’s action.

“Hundreds of thousands of migrants could be affected by the crackdown. In our view, this is a vicious incident that breaks the law and tramples on human rights and should be resolutely stopped and rectified,” the group wrote.

If it continues, these human workhorses of the e-commerce industry could slowly disappear from the streets, and sidewalks, of Beijing and other major cities in China.