Have you ever thought about why a phone case, for example, bought in a local shop in your neighborhood costs more than a phone case from Temu? Sure, shipping from Asia takes a couple of weeks. The markup is lower. Cost of labor may be lower, although it is questionable because these phone cases probably come out of the same manufacturing plant. So, cost of labor, like I said, is debatable. But seriously, think about it. How can an object made on the other side of the planet, travel halfway around the world, ship across oceans, pass through customs, stored in warehouses, delivered to your mailbox, cost less than the one in your nearest dollar store? Plus, don't forget when you order on Temu or similar websites, you're not ordering in bulk. So, the reason it costs so little is not because you're buying thousands.

The reason why the one in the dollar store costs more, actually isn't shipping. The real difference is how many hands it passes through before it gets to you. A phone case might cost 50 cents to make, but then it goes from the manufacturer to distributor who marks it up 50%, then to a wholesaler who also marks it up 50%, then to the retailer who adds another 75% on top of it. And by the time it sits on a shelf in your neighborhood, that less than a dollar case costs 10. Companies like Temu, on the other hand, skip almost all of that and connect you directly with a factory with one markup instead of four. And there's more to it. For years, packages under $800 shipped straight to consumers, avoiding import duties, a rule known as de minimis. A dollar store importing 10,000 cases in one shipment gets taxed as commercial freight. Temu on the other hand shipping those same 10,000 cases as 10,000 separate individual packages pays nothing. And lastly, companies like Temu hold zero inventory, which means that your case sits in the factory until you click buy and then it ships directly to you. While a dollar store has to ship in bulk to a warehouse, pay rent and staff to sit on that inventory, then ship it again to the store and pay rent and staff at the store as well. So, the price gap isn't as much about the shipping in this case. But that doesn't mean shipping is irrelevant. It is the shipping system that is exactly what makes the entire direct from factory model possible in the first place.

And it's built around a shockingly small number of bottlenecks. Listen closely. If the ship is going from Asia to Europe, it departs from Shanghai, Shenzhen, or Taiwan, then it goes either west of Taiwan through the Taiwan Strait or east of Taiwan through the Philippine Sea. Then it goes further south, makes a turn through the straight of Malacca, passes across the Indian Ocean, up the Red Seas Suez canal in Egypt, not too far from Saudi Arabia, and ends up in the Mediterranean from where it gets to wherever it needs in Europe. Now, if the ship is going from Asia to North America, it travels directly across the Pacific Ocean. It is a beautiful straightforward route all the way to the western ports of the US and Canada in Los Angeles, Oakland, Seattle or Vancouver. Or if it is going to the east coast of the US to places like New York or Florida, it turns south and crosses the Panama Canal. The North American route is pretty sweet from point A to point B.

The Taiwan Strait is roughly 180 km wide and it lays between mainland China and Taiwan. If you look at where Zhejiang, Shanghai, and major electronic manufacturers in Korea and Japan are located, you will see that going through the Taiwan Strait is the shortest and most efficient way to make it into the South China Sea and then move further south. But Taiwan is a major geopolitical choke point in a full war scenario between China and the US. Losing access to Taiwanese semiconductor plants, as well as avoiding the Taiwan Strait as the shipping route, would cut global supply of Frontier AI chips by 62%. And for less advanced chips, such as the ones used for everyday devices like phones or cars by 31%. If this were to happen, we would see a drastic spike in shortages and prices on the electronics market.

Can ships take another route and bypass Taiwan altogether? And if so, what will happen in that case? The ships absolutely can sail further east away from Taiwan into the Philippine Sea. But the problem is that detours are enormously expensive. They add distance, transit time, fuel, insurance, congestion, and they shift a tremendous flow of ships into routes and ports that are not designed to absorb all of them at once. Say there is a laptop sitting in a massive container that was loaded on a ship. That container might be holding 400, 500, 600 boxed laptops. If the ship needs to take a detour, it would become a fuel only detour. The cost of fuel per day is roughly $50,000. And if you divide that by 600 laptops, we're looking at approximately $83 loss per device, which is a negligible number for a manufacturer to absorb. But that $50,000 figure is not going to be the all-in loss in a worst scenario. In a geopolitical crisis, insurance companies will most definitely impose war risk premiums, which are massive, or refuse coverage for any loss inventory altogether. A normal Taiwan related premium that costs between $15,000 and $30,000 per voyage will go up to $100,000 to $150,000 in a worst scenario. On top of that, ports and alternative lanes will become congested. And lastly, a big portion of the shipping cost is the money that you pay to secure a space on the ship. Imagine a container ship that can load 20,000 containers. If they've got unused inventory, they may offer that space at a discount. But there are situations when there is only one slot left and several importers may need it very urgently. So, they start a bidding war. The carrier will take the highest price a buyer is willing to pay. Now add all of that up and you'll see how quickly the global supply chain starts to crash because nobody will be able to afford those prices anymore. The China US war involving Taiwan would burn about $10 trillion hole in the global economy industry in just the first year, which is roughly 9.6% of global GDP. For comparison, a year of war in Taiwan, would erase more economic output than Japan and Germany produce in an entire year combined. What's even more interesting is that to punch a hole in the supply chain, you do not need a full-scale military operation. You only need to make shippers unwilling to sail the straight. All they need is for an insurer to suspend coverage for East Asian shipping routes, which they will do even under a blockade scenario, let alone a full-scale war.

Moving on to the second point, the Strait of Malaa. When you hear the Strait of Malaa, think oil and energy. It is the world's largest oil transit passage. Around 29% of global seaborn oil trade goes through this specific straight. China alone channels 80% of its oil imports through the straight of Mala. So on top of all the oil, Mala also receives all of the traffic coming from the straight of Taiwan. The value of cargo passing the straight of Malaa is around $7 billion per day. For context, if you multiply this number by 30 and take the value of goods passing through Malaca in 1 month, it would roughly equal the annual economic output of Hungary. If something happens in Malaa, nearly half of the world's shipping fleet would need to reroute around Indonesia or Sunda Straits. In the context of unit economics, for a ship traveling from the Persian Gulf to Japan, the Indonesian diversion adds roughly 4 and a half thousand kilometers and seven extra days at sea, which would roughly add 20% of cost. Multiply that across thousands of ships, more fuel burned, more vessels tied up at sea, less shipping capacity available, higher cost for energy and components, and the price of electronics tied up to this specific export route goes up.

After the straight of Malaa, the ship enters the Suez Canal and the Red Sea. Does anybody remember these photos? March 2021, a massive container ship called Evergiven, even though most people remember it as evergreen because those letters were painted on across the hole, turned sideways across the canal and blocked it. The ship fell victim to something called the bank effect, where the canal walls sucked it in and it rammed into the sandy embankment. It blocked the canal for six full days. And in those six days, the blockage held up roughly $9.6 billion in cargo per day with total economic damage estimated between 70 and $90 billion. Electronics, Samsung phones, LG displays, auto components, Toyota, Volkswagen, and Renault all shut production lines waiting on semiconductor chips and wiring harnesses stuck in the canal. The more recent Houthy campaign in the Red Sea, running since late 2023 and escalating again into 2026, forced the mass diversion around the Cape of Good Hope. Going through the Cape of Good Hope adds about $1.5 million in cost per vessel every single day. This shutdown was the last straw before Tesla and Volvo shut down European factories in early 2024.

So, if after listening to all of this, you're wondering what about rivers? What about seas? Why not distribute delivery between shipping vessels and trains or planes? Why go around continents? Why run the risk of losing so much cargo when half of the world is on fire? Why not use trains? Trains are long. They're faster. They're less susceptible to weather changes. If you're asking all those questions, you're not alone. I had the same questions. And naturally, I went looking.

Let's start with what they have in common, which frankly isn't much. Both ships and trains need a crew. Both burn fuel. The cost of a voyage is mostly fixed. Whether a ship or train is half empty or completely full, fuel, crew, port fees, insurance stay more or less the same. Sure, you might need a couple more people here and there as your ship or train gets bigger, but the costs do not scale linearly. Which is why the more containers you put on a ship or on a train, the lower the cost per container. But this is where the similarities end. Now, on to the differences. A typical large sea vessel that goes between East Asia and Europe or North America carrying technology components and electronics can hold about 20,000 containers. A train at the same time carries roughly 150. 20,000 versus 150, meaning one ship replaces roughly 160 trains.

When a train travels between countries, it faces a mountain of border crossing paperwork at every national border it crosses. For example, if we wanted to ship electronics from China to the Netherlands, the train is going to be crossing six borders. China, Kazakhstan, Russia, Belarus, Poland, Germany, the Netherlands. Now throw geopolitics into the mix. After the Russian invasion of Ukraine, Russia and Belarus were hit by sanctions, so they're out of the equation. So what happens to the train route? It now starts following the new Silk Road corridor. China, Kazakhstan, Caspian Sea, which by the way to cross the sea, the containers will be taken off the train, loaded on a ferry to Azerbaijan, put back on a train in Azerbaijan, then Georgia, then Turkey, then Bulgaria or Romania, and then perhaps through Austria or any other neighboring country. The train will finally reach the Netherlands. Each country would require to pay fees for transit and depending on how military and political scenarios unfold, that list of countries could either change or grow. The new Silk Road is indeed faster than sea. It's about 15 days versus 30, but it carries a fraction of the volume at a meaningfully higher cost per unit. It's active and it is used regularly for shipments, but the shipments that it is used for are premium, time-sensitive, and you're paying for it. Plus, you can't simply put 24,000 containers on a train. There are physical track and station length limits that cap train length. So, it physically cannot carry as much as a sea vessel. Rails only advantage is speed. Like I said, 15 days versus 30. But economically speed only pays for itself when the cost of time exceeds the cost of rail shipping. This is why the rails market is dominated by the mid value goods and premium components but it is not used for bulk commodity electronics. Rail is a growing market because the Red Sea disruption made sea temporarily unavailable but it cannot absorb bulk electronic components at volume. So all in all the economics of shipping skew heavily towards sea cargo making rail roughly two to three times more expensive per container even in normal conditions.

To that you may say but what about rivers? What about seas? What if that ship goes inland? The answer is quite elementary. They're simply not deep enough. The economics assume you can load an ultra-large vessel in the first place. And ultra-large ships require deep water berths that only exist at coastal ports built specifically for them. Inland rivers are too shallow and too narrow for the vessels that generate the economies of scale. So they physically cannot host the ship sizes that make ocean cheap. This is why Shanghai, Singapore, and Shenzhen are exactly where they are. They sit at the specific geographic points with access to deep water. They're concentrated in a handful of megaports because that's where the manufacturing facilities are. and they have every incentive to build the biggest possible ships and run them on the fewest possible routes between those megaports and the western gateways.

Why does importing and shipping from Asia still beat local prices even after the tariffs? The number one reason is of course cost to manufacturing. I'm not going to spend a lot of time talking about manufacturing now because it deserves a big standalone episode. The second biggest reason is a heavily established market of components. A 2026 analysis found that even assembling a laptop in the US using components imported from China, again not full production, just the final assembly comes out only 6% cheaper than importing the whole thing from China. The entire production in the US comes out 14% more expensive. But the problem isn't just the fact that the labor costs more. That's an obvious one. The biggest thing is that to manufacture a laptop or any physical device, you need hundreds of components and those components are not produced in the same facility. You need a lot of suppliers within a few hundred kilometers from you. And this is something that China is simply unbeatable on. That kind of density simply does not exist in North America.

The reason Asia wins on electronics manufacturing, the reason I can't just start an electronics business in Canada, even if I put a shiny label 'made in Canada' on top of my product and people will say, "Okay, fine. We'll pay premium because it's Canadian." is because despite tariffs, however large, the manufacturing system and the ecosystem gap is so huge that you can't just beat it. What tariffs can do is actually flip the outcome in Mexico's favor. For example, US tariffs jumped from 2 to 17% between the last 2 years and that made importing into the US much more expensive. So, the benefit of importing from China or Vietnam has indeed shrunk. For semiconductors specifically, some 2026 tariff schedules run 50 to 75%. And at that level, sourcing from China becomes economically indefensible for many electronic categories. But nevertheless, for the most advanced, highest complexity electronics, semiconductors, precision PCBs, complex multicomponent assemblies, East Asia retains manufacturing edge that no tariffs can beat. Vietnam, India, and Mexico can cut their share of the market for the labor intensive and lower complexity categories. But when it comes to complex, high-speed, component dense, super modern categories where the manufacturing ecosystem advantage is simply too large for any current tariff schedule to offset, China is unbeatable at this point. And this is why despite the tariffs, despite import fees, we're still importing and shipping from Asia. As always, we hope this was helpful and we'll see you in the next episode. Bye.