Alibaba Cainiao: Delivering Innovation, Globally?
Before we start, there is one error we wish to correct: in our last issue, Electrifying the Future: CATL and its Power Play, we mistakenly wrote “Debond” when the company in question is "Darbond (688035. SHA)”. Thank you to our astute readers for pointing it out!
Table of contents
Things that caught our attention
Xpeng, a leading Chinese EV brand, has announced dismal Q1 results. Revenues were down 46% YoY. Despite this, it is maintaining its full-year targets. The EV market in China is experiencing great flux.
Temu or Shein are the No. 1 most-downloaded apps in half of the world’s fifty largest economies. We wrote about Temu in Temu - Pinduoduo's Cross-Border E-commerce Platform.
Xianyu AKA Idle Fish (闲鱼), Alibaba’s used product resale platform, revealed that its user base has exceeded 500 million, with Generation Z (born between 1995 and 2000) accounting for 43% of its users, and Generation Alpha (born after 2000) representing 22%. This may be one of China’s youngest platforms yet!
WeChat Channels started testing local services. Leading fast-food brands like Burger King, McDonalds and KFC have started offering group-buying coupons and home delivery in the app's video channel. We wrote about WeChat Channels recently in WeChat Channels - The Hope of Tencent. WeChat is following Douyin, which also has been adding local services to its video app in recent years. We wrote about it in Food Fight! Douyin’s local services business.
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Cainiao, while starting off as an integrator of logistics resources, has transitioned towards operating its own logistic services in the domestic market, mirroring what it has done with its international business model which started in 2017-18.
Because it focuses its domestic warehousing and distribution services on Tmall flagship stores, Cainiao sees less utilization by Taobao shops due to their lower requirements for timeliness and service quality and aversion to higher costs. It is aiming for a 25% Tmall penetration rate by 2023.
There are significant losses in Cainiao's domestic W&D business. However, Alibaba will continue to invest in improving user experience and in areas like cloud computing technology, infrastructure and other areas of long-term value.
Alibaba's e-commerce platforms lead the express business market with over 45% share by parcel volume, followed by JD (20%), Pinduoduo (13%), and Douyin and Kuaishou (10% each). Though newer platforms like Pinduoduo and Douyin are altering the competitive landscape they cannot establish comprehensive warehousing and logistics segments in the short term.
Over 90% of Cainiao's international orders currently come from Alibaba, but industry experts believe the next two years may provide an ideal opportunity for Cainiao to expand its services to more external clients.
JD Logistics, a major competitor to Cainiao Cross-Border Logistics, concentrates on leveraging its domestic logistic strengths in its international strategy, focusing primarily on warehousing and after-sales service rather than expanding its e-commerce operations.
Alibaba just announced that it has approved for Cainiao to go IPO with an expected timeline of 12-18 months.
Cainiao is Born
In 2009, Alibaba initiated the first Double 11 (AKA Singles Day) event, catapulting e-commerce volume growth and, in turn, leading to a massive surge in the volume of express packages. This rapid explosion in order volume swiftly exposed the limitations of the express delivery industry at the time: inadequate capacity, low degree of technological sophistication, and operational inefficiencies. Alibaba quickly realized that such logistics service capabilities would inevitably hinder the development of e-commerce and thus decided to venture into logistics to address the pain of e-commerce logistics. As a result, Cainiao Network Technology Co., Ltd. (hereinafter referred to as "Cainiao") was established in 2013.
Born with a proverbial silver spoon, Cainiao is backed by a host of illustrious logistics shareholders, apart from Alibaba, which include Yintai (银泰), Fosun (复星), Forchn (富春), SF Express (顺丰), STO Express (申通), ZTO Express (中通), YTO Express (圆通), and Yunda Express (韵达). Among these investors, Tmall made a significant contribution, injecting 2.15 billion yuan to secure a 43% stake in the company.
Fast forward to September 2017, Alibaba invested an additional 5.3 billion yuan, raising its stake in Cainiao Network from 47% to 51% and earning another board seat. Further, in November 2019, Alibaba increased its stake to approximately 63% through a 23.3 billion yuan investment.
Cainiao is not a Top Logistics Company
In the years following its establishment, Cainiao's executives frequently emphasized that the company's original intention was to use technology to enhance logistics efficiency, not to enter the courier business. This assertion was initially met with skepticism, as more than 70% of all e-commerce packages at the time were from Tmall and Taobao. If Alibaba wanted to control the courier industry, it could easily shift the balance of power by acquiring a company or referring traffic. However, eight years on, Alibaba has not taken these actions. Merchants on Tmall and Taobao can independently select courier companies to cooperate with, bypassing Cainiao's involvement.
According to the 2021 mid-year express delivery CR8 index released by the National Post Bureau, China's eight leading courier companies in terms of business revenue (STO Express, ZTO Express, YTO Express, Yunda Express, SF Express, China Post 中国邮政, JD Logistics 京东物流, J&T Express 极兔) held 80.8% of the courier market share, reflecting intense competition. Cainiao is not one of them. In contrast, two to three companies control over 90% of the courier market in the US, Japan, and Europe. Evidently, Cainiao is indeed an unconventional logistics company, with limited overlap with traditional courier logistics.
Of the leading players, SF Express is considered the premium service provider. It is the go-to courier for numerous retailers dealing in high-value goods, a fact that has burnished its reputation within the industry. SF targets upscale merchants, individuals, and corporations, and in recent years has introduced services catered to its mid-tier clients, because downward compatibility in business development is generally easier to achieve. It is also highly profitable. Its operating income for 2021 was RMB 207.2 billion, although it is offset by slower growth. Nonetheless, despite SF not being directly backed by an e-commerce brand, unlike Cainiao and JD Logistics, it's worth noting that its market value outshines its peers.
In comparison, Cainiao Network's operating income sits on the lower end of the spectrum among its peers. However, it is growing rapidly. The latest figures from Cainiao's 2021 annual report show an operating income of RMB 37.3 billion, with a growth rate of 68.2%.