This is the third of a four-piece series breaking down Alibaba’s plan to shake up China’s logistics: Cainiao Network. Part 1, Part 2Part 4

Based on the information available on Cainiao Network, the business model can be divided into two levels:

1. In its strategic positioning, Cainiao Network is an important part of Alibaba’s business portfolio and ecosystem, complementing its weakness in logistics.

2. From a business operations point of view, Cainiao Network is an expansion of the Taobao model onto the field of logistics.

Strategic Positioning

Alibaba and Jingdong are the two giants in the field of ecommerce in China. Since the early days of its business, Jingdong has always emphasized logistics and built out its own warehouses and fulfillment centers as well as last-mile delivery fleet. This is exactly the opposite of what Jack Ma has done, with Alibaba’s focus on maintaining an asset-light business model. Alibaba’s intention for Cainiao Network is to enter the field of logistics and make up for its weaknesses in this area.

From the existing business segments of Alibaba, through Taobao/Tmall, Alipay/Yu’E Bao, and Ant Financial, the company has had full control of the business flow, information flow and capital flow in ecommerce, but it doesn’t have any control over the physical logistics part. The establishment of Cainiao Network allows Alibaba to fully control the entire ecommerce value chain, all the way from businesses to consumers. Because of Cainiao, Alibaba’s ecommerce ecosystem can now be considered complete. 

Below is an illustration of Alibaba’s ecommerce ecosystem.

cainiao southeast asia

Focusing on the logistics link in the chart, Alibaba has achieved control of courier companies through Cainiao Network and courier companies have been relegated to being just a “transportation tool” in Alibaba’s ecommerce system.

Through the construction of an ecommerce logistics platform ecosystem, Cainiao Network has become a rule-maker in the logistics industry to take the lead in the development of industry guidelines. This will undoubtedly contribute to the standardization of China’s courier industry.

However, for courier and logistics companies, they can’t help but feel uneasy that control will be by someone else rather than themselves. This sense of unhappiness is, to a large extent, reasonable, but they don’t really have the leverage to reject it.

A tremendous 70% of the business of the “Three TOs and One Da” and other courier giants comes from ecommerce. In April last year, Cainiao Network launched an e-shipping label system that now accounts for 40% of the entire volume of the courier delivery system and is expected to reach 100% by the end of 2016. As a result, Cainiao has an increasingly tighter grip on flow of goods and information resulting from ecommerce transactions in China.

At this point and in light of everything discussed, we need to think twice about Jack Ma’s commitment not to have Cainiao provide courier services, buy trucks or recruit any delivery staff. Jack Ma’s words are very tactful and subtle.

Although Cainiao Network isn’t going into the courier business, incumbent courier companies are increasingly dependent on Alibaba to receive courier business. Its impact on the existing courier industry is not a possibility but an inevitability.

Through the construction of Alibaba’s ecommerce ecosystem, Cainiao Network controls the vast majority of Alibaba’s logistics resources and will have the full right to speak. All the courier companies and line-haul logistics operations companies have to use Cainiao Network to access orders, uphold their ethical standards and follow the logistics hardware and software standards and the corresponding logistics rules developed by Cainiao Network.

Specific Business Model

Regarding its specific business model, Cainiao Network is an extension of Alibaba’s Taobao model, both commercially as well as conceptually. Taobao was developed as a third-party ecommerce platform between sellers and buyers, and gradually became a sound ecommerce ecosystem through the introduction of Alipay.

Cainiao Network applies this business model to the logistics field through the construction of a “China Smart Logistic Network (CSN)”.

It aims to create a virtual platform for an intelligent logistics ecosystem.

To build this “China Smart Logistic Network (CSN)”, Cainiao Network relies on five strategic pillars: express delivery, warehousing, cross-border logistics, rural area logistics and pickup stations. It strives to soon achieve the goal of 24-hour delivery within the country and 72-hour delivery across the world.

cainiao-southeast-asia

Strategy 1: The Express Delivery Strategy—bring an end to price wars among courier companies

With regards to express delivery, Cainiao Network’s next focus is to use the internet and big data to help courier companies become more data-driven to drive product and service expansion. This will enhance the overall speed and service level of the logistics industry and at the same time maintain order in the market and prevent courier companies from entering price wars.

Skeptics, however, would say that Cainiao’s success will actually drive last-mile players into a commodity service as they compete for orders drip-fed to them through the Cainiao Network. Cainiao aggregates Alibaba’s massive ecommerce demand and leverages it to drive down prices among last-mile suppliers. As a result, logistics becomes cheaper and more people will use ecommerce, driving up GMV, with Alibaba being the ultimate winner.

It is reported that Cainiao has launched a number of big data products. For example, the level 4 address database generated by Cainiao along with AutoNavi Map and big data algorithms can match a consumer’s delivery address to a specific township.

And the popularization of Cainiao’s e-shipping label system is expected to become the basis of digitization of courier companies to further enhance the overall efficiency of the industry.

Strategy 2: The Warehousing and Distribution Strategy

Through a social collaborative approach, Cainiao has formed a nationwide network to help businesses improve warehouse operations efficiency and experience. Having distribution hubs in five locations will reduce logistics costs and achieve next-day delivery in 50 cities within this year – a smart network.

Strategy 3: The Cross-border Logistics Strategy

In order to align with Alibaba Group’s globalization and rural strategy, Cainiao aims to establish a global network to reduce cross-border ecommerce logistics thresholds.

At present, Cainiao Network already has overseas warehouses in seven countries and cities and achieved a direct connection with national postal information to better serve the global market.

In terms of imports, Cainiao Network will enable consolidated imports and direct mail routes to allow consumers to have the same logistics experience as they do with domestic online shopping.

It is reported that Cainiao has partnered with YTO, DHL and the Russian Post and opened a number of import channels between the United States and China, Australia and China, and South Korea and China.

The company is also piloting a bonded warehouse model with several cross-border ecommerce businesses in Hangzhou, Guangzhou and Ningbo and in addition, established data integrations and business partnerships with dozens of overseas logistics partners to achieve synchronization of logistics information.

Strategy 4: The Rural Areas Logistics Strategy

Regarding its rural strategy, Cainiao has rapidly built the capability to cover second-tier logistics in counties and villages country-wide by relying on Alibaba Group’s Rural Taobao initiative. This was done in collaboration with Shanghai Winshine Logistics and dozens of other cash-on-delivery logistics companies as well as China Post.

Since the launch of Alibaba’s “1,000 Counties and 100,000 Villages” program in the second half of last year, Cainiao has in a few months used existing social logistics systems and its technical advantages to achieve quick delivery of goods from county to village.

Currently, Cainiao Network has achieved delivery of goods from Rural Taobao to villages in Ningxia, Guizhou, Jilin, Jiangxi, Fujian, Jiangsu, Zhejiang and Guangdong.

Cainiao Network’s data from May show that about 20% of the orders in areas covered by Rural Taobao of Alibaba can be delivered with same-day or next day service.

Strategy 5: The Pickup Stations Strategy

Cainiao has jointly built Cainiao pickup stations across the country with its partners. Through student entrepreneurs at colleges and universities, residential property management companies Greentown and Vanke in neighborhoods, and convenience stores such as C-Store, it has formed a “crowd-sourced” last-mile delivery network covering major cities across China.

At present, Cainiao Network is operating more than 20,000 pickup stations that provide integrated logistics and lifestyle services. In the future, this will be a last-mile logistics and express delivery network across the country.

Cainiao has also launched an app called “Guoguo” that consolidates all functions of courier companies, allowing users to check shipping status and to drop off and pick up orders.

By analyzing the aforementioned five pillars of Cainiao Network, we find that the implementation of its strategies cannot be achieved without collaboration with other partners such as warehouse storage operations. This reveals Cainiao Network’s business model implementation approach: a data-driven “platform model” (i.e. decentralized, horizontally integrated, asset-light).

For the final part of this series, we compare the “platform model” against the more common “direct model” and what this all means ultimately for China’s future and its influence on Southeast Asia.

The original first appeared in Chinese on Yunbao88. Editing by ecommerceIQ team.

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