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This is the second of a four-piece series breaking down Alibaba’s plan to shake up China’s logistics: Cainiao Network. Part I, Part 3, Part 4

Stage 1: The Birth of Cainiao to Serve The Motherland

When Cainiao Network was established, it positioned itself as an internet company with an asset-light business model, insisting it would not provide courier services, buy trucks or recruit any delivery staff.

At that time, Cainiao was given an exceptionally ambitious strategic vision: to build a “China Smart Logistics Network (CSN)”, develop an open and shared logistics platform, and to achieve 24-hour delivery of goods to any location in China through the Cainiao network.

This is the strategic mission that Jack Ma bestowed upon Cainiao, both out of commercial and national interests. We need to realize that this is an unprecedented challenge; there’s no precedent for reference; even in the United States, Japan and other countries where logistics is much more developed, there’s no such single logistics company performing a similar nerve center role.

If Jack Ma manages to pull off Cainiao, he will be lifting China from the logistics dark ages towards one with modern infrastructure, essentially accelerating the growth of China’s entire economy and well-being as well as cementing China’s position as the world’s largest and most advanced ecommerce market.

Stage 2: Cainiao’s Nest Building: Acquiring Land and Building Warehouses

After having established a lofty strategic vision, Cainiao Network seemed to deviate from its course in its next development phase. It set out acquiring land across the country at low prices and building warehouses and fulfillment centers, triggering a gold rush among related companies including ecommerce, logistics and large state-owned enterprises.

At the same time, voices of doubt were saying that Alibaba was taking this opportunity to engage in land enclosure (i.e. the fencing or hedging off areas of land for private use that had once been available for common use) and to develop logistics real estate. Jack Ma and Alibaba have never directly responded to these claims.

Cainiao Network’s capacity and speed in hoarding land has been nothing but amazing. In June 2013, the media reported that Cainiao Network acquired nearly 20,000 mu (about 13.3 million square meters) of land across the country. Alibaba has not confirmed this.

According to public information, Cainiao Network bought 1,000 mu of land in Shuangliu, Chengdu province; 1,500 mu of land in Jinhua, Zhejiang province; and 1,500 mu of land in Tianjin. And a conservative estimate, calculated based on a minimum purchase of 1,000 mu per city in an estimated 30 cities, amounts to 30,000 mu of land.

With such a large amount of land acquired in such a short period of time, it inevitably raised alarms and suspicions. People started thinking of this as land enclosure under the disguise of developing ecommerce logistics. Regardless of the source of funding used for this acquisition of land and construction, whether the acquired land will be really used in the construction of a smart logistics network, and whether the goal of “24-hour delivery throughout the entire country” really requires so much land remains an open question.

To illustrate this point, Global Logistics Properties, a modern logistics provider that built and managed 125 logistics parks in 33 major cities in China, has provided data. One of its presentations shows that the internal rate of return on a 10-year investment in the development of logistics real estate projects in China is about 15% to 20%. Among these returns, in addition to rental income brought in by warehouse storage rental, land value appreciation also provides attractive profits.

No wonder then that Cainiao Network’s actions came as an unpleasant surprise to several industries.

Real estate developers typically buy land and hold off on development, waiting for the land to appreciate in value and then selling it to never lose money. But now Cainiao Network has acquired land at a low cost and has suddenly broken into the territory of the real estate business.

The Chairman of Vantone Holdings Co. Ltd, Feng Lun once jealously said,

“The future of China’s real estate does not really depend on what the government will do, but on what Jack Ma will do.”

By acquiring land at a low cost and building warehouses, Cainiao Network has also created a strong conflict with other related logistics companies by not partnering with them. Warehousing is one of the central links in logistics and logistics companies don’t want this link belonging to someone else.

Jingdong is buying land, Suning is buying land, Shunfeng Express and DEPPON are buying land, and COSCO International is also buying land. Compared with the total amount of land these businesses have acquired, the 30,000 mu of land that Cainiao Network has bought is nothing and forming a competitive relationship could be a mistake.

Cainiao Network’s actions have also annoyed the Chinese government. When Cainiao Network was founded in 2013, the Ministry of Commerce praised Cainiao Network for using an internet platform to actively provide an integrated and one-stop service for small and medium-sized enterprises.

But relevant government officials are now convinced that the land enclosure movements of Cainiao Network is the wrong approach. Nie Linhai, Deputy Inspector at the Department of Electronic Commerce in the Ministry of Commerce, has bluntly pointed out that “Jack Ma set out to create Cainiao as a fourth-party smart logistics platform which I think would make a significant contribution to our country, but I find that he is walking in the wrong direction and building logistics bases and warehouses everywhere. That is because he can’t resist the temptation.”

Stage 3: Cainiao Grows Up and Takes Flight

In the two years since its establishment, Cainiao Network seems to have entered into a tangled state but under a low profile. Cainiao Network’s new president Tong Wenhong has said frankly that Cainiao has experienced a lot of hesitation and been constantly in a period of trial and error.

She told a China Economic Weekly reporter: “We have spent two years and are finally thinking clearly about what Cainiao is and what Cainiao will do.”

Tong Wenhong’s above statement was made at the “Cainiao Jianghu Assembly” held in Hangzhou on May 28, 2015. Based on Cainiao Network-related information revealed at this event, the company has finally returned from ideals to reality and is ready to take off.

In the next part of this series we will look at Cainiao Network’s business model in more detail to understand how it plans to build the China Smart Logistics Network (CSN).

 

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

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