Post sponsored by Last Mile Fulfilment Asia (LMFAsia)

LMFA is Southeast Asia’s premier trade show for the retail, ecommerce, logistics and parcel industries, and returns with the 3rd edition on March 2-3 2017.

Themed “Go Global, Deliver Local”, the event aims to drive and strengthen a borderless fulfilment process.

Amidst a backdrop of economic uncertainties today, Southeast Asia’s ecommerce market is expected to reach $88 billion by 2025.

In recognising that last mile costs almost 28% of total cost of moving goods, achieving cost efficiency through innovative logistics solutions will be key to amplify the ecommerce market that is already expanding at rapid speed in the region.

According to Frost & Sullivan, the global B2B ecommerce market alone will reach US$6.7 trillion by 2020. This year’s conference will feature a new track “The Future of Ecommerce is B2B Ecommerce”, and include industry speakers from renowned retail, ecommerce and logistics leaders such as DHL, aCommerce and JD Worldwide.

The two-day conference and exhibition, organised by SingEx Exhibitions, comprises of a multi-track component that will dive into topics such as turning fulfilment challenges into opportunities, designing cross-border fulfilment solutions across Asia.

For more event information, please visit the website: http://www.lmfasia.com/

For Logistics related reports, visit our reports section

Disclaimer: ecommerceIQ is LMFA’s official Knowledge Partner for this year’s conference. We look forward to meeting everyone.

When successful, established businesses tell their story, it usually sounds all very straightforward. The founders get an idea, work hard to execute it, and miraculously, it all works smoothly from the very beginning to result in millions of dollars earned.

The reality of start-ups in today’s economy is different – the initial idea is only the starting point that almost always evolves at any point of time. The founders of TheLorry, Malaysia’s on-demand logistics start-up, experienced this firsthand and have been on the tips of their toes since deciding they would capture the market’s overlooked opportunities.

TheLorry is a technology-enabled platform that matches lorry owners and drivers with private and corporate customers who need help moving house, office and/or general cargo.

Founded late 2014 by ex-colleagues Nadhir Ashafiq and Chee Hau Goh, TheLorry was initially intended to be the “Expedia for logistics”, but then became the “Uber for lorries” to focus on the business-to-consumer (B2C) market and then later switched focus to the business-to-business (B2B) market.

Ex-colleagues Chee Hau Goh (on the left) and Nadhir Ashafiq (on the right) have reinvented TheLorry three times within two years, showing how startups can adapt to unexpected factors.

It may sound like there was a lack of vision, but this is the reality of businesses in dynamic markets, especially developing ones. The growth of any company involves adapting to unexpected factors such as new competitors, new technologies or customer demands.

ecommerceIQ sits down with TheLorry co-founder and executive director Nadhir Ashafiq to find out how his company carved out a niche in Malaysia’s competitive logistics landscape and why they decided to pivot.

The Business Model Evolution of TheLorry

2014 – early 2015: Expedia for Logistics

At first, TheLorry built a website that allowed customers to access instant lorry rental price quotes online after sharing some common variables: the type and size of the lorry needed, the start and end points of the journey, etc.

The whole business was a two-man team at that time. While Chee Hau was pumping up marketing and sales, Nadhir was running around Kuala Lumpur and Selangor meeting lorry drivers and giving them Excel sheets to fill in their prices, which would afterwards be uploaded on TheLorry website.

TheLorry initially wanted to be “Expedia for Logistics” where users could choose lorry rental on the startup’s platform from selected service providers based on ratings and prices

Right away, there were several downsides to this model, the most pressing being the scalability of the model. It was a time consuming and tedious process to acquire the price quotes from service providers that sometimes involved over 900 price points.

The other reason was that TheLorry could not prevent customers from going directly to the service provider instead of booking through the website. There were several cases when TheLorry got to know that people were searching for their providers online either by customers’ own admissions or comments from the providers.

“Therefore, around the mid-2015 we moved to an Uber-like model where we would be setting the prices ourselves,” explains Nadhir.

Early-2015: Uber for Lorries

The switch meant TheLorry would need to match providers with jobs. At first, it was done manually until the company built an app in-house and the minimum viable product (MVP) within two months. The drivers could accept the job on the app, and thus the process became automated.

TheLorry built an app for drivers in-house within two months. It automated the process of matching lorry drivers with the jobs available.

As TheLorry had attracted funding at the beginning of 2015 from pre-accelerator program WatchTower and Friends and Singapore’s venture capital KK Fund, the company started scaling up by hiring people for their team. Their obsession became to grow bookings through their website and increase their fleet size.

The need for a second major pivot came when the company realised that lorry rental aimed at individuals was mostly a one-off event as people did not often move homes or offices. And apart from customer referrals, the company would find a difficult time sourcing new clients.

Mid-2015 – present: Lorries for B2B  

This is when TheLorry decided to push for B2B sales targeting commercial cargo market – manufacturers, distributors and freight forwarders with urgent trucking needs. Now business customers make around 60% of the company’s sales when it was only expected to make up around 30% of the entire business.

But every business model, no matter how successful, has its own set of challenges.

“There are a few drawbacks for B2B. First, the onboarding process of each client is longer and sales managers have to be hired to pitch our services and build a long-lasting relationship. Then, we also have to give corporate clients a credit meaning at least 30 or 60 days to pay for the services. But chances of repeat business are high and generated revenue is healthy,” says Nadhir.

Servicing Different Customers: B2C versus B2B

Targeting B2C and B2B segments obviously require different approaches. TheLorry adopted online marketing strategy to acquire more individual customers and invested in Google adwords, Facebook ads and content marketing to drive as much traffic to website as possible.

This tactic, however, did not really work for targeting corporations where it is more effective when sales managers knock on client office doors for a face-to-face meeting – especially in the Southeast Asia business world.

“Online marketing gave us visibility, but to seal the deal, we needed a salesperson on the ground and account managers to meet customers to clearly explain our solutions. B2B sales is all about creating and maintaining relationships,” says Nadhir.

Once onboarded, corporate clients can use TheLorry app to hire drivers directly or in the case of any special needs they can turn to an account manager, assigned to each business. Through the TheLorry platform, clients can view all the past and present bookings and invoices as well as track drivers who are on the job.

As TheLorry is a technology-enabled platform, around two thirds of its business is automated. Compared to other start-ups, Nadhir says the company wants to be fully transparent with its clients and does not promise full automation because of the difficulty it entails.

“There needs to be a bit more scrutiny and a bit more manual intervention in order to get the business to run properly,” explains the entrepreneur.

As quality of service is important to any type of customer, TheLorry interviews all drivers and puts them through 2-3 test drives where their skills and professional manners are assessed. If clients give them 1-star rating after these test jobs, they don’t get the opportunity to join TheLorry driver family.

TheLorry team interviews all their drivers face-to-face and gives them test jobs before accepting them to TheLorry driver family to ensure quality of the service.

What’s in The Cards for TheLorry?

TheLorry still has plenty of room to grow. The B2B lorry rental market in Malaysia is estimated at $3.9 billion. There are no solid figures for the B2C market, but the company estimates that this segment is worth around $22.5 to 45 million based on property sales data.

TheLorry wants to become profitable in 2017 and expand to Thailand in addition to its existing services in Malaysia and Singapore.

Jumping on new and unexplored opportunities to raise revenues is one way to grow. Yet, one piece of advice Nadhir hopes other entrepreneurs remain mindful of is that potential top line revenue always carries costs.

Lured by potential revenue growth last year TheLorry took a business opportunity, which Nadhir did not want to disclose, in a field they had no experience and no clear plan to make unit economics profitable.

“In the end, we ended up in a situation where we were selling our service for 1 ringgit and our cost was 2 ringgits. And there was no way for us to increase the price to 3 ringgits,” said Nadhir, adding they decided to quit the business opportunity later that year.

On the bright side, there also have been surprising successes. In 2016, TheLorry introduced a new product – 4 wheel drive car rental, which turned out to be a hit for small and medium mom-and-pop shops who use them on a more regular basis.

As for 2017, the company’s end goal is to grow revenue by a certain multiple, not disclosed, to become profitable. In the second half of the year, TheLorry hopes to expand to Thailand in addition to its existing services in Malaysia and Singapore.

After raising $1.5 million in Series A funding early last year, TheLorry is still in touch with many investors but has no plans for fundraising as yet.

You can read more about TheLorry in SPARK40 here.

Nadhir Ashafiq’s Tips for Aspiring Entrepreneurs

  1. Validate your business idea – test the product, see whether you will have a market before spending money on it. Prior to TheLorry I spent RM 200,000 ($USD 45,000) on a thing which did not work. Don’t spend so much money for nothing!
  2. Read The Lean Startup by Eric Ries, create minimum viable product and get as many people to review your product and launch as fast as possible at the lowest cost possible.
  3. Learn about online marketing, things such as how to drive traffic, conversion rates, upsell and do email marketing, if you will be working in ecommerce space. Good resources for this are kissmetrics.com, backlinko.com, quicksprout.com, neilpatel.com.  

 

By Aija Krutaine based on an interview with Nadhir Ashafiq

This is the last of a four-part series breaking down Alibaba’s plan to shake up logistics in China: Cainiao Network. PART 1, PART 2, PART 3

Cainiao’s Platform Model Versus Jingdong’s Direct Model

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).

Clearly, the platform model advocated by Cainiao Network is very different from the “direct model” (i.e. centralized, vertically integrated, asset-heavy) represented by Jingdong and SF Express and represents a different logistics development approach.

But it’s not a simple comparison – whichever fits a company’s own needs at any given stage is the most appropriate approach.

The advantage of the direct model of Jingdong lies in the high degree of control and better experience it can bring. As long as ecommerce logistics has massive demand reflected in warehousing and distribution, Cainiao’s platform model can achieve rapid growth.

In Cainiao Network’s view, the platform model is the inevitable future of logistics. Cainiao’s president Tong Wenhong believes that the direct model has no future and “Jingdong will eventually use Alibaba’s model in the future” on the grounds that Jingdong needs seventy to eighty thousand logistics personnel to process a daily parcel volume of one million and SF Express needs close to 400,000 logistics staff to handle a daily capacity of 4 million parcels.

When the number of China’s packages reaches 200 million, how many logistics staff will be needed to deliver them? The director of strategic cooperation at Cainiao Network, Li Wei, has said that “in the pyramid-shaped management structure of the direct model, each layer added will result in additional management costs of about 30% being passed along.”

The direct model ensures better service and timeliness, but it cannot solve the problem of scale. Cainiao hopes to help logistics companies through a platform approach with the goal of improving service and timeliness through technical means rather than brute (human) force.

Cainiao’s Platform Model Has its Skeptics—SF Express

Although Cainiao is very confident about its own platform model, its partners are not and some are even rejecting it. When Cainiao Network was established, it claimed bring innovation to the express delivery industry using a cloud system and warehousing storage system.

Two years later, these original strategies became the previously highlighted five key strategies: the express delivery strategy, the warehousing and distribution strategy, the pickup stations strategy, the cross-border logistics strategy and the rural logistics strategy.

The first three strategies almost closely control the operating lifeline of courier companies: that is, they intervene in terms of data, control delivery routes, and seize the last-mile. Needless to say, it will cause resistance by courier companies.

Take SF Express as an example. Even though SF Express and the “Three TOs and One Da” were all 1% stakeholders when Cainiao was established in 2013, they have expressed disagreements regarding their position with respect to Cainiao.

During the “Cainiao Jianghu Assembly”, more than 10 representative courier companies led by the “Three TOs and One Da” appeared to support Alibaba; only SF Express was absent. When facing the matter of business alliances, the strategies of the “Three TOs and One Da” are completely different from that of SF Express.

“The Three TOs and One Da” have difficulty coming to a resolution, while SF Express wants to get rid of the control of Cainiao Network platform and its ambition to be independent is abundantly clear. To show you why, let’s look at a simple comparison of SF Express and Cainiao Network.

cainiao business-model

Through the above comparative analysis, SF has been keeping an alert and sober eye on Cainiao for some time, and it has even tried to “challenge” Alibaba. The “Three TOs and One Da”, on the other hand, have been strategically ambiguous.

At present, it is hard to say who will win and who will lose—this is a long-distance race, and at this moment, the competition is more about who has made the best preparations for the future.

Conclusion

This three part series aimed to systematically review and analyze the commercial trajectory and development of Cainiao Network over the past two years since its establishment in 2013.

It also focuses on Cainiao Network’s strategic positioning to complete Alibaba’s own business ecosystem, and points out the five current strategic directions and implementation approaches of Cainiao Network. The main conclusions are as follows:

  1. Consumers have long complained about poor logistics in China. With the growth of the direct logistics approach of Jingdong, Alibaba’s logistics business has been at a greater and greater competitive disadvantage. This is the real reason why Cainiao has doubled-down building its own warehouses.
  1. Compared with the ecommerce and financial services business that Alibaba has successfully launched before, Cainiao’s current efforts involve many offline courier and logistics issues.

The complexity involved in completing the full integration of online and offline is beyond imagination – no precedent outside of China can be referred to. Also, Cainiao’s partners are cautious and alert and have their own contingency plans. Therefore, it is difficult to say whether Cainiao’s platform approach will be successful in the future.

Implications For Logistics in Southeast Asia

As Alibaba may have noticed, Southeast Asia shares a lot of similarities with China a decade ago, especially in terms of a nascent and fragmented logistics ecosystem.

Because of the pain points in logistics, plenty of investor funding has gone into this space. Companies like Ninja Van, Deliveree and the now-defunct Zyllem have raised millions to tackle the last-mile challenge in SEA – even Lazada invested in its own delivery fleet as part of Lazada Express (LEX).

In this kind of environment, introducing a platform like Cainiao would make a lot of sense. A central platform with large address database and route optimization would improve the efficiency of logistics in the region.

On the other hand, it could also spell bad news for last-mile delivery companies in the region because Cainiao would end up controlling the supply of packages, the data, the rules, and potentially turn last-mile logistics into a price-driven, commodity play.

Alibaba was able to get Cainiao off the ground due to the massive order volume from Tmall and Taobao combined. In SEA, there’s no single dominant player who commands the bulk of all orders making Alibaba’s acquisition of Lazada a likely first step towards introducing Cainiao. As we’ve seen with Alipay and Ant Finance, Cainiao in Southeast Asia may not be a matter of “if” but rather “when”.

The original first appeared in Chinese on Yunbao88. Concluding excerpt by Sheji Ho, editing by ecommerceIQ team.

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.

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.

This is the first of a four-piece series breaking down Alibaba’s plan to shake up China’s logistics: Cainiao Network. Part 2, Part 3, Part 4

The Beginning

In May 2013, Alibaba, along with Yintai Group, FOSUN Group, FORCHN Logistics, SF Express and a group of leading Chinese last-mile logistics companies conveniently labeled “Three TOs and One DA” (YTO Express, STO Express, ZTO Express and Yun Da Express) established Cainiao Network Technology Co. Ltd.

This consortium led by Alibaba is committed to building a “China Smart Logistics Network (CSN)” to realize 24-hour delivery of any product to anywhere in China and a total of 300 billion RMB ($43 billion USD) was invested to kickstart the project.

Alibaba’s announcement of Cainiao and Jack Ma entering the logistics industry was like an atomic bomb dropping, with rippling effects across the entire value chain including the Internet, ecommerce and real estate industries. People soon started speculating that similar to how Taobao transformed an entire generation’s shopping behavior, Cainiao would disrupt and change the traditional logistics ecosystem.

But during the noise, Cainiao retreated into silence. There has been very little public information about the company except for leaked news that it had been gradually acquiring more land as part of a much bigger and soon to be revealed strategy.

All this changed two years later on May 28, 2015, when Alibaba held the “Cainiao Jianghu Assembly” to officially launch Cainiao, along with answers to a series of personnel changes and the strategic positioning of Cainiao Network’s future.

This four-part series intends to shed more light on the series of actions and arrangements made during the period of time between the establishment of Cainiao Network in 2013 and the May 2015 assembly.

We will learn more about Cainiao Network’s underlying business model, why Alibaba initiated it and what the implications are for industries inside China and beyond. With Alibaba’s march into Southeast Asia through the Lazada acquisition, there may be signs that Jack Ma’s Cainiao Network strategy may not only be limited to China.

Analysis of Cainiao’s Ownership Structure

To fully understand Alibaba’s Cainiao strategy, we need to dive deeper into the consortium’s ownership structure. Who are the key players and their intentions? Their backgrounds and roles within the consortium and their percentage share holdings reveal Jack Ma’s master plan.

As mentioned at the beginning of this article, Cainiao’s investors include Alibaba, Yintai Group, FOSUN Group, FORCHN Logistics, SF Express and “Three TOs and One Da”. The proportion of each investor’s investment is shown in the table below:
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Brief introduction and analysis of each investor’s background:

First, FOSUN Group founded in 1992, is mainly engaged in real estate investment, pharmaceutical and steel industries, and its far-reaching professional experience ranges from land acquisition, construction, and warehouse real estate property management.

Second, Yintai Group has long been involved in department store chains, particularly in supply chain management. When Cainiao Network was first established, Shen Guojun from Yintai Group was appointed as its CEO. It was because of Yintai Group’s strengths in this area that Shen Guojun was appointed to take charge of Cainiao’s warehouse and logistics operations.

Third, Alibaba’s stake in Cainiao Network accounts for the largest chunk — a 43% of total investment. This is mainly based on the following:

  • Alibaba has a lot of capital
  • Alibaba is acting to unite different parties in order to address its own weaknesses with regards to warehousing and logistics
  • Alibaba has always favored an asset-light, platform approach (i.e. Taobao and Tmall) and doesn’t plan to become an asset-heavy organization. Let other players do the heavy lifting while Alibaba invests into and builds a platform for intelligent logistics it is able to unify and control the flow of information and finance.

Given that Cainiao could be considered a logistics play, then why have the “Three TOs and One Da” companies and SF Express each invested only 50 million RMB ($7.2 million USD) to account for 1% of total investment?

SF Express and the “Three TOs and One Da” are courier companies. Their participation reflects the resolution of Cainiao Network to become China’s logistics backbone, while also ensuring that risk can be properly dispersed. But why do they account for such a tiny stake?

This may be due to Alibaba’s business arrangement considerations. Through analysis of the relevant investors, we can see that in the future business operations of Cainiao Network, FORCHN Logistics will be mainly responsible for line-haul logistics, and the “Three TOs and One Da” companies and SF Express are left to compete for last-mile delivery.

Through this shareholder structure: FOSUN builds warehouses, Yintai manages warehouse operations, FORCHN is responsible for line-haul logistics, the “Three TOs and One Da” companies take care of last-mile delivery, and Alibaba provides the platform and controls flow of information and financial reconciliation.

The stage is set for Cainiao Network to become the single biggest backbone for logistics in China.

Analysis of Cainiao’s Executive Team

Within the short two years after the founding of Cainiao Network, the company has been through several executive changes. All of which were strategic and diving deeper provides additional insight into Cainiao’s strategy.

When Cainiao Network was first established in 2013, Jack Ma himself served as chairman of the board and Shen Guojun served as CEO. One year later, Shen Guojun became executive Chairman of the Board of Cainiao Network while Zhang Yong, COO of Alibaba Group at the time, took over as CEO instead.

Finally, in 2015, it was disclosed at the “Cainiao Jianghu Assembly” that Tong Wenhong would serve as president of Cainiao Network, specifically responsible for Cainiao Network’s business operations. Who are these big shots?

Shen Guojun (Cainiao Network Founding CEO; former Chairman)

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Shen Guojun founded China Yintai Investment Co., Ltd. in 1997 and served as Chairman of the Board. As the founder of Yintai Group, Shen Guojun led the company’s expansion into commercial retailing, real estate development and natural resources, eventually becoming the 97th richest person in China with an estimated net worth of $2.3 billion.

Shen has also established many well-known landmark projects such as Beijing Yintai Center, Hangzhou Lake Coast Yintai, Hangzhou Wulin Yintai Department Store, Hangzhou West Yintai City, Chengdu Yintai Center and Ningbo Yintai Universal City just to mention a few. As of 2015, Shen Guojun retired as chairman of Yintai Group Board of Directors and Zhang Yong from Alibaba took over.

Zhang Yong (former Cainiao Network CEO, current CEO Alibaba Group)

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Zhang Yong is the current CEO of Alibaba Group, a member of the Alibaba Group Board of Directors as well as a founding partner of Alibaba. A Shanghai native, Zhang Yong started out his career in auditing and advisory at Arthur Anderson and PricewaterhouseCoopers in Shanghai.

In 2005, he joined Shanda Interactive Entertainment Limited, a leading online game developer in China, as CFO. During his two-year stint at Shanda, he led the company through a rapid growth period culminating in a public listing on NASDAQ.

In August 2007, Zhang Yong left Shanda to join Alibaba Group to serve as Taobao’s CFO and later COO of Taobao and General Manager of Taobao Mall. In 2011, as Taobao Mall spun off from Taobao to become Tmall, Zhang Yong served as its president. During his time heading up Tmall, Zhang Yong grew the platform into one of the world’s largest ecommerce marketplaces and is also credited for inventing the Singles’ Day 11.11 mega shopping event.

Since September 2013, Zhang Yong has served as the COO of Alibaba Group, responsible for both Alibaba Group’s domestic and international operations. He has led Alibaba Group in its continuing transition towards mobile, established an integrated global logistics network – Cainiao Network, and launched the Alibaba international platform where China’s consumers can buy global brands – Tmall International. Zhang Yong has also led a number of important strategic investments for Alibaba Group, including Ali Health, Haier Electric, Yintai Business Group, and Singapore Post.

On May 7, 2015, Alibaba Group announced that Zhang Yong would become the CEO of Alibaba Group and, at the same time, serve as Chairman of Yintai Group’s Board of Directors.

Tong Wenhong (current President and COO of Cainiao Network)

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In a classic rags-to-riches story, Tong Wenhong joined Alibaba in 2000 and slowly worked her way up from front desk receptionist to Alibaba Group Senior Vice President. Today, she’s a partner at Alibaba and serves as COO of Cainiao Network as well as Alibaba Group SVP.

With a strong team spearheading this ambitious project by Alibaba, how will they structure a business model to be a strong contender against competitors like JD? The next article in this series will focus on the formation of Cainiao Network’s strategy and further glimpse into Jack Ma’s plans.

The original first appeared in Chinese on Yunbao88. Editing by ecommerceIQ team. Sign up for eIQ newsletter for updates.