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.


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.

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