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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.

Wal-Mart Yihaodian Fails in China, B2C bloodbath

(Hint: It’s a red ocean bloodbath), Image source: FactsRider

Its demise was inevitable. Since its 2008 launch, Wal-Mart’s online grocery business Yihaodian struggled to gain traction in China in the red sea of deep pocketed local B2C ecommerce players. Finally, Yihaodian has thrown in the towel and being sold to ecommerce Goliath JD.Com. The recently announced deal means JD will take over Yihaodian online and Wal-Mart will acquire a 5% stake in JD.com.

The Chinese branch of Sam’s Club, an American chain of membership-only retail warehouse clubs owned and operated by Walmart, will open a flagship store on JD.com, and the two companies will link their supply chains, broadening the range of imported goods. Wal-Mart, No. 8 in the China 500, will receive approximately 145 million newly issued Class A shares of JD.com in the transaction. So why and how did Wal-Mart’s seemingly successful Yihaodian fail so quickly in China?

 

Wal-Mart Yihaodian Fails in China Acquired by JD.com

Wal-Mart Yihaodian fails in China because the B2C market in China is a bloodbath. Smaller or global players will be hard-pressed to succeed there.

Wal-Mart’s Yihaodian fails in China, but why?

Walmart’s China strategy sought to establish itself as a source of high-quality food products after a series of safety issues in China, but failed because it could not adapt to local culture and buying patterns. It could also not compete with the economies of scale that giants JD and Alibaba wield. In TechCrunch last year, Sheji Ho and I predicted this when writing Forget China, There’s a Gold Rush in Southeast Asian Ecommerce Sphere

“In the Chinese ecommerce race the market giants have taken too large a lead for too long in China.

“Smaller” players such as Amazon, Rakuten, and Neiman Marcus entering the market struggle to compete because of fewer domestic resources, a lack of understanding of the Chinese market, as well as slower execution. Recent examples include Macys and Neiman Marcus shutting down their China ecommerce initiatives and Amazon throwing in the towel and opening a store on Tmall, China’s largest B2C marketplace.

With Tmall and JD owning close to three quarters of the Chinese B2C ecommerce market, there just isn’t much room for both “smaller” global and local players like Yihaodian, Suning, Amazon and VIPShop to compete. They cannot tap into the economies of scale enjoyed by the market leaders. B2C ecommerce is a winner-takes-all market where the rich get even richer.”

With nearly 6,000 delivery and pickup stations in approximately  2,500 counties and districts across China compared to Yihaodian’s mere 250 hubs, it sadly did not have a strong chance.

Cross-border ecommerce isn’t the answer either

Nonetheless, the company seemed optimistic last year. At a logistics conference in Shanghai, Yihaodian senior manager Yang Shenling said with confidence that ‘cross-border is the last blue ocean for Chinese ecommerce.’

The inbound cross-border market is estimated to be 155 billion RMB ($25 billion) and is expected to grow to a whopping 1 trillion RMB ($164 billion) by the end of 2018 according to The China e-Business Research Center cited by Shenling. But when we asked Yihaodian how big its new cross-border business was in terms of percentage of total company sales it turned out to be only 2% and projected to go up to 10% over the next five years.

Ten percent is still a very small number and getting there would be an uphill battle as the quality and safety of domestic products will no doubt increase over the next few years thanks to increased government pressure and regulation. As quality improves, there will be no need for Chinese consumers to look abroad.

In many ways, cross-border ecommerce in China can be seen as a desperate move to cope with the fact that the domestic market is reaching saturation. And despite all the hype, it is still a very small business compared to the Chinese domestic ecommerce market.

Lucky for them, JD.com has been doubling down on winning the food category. Last August, it bought a 10% stake in Yonghui, a rival that specializes in fresh food. From the Yihaodian acquisition, the company stands to gain credibility of a global brand in its efforts to be seen as a more trusted food retailer in the rightfully suspicious Chinese food ecommerce landscape.

Businesses are realizing that China is a Venus Flytrap – plenty of allure but crushing once inside.

This is just the beginning as global players are increasingly realizing that China is a Venus Flytrap – plenty of allure but crushed once inside. They instead start to look longingly south towards the real blue ocean- Southeast Asia. Expect China’s B2C ecommerce bloodbath to get a lot murkier as global and smaller ecommerce players learn the Amazon and Yihaodian China lesson the hard way.

By Felicia Moursalien

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