In 2014, Chinese e-commerce giant Alibaba released the largest IPO ever to hit the U.S. stock market. Last month, Chinese logistics company ZTO Express entered the New York Stock Exchange with a $1.4 billion IPO, which was the largest U.S. IPO of 2016. E-commerce in China continues to boom, and logistics companies are along for the ride.
E-commerce growth during just the past several years is astounding. Gross merchandise volume reached $609 billion[i] in 2015 (roughly doubled from 2013[ii]) and is projected to hit $1.1 trillion in 2020[iii]. In 2013, less than one-fifth of China’s population shopped online, but as more people gain access to the internet, particularly in rural areas, that number is sure to grow[iv]. Alibaba CEO Jack Ma has been quoted as observing that for U.S. retailers, e-commerce is often viewed liked a dessert – a supplementary aside to the main business. In China, however, because the infrastructure of commerce is so bad, “e-commerce becomes the main course.[v]”
Every order requires someone to deliver it, whether by truck, subway, bike or moped. China’s logistics market is split between 9 or 10 major players (as opposed to just Fedex and UPS in the U.S.) and each of those companies works with numerous smaller partners to deliver products to consumers. ZTO has over 7,000 partners.[vi] ZTO is the 2nd largest delivery provider in China, with 14% of the market, and Alibaba is responsible for about three-quarters of ZTO’s parcel volume.[vii] However, Alibaba has also invested in competitors to ZTO, and is working to expand an in-house logistics arm called Cainiao.
Although there is plenty of competition in China’s logistics market, there are concerns that the market is inefficiently organized and underprepared to meet growing demand. For Alibaba, the world’s chief e-commerce behemoth owning Alibaba.com (the world’s largest business to business trading platform for small businesses), Taobao (an eBay-like platform which is China’s third most visited website[viii] and one of the top visited websites in the world) and T-mall (a popular retailer-to-consumer platform), working to address sellers’ logistics needs is a big task. It’s also an important task, in order to facilitate faster and more reliable deliveries (including deliveries to small towns and rural areas, and international deliveries) as well as to accommodate skyrocketing numbers of deliveries after peak sales days like the November 11th “Singles Day.” Singles Day sales in China have been growing at about 30%[ix] per year, and dwarf Black Friday sales in the U.S.
Alibaba and its investment partners plans to spend $16 billion on logistics improvements over the next 5-8 years[x], growing Cainiao into a more effective data-driven logistics network operator. Cainiao partners with other large logistics providers (including leading providers like ZTO and YTO), and offers a centralized system with a standardized E-shipping label, a “smart-routing” data service, and a demand-forecasting data service. Success with Cainiao will help Alibaba stay ahead of smaller e-commerce competitors like JD.com, which grew about 40-50% quarterly year-over-year in 2016 and is lauded for its reliable delivery service.
With smart planning, logistics companies have an opportunity to turn China’s market dynamics into a solid recipe for growth.
– Mary Siebenaler, Associate Consultant, Logic Information Systems