The business of moving boxes around China is anything but boring these days.
Cainiao Smart Logistics Network last month reported faster revenue growth than any other specified part of Alibaba Group Holding’s vast empire. JD Logistics, the corresponding arm of rival JD.com, has filed to raise as much as $5 billion in an initial public offering in Hong Kong. SF Holding, a stand-alone Chinese courier company, has offered $2.3 billion to buy control of Hong Kong-based Kerry Logistics Network to expand its reach into Southeast Asia.
Cainiao has largely taken a different path from its rivals in stepping out from mainland China. In December, it launched a 500 million yuan ($76.8 million) tender for partners to help with package pick-up, customs clearance, trucking, warehousing, international shipping and final delivery around the world.
This call for foreign partners illustrates how Cainiao is expanding its formidable logistics network abroad: Instead of purchasing trucks, storage facilities, fuel and all the other things one normally associates with a shipping network, Cainiao is leveraging its data to streamline deliveries in a way that was never previously possible.
Just as importantly for Alibaba, Cainaio is turning from a money-draining support service for the group’s e-commerce operations into a profit center in its own right.
Last month, Alibaba Chief Financial Officer Maggie Wu announced Cainiao began generating positive operating cash flows in the October-December quarter. For the nine months to Dec. 31, the unit generated 27.3 billion yuan in revenue, up 58% from a year before.
Cainiao’s 3,000 worldwide partners do the heavy lifting of the network. Instead of building a warehouse in another country, Cainiao uses data analysis to tell its partners where to build. The goal is an easily accessible network with global reach, able to ship a package anywhere within China in 24 hours and anywhere in the world in 72.
For the Chinese customer used to speed in just about everything, the precision that Cainiao is bringing to logistics may be even more important.
A range of small innovations have laid the basis for this, from a standardized electronic shipping label platform to a cloud-based enterprise resource planner for logistics clients.
This model has been very effective in China, in part because Cainiao leverages network effects more than other logistics companies.
When more partners join the network, its efficiency improves because all the transactions in the logistics ecosystem are captured in a data exchange, analyzed and used to make informed decisions on issues such as how much to pre-stock in warehouses of specific goods, how to optimize pick-up and delivery routes and even what new services can be offered to merchants, customers and logistics partners.
While some freight forwarders and other logistics providers have their own platforms, none can match Cainiao for the extent of data analytics applied through a full logistics network. Fundamentally, Cainiao is a data-driven digital ecosystem embedded in a logistics value chain, rather than a logistics company per se.
Consider its Cainiao Guoguo delivery platform, which now has more than 100 million users. After entering shipment details on the Guoguo app, consumers and small businesses can arrange pick up, with nearby couriers automatically alerted, and then track their packages.
To expedite final delivery, the company has built partnerships, under the brand Cainiao Post, with supermarkets, convenience stores, schools and corner grocers willing to serve as pick-up and drop-off points. As of year-end, the company had established more than 80,000 neighborhood Cainiao Post stations.
Overseas, Cainiao has constructed a network of local pick-up spots across 33 countries and is building up regional hubs in Hangzhou, China; Hong Kong; Kuala Lumpur; Pattaya, Thailand; Belgium; Russia; and Dubai. This is creating a hub-and-spoke model to improve efficiency for global deliveries.
No competitor has built up anything close to Cainiao’s setup.
Amazon.com could theoretically seek to match its network but the American online retailer has focused on a heavier, do-it-yourself, asset-driven approach and has a limited Asian presence beyond Japan and India. The same could be said for FedEx and DHL, which both now collaborate with Cainiao in several areas.
But Cainiao’s ascendance could encounter obstacles as its global expansion draws more attention from rivals and foreign governments. Indeed, the U.S. Securities and Exchange Commission probe into Alibaba’s accounting, disclosed in 2016 and still unresolved, centers in part on Cainiao. Also, the company’s focus on data could be disrupted by the proliferation of divergent national regulations on data storage and transfer.
Yet such issues are likely only to slow Cainiao’s growth, not derail it. The company’s roots within the retail and e-commerce ecosystem of Alibaba give Cainiao a data advantage that has the potential to disrupt the logistics industry worldwide. The fact that it is starting to generate operating profits underscores the potential impact of the global business ecosystem Cainiao is putting together.
Mark Greeven is a professor of innovation and strategy at the IMD business school in Lausanne, Switzerland and the author of “Business Ecosystems in China: Alibaba and Competing Baidu, Tencent, Xiaomi and LeEco.”