Cainiao to become a courier before HK IPO

By BAI Fan

Cainiao, Alibaba’s logistics business has previously made most of its money by farming deliveries out to established couriers. Now, the company plans to become a courier itself, a move that is set to cause widespread disruption to the industry, not least among those businesses that have – quite literally – done Cainiao's heavy lifting up till now.

The Cainiao Express (CE) network extends to nearly 300 cities in China. For now, Alibaba's delivery guy is offering generous terms to anyone jumping on board.

Unmet demand, unmade profits

Cainiao claims to have to solution to the perennial minor and massive headaches of vendors and couriers: cancellation after pickup, change of destination, delay and damage.

“China’s courier market is big enough and growing fast enough for a newcomer,” said CEO Wan Lin hopefully.

Cainiao was founded ten years ago on a business model based on pooling the resources – trucks, flights, warehouses, etc. – of courier companies. Cainiao does deliver some packages itself, mainly for Tmall and CE simply extends that delivery to non-Tmall clients.

CE will specialize in half-day, same-day and next-day delivery. That's the high end of the market and only affordable to high-end retailers, corporate clients, and individual customers who are willing to pay a premium. The courier industry is and always has been famously competitive and notoriously unprofitable, but there is still unmet demand.

Getting what you paid for

“Online shops have no choice but to save costs, so couriers are unable to make much money from them. To survive, they have to cut corners by, say, not offering doorstep delivery,” said Gong Fuzhao, an analyst at Shuangyi Consulting.

“There are two approaches to the situation. Budget couriers try to convince customers it’s worth it to pay less and deal with the so-called "inconvenience." Cainiao, and also SF Express, charge more and while claiming to provide "better" services,” said Gong.

ZHAO Xiaomin, a supply-chain blogger, does not expect that Cainiao will clash directly with budget couriers. It will, however, be a solid rival for SF Express, which is reliable but pricey.

Banking on the competition

Cainiao however is not the exclusive five-star service executives like to portray it as. Cainiao has no problem getting its hands dirty at the lower end. Alibaba's offspring participates in the budget market through shareholdings and partnerships.

Prior to big carve up, Alibaba held minority stakes in three of the country’s top logistics companies. Cainiao owns 25 percent of STO Express. A subsidiary controls 20 percent of YT Express. Cainiao and YT Express jointly operate cargo flights. In turn, couriers including YTO, STO and SF hold stakes in Cainiao.

Outside China, Cainiao boasts that it will deliver to or from "anywhere" in the world within five business days, but who's counting? Consumers who do not live in the heart of the Sahara or Tierra del Fuego are well accustomed to such delivery times, but residents of St Helena must be delighted.

The service is already in operation in Spain – hardly "anywhere" - and so far includes only two-day delivery in 20 cities and next-day delivery in a lot less. Wan says he has plans to expand at a pace of one or two countries each year.

IPO top priority delivery

Cainiao is setting itself up for a faceoff with JT Express, the largest courier in Southeast Asia.

The faceoff might be more of a staring match than a life-or-death struggle for supremacy. It's not even clear if the two are genuine competitors. JT Express is a close partner with many Southeast Asian e-commerce companies, and many of those companies – Lazada for example - are Alibaba in disguise.

Some analysts think Cainiao may aim for the higher end of the market and benchmark against FedEx and UPS. In a lengthy stream of brazen optimism, Wan said during the press conference that Cainiao would build a “world-leading smart logistics network” that is digital, adaptive, and extremely responsive to market needs.

Cainiao is one of the six units to emerge from the dissection of Alibaba Group. As expected, Cainiao is pursuing an IPO in Hong Kong at a pace that defies belief. Alibaba suggested that Cainiao would go public within 18 months but many in the market believe the deal will be done this year.

Delivering the IPO looks like a much higher priority than delivering any packages, even same-day packages.

Express IPO service in full swing

Joseph Tsai, a founding member of Alibaba and vice chairman of the group is now chairman of Cainiao. Tsai served as Alibaba’s CFO from 1999 to 2013 and took the company public in New York which seemed like a good idea at the time. As one of the small group of Alibaba founders, Tsai's appointment has been interpreted positively for Cainiao.

Reuters reported this month that Cainiao will file for an IPO in Hong Kong in Q3 in one of the biggest deals for the exchange this year. Cainiao has neither confirmed nor denied the rumors.

Competitors are not just standing idly by as Cainiao pursues capital over profits. JT Express published a prospectus for a Hong Kong IPO in June. SF Express reportedly also has plans for a secondary offering in Hong Kong.