Logistics revolution in China: Will delivery companies deliver?

An SF Express delivery truck in downtown Beijing

An SF Express delivery truck in downtown Beijing

China’s logistics sector owes its rapid growth to the country’s e-commerce boom, but can it keep pace?

Express delivery in China is cheap and fast. Buy something online and most likely you’ll have a kuaidi (Chinese word for courier) at your door step in just a day or two for a small delivery fee of as little as RMB 10 ($1.5). The country has more than 35,000 courier delivery companies that make this speedy delivery possible. They whiz through the cities on their three-wheeled electric trucks, and go door-to-door delivering parcels for a slim profit.

But having so many companies competing for such low margins has created a fiercely competitive logistics industry. The business model of most of these companies centers on delivering parcels, and very few venture on to other value-added services. Aiming at only being quick—and cheap—doesn’t leave much room or time for any other customer-friendly initiatives. T.L. Yip, Associate Director of Hong Kong-based C.Y. Tung International Centre for Maritime Studies, says, “The market is so big that delivery companies have to sacrifice efficiency to meet the demand.”

And this comes at a price.

In 2012 the Chinese postal authority cancelled the permits of 116 express delivery companies amid growing reports of customers complaining about losses, theft, poor handling of parcels and massive delays, especially during peak times. In 2011 the State Post Bureau received a whopping 366.1% more complains than the previous year! Half of them were due to delays in deliveries. This seriously affects e-commerce companies whose inability to control delivery may end up tarnishing their prospects of growth

and affecting the loyalty of their customers.

Alibaba, the world’s biggest business to business (B2B) online platform, is probably the one facing the biggest challenge. It’s popular customer to customer (C2C) online marketplace Taobao receives more than 20 million orders a day (70% of China’s deliveries). The parcels are delivered by third-party providers that have to deal with China’s underdeveloped delivery infrastructure. This is a common problem the whole industry is facing, prompting other e-commerce players like Jingdong Mall (JD.com which was formerly known as 360buy.com), Suning and VANCL to invest in self-owned and managed logistics systems to ensure they are in control of the whole process.

In contrast, Alibaba is not interested in owning its delivery network and since 2011 it has been lobbying for what it sees as a “logistics revolution”.

In May this year, it announced the formation of a new company, Cainiao Network Technology. With Alibaba’s former CEO, Jack Ma, as the Chairman, Cainiao is an alliance of logistics companies, couriers and e-commerce companies such as Yintai Group, Alibaba Group and SF-Express, that are willing to collectively work for the development of a nationwide IT logistics platform. An Alibaba group spokesperson told CKGSB Knowledge that the company is “spearheading the project in cooperation with industry partners with a common goal of enhancing the existing logistics network, whether it be on the IT or physical delivery and warehousing levels”. With a planned initial investment of $16.3 billion, the consortium marks a critical step in Alibaba’s vision of developing what it calls a China Smart Logistics Network within this decade. The ultimate aim is to solve a common problem that the company describes as a “key industry bottleneck for e-commerce growth in China”, the spokesperson says.

Growing Fast, But Evolving Slowly

China’s logistics sector owes its rapid growth to the country’s e-commerce boom. The quick development created a huge business opportunity as delivery companies mushroomed. According to the State Post Bureau, in 2012 express delivery companies delivered 5.69 billion parcels, with an annual growth of 548%, creating revenues of RMB 105.53 billion.  Of all these parcels, 60% came from online shopping, amounting to 38% of their total income, according to statistics from China Express and Logistics Consulting, a consultancy specializing in courier, express and postal services.

Nevertheless, the sector failed to adjust itself to the rapid growth of e-commerce, something Cathy Roberson, Senior US Analyst at the UK-based Transport Intelligence, sees as the reason why the sector is lagging behind. “So many logistics providers have jumped on to the stage… They lack the adequate networks, such as warehousing or the appropriate delivery channels. They lack enough cars and trucks and they are all concentrating on the big cities,” she adds.

Nonetheless, the sector will continue to grow. In May, statistics presented at the China Express Delivery Industry Development Conference forecast that 8 billion parcels would be delivered in 2013, creating revenues of RMB 140 billion.

The fragmentation of the logistics sector, however, poses serious challenges to e-tailers struggling to make customer experience their key value proposition.

More importantly, as A.T. Kearney points out there is also a risk of logistics undermining the e-commerce industry unless e-commerce players take an active role to confront the issue. In a recent report titled ‘China’s e-commerce market: The Logistics Challenges’, the global consultancy firm concludes that “there is a clear gap in the market as no player offers the breadth of services needed at a competitive price across a broad network demanded by e-commerce companies”.

This issue will become even more pressing as e-tailers try to improve delivery times and increase their nationwide reach as the number of customers from third and fourth-tier-cities shopping online increases.

Filling the Gap

VANCL, China’s biggest fashion e-tailer, has user experience at the core of its business model. As part of the brand’s policy, all the goods can be returned and exchanged within 30 days. Items can be tried upon delivery; and if customers are not satisfied, they can return them to the same courier which delivered them. VANCL soon realised that not even one express delivery company was able to satisfy the promise they made to their clients. And so in 2008, just one year after its founding, they established their own home delivery subsidiary called Rufengda Express.

Today logistics has become a key competitive advantage for VANCL. As Deng Bin, Deputy General Manager, Rufengda, explains, having a self-owned delivery network resulted in higher customer satisfaction. “Our data shows us that 66% of buyers will come back to VANCL if the goods are delivered through Rufengda, whereas we will have only a 50% of returning customers if external companies were in charge of delivery,” he adds.

Jingdong has also experienced the benefits of having its own network. Thanks to its distribution centers in key cities like Beijing, Shanghai, Guangzhou and Chengdu, the company is now able to provide same-day or next-day delivery to the majority of users. According to the A.T. Kearney report, “Jingdong Mall posted a 300% growth rate in the past five years after logistics bottlenecks forced the company to establish its own express delivery operations.”

Rufengda’s Bin points out that there’s an important difference between VANCL, a fashion e-tailer selling its own brand, and other B2C sites like Jingdong or Suning, that are selling third-party brands consumer products. “Those companies’ main focus is on on-time delivery, while we focus on the services we provide to our customers. And the reason why we have a self-owned logistics system is because we focus on user experience,” says Bin.

Sound Logic vs. Exorbitant Costs

While a self-owned logistics system may be a key differentiator, it’s not clear whether it will be a long-term solution, or an option suitable for all e-commerce platforms.

In its 2012 review of online retailing in China, the Hong Kong-based Li & Fung Research Centre highlights that there’s a concern among industry watchers about these online retailers lacking enough logistics knowhow, as well as a shortfall of e-logistics professionals.

Furthermore, developing a self-owned logistics network entails a huge investment. And the issue about how these e-tailers already struggling to earn profits will manage to cover the costs still remains. This will get increasingly pronounced as the demand from inland cities rises and they need to invest in IT solutions to process a higher volume of orders and widen their delivery network’s outreach. In the case of VANCL, for instance, they have warehouses in big cities like Beijing, Shanghai, Guangzhou, Chengdu, Wuhan and Xian. Rufengda has sub-branches in these cities too. But in smaller cities where the demand is still not so big, Rufengda operates through a hundred cooperative companies, and is thus unable to control the entire process.

For the last decade courier companies focused on providing the cheapest delivery, igniting a price war that has been constantly keeping the industry from developing. Yip says that in the long run, for the sector to be sustainable express delivery companies must become “cost leaders” by lowering their operational costs and achieving standardization.” They must be more efficient than competitors by providing the same services but at a lower cost while they specialize in their core businesses,” he says. On the other hand, the standardization of the whole process will help Chinese e-commerce sites reduce logistics costs and stay competitive. “Nowadays in the West logistics costs are about 5-10% of the final product (cost), whereas in China they are of over the 10%,” he adds.

All in the Same Boat

Only sophistication and specialization can ensure that Alibaba’s Taobao and Tmall platforms will function efficiently in the future. The company wants to be able to guarantee same-day delivery nationwide. And it believes this will be possible only if all the parties involved form partnerships and strategic alliances to actively participate in the development of a ‘Modern 21st Century Logistics Network’.

It’s an ambitious attempt. According to the company, over the next 5-10 years, the newly formed Cainiao will oversee the construction of a nationwide warehousing network that will cover a total area as large as 560 American football fields (3 million square meters approximately). Beijing, Tianjin, the Yangtze River Delta and the Pearl River Delta are some of the locations under consideration to build these logistics hubs. Since the project is conceived as an Open Logistics Platform, its partners, Taobao sellers and B2C websites can openly share facilities and all the logistics data.

Alibaba has vowed that all industry members willing to work for this common goal are welcome to join the alliance. But the fact that Taobao will manage the whole process as the provider of a central supply chain is an issue of concern among some industry watchers, who see the risk of the network becoming a monopoly that will give too much power to Alibaba.

Rufengda’s Bin doesn’t see Alibaba’s Smart Logistics Network as competition and the two companies are actually discussing how they can cooperate with each other. “Jack Ma is building a platform that doesn’t have any value-added services, whereas we focus on operations,” he explains.

 Long-Term Solution?

“Building a logistics network requires automation, innovation, investment in IT and also sufficiently trained staff, who should be able to provide value-added services to the network,” says Roberson from Transport Intelligence.

It is here that Bin says that Rufengda differs from the rest. He argues that Rufengda is not just a logistics or a courier company–it is a company which emphasizes on training and development, and the creation of a healthy corporate culture. This gives Rufengda an advantage as it tries to maintain its high quality standards and develop a costly infrastructure. To make their services profitable, in the long term they plan to use their expertise and reputation to offer customers and other private companies their knowledge in value-added services. Rufengda, for instance, already cooperates with Chinese companies like phone manufacturer Xiaomi and Ping An Insurance as well as multinational insurer Metlife, providing specific services like delivering contracts, and recording client signatures at their doorsteps, and sending them back to the company. In the future, Rufengda also plans to complement their basic services with other value-added services such as giving customers the option to use their point-of-sales (POS) machines to pay electricity, gas and water bills.

Cainiao claims to be doing something new. It says that thanks to the data openly shared through its platform, the Smart Logistics Network will be able to process 10 times the current volumes of today’s online purchases, worth RMB 30 billion. As for the future, its commitment is to keep innovating and learning.

“Trying to connect a national network that connects the North with the South and the West with the East is a huge undertaking; we don’t know of any logistics provider who managed to do this yet,” Roberson concludes.