Monday, March 14, 2016

ALIBABA TO TAKE ON AMAZON LOGISTICS

Alibaba gears up to compete with Amazon on logistics

Alibaba
Amazon isn’t the only e-commerce platform looking to make a major foray into the logistics industry, according to this analysis. Chinese counterpart Alibaba closed a fundraising round on its transport and supply chain subsidiary, Cainiao, today which, although undisclosed, was expected to be well over $1bn, and is likely to emulate the way Amazon has been able generate greater revenues per sale. “This difference can be attributed to Amazon’s closed business model, which involves handling everything from storage to delivery. Alibaba’s business model is more reliant on third-party logistics partners, and is similar to the role of a middle-man.”

Alibaba Group Gears Up to Compete with Amazon on the Logistics Front

By Bilal Kamran on Mar 14, 2016 at 7:33 am EST
Alibaba Group Gears Up to Compete with Amazon on the Logistics Front
Alibaba Group Gears Up to Compete with Amazon on the Logistics Front

Alibaba completes a round of funding for its logistics unit, Cainiao

Alibaba Group Holding Ltd.’s (NYSE:BABA) logistics unit — Zhejiang Cainiao Supply Chain Management Co.— has completed a recent round of funding, as announced by the e-commerce giant, on Monday. Cainiao’s latest investors include Malaysia’s Khazanah Nasional Berhad, China’s Primavera Capital, and Singapore’s GIC Pte Ltd. and Temasek Holdings.
The amount raised by Cainiao, or its net value after funding has not been disclosed by Alibaba as yet. Sources close to the Chinese media company, Caixin, believe that Cainiao is now worth $7.7 billion. The division was established in 2013 and Alibaba — in collaboration with certain Chinese logistics groups — had pledged to invest over $15 billion in the unit, to develop the national logistics infrastructure in the next 5-8 years.

Alibaba’s Role in the Chinese E-Commerce and Logistics Sectors

The Chinese logistics and package delivery sectors have become fragmented over time, as the popularity of e-commerce transactions has spread beyond urban epicenters, to more diverse areas of the country. A research from eMarketer suggests that over 60% of all online transactions in Asia will come from the Chinese market, which will leave behind the US market, by 2017. Despite the economic slowdown in China, Alibaba’s rising Chinese retail business, as shown below, confirms this trend.
 

Alibaba has sought a leading role to develop the logistics network; its Cainiao unit has entered partnership agreements with various delivery services, to compute large packets of data, in order to improve the delivery process. It is likely that the announcement of Cainiao’s first ever funding round today, is in line with this strategy.
Cainiao caters to more than 70% of China’s express package delivery, and as of March, it has a network that spans over 2,800 local counties and 224 countries. Its 700 employees strong workforce operates a network of self-owned warehouses, and uses software systems to mobilize delivery companies to complete the package fulfillment process. Greater computing of delivery data will facilitate Alibaba in commanding greater control over supply-chain, to improve efficiency.

Alibaba vs Amazon

Through expansion into logistics, Alibaba aims to counter the growth of American e-commerce giant Amazon.com, Inc. (NASDAQ:AMZN). The former has exposure to a greater market than Amazon, considering the size of the Chinese population. The company is also making ground against Amazon, in the global market. This is corroborated by the fact that on Single’s Day, an event similar to Cyber Monday in the US, Alibaba’s global gross merchandise volume crossed a whopping $14 billion.
However, despite Alibaba’s greater sales volumes, its revenues still lag behind Amazon’s. The former’s $5.3 billion net sales from all divisions in the quarter ended December 31 2015 were dwarfed by Amazon’s $35.7 billion, during the same period. This difference can be attributed to Amazon’s closed business model, which involves handling everything from storage to delivery. Alibaba’s business model is more reliant on third-party logistics partners, and is similar to the role of a middle-man.
Both the online-retail giants have focused on the logistics side of the business in recent times, as scaling operations and improving cost-based efficiencies are the key to drive successful business growth. Amazon is believed to have leased 20 Boeing aircraft for airfreight, as it hopes to take on traditional delivery companies such as UPS and FedEx. In January, the company received a license from the Federal Maritime Commission, to operate as an ocean freight forwarder from China. This move gave the company, a greater control over its supply-chain.
Cainiao appears to be a positive start, for Alibaba. Efficient planning through the delivery network data computing can help the Chinese company scale costs and attain a large share of logistics, in both local and international markets. We believe that the company that manages to deliver goods quickly and safely with favorable margins, will steam ahead, in the race to capture the largest market share in the global logistics segment.