How Do 1,100 People Run the Work of 1.7 Million Couriers — and What Is Alibaba's Cainiao Network Worth?

For Alibaba, moving into logistics was only a matter of time. It helps build a competitive advantage that rivals will find much harder to copy.

Alibaba's third giant is taking shape.

Three years ago, 18 days after giving the speech in which he stepped down as CEO of Alibaba Group, Jack Ma pushed Cainiao Network Technology Co., Ltd. (Cainiao Network for short) into the public eye. Many people may still not know exactly what it does, yet Cainiao Network is already valued at 50 billion yuan (about US$7.7 billion).

Alibaba Group, already listed and built mainly on its e-commerce businesses Taobao and Tmall, has a market capitalization of about US$191.6 billion. Ant Group, spun off before the IPO, is valued at more than US$50 billion, thanks to more imaginative internet-finance services such as Alipay and Yu'ebao.

Together, Cainiao Network, Ant Group and Taobao-Tmall make up the three strategic businesses of the Alibaba family, all of them rooted in e-commerce. Their combined value is US$249.3 billion, close to the US$259.9 billion market capitalization of Amazon, another company that started in e-commerce.

Last week Cainiao Network, now nearly three years old, announced that it had closed its first round of financing. It did not disclose the amount. Outsiders widely put it at "over 10 billion yuan," at a valuation of 50 billion yuan.

Niu Zhijing, director of brand and public communications at Cainiao Network, told QDaily that the company had no plans to disclose the size of the round. The valuation, he said, was each investor's own judgment: "Some have valued it at 100 or 200 billion yuan. We can't say whether that's right or not."

For Alibaba, logistics was something it had no choice but to take on. In Jack Ma's words: "We found that all the complaints and grievances come from logistics. That's no good. We have to get involved together."

But the Cainiao Network Jack Ma wanted is not a logistics or courier company in the usual sense. It is a logistics data platform.

Put simply, Cainiao Network is a data company that delivers no parcels itself yet holds the information on 70% of China's express parcels. According to Cainiao's own figures, 70% of the parcels shipped in China each day run through its logistics system, which covers the delivery routes of 1.7 million couriers at more than a thousand courier companies.

The team that holds all this data has just 1,100 people. How do 1,100 people organize the work of 1.7 million, and what should Alibaba's Cainiao be worth?

1.7 million people are Cainiao Network's biggest asset

Cainiao Network's system has already collected at least the following: data on 180,000 courier and logistics outlets, 6.09 million transport routes, hundreds, perhaps thousands, of logistics warehouses across the country, and, most important, the delivery routes of 1.7 million couriers.

Internet companies run on huge amounts of human labor, and Cainiao is no exception. Look at Meituan in the chart below. Likewise, Didi has just over 3,000 employees, but it also has 1 million premium-car drivers and 7.45 million Express drivers, all of them, in effect, its indirect employees.

Of course, those 1.7 million people don't actually work for Cainiao Network. They work for the Tongda couriers (ZTO, YTO, STO, Yunda) and more than a thousand other courier companies that have joined Cainiao Network. Still, they are Cainiao Network's biggest asset.

The courier workforce grew because China's express-delivery market grew fast over the past nine years. From 2011 to 2014, China's parcel volume grew by more than 50% a year, four years running. According to the State Post Bureau, private courier companies' share of parcel volume rose from 67.6% in 2011 to 85% in 2014.

Why do the Tongda couriers and others join Cainiao Network?

The express industry's growth of more than 50% a year over the past four years came from e-commerce. And Alibaba holds the overwhelming majority of China's e-commerce market. According to the China E-commerce Research Center, Tmall held 57.7% of the B2C online retail market in the first half of 2015. In C2C, an e-commerce industry report from Qianzhan puts Taobao's share at 96.5%.

A 2013 report in Southern Weekly found that Taobao accounted for 60% to 80% of the Tongda couriers' revenue.

In 2011 Jack Ma said: "I want Taobao to make a push for 1 trillion yuan next year. We don't see any great disaster that could bring Taobao down, but the biggest obstacle between 1 trillion and 3 trillion is logistics."

So logistics and e-commerce, the Tongda couriers and Alibaba, depend on each other almost completely. And most future growth will come from cross-border and rural e-commerce.

According to the National Bureau of Statistics, China's cross-border e-commerce transactions have grown by more than 25% a year since 2010 and are expected to reach 6.5 trillion yuan this year. By 2017, cross-border e-commerce is projected to account for 20.5% of China's import and export trade, up from 6.3% in 2010, reaching 8 trillion yuan.

Alibaba is moving faster into this business. Its cross-border operations are split into exports, led by AliExpress (a B2C platform selling to individual consumers abroad), and imports, led by Taobao Global and Tmall Global.

A parcel shipped from abroad into China today usually travels in two relay legs: a foreign logistics company handles the overseas leg, and once the parcel enters China a local company delivers it. For an ordinary courier company, the most direct way to win cross-border e-commerce orders is to work with Alibaba's Cainiao Network.

There are exceptions. SF Express has 20 warehouse networks around the world and has built bonded warehouses in Hangzhou, Guangzhou and Ningbo. It wants to get around Cainiao Network and Alibaba by linking up directly with overseas logistics partners, so that cross-border parcels move smoothly along their routes. Its cross-border shopping platform Fengqu Haitao (formerly SF Haitao) is a bet on how large this market can grow.

Other active players in cross-border e-commerce include JD Worldwide, Amazon Global Store, Mitao, Yangmatou and Xiaohongshu. Last year's Black Friday, which drew a lot of attention in China, owed its success to them.

For the Tongda couriers, partnering with Cainiao Network early, before competition in cross-border e-commerce heats up, is a way to secure a share of that business's future growth.

The same goes for rural e-commerce and rural logistics.

In 2014, China's rural online shopping market reached 180 billion yuan. By 2016 it is expected to pass 460 billion yuan, more than Hainan Province's GDP in 2015.

In 2014 Alibaba launched Rural Taobao, a subdomain of the Taobao website whose goods are aimed only at rural consumers. Each village has one or two "Rural Taobao partners" who help villagers place orders, pay, and send and receive parcels.

Shen Jianfeng, who runs rural logistics operations at Cainiao Network, says the only company with an edge in resources in the countryside is China Post. But rural orders are not very "standard": villagers often buy bulky items such as mahjong tables and shower cabins, and China Post has yet to find an efficient way to deliver them.

Cainiao Network sees that as its opening. Shen told QDaily that Alibaba's rural logistics also works in relay legs: national courier companies carry parcels to the county level, and Cainiao Network then organizes local resources to carry them from the county to the village.

The Tongda couriers and other courier companies don't handle the rural leg for now, but as rural e-commerce grows they may well be tempted. Besides, before any parcel reaches a village it still has to pass through the courier companies' hubs above the county level. More orders mean more revenue.

Alibaba is not the only company building rural logistics. In 2015 JD.com announced it would recruit 10,000 village promoters and planned to build 500 service centers at the county level. SF Express started its rural network even earlier, in 2014. Its problem, though, may lie in the weakness of its own e-commerce business, and as Cainiao Network expands, the room SF once had in rural logistics will shrink.

In the end, it comes down to who takes hold of the resources and who gets into the market first. And the final contest is over efficiency.

So can Cainiao Network actually make logistics more efficient?

Cainiao Network has always told the public that it is a "data company." So once it has the data, what can it actually do with it?

"Improve courier companies' service quality and efficiency" is Cainiao Network's official answer.

According to Niu Zhijing, Cainiao Network launched a feature called "Eagle Eye" in 2015. It connects to courier companies' networks of outlets, picks out parcels that have gone undelivered for a long time, and sends each outlet's list of undelivered parcels to the courier company's headquarters, so headquarters can see how efficiently each outlet runs and how well it serves customers.

Before this, private courier companies like the Tongda couriers had no efficient information systems. They cared more about how much revenue each outlet brought in each month than about efficiency or service quality. For Alibaba, of course, better last-mile delivery also means a better experience for Taobao and Tmall shoppers, which is why it set out to do this in the first place.

There is also the "electronic waybill" platform. It lets sellers type all their parcel information on a computer straight into the courier companies' systems (which share it with Cainiao Network), replacing the handwritten forms and manual data entry of traditional express delivery. In the past, a seller shipping goods first had to phone a courier company to book a pickup, and the courier learned the size, volume and packing needs of the shipment only on arrival. Sellers also had to fill out waybills by hand, and parcels had to be taken to an outlet and entered by hand before they could move on to transit.

With electronic waybills, couriers know how many parcels they will collect, and how big they are, before they arrive. Because the information is entered up front, couriers can plan vehicles and packing materials in advance. In extreme cases, such as a very large pickup, they can skip the outlet altogether, since nothing needs to be entered by hand, and take the goods straight to the transit warehouse, which cuts transfer costs and speeds up shipping. For courier companies, this means lower labor, management and transport costs.

Even earlier, Cainiao Network had launched a service that forecasts order volumes for courier companies. By predicting how many parcels are coming, it helps them allocate resources and avoid warehouses being overwhelmed. Judging by the last year or two of "Double 11," it has worked to some degree.

Still, Tmall's reputation for delivery falls short of JD.com's, which built its own logistics network.

Cainiao Network is integrating Alibaba's e-commerce and logistics, making it more like Amazon

In the end, everything Cainiao Network does serves one goal: turning Alibaba into a platform that combines e-commerce with logistics.

Amazon, founded in 1995, was the first to show how efficient it is to combine e-commerce and logistics. That helped it overtake Walmart in 2015 as America's most valuable retailer by market capitalization. Even now, Amazon spends between several billion and 10 billion US dollars a year on logistics.

In 2007 Amazon also began offering outsourced logistics to third-party sellers, handling everything from warehousing to picking, packing, shipping and delivery, and charging them warehousing and fulfillment fees. That turned a logistics cost into a source of profit. Today, goods from third-party sellers account for 40% of Amazon's annual sales.

JD.com copied Amazon's model, and building its own logistics has earned it a good reputation. JD.com has seven logistics centers in China and runs 196 large warehouses in 46 cities. According to its website, it offers next-day delivery in 151 cities, and in another 23 cities it offers "211 timed delivery": in-stock orders placed before 11 a.m. (10 a.m. in some cities) arrive the same day, and in-stock orders placed before 11 p.m. arrive by 3 p.m. the next day.

Now Cainiao Network can bring Tmall closer to that model.

In 2015 Cainiao Network bought Amazon's warehouses in East China. The deal got Cainiao Network into the Shanghai and East China market, where land is hard to come by, but more importantly it gave Cainiao Network access to Amazon's advanced technology and operating know-how.

Inside Tmall, the self-run Tmall Supermarket is the first testing ground for combining e-commerce and logistics. Tmall Supermarket has built distribution centers in seven cities, including Shanghai, Tianjin and Guangzhou, and offers same-day delivery in those seven cities and next-day delivery in 90.

Fixing its weakness in logistics makes Alibaba more competitive.

As electronic waybills spread, for example, Cainiao Network will collect data on each parcel at three points, the seller, the courier company and the consumer. From this it can work out demand for goods in major cities and forecast sales for sellers. During last year's "Double 11," Cainiao Network used its mass of data to predict which products would sell well in which regions, moved stock into warehouses at every level and restocked them in time, shortening the time between a shopper's order and delivery.

Under Cainiao Network's plans, it will first offer warehousing and delivery services to large merchants in six categories: major appliances, small appliances, fresh food, apparel, beauty products and fast-moving consumer goods. After signing a strategic partnership with Suning, Cainiao Network expects to deliver electronics and home appliances within two hours in 150 cities.

What should Cainiao be worth?

Logistics is an old-fashioned business and has never been easy, even for Alibaba. Cainiao Network spent a full year after its founding just building the electronic waybill system, which shows how long it takes to develop a logistics information system. And to come back to where we started: the big data Cainiao Network wants to put to work depends on 1.7 million couriers.

Cainiao Network's valuation could swing. Its relatively predictable base, traditional e-commerce, may not be as bright as people imagine. Since Alibaba listed in the US on September 19, 2014, its share price has fallen from US$92.7 to US$76.25 as of this article's publication, at one point dropping below US$60. Investors see China's slowing economy as the main reason.

As for the two future sources of growth: according to Alibaba's annual report for fiscal 2015, domestic e-commerce made up 82.59% of the group's revenue, and cross-border e-commerce less than 9%. In rural e-commerce, Rural Taobao's sales on last year's "Double 11" were 200 million yuan, about 1/450 of Tmall's, so its contribution to Alibaba's e-commerce business is still small. And Alibaba is not without competitors in either cross-border or rural e-commerce.

What Cainiao should be worth may only become clear once more people understand its business value and what it means.

Charts: Lin Yuyao

Cover image from hubspot.net and ahlsell.com