Billions invested by JD.com and Alibaba in e-commerce empires’ logistics
With the rise of e-commerce, the courier industry is booming in China. To reduce delivery times substantially, massive investments in new logistics technology is being made.
Curious visitors used their smartphones to take photos of the many robots on display at the Hangzhou International Expo Centre. A robotic arm was seen putting boxes on top of quite a few tall robots while they were moving, seemingly without being controlled. Once these arrived at a sorting area, their load was tipped into various collection bags that were labelled with numerous destinations within China.
Many AGVs (automated guided vehicles) could also be seen scampering about lifting metal racks filled with heaps of boxes. High-tech logistics technology could be seen everywhere you looked at the annual Global Smart Logistics Summit, from self-driving carts that could move along streets delivering packages to customers, to autonomous drones that are able to carry payloads of up to a metric ton.
The express delivery service industry in China is determined to improve the efficiency of deliveries with these new robotic inventions. Areas of improvement includes fulfilment centers where thousands of parcels are packed per day, and the ‘last stretch’ of delivery before parcels are delivered to customers.
Although delivery times have in recent years been reduced dramatically, the executive chairman and founder of Alibaba, Jack Ma Yun, aims to reduce his logistics affiliates’ global delivery times to less than 72 hours. To achieve this aim, Jack Ma is willing to invest more than one hundred billion yuan.
Over the last few years, the courier industry in China has been booming due to the increase of e-commerce. According to Jack Ma, about 130 million parcels are being delivered to customers in China per day, which is the highest number in the world.
This swell of business has made billions for the founders of the biggest Chinese express delivery companies. Seven of these companies went public just in 2017. The total market cap of China’s courier companies ZTO Express, SF Express, YTO Express, Deppon Logistics, STO Express, Best Inc and Yunda Express is about US$82 billion today.
The expansion of express delivery companies has happened so fast across China that parcels sent to destinations in the same city, or the same province, are now delivered on that same day. Between major cities like Beijing and Shenzhen, packages are usually delivered on the following day.
Ma noted at the Global Smart Logistics Summit in Hangzhou that deliveries from China to most other big countries takes less than 10 days nowadays, while the average time for global deliveries 5 years ago was about 70 days.
JD.com and Alibaba, China’s biggest e-commerce companies, have had a big role in this by investing massively to build up logistics infrastructure. Both companies are constantly pushing to improve services and offer faster deliveries to their consumers.
Neil Wang, Greater China president of consultancy Frost & Sullivan says that e-commerce development has helped improve the logistics industry in various ways. Many new firms have been attracted into the industry. This has increased both the service quality and quantity. The former is measured by % of on-time deliveries, delivery time, and the ratio of goods lost or damaged. Improving these factors ultimately leads to an improved user experience.
Wang also noted that the flood of capital to the Chinese logistics industry has enabled rapid modernization and the establishing of huge volumes of logistics data and user information. These could be leveraged to get insights that will assist companies in improving their supply chains and logistics even more.
Wang added that logistics is a critical part of online shopping experiences. Frequent delays, lengthy delivery times and goods damaged or lost will send customers right back to brick and mortar shops.
Alibaba and JD.com have used different philosophies to build logistics infrastructures.
Alibaba traditionally favors an approach with as few assets as possible, and formed Cainiao, its logistics affiliate in 2013. Cainiao works with delivery firms to create a standardized, open source logistics process which provides insights that enable increase productivity. On the other hand, JD.com has built its own exclusive logistics network by hiring large fleets of delivery personnel and building warehouses to serve their customers country-wide. This model is similar to that of Amazon.
These different approaches is a reflection of the unique business models of the companies. Alibaba has platforms Tmall and Taobao for e-commerce. These marketplaces host third-party traders, while JD.com carries stock that is sold directly to consumers. The majority of JD’s business is still direct sales, although third-party traders have been introduced to their platform.
Cainiao operates with 15 major Chinese express delivery companies, while also using numerous other delivery partners globally. All of these use the Cainiao data platform for a wide range of activities from capturing waybills electronically to predictions of projected delivery volumes driven by big data of during peak season.
Cainiao has enabled standardization of electronic labels and bills for express delivery firms, making it easy to keep track of parcels sent by Cainiao’s partners through the single platform. Package volumes and delivery efficiencies have also been increased for couriers, as traders can select preferred couriers and optimal routes through Cainiao which is integrated with both Taobao and Tmall.
Cainiao has also recently started investing seriously in strengthening innovation and its physical logistic infrastructure. Although Ma reaffirmed at the Hangzhou summit that Cainiao wouldn’t manage their own logistics business, they would invest into areas where their partners are either unwilling or unable to invest.
Tom Birtwhistle, PwC’s China Digital Strategy lead said that the magnitude of opportunities in Chinese e-commerce means that firms must be prepared to provide the capital required to build the network. Couriers in China are still low cost because much of the ‘last mile delivery’ is performed by individuals riding bikes, resulting in the delivery firms not being burdened by similar wage challenges facing companies in regions of North America and Europe.
Last September, when Alibaba acquired a controlling share in Cainiao, it said it planned to invest 100 billion yuan (US$15.6 billion) to build an efficient logistics network to enable delivery of packages within China within 24 hours, while international deliveries would be done in 72 hours.
Cainiao has invested huge amounts to develop technologies with their partners as part of its efficiency drive. AGVs (Automated guided vehicles) that are able to carry shelves loaded with goods weighing 500 kg have been deployed.
Cainiao has partnered with FAW Group Corporation, an auto manufacturer, to develop fleets of self-directed trucks for deliveries over long distances. Another alliance is with Robosense, a company specializing in autonomous driving technology, who will develop “Little G Plus”. This unmanned logistics vehicle will be the first to use Micro-Electro-Mechanical Systems (MEMS) solid-state Light detection and ranging (LiDAR) technology for vehicles’ autonomous functions.
Robosense’s MEMS solid-state LiDAR sensor steers a laser beam in various directions by using a mirror only several millimeters wide. The laser scans the environment surrounding it extremely fast and enables autonomous cars to detect potential obstacles, landmarks and pedestrians.
MEMS solid-state sensor technology will probably reduce LiDAR sensor costs for autonomous driving because it has no moving parts, found in older LiDAR sensor technology. Moving mirrors were used to direct the laser beams scanning the environment in older LiDAR sensors.
The head of Cainiao’s ET Logistics Lab, Zhang Chunhui, said an interview that MEMS will reduce sensor costs by about 66%, enabling the mass production of driverless vehicles. Zhang also mentioned that Little G Plus is at present undergoing street trials and reaches a running speed of 15 km/h. This is ideal as it is not fast enough to be dangerous to drivers and pedestrians, nor too slow.
Cainiao also has a partnership with Beihang Unmanned Aircraft System. This company is an offshoot from Beihang University and they will develop delivery drones that could potentially be the biggest in the world used by civilians. These drones will be used by logistics companies to deliver parcels to China’s remote regions. These drones, with a 20 meter wingspan are able to fly 1,500 kilometers and can carry more than a metric tons of cargo.
JD.com has also invested heavily in technology for logistics and introduced its technology for autonomous trucks in May, developed in their research center in the USA. The self-driving truck is able to reach Level 4 in autonomous driving, which is by definition fully autonomous. This means it does not need a human present to perform all functions critical to safety. According to the framework on autonomous driving released by the Department of Transportation’s National Highway Traffic Safety Administration in the USA, it is however limited to its operational design domain.
Xiao Jun, president of JD’s X-Business Division notes that if technology only cuts 3 drivers down to 2 or even 1, it does not have much value. JD intends to develop a completely unmanned truck. Xiao added that their truck still has to learn how to handle traffic lights, but it able to handle open road driving.
JD.com is also developing delivery drones that will be used in rural areas. These drones are controlled from a Delivery Drone Scheduling Centre located in Suqian. JD’s small, self-driving autonomous delivery vehicles are currently undergoing tests on university campuses in Beijing.
JD.com has a network of nearly 7,000 pickup and delivery stations, and 500 warehouses. This enables them to deliver 90% of orders on the same or the next day.
The race for innovation is not restricted to delivering and sorting. Companies also focus on customers’ experiences, constantly finding new ways to make it more suitable for consumers to receive a package at whatever time. Companies also try to enable a delivery person to deliver more parcels at a given time.
Companies operating ‘smart lockers’ are also rapidly increasing in China. Banks of lockers are installed at apartment buildings, allowing a customer’s delivery to be deposited a locker. Once this is done, a code is texted to the customer and this allows them to collect the parcel when it is convenient for them. This eliminates the requirement for courier companies to coordinate with a customer to determine a suitable delivery time.
Various firms in China provide this service, including China Post. It has installed more than 90,000 smart lockers in some 80 cities in China. Hive Box is a smart locker firm backed by Cainiao and it delivers about 7% of the total package volume in China.
Cainiao also revealed their invention called the Cainiao Box at the logistics summit in Hangzhou. This smart locker is installed by consumers outside the home. It can expand horizontally to allow larger parcels to be accommodated and its temperature can be controlled in cases where hot food, i.e. pizza is delivered. The box also has a facial recognition feature that will allow only its owner to open it for collecting parcels. According to Cainiao, although many pizza fanatics have expressed interest in the box, it is not available to the public yet.
Even though both JD.com and Alibaba are investing billions into infrastructure for logistics, China is still behind numerous other markets as far as performance is concerned. Mainland China ranked only 27th on the World Bank’s Logistics Performance Index in 2016, lagging behind Hong Kong (9th), Japan (12th), South Korea (24th) and Taiwan (25th). The index is used to measure and score markets on core logistic processes, the logistics environment, performance cost and time data, and institutions.
According to Alibaba’s Ma, Cainiao aims to reduce logistics spending in China as a % of its GDP down from about 15% currently to less than 5%.
PwC’s Birtwhistle noted that the Chinese market is an attractive one to create supply chain solutions. The mistake is often made of believing that as China has experienced massive e-commerce growth, this will also happen in India and Southeast Asia. Rates of penetration in these areas are however very low. He added that you simply can’t serve the majority of the market without a broad or national supply chain network.
The market in Southeast Asia is also extremely fragmented, with many low levels of urbanization and islands. This makes it very challenging to build efficient logistics networks.
Alibaba has identified the e-commerce market potential in Southeast Asia, and has already worked with other countries including Thailand and Malaysia to create an electronic free-trade zone. They have also invested huge sums of money into logistic firms such as Singpost, Singapore’s postal service.
Birtwhistle concluded that for a supply chain, investment comes before demand.