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Growing pains

April 1, 2014

On 11 November 2013, a world record was set for the highest ever online sales in a single day in any country. There were several startling things about this record not the least of which was that it happened, not in the west, but in China. Another two remarkable things were the sheer scale of the shopping event – with US$5.75bn in sales, it eclipsed the amount sold by US retailers on Cyber Monday 2012 by two and a half times; and that all these sales were processed by a single company, the e-commerce giant Alibaba Group.

If you were to assume from this that China is undergoing an e-commerce boom, you would be very right. According to the consultancy Forrester Research, the number of online shoppers in China this year is poised to reach 356 million, exceeding the entire population of the USA and making China’s e-commerce market the world’s largest. These shoppers will help push the market value from US$294bn in 2013 to US$604bn in 2017, Forrester predicts.

The boom in e-commerce has taken many by surprise, including China’s domestic express delivery industry, which is struggling to keep up with demand. The sheer scale of the uptick would be reason enough for the industry being swamped. Last year, express delivery companies handled 4.77 billion items, according to the industry’s own figures. That represented a 70% increase on 2012.

To make things harder, there are no national delivery companies of the stature of FedEx or DHL in China and the market is fragmented. Added to this, transport networks and logistics services vary wildly in quality depending on location. Officials on the ground refer to the problem as China’s logistics bottleneck, and it is something the e-commerce companies are seriously worried about.


Inconsistent services

In 2011, Jack Ma, chairman of the Alibaba Group, called logistics “a crucial link in the e-commerce ecosystem” as he announced plans to invest US$1.5bn to build a nationwide network of warehouses.

Last May, Ma’s firm clubbed together with other e-commerce companies and delivery companies to create the China Smart Logistics Network, a consortium that plans to invest US$16.3bn over the next five to eight years to relieve the bottleneck.

“China is unlike any other in terms of geography,” a spokesman for the Alibaba Group tells Postal Technology International. “The offline infrastructure is extremely underdeveloped, which is one of the contributors towards the massive uptake of e-commerce. And the logistics sector is fragmented and has no unified standards.” He identifies infrastructure, and in particular technological capabilities, as the biggest things holding back logistics. “Many logistics companies lack the ability to efficiently allocate resources and manpower based on volume and location of incoming orders.”

Chee Wee Gan, a principal in the consultancy AT Kearney’s Strategic Operations Practice, says the current express delivery landscape in China can be divided into three distinct blocks. “First you have the state-run company, China Postal Express. Then you have the nationwide private delivery company Shunfeng Express, also known as SF Express,” says Gan, who is based in Shanghai.

“The third block is composed of logistics providers that operate through a franchise model. The biggest of these is Shanghai STO Express. Between them, China Postal Express, SF Express and STO probably account for about two-thirds of the e-commerce delivery market.”

Companies like STO oversee a network of locally based courier services and, alongside SF Express, account for approximately 80% of the express delivery market, according to industry figures.

But Gan says that as the e-commerce market grows, this model is being tested. “A company like STO has hundreds of small courier firms working under its franchise and this means 
the level of service can be inconsistent. It also makes certain services less efficient.

“For example, in the case
of product returns, if a different company in the franchise handles the return, there may be no financial incentive for them to do a good job.”

Right: As of January 2014, SF Express has nearly 10,000 vehicles and 7,600 service centres in mainland China and overseas regions


Taking control

Concerns about poor service have been laid bare several times in recent years. 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.

The most shocking case of malpractice happened last year when a Shanghai-based express delivery company sent out parcels coated in poison, resulting in the death of one recipient and leaving several others very ill. The company, Shanghai YTO Express, issued a public apology after the toxic chemical apparently leaked on to parcels during shipment, the Xinhua News Agency reported.

Concerns about the domestic market have led some e-commerce companies to set up their own networks. Online supermarket site Yihaodian has created its own last mile delivery, for example. Yihaodian launched five years ago to sell supermarket items, but it now offers a broad range of consumer products. It has 18 fulfilment centres in eight cities nationwide. “We have around 3,000 last mile workers in 330 delivery depots, each worker owns a moped or bicycle,” says Harvey Wang, Yihaodian’s vice president of operations. The workers are independent freelancers or contracted to one of the 30 third-party logistics providers that Yihaodian also uses as partners in its last-mile service.

Wang says complaints about local couriers led Yihaodian to set up its own last mile service. He says the problems included “customer satisfaction on delivery services, including a stable lead-time, missing/wrong/damaged goods, and a poor attitude towards customer service”.

By building its own network, Wang claims the company, which has a yearly turnover of approximately US$1bn and is half owned by the US retail giant Walmart, has achieved better lead-times than comparable delivery services in the USA or Europe.


Strengthening the network

Left: Launched in May 2003, Taobao Marketplace is the most popular C2C online marketplace in China

The undisputed king of Chinese e-commerce is the Alibaba Group. Taobao, Alibaba Group’s giant e-commerce site, generates 20 million parcel deliveries every day, accounting for 70% of China’s total. The site is often compared with C2C sites like eBay, but it’s really more akin to store-hosting websites like the arts and crafts site Etsy. Users set up their own online shops, selling goods to one another and to outside visitors to the site.

For Richard Wishart, from UK-based consultancy Delivery Management, the mass appeal of Taobao is no surprise. “The Chinese have retail in their DNA,” says Wishart, who helped develop China Postal Express’s express delivery service, EMS. “They’re a nation of shopkeepers, and online is no different.”

The Alibaba Group, which owns a number of other e-commerce sites, including the highly successful B2C site Tmall.com, has so far resisted building its own in-house operation. Instead it has focused its efforts on strengthening its existing logistics through the China Smart Logistics Network. 

“The reason why Alibaba chose to throw open its delivery arm to the market has to do with the type of company it is,” says Gan. “You have to remember it made its name with Taobao, an online marketplace, so the marketplace is where it feels at home.”

Alongside the Alibaba Group, the major shareholders in the China Smart Logistics Network are retailer Yintai Group, Chinese conglomerate Fosun Group, SF Express, and four other Chinese courier companies – Shentong, Yuantong, Zhong Tong and Yunda.

Their goal is to build an IT-driven network capable of delivering packages anywhere in the country within 24 hours. To do this, they plan to use technologies such as cloud computing to create a shared data platform to serve e-commerce, logistics companies, warehouse operators and supply-chain managers.

Creating such a network will be a major undertaking. Among the difficulties to overcome are the massive variations in quality and technological advancement between some of the courier companies. SF Express, for example, has 10,000 vehicles, 14 aircraft and a network of 7,600 service centres. It offers SMS pick-up notification, a redirect service and security features that enable customers to see a photo of the delivery person before they arrive. Its 200+ distribution hubs are equipped with automated sorting systems.

This is a far cry from some of the warehousing operations run by the franchised courier companies Gan has visited, where he says there are “very low levels of automation, no warehouse management system and products strewn all over the ground with no clear sorting process”.

Another area where differences in quality can be found is in transport infrastructure. About 80% of China’s express deliveries are carried by road, according to analysts Anbang Logistics. But the road network in China is patchy at best, says Wishart.

“There’s a huge disparity between the eastern coastal cities and rural China,” he says. “Once you leave the cities, motorways disappear into dirt roads. You’re talking about two totally different worlds.”

China grades its cities into ‘tiers’ ranging from 1 to 4 according to their stage of development. The coastal cities Shanghai, Beijing, Shenzhen and Guangzhou are classed as Tier 1, as they were the first to be opened to competitive economic development and have a large middle class and income levels well above the national average.

But the biggest growth in e-commerce is actually going on in Tier 2 and 3 cities. This is because there aren’t the bricks-and-mortar stores on the ground in these places to offer the diversity of shopping experience you could find in, say, Shanghai,” Gan says. “As a result, e-commerce is plugging the gap.”

 

Barriers to entry

Right: By the end of 2013, SF Airlines owned 14 all-cargo carriers

One group conspicuously absent from China’s e-commerce boom are the well-established western courier brands such as FedEx, UPS and DHL. According to Gan, the main reason they have had little impact on the domestic market are low margins.
He says: “The price points are just too low for them to compete. DHL, for example, bought a Chinese delivery company a few years ago with a view to getting into the domestic market but sold it at a big loss a couple of years later. These companies have focused instead on B2B delivery, where the margins are higher.”

Low margins may not be the only reason, however. Until recently, Chinese government policy largely excluded foreign couriers from its domestic market. UPS, for example, has had a base in China since 1988, but it wasn’t until two years ago that it was granted approval to provide domestic express-package services, and even then only to five cities. FedEx, which already provides service to more than 400 Chinese towns and cities through joint ventures with Chinese companies, was granted sole access to serve eight cities. 

Wishart says that China remains quite proprietary about its domestic market and that within government there is still a culture of suspicion towards western companies. He cites his own experience in setting up an e-commerce website a few years ago. Although created in the UK, it was translated into Chinese and aimed at the Chinese market. When he travelled to China, however, he found that the website was blocked in much of the country. “I’d come up against the Great Firewall of China!”

April 1, 2014

 

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