Internet & Tech

Bankruptcy express

A courier firm goes bust, Alibaba is hit

Bankruptcy express

Poor delivery : Chen Ping

Losing your job is usually bad news. But to find out by text message is hardly going to lighten your mood.

That’s how Chen Ping, CEO and founder of courier company Morning Star, recently told his staff that they were no longer on the payroll. Chen’s message, reports the Beijing Times, was that the company was to be dissolved, and that both he and his major partner Alibaba Group would be losing their combined investment of Rmb120 million ($18.9 million).

“I have to go bankrupt,” Chen concluded in his message. “Business is risky. Now that the company is losing a lot of money, I urge everyone to bear this together and I hereby tell everyone sincerely: I am sorry.”

Chen then seems to have briefly skipped town, reports Southern Metropolis Daily, before thinking better of it and returning to Beijing.

The newspaper also notes that Morning Star’s operations have halted across the country and that its Beijing headquarters are already empty.

With turnover reaching Rmb750 million in 2011, Morning Star was a growing business. Founded in 2008, it handled 130,000 parcels on a daily basis, reports 21CN Business Herald.

But the domestic media is now blaming the company’s collapse on its rapid growth. Morning Star grew through a franchising model. Through franchises, Chen believed, it was possible to expand quickly but with less investment and at lower risk.

But for a courier to establish a national network, it needs hundreds of millions of yuan to offset its early loss-making years (as many as five years of losses, thinks Xu Yong, an advisor to courier firm, talking to Southern Metropolis Daily).

That makes Morning Star’s start-up capital of about Rmb100 million look insufficient to support both regular operations, as well as expansion.

The acquisition of another courier operator Xinfeihong in 2011 created further financial pressure.

The demise of Morning Star hurts Alibaba in two ways. The e-commerce firm invested Rmb70 million for 30% of the company in 2010. But it is also a strategic loss. Alibaba’s online shopping website Taobao is at the forefront of China’s e-commerce sector.

The value of online shopping transactions was up 66% in 2011 to Rmb780 billion, compared to a 11.6% increase in total retail sales in the same period. But the increased popularity of online shopping means more parcels need to be delivered. Alibaba’s stake in Morning Star was an attempt to integrate the courier company into its own sales network, allowing for greater control over the distribution and logistics of its business.

If Morning Star had survived, its employees would now be struggling with a series of new security rules that require couriers to check the content of parcels that they handle. The rules went into implementation in Beijing last month, and will become effective nationwide on May 1. The problem, says the Economic Observer, is that couriers lack the training to give parcels the proper security check, which are also adding another stage to the delivery process.

One Beijing courier talking to EO said that before the regulations were introduced, he was collecting around 50 parcels a day. But on the day that the rules came into effect, he was only able to handle 38. Of course, the expectation is that the new handling requirements will soon translate into higher prices.

Morning Star’s demise is not the only bad news to hit Alibaba this month. The company has also just fired the president of its group-buying subsidiary Juhuasuan, reports Want China Times. The business model here resembles Groupon’s but the newspaper cites rumours of “bad management and an immature system” at Juhuasuan that instead allowed the spread of counterfeit goods.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.