The mighty Amazon

Pick up your Amazon orders here

In WiC300, we reported that SF Express, one of China’s largest delivery firms, had announced plans to build its own airport in Hubei province. The airport would be only the fourth worldwide to be run by a delivery company, and the first of its kind in Asia. But the president of SF Express’s aviation unit Li Sheng believes that a purpose-built facility is crucial for improving the company’s service. Airports in China have been built with passengers in mind rather than cargo, he says, which disrupts the delivery process, leaving him with “no choice but to consider this option”.

At the beginning of April, the plan was approved by the Civil Aviation Administration of China. The site in Hubei will serve as a central hub, providing SF Express with a unique selling point for its logistics services.

But SF Express might also have an eye on the ambitions of Amazon’s China division. In February, Amazon registered its Chinese subsidiary Beijing Century Joyo Courier Service as a freight forwarder, allowing it to broker customs documentation for clients shipping overseas. The move coincided with leaked documents that revealed a plan dubbed ‘Dragon Boat’. The blueprint, Bloomberg reports, is to establish a global delivery network that controls the flow of goods from factories in China and India to customer doorsteps in Atlanta, New York and London. Other analysts say the biggest impact might be felt on Amazon Marketplace, the platform for third-party sellers, where vendors could be attracted by the prospect of shipping to consumers in a more direct fashion. Some manufacturers could even choose to bypass traditional retailers entirely.

This proposition requires the creation of a deeply integrated, cross-border logistics system. In March Amazon revealed another stage in the plan’s development when it confirmed long-standing rumours that it had leased 20 aircraft to improve its in-house logistics services. Various media reports since then have suggested this is the beginning of Amazon’s plan to fly more of its freight itself, freezing out global delivery firms such as UPS and DHL.

Although appearing to be orientated towards exports from China, the Dragon Boat plan could be steered in the other direction. Indeed, the announcement last month that Amazon China had signed a strategic partnership with one of China’s largest offline retail chains, Gome, appeared to confirm its parent company’s ambitions.

Gome has more than 1,800 stores in China, spread over 400 cities, as well as a multitude of warehouses and delivery networks. Under the partnership, Amazon will be allowed to utilise these assets, which will help it compete with much larger rivals like JD.com and Alibaba. National Business Daily notes that the Gome stores will be used as collection points for Amazon’s customers, as well as showrooms where shoppers can trial products available on Amazon’s e-commerce platform.

Last August, Alibaba Group said it was investing $4.6 billion in the electronics retailer Suning, as part of the same trend of bringing together online and store-based shopping.

Gome will see some benefits too. It has opened a virtual store on Amazon’s China site and will hope to piggyback on Amazon’s international logistics chain to expand its own business overseas. Then again, perhaps it ought to be careful how much it helps Amazon find its feet in China – Bloomberg reported that the leaked Dragon Boat documents indicate Amazon plans to “squeeze” out its partners, once it has learned enough to run the operation on its own.

But Doug Young, a former China company news chief for Reuters who writes a business blog, thinks a financial tie-up is more likely in the future, speculating that Amazon could buy 20% of Gome for only $500 million. Gome recently announced that it expects a profit drop of 30% this year, so a cash injection from Amazon might be welcome.

© 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.