Economy, Logistics, Talking Point

Wang’s war with Jack Ma

Cainiao’s row with SF Express sets the scene for a longer struggle


Wang’s firm dominates deliveries

Yuetan is a Chinese term that means to set a date and talk. It has a specific political context too. When a private sector firm is told that the authorities in Beijing are asking for a yuetan, it’s usually because they are upset and want a commercial decision to be shelved or reversed.

Longtime WiC readers will recall a high-profile case from 2011, when consumer goods giant Tingyi was ‘encouraged’ to abort an attempt to raise prices for its instant noodles. The fear at the time was of food inflation, and after meeting with the National Development and Reform Commission the company quietly dropped the price increase.

A year later when a price war erupted between online retailers and Suning another yuetan was set up. The parties were instructed that their overly hostile competition was not in the interests of growing the internet industry – a priority for the government.

Much more recently, the yuetan tactic has been applied again – this time as a means to ease a standoff between Alibaba and SF Express, two of the key cogs in China’s e-commerce sector.

At stake has been the sharing of valuable industry data, and the two sides in the dispute came to an uneasy truce this month. Yet the row is far from settled and there could be more drama between China’s biggest e-commerce firm and its leading delivery company.

How did the row start?

At a logistics industry summit in May, Jack Ma proclaimed that the number of express delivery packages handled in China would jump tenfold to one billion items a day by 2025. Alibaba’s chairman also told a packed crowd of courier bosses that they needed to “transform their firms into data companies and embrace new technologies”, or half of them would go out of business within 10 years.

Ma is ranked by Bloomberg as China’s richest man but he aimed a thinly-veiled jab at SF Express chairman Wang Wei, who is now the fourth richest, following SF’s backdoor listing this year (see WiC358).

“Many logistics firms have gone public,” Ma noted. “But I could not see any difference in them before and after their listings, besides [their bosses] becoming one of the richest tycoons, which is meaningless.”

SF’s Wang was a notable absentee at the summit but he hasn’t been ignoring Ma’s advice – at least not on the importance of the customer data generated by his hundreds of millions of shipments.

A week after Ma’s slight, news emerged that SF had stopped sharing information on orders processed through its pickup and drop-off stations via a service known as Beehive (or Hive Box). Beehive has a data connection to Cainiao, a logistics network 47%-owned by Alibaba (SF is a tiny shareholder, but more on this later). SF argued that it could not pass on customer information on privacy grounds and Cainiao reacted by disconnecting Beehive’s data interface completely in the early hours of June 1.

Cainiao insisted that SF had fired the first shot with its unwillingness to provide verification information for Beehive deliveries. The Alibaba affiliate then claimed SF’s decision could lead to significant losses for both retailers as well as their customers. For that reason it then boycotted SF Express, removing it from its list of firms eligible to deliver items bought on its Taobao sales platforms, diverting orders to couriers such as YTO Express instead.

A public relations war then went into overdrive as the duo traded barbs over social media, with tens of millions of netizens keeping track of the ill-tempered exchanges.

Anyone else in the dispute?

Chinese media has described the row between Beehive and Cainiao as “the war of the bees and the birds” (Cainiao literally means ‘green bird’) but an array of other firms soon joined the fray, underlining the ‘frenemy’ relationships that characterise the sector.

On June 1, Tencent, the biggest Chinese internet firm by market value, was the first to support SF, claiming that it fully backed the delivery company in protecting its client data. (Beijing News senses an alliance here, suggesting that SF had refused to bow to pressure from Alibaba to switch from using Tencent’s cloud services to AliCloud.), another rival of Alibaba, didn’t stay on the sidelines long either. Its chairman Liu Qiangdong announced on Tencent’s social media platform (he never uses Sina Weibo, which is partly owned by Alibaba) that would provide support services for SF’s Beehive. “I always fully trust Wang Wei’s integrity,” Liu wrote. Ding Lei of NetEase and Meituan, a group buying site, adopted similar stances.

Cainiao marshalled its own supporters. YTO Express, which is backed by Alibaba, announced on its official weibo that it would “join hands with Cainiao to offer a better service” and similar messages of support arrived from the other couriers in the so-called “Tonglu gang” (see WiC344).

Suning, an old foe of and 19%-owned by Alibaba, voiced its support for Jack Ma too.

The escalating conflict forced the government to step in and the peacemaker was the State Postal Bureau (SPB).

After a yuetan session, the two called a halt to the squabble and agreed to renew data sharing.

“Both parties should seek a solution on the basis of the largest possible common ground, abide by market order and consumers’ rights and refrain from exerting severe and negative social influence because of company feuding,” the government spokesman had urged in a statement.

Early this month the SPB announced in another statement that Cainiao and Beehive had reached a consensus over data sharing. The government-mediated armistice will last for at least a year, internet newspaper Jiemian reported.

What exactly is Cainiao?

Cainiao was formed in May 2013 by a consortium led by Alibaba. Other founding shareholders include retailer Yintai Group, investment conglomerate Fosun International and most of the major delivery firms, although SF and YTO have minimal stakes in the venture. Jack Ma announced at the time that up to Rmb100 billion ($15 billion) would be invested in Cainiao by 2020, which would become “China’s intelligent logistical backbone network” (a term that now crops up a lot in government policy documents).

Cainiao doesn’t compete directly with the likes of SF, Ma has stressed, because it doesn’t own a single truck or employ a single delivery man. Instead it acts as a platform for logistics service providers to cooperate with each other, while matching up retailers with customers, so they can pick the most cost-effective way to ship their goods.

The ultimate goal of this smart network is to enable “delivery within 24 hours to every corner of China”. And according to Alibaba’s latest quarterly results, more than 80% of shipping orders by Chinese couriers were generated through Cainiao in March. Several thousand logistical firms with 1.7 million staff rely on Cainiao, it claims.

What’s the background to the row?

Of course, Cainiao’s popularity also poses a threat to SF Express. China’s leading courier has prospered from the boom in e-commerce. But Cainiao also makes it easier for other providers to win business. “Cainiao is an open-source platform that allows smaller logistics firms to share the network and the technology of the leading couriers,” a tech columnist wrote on Sina Finance.

Alibaba’s assessment of Cainiao’s contribution to the delivery business is changing too. In part that’s because regulators in the United States are pressing Alibaba to consolidate its financials into its own financial statements. So its executives are looking at ways of monetising more of the platform’s services, which could include new charges for the delivery companies that rely on it.

There’s also growing recognition of the power of the data that the network collects, and that Alibaba’s influence over Cainiao (there are no deliveries from its rival via the platform, for instance) could become detrimental to the logistics firms that utilise it.

“SF Express risks becoming the logistics industry’s China Mobile, spending all the money on a physical network only for the internet firms to cut away the thickest slice of the cake,” Sina Finance’s tech columnist warns.

What he means is that more of the value in the system’s network will be derived from Cainiao’s mastery of the data rather than the manual labour of the partners that actually deliver the parcels.

To explain the parallel with China Mobile further we need to look at Tencent’s WeChat. That social media app has established dominance while sitting atop China Mobile’s cell network. As a free service it has pretty much obliterated the telco’s formerly huge text messaging business. The result: China Mobile’s market capitalisation used to be much greater, but Tencent’s has surged fivefold in five years and China Mobile is now a third smaller than the internet giant (in market value).

What explains this change of fortune? Helped by the ubiquity of WeChat and its related services, Tencent has captured the richest seams of data generated by its 966 million customers (for instance, it knows their habits through its location-based services and how they shop thanks to its e-wallet WeChat Pay). By surrendering these customers to the WeChat ecosystem, China Mobile got relegated to something more akin to ‘dumb pipe’ status. Thus even though the telco (and its two smaller state-owned peers) were tasked with investing more than $100 billion building the 4G delivery platform (see WiC372), much of the benefit accrued to Tencent (which spent zero on it).

Cainiao poses a similar threat to SF Express (which is now spending large sums on planes and airports).

How long will peace last?

When SF Express began to invest in retail outlets of its own in 2014, we asked whether the courier might become Alibaba’s biggest rival in the e-commerce world (see WiC241).

SF has a lot of catching up to do before that becomes true. Its market value stands at $30 billion as of this week, compared to Alibaba’s $377 billion. However, the fact that it has squared off against Alibaba has at least underlined its position as China’s leading courier.

Citing insiders close to Cainiao, Jiemian has reported that although Cainiao and Beehive have reached an agreement on data sharing, there are likely to be “hidden battles” between the duo in the months ahead.

Alibaba has already invested in SF’s main rivals. Besides a 20% stake in YTO, it has acquired minority stakes in ZTO, STO and Yuanda Express. It owns another 29% in Best Inc, another local logistics provider that is working this week to raise $750 million from an initial public offering in New York.

Alibaba has also talked about building delivery hubs for Cainiao. Moreover, Cainiao will partner with Fosun and EMS, the express service of the State Postal Bureau, to invest in Sposter, which operates parcel pickup and drop-off lockers in 55,000 residential districts nationwide. According to a circular this week from Shenzhen-listed Santai Holding (the parent firm), Sposter will incorporate 21,000 “smart lockers” owned by EMS. (These refrigerator-size boxes have been labelled as the all-important, ‘last mile’ of the delivery network as they are used by delivery people when recipients are unable to take collection at home.)

“Cainiao seems to have reached a truce with SF Express but behind the scenes it has sent its troops to Beehive’s doorstep,” Tai Media said. “Jack Ma wants to leverage on Cainiao to become the biggest player in the logistics market. As the incumbent leader, SF Express doesn’t want to be an also-ran and that’s why it has pulled the trigger and revolted.”

Why did the government intervene?

Logistics has been identified as one of China’s pillar industries. Policymakers believe that reducing the costs of moving goods will help to keep inflation in check. The sector is also expected to boom. According to a report from the SPB last month, a total of 31.3 billion parcels were delivered last year, up 51% from 2015. The industry generated Rmb397 billion in revenue, up 44% year-on-year, and target annual revenue is Rmb800 billion by 2020.

A national delivery network is crucial to China’s urbanisation efforts as it will help in the transfer of perishable produce from rural areas to the cities and support the broader push to make the Chinese economy more consumer-driven.

It will be harder to achieve without the kind of machine learning and Big Data analytics envisaged by Cainiao, which has set out to cut costs and boost efficiencies. But one of the side effects of this information revolution is a shake-up in the sector that may not be as appealing to some of its other participants.

Meanwhile, Alibaba’s Ma has made his first public remarks on the spat with SF Express this week. In another conference appearance he said that Wang Wei had contacted him and that they had both agreed the conflict between the two firms had been overblown in the media.

“It’s normal for companies to have minor disagreements, but it was settled in the end,” Ma ventured breezily and he reiterated that Alibaba had no interest in targeting other companies.

But there was a postscript from Alibaba’s founder on what might lay ahead for the companies that challenged him. “There are many opportunities, but if you want to do what we are doing, chances are that you, not us, will feel the pain eventually,” he warned.

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