Run rabbit run

STO: joining the rabbit hunt

For delivery firms in China, no other time of the year is more exciting than the Singles’ Day festival. This year the sector will handle an average of 490 million parcels daily between November 11-16, up nearly 28% on the previous year, China’s State Post Bureau forecasts.

Not all couriers are as well placed to take advantage of the shopping bonanza. Jitu Express, which joined the fray only in March, is being frozen out by bigger and older rivals wary of its meteoric rise.

On October 19 Yunda Express laid down new rules that essentially bar its franchisees from working with Jitu. Violating the guidelines will lead to fines of up to Rmb5,000 ($748), or, in the worst scenario, ejection from Yunda’s network. Similar instructions had been issued by peers from the so-called ‘Tonglu Gang’ (named after the city they hail from; see WiC344) including STO Express and YTO Express a month earlier.

To save costs, major couriers tend to run their own mission-critical, long-distance transportation and sorting networks, but leave the pick-up and last-mile delivery services to network partners or franchisees. The model also allows couriers to scale up their operations during peak seasons without having to invest in additional resources.

The campaign launched by Yunda, STO and YTO against Jitu could therefore have a material impact on the newcomer’s operations. The constraints will force Jitu to either build up its own team of last-mile deliverymen or limit its offerings to pick-ups at posting stations and express cabinets. Either way its channel costs and delivery time will go up, at least in the near term.

When we first mentioned Jitu in WiC494, we warned that the incumbents would try to crowd out newcomers to the sector.

Through competitive pricing, Jitu has managed to grow its orderbook from 5 million parcels a day in March to more than 10 million last month. It is targeting 25 million deliveries during Singles’ Day. To put that into perspective, Yunda processed an average of 48.8 million parcels daily in September.

Jitu’s growth would not have been possible without its close ties with e-commerce platform Pinduoduo and OPPO, which together with its sister brand Vivo commanded 32% of China’s smartphone market as of June. Duan Yongping, founder of BBK Electronics Group (which operates OPPO and Vivo), is the key connector between the three parties. Jet Lee, Jitu’s boss, was formerly OPPO’s CEO in Indonesia and Pinduoduo’s founder Colin Huang is another protégé of Duan, having been invited to join him at a charity lunch with Warren Buffett in 2006.

Some commentators are seeing the clash between the established couriers and Jitu as a proxy war between Alibaba and Pinduoduo.

Since 2008, Alibaba has been building up sizable stakes in China’s major couriers including Best, YTO, STO and Yunda. That means the Tonglu firms are more than just third-party partners to Alibaba. YTO, for instance, is working closely with Alibaba’s logistics technology platform Cainiao in the buildout of international logistics hubs, air freight services and global supply chains.

In contrast, Pinduoduo is yet to name a dedicated delivery partner. That explains why the company, seen as a growing rival to Alibaba, is having to rely on parties that have entrenched relationships with the tech giant, a major weakness should it also be boycotted by the Tonglu Gang in the same way as Jitu.

Since last year Pinduoduo has been establishing its own logistics infrastructure. Aside from ploughing $200 million into Gome, a home appliance chain which owns thousands of delivery trucks and hundreds of warehouses, Pinduoduo is also creating a Big Data platform to support its deliveries like Alibaba’s Cainiao.

The moves prompt ThePaper.cn, a local news outlet, to speculate that Jitu might end up becoming a unit of Pinduoduo. Making up 31% of China’s delivery orders in 2019, Pinduoduo could then support Jitu’s ascent in China and reduce own dependence on Alibaba’s affiliates. Jitu is already the largest player in its home market Indonesia.

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