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Special delivery

2 October 2015 By Robyn Mak

Alibaba’s expanding delivery arm is a financial blind spot. The Chinese e-commerce group owns just under half of the company that manages billions of its packages each year. Yet Alibaba has spent over $6.3 billion on logistics-related deals in three years. When it comes to working out whether these investments make strategic sense, shareholders are in the dark.

The $148 billion e-commerce giant matches buyers with sellers on its online platforms, but doesn’t control shipping or delivery. Instead, merchants choose from a huge and fragmented list of companies across China to warehouse, transport and drop off their products. Three years ago Alibaba joined forces with a handful of partners to set up Cainiao Logistics, a 5 billion yuan ($787 million) venture which it describes as an information-sharing platform that links delivery companies.

Cainiao boasts a partnership network of 15 companies with over 1.5 million delivery employees across the country. In the 12 months to March, this network claims to have delivered 8.6 billion packages from Alibaba’s shopping platforms. To compare, U.S. parcel giant UPS delivered less than half of that number globally in 2014.

Alibaba’s 48 percent stake means it does not formally control Cainao. However, the venture’s president, Judy Tong, is a member of the powerful partnership committee which nominates the majority of the e-commerce group’s board.

Moreover, Alibaba has also been pouring cash into other logistics ventures. Earlier this year it pumped $4.6 billion into Suning, an electronics retailer which owns 65 national and regional distribution centres. It has invested in Singapore Post and YTO Express, a delivery company that is part of Cainiao’s network. And last year it bought stakes in Chinese electronics group Haier and its logistics subsidiary, as well as in a department store operator whose parent is Cainiao’s second-largest shareholder. In total Alibaba has spent at least $6.3 billion, according to Breakingviews calculations.

This matters, because the company founded by Jack Ma has made a virtue of its asset-light business model. Not holding inventory and outsourcing delivery to other providers has proved lucrative. Alibaba’s adjusted net profit margin in the quarter ending June was 47 percent. Contrast that with Chinese rival JD.com, which has adopted an Amazon-like model that requires it to maintain a large inventory and build up its own delivery network. The $36 billion group has yet to turn a profit.

Yet there are signs that getting packages to consumers quickly and reliably is an increasingly important battleground. JD.com offers same-day and next-day services for over 80 percent of orders it delivers while Alibaba aims to have next-day delivery available in 50 cities by the end of the year. Cainiao has said it plans to spend 100 billion yuan over the next few years and wants to quintuple its warehouse space to 5 million square meters next year.

Meanwhile, Alibaba and JD.com are battling it out in time-sensitive products like fresh groceries: earlier this year, Cainiao started offering same-day food delivery in Beijing and Shanghai for Alibaba’s online supermarket. JD.com announced a $700 million investment in a supermarket operator in August. The latest e-commerce buzzword – “online-to-offline” – also hinges on speedy and reliable deliveries.

Because it’s a minority investor, Alibaba doesn’t have to break out financial results for its logistics ventures. It’s not clear from the company’s financial statements whether Cainiao is generating any significant revenue or making a profit.

With net cash of over $16 billion, Alibaba can afford to make bold bets in logistics and other areas. Executive Vice Chairman Joe Tsai has likened the group’s shopping spree to a coordinated chess game. Even so, these ventures are a financial drain: if Alibaba were to finance Cainiao’s planned 100 billion yuan expansion in proportion with its current shareholding, the investment would be equivalent to the group’s operating net cash for the year to last March.

In such a capital-intensive business, sharing the burden with other investors may make financial sense. Cainiao’s partnerships mean Alibaba can partly offload the risk of owning warehouses and delivery stations, or employing over a million couriers. But the company’s shareholders can only guess at the true costs, or what kind of returns the investments might generate.

Worries of a slowing Chinese economy have wiped out half of Alibaba’s market value since last November. Any suggestion that the company’s margins are less healthy than they look would offer a renewed challenge to investors’ faith. But even as delivery becomes increasingly important, Alibaba shareholders can only guess at how much it costs.


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