Alibaba’s Logistics Gamble: Difficulty Ahead

By  |  May 30, 2013, 11:14 AM

Say the word “logistics” in any conversation and you’ll almost inevitably put anyone listening to sleep. But the concept is hardly a boring one in China’s hyper-competitive e-commerce space, where industry leader Alibaba has just announced a massive 100 billion yuan ($16.3 billion) plan to build up its logistics network over the next few years. To me this plan looks like a direct response to similar recent moves by e-commerce names like Jingdong, Tencent, and Amazon, which are aggressively building logistics networks with an aim of reducing delivery times to two hours or less. But the situation for Alibaba is far more complex due to its different business model, leading me to suspect this plan will run into problems as it’s rolled out.

Let’s start with a look at the plan itself, the aim of which is to shorten delivery times to as little as 24 hours for items purchased on Alibaba’s popular TMall and Taobao e-commerce platforms. Alibaba is calling the project Cainiao, which is being developed with a list of partners that includes delivery companies like SF Express and Yunda Express. The initiative also has a roster of major financial backers, including Fosun Group, China Life, and China Citic Bank.

On the one hand, I need to commend Alibaba for realizing the importance of improving its logistics, which ultimately results in more efficient deliveries. Such improvement will be critical for continued success as the company tries to compete with other major e-commerce players who are already hoping to whittle their delivery times to two hours or less by setting up networks of major warehouses in the centers of some of China’s biggest cities.

But Alibaba uses a different business model from most of its main rivals that will make establishment of this kind of logistics service network difficult. We can already see that difficulty in the fact that Alibaba is aiming for delivery times of 24 hours in its most efficient scenarios, which is far slower than the same-day, two-hour deliveries that Tencent and Jingdong have announced in recent similar initiatives.

The difference in business models is relatively straightforward. Most sellers purchase their products from manufacturers and then stock those items in their own warehouses until they are purchased by consumers. Alibaba, by comparison, operates e-commerce platforms where third-party retailers can rent spaces, much the way that individual shop owners rent stores in a shopping mall. Thus Alibaba has far less control over delivery times for goods ordered on its site, since the delivery of those goods is ultimately the responsibility of the individual shop owners.

Because of this structure, the best Alibaba can do is to help its third-party merchants by providing them with services and other tools to improve their efficiency. But the complex nature of its ecosystem means it could be very difficult to create a uniform program where consumers can be guaranteed 24-hour delivery for many of their purchases. And even if Alibaba can guarantee 24-hour delivery, that would still be far slower than the two hours that Jingdong or Amazon may be able to offer for comparable products.

While Alibaba’s unique operating model has been one of its biggest advantages over its rivals up until now, the model’s shortcomings are also starting to appear as issues like logistics become more important. At the end of the day, I won’t predict an outright failure for this new initiative, which I do think is a necessary step for Alibaba to compete with its rivals. But I do see many problems ahead, and expect we’ll see many modifications to the plan that may result in a network far different from the one Alibaba has originally envisioned.

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