No End in Sight for China’s Delivery Wars
Date: Friday, November 29, 2019
Source: The Wall Street Journal
Superfast growth sometimes isn’t enough to make an industry attractive. Just look at parcel delivery in China.
More than 60 billion packages have been shipped around China over the past year, up from just 1.9 billion a decade ago, thanks to the boom in e-commerce. The exponential growth has given plenty of business to express delivery companies, but it has also fostered cutthroat competition.
Courier services play a crucial role in China’s e-commerce ecosystem. Unlike Amazon, which runs its own network, China’s e-commerce leader, Alibaba, has outsourced logistics to third parties. Its fast-growing rival Pinduoduo has adopted the same model, providing a platform for shoppers and merchants to meet while leaving the messy business of deliveries to others.
Competition among delivery companies to serve these e-commerce giants is intense. Many of them in turn outsource goods collection and last-mile delivery to cheap local franchisees, further squeezing costs. Average delivery charges dropped 36% between 2012 and 2018, and the price war has only intensified this year, according to Morgan Stanley.
The five largest players employing the franchising model—collectively called the Tongdas—have managed to muscle out smaller players lately while using their scale to lower costs. They have increased their total market share to 73% from 59% in the past two years, according to Bernstein.
But the market is still very fragmented compared with equivalents in the developed world, where two or three leaders typically dominate—FedEx and UPS in the U.S. Chinese delivery leaders with a cost advantage like New York-listed ZTO Express may continue to win share by cutting prices. Eventually, consolidation could lead to a truce, but it will likely take a while yet.
Alibaba, which owns minority stakes in four of the five Tongda companies, could complicate things. It doesn’t necessarily want consolidation, but it has every interest in ensuring cheap, smooth and quick deliveries for shoppers on its platform. It currently tries to guarantee shipping quality through its subsidiary Cainiao, which owns a network of warehouses as well as a technology platform to track deliveries. Alibaba invested an additional $3.3 billion in Cainiao earlier this month, raising its stake to 63%.
Customers will cheer the continuing price war. The ones delivering the goods for them aren’t so fortunate.