All those Singles Day packages show where’s the real battleground for China’s online shopping giants

BEIJING – Alibaba, JD.com and Pinduoduo. For these three forces of China‘s online shopping market, winning the race to tap the country’s fastest-growing regions will depend largely on an efficient delivery strategy.

China’s largest cities rival global metropolises in the variety of clothes, electronics and other goods that can arrive at the door often less than a day later. In cities like Beijing and Shanghai, online shopping is already a major part of daily life, leaving limited room for growth.

As a result, e-commerce companies are increasingly turning to smaller cities and rural areas, where disposable income remains relatively high, in part due to lower living costs.

For example, Alibaba said its penetration rate in developed parts of China is 85%, versus 40% in less developed areas. The company added that for the quarter ended June 30, more than 70% of the increase in annual active consumers was from those less developed areas.

To reach consumers in more remote markets, each of the e-commerce giants is trying a different tactic.

• Alibaba announced Friday it invested an additional $3.3 billion in its shipping affiliate Cainiao, for a 63% stake. The e-commerce company also has strategic investments in two of China’s major delivery companies: ZTO Express and YTO Express.
• JD.com touted its five years of investment in an in-house logistics network as a driver in overall profits in the second quarter – the logistics unit itself reached break-even during the same period.
• As for Pinduoduo, known for its group-buying model that initially took off in lower-tier cities, it has left the distribution of parcels to shipping companies.

But, as Pinduoduo CEO Colin Huang announced on the second-quarter earnings call, the company is in the early stages of developing a system for making delivery more efficient using big data. In one case, a system could take information on past orders and traffic to determine the cheapest delivery route.

That layer of information technology is what logistics companies need to develop now, since the basic infrastructure already exists, said Melissa Chen, logistics analyst, at China Renaissance.

It’s the same case for JD.com. The company claims its logistics network already covers 99% of the population of China, and at least 90% of orders can be delivered within 24 hours. In more remote areas, the company has collaborated with local stores to serve as mini-warehouses.

A key next step is to improve data collection and analysis of local demand, so JD can effectively stockpile those smaller outposts with goods for one-day delivery to the region, the company said. JD also plans to open some more warehouses in lower-tier cities.

“We have always believed the increased efficiency of logistics will bring a very large growth in sales,” JD Logistics CEO Wang Zhenghui told reporters on Oct. 29, according to a CNBC translation of his Mandarin-language remarks.

Wang would not provide a precise breakdown of costs for reaching less densely populated lower-tier cities versus more developed areas, but noted that as order volume increases, unit costs decline.

The retailer is also looking to its delivery network as a source of income. Wang disclosed that since opening the network to third-party players in 2017, those clients now contribute to about 40% of the logistics department’s revenue.

Without that third-party volume, an e-commerce company’s logistics business will have difficulty becoming a profitable enterprise, Charles Guowen Wang, director at think tank China Development Institute, said according to a CNBC translation of his Mandarin-language remarks. Wang is also the roundtable chair in China for the Council of Supply Chain Management Professionals.

He pointed out that one key way for delivery companies to lower costs is by keeping trucks full in both directions: a vehicle bringing products from an urban center to a village can then bring agriculture produce back to the city.

Pinduoduo already sells inexpensive fruit and other farm produce directly to urban residents through its platform. Gross merchandise volume from first and second-tier cities rose from 37% in January to 48% in June, the company said in its second-quarter earnings call. A spokesperson also noted that the forthcoming technology platform could help aggregate collection and delivery of these farm goods in a more efficient way.

Even as China’s e-commerce players work to improve their own logistics services, the market is full of other established players ranging from nationwide giants like SF Express to small, local delivery businesses.

In August, China’s official postal service company also disclosed that packages for products sold on Pinduoduo accounted for about a quarter of the 27.76 billion parcels handled nationwide in the first half of the year. Since the e-commerce company does not deliver its own packages, the figure indicates shipping volume through a variety of Chinese courier businesses.

Another tactic for reaching lower-tier cities centers on local supermarkets. Dada-JD Daojia, in which JD.com and Walmart are investors, seeks to combine software, store layout and a network of couriers to deliver supermarket products to the surrounding area in two hours or less.

“For the platform to achieve sustained and steady profitability in the future, the key is to improve operational efficiency by using product technology as the main driving force, which for logistics specifically means optimizing the pricing and order distribution algorithms to improve the efficiency of the delivery staff,” Jun Yang, co-founder and chief technology officer of Dada-JD Daojia, said in a Chinese statement translated by CNBC. He noted the same logic applied to both first and lower-tier cities.

Given the competition and complexities of working in more rural parts of the country, China Development Institute’s Wang expects that the large e-commerce companies will eventually find they need to partner with, or acquire, local players.

Here, Wang predicts the distribution systems will take three to five years to near completion.