China’s E-Commerce Giants Battle for National Expansion through Diversified Delivery Strategies

Chinese e-commerce giants are changing strategies in response to reduced growth rates and continued economic tensions. Still, across the country, more than 100 million packages are shipped each day. The largest e-commerce giants intend to deliver any of their orders to any of their in-country locations within two days. Recently, nearly 70% of Chinese e-commerce orders were delivered same-day. Transactions in first-tier cities including Shanghai, Guangzhou, Beijing, and Shenzhen have slowed, however, leading competitors to add a greater focus on lower-tier cities for growth. Over 50% of China’s population resides in rural locations. An estimated 5% of consumers in these lower-tier cities are said to have comparable incomes to the average American. Pinduoduo (PDD), Tmall and Taobao Marketplace (Alibaba), and Vipshop (Tencent) confirmed increases in lower-tier city consumption through comments in their quarterly earnings reports.

Both Alibaba and JD.com have followed a path of vertical integration from product sales through final delivery. Overall, growth in lower-tier cities is complicated by a number of challenges including a lack of street names or signage. Alibaba pursues last-mile deliverythrough its controlling interest in Cainiao, as well as with third-party companies like SF Express, ZTO Express, and YTO Express, leveraging in total more than two million drivers. This allows Alibaba to operate an immense data-sharing platform without owning much infrastructure.

JD.com, however, has an in-house strategy and fulfills all its deliveries internally, leveraging over 65,000 drivers, in order to support 90% of orders that request same day delivery. The company recently expanded its logistics services externally through the creation of Fulfilled by JD, which is now competing with last mile companies like SF Express and creating a new revenue-generating business. Additionally, the company hires residents in the lower-tier cities who can leverage their connections to enhance customer service and grow last-mile services.

Developing methods to enable last-mile deliveries across China’s vast geography, of which JD.com has been an early adopter, include the emerging use of drone deliveries to aid local delivery drivers by flying parcels that drivers collect, separate and deliver to their final locations. Autonomous Ground Vehicles (AGVs) are another option where possible, and are also being developed for JD.com. AGVs are able to travel on pedestrian roads, move up to 30 parcels, and utilize facial recognition technology to verify the correct recipient for the collection process.

Hive Box and other Pick-Up/Drop-Off (PUDO) points are another option for deliveries in numerous locations. China is said to have the most parcel lockers globally, by a wide margin. This option is expanding, with over 150,000 locations and growing over 50,000. SF Express and STO Express each own a stake in Hive Box, which operates as an open network, as compared to the mainly company-specific options in the West. Alibaba also utilizes the Hive Box network extensively, as a key component of first-time and same-day delivery as well as an additional 50,000 PUDO points. In contrast, JD.com has an over 50,000 parcel lockers, which are proprietary.

Chinese e-commerce drove the related parcel delivery market by 28% from 2010 to 2017. This growth, based on sheer population, pent-up demand, rising incomes, and consumption across numerous cities, will continue for the foreseeable future. The related growth in lower-tier cities also fosters new Small and Medium-sized Businesses (SMBs) and employment. According to the China State Post Bureau, online trade in these lower-tier cities may reach US$296 billion next year, and between 10-13 billion parcels annually. Along with that growth, however, will come increased labor costs and infrastructure/investments.

No one solution will prevail, and it will take a combination of route and asset optimization, evolving demand/inventory prediction and local knowledge of geographic markets that have been historic laggards of technology adoption and comprehensive infrastructure. Only the very large competitors will have the ability to scale, although further acquisitions, equity investments, and partnerships are likely. Even the three largest may sacrifice profit for scale to enter numerous lower-tier cities. Those companies willing to take the nearer-term risks will benefit from lower-cost solutions that do not require high-speed connectivity, provide a strong user interface, and have an ability to effectively meld technology with human labor that may not have traditionally worked in logistics.