Alibaba-backed firm eyes scale

Loss-mak­ing Cainiao pri­or­i­tizes growth over prof­its; wants in­vestors to fund ex­pan­sion of its dis­tri­bu­tion net­work

China Daily (USA) - - FOCUS | BUSINESS - By BLOOMBERG

Alibaba Group Hold­ing Ltd’s de­liv­ery af­fil­i­ate will con­tinue to pri­or­i­tize growth over prof­its as it builds the lo­gis­tics net­work at the heart of the Chi­nese e-com­merce giant’s global ex­pan­sion.

While Cainiao Smart Lo­gis­tics Net­work Ltd needs funds to con­tinue its in­vest­ment in its dis­tri­bu­tion net­work, it only wants the back­ing of in­vestors who en­dorse its model of in­cur­ring losses to build scale, Chief Ex­ec­u­tive Of­fi­cer Judy Tong told part­ners at a con­fer­ence in Hangzhou.

Those losses have prompted a US in­ves­ti­ga­tion into why largest share­holder Alibaba doesn’t fully fold the smaller com­pany into its own re­sults. But she said both com­pa­nies have pro­vided data to prove they’ve played by the rules.

Founded in 2013 by Alibaba and a small group of ini­tial back­ers that in­cludes truck­ing com­pa­nies, Cainiao un­der­pins the e-com­merce giant’s ex­pan­sion. It’s build­ing dis­tri­bu­tion hubs in re­mote prov­inces and around China’s big­gest cities, in­clud­ing one near Bei­jing that spans 37 foot­ball fields.

The com­pany han­dles some 42 mil­lion pack­ages daily, or 70 per­cent of the coun­try’s de­liv­er­ies, and pro­vides a cen­tral sys­tem that di­rects de­liv­ery firms mov­ing goods from seller to buyer.

“I def­i­nitely need more fi­nanc­ing be­cause we’re mak­ing such a big plat­form,” Tong said. “But we’re be­ing picky with in­vestors. We don’t want those who tell us every day ‘you must make money to­mor­row’,” she said.

Un­like Ama­zon.com Inc and JD.com Inc, Alibaba es­chews own­ing its own trans­port net­work, pre­fer­ring to farm out dis­tri­bu­tion. That less cap­i­tal-in­ten­sive model can be scaled up to match de­mand, its ex­ec­u­tives have said.

Alibaba an­nounced in 2014 a plan to in­vest 10 bil­lion yuan ($1.5 bil­lion) in lo­gis­tics and train­ing to push its e-com­merce model into 100,000 vil­lages over three to five years, about five times the num­ber cur­rently. That’s some­thing like a sixth of the coun­try’s ru­ral set­tle­ments, Jef­feries & Co es­ti­mates.

Cainiao has also set its sights on ex­tend­ing a net­work reach­ing Rus­sia, Brazil and Spain to com­ple­ment ex­ist­ing bases in seven coun­tries, in­clud­ing Ama­zon’s home turf. Alibaba’s bil­lion­aire chair­man, Jack Ma, wants more than half the com­pany’s rev­enue to come from out­side China within a decade. A $1bil­lion in­vest­ment in South­east Asia’s Lazada Group SA helped open a win­dow to six ma­jor mar­kets in the re­gion, and the former Rocket In­ter­net SE unit will work closely with Cainiao on re­gional in­fra­struc­ture.

“Two months ago, I was talk­ing with Jack Ma and asked him if he wanted me to think of how to turn a profit next year,” Tong re­lated. “He said, ‘ Don’t you dare think like that, be­cause if you do, you’ll def­i­nitely make Cainiao small’.”

Tong said last year the com­pany was angling to­ward an ini­tial pub­lic of­fer­ing. It at­tracted 10 bil­lion yuan in its first round of ex­ter­nal fundrais­ing in March, from in­vestors in­clud­ing Sin­ga­pore’s Te­masek Hold­ings and GIC, and Malaysia’s Khaz­anah Na­sional.

Cainiao’s re­la­tion­ship with Alibaba, which owns a 47 per­cent stake, has, how­ever, caught the at­ten­tion of reg­u­la­tors. It’s one of sev­eral is­sues that prompted a Se­cu­ri­ties and Ex­change Com­mis­sion in­quiry into how Alibaba ac­counts for its in­vest­ments, sales and af­fil­i­ates.

The watch­dog ques­tioned why Cainiao wasn’t fully in­cor­po­rated into fi­nan­cial state­ments. Alibaba says the com­pany isn’t a sub­sidiary and is a ven­ture be­tween sev­eral back­ers, in­clud­ing de­part­mentstore chain In­time Re­tail Group Co and in­dus­trial con­glom­er­ate Fo­sun In­ter­na­tional Ltd.

In 2015, Cainiao posted a net loss of 617 mil­lion yuan on sales of al­most 3.1 bil­lion yuan. That year, Alibaba recorded its per­cent­age of the loss on its books — $46 mil­lion. At the same time, it re­ported a $128mil­lion gain on in­vest­ments in Cainiao and other en­ti­ties. The SEC hasn’t re­quested any new in­for­ma­tion from Cainiao since the probe opened, Tong said.

HE GUANG / FOR CHINA DAILY

A han­dler of e-com­merce goods scans the bar­code on a par­cel in one of Cainiao’s smart de­liv­ery cen­ters in Guangzhou, Guang­dong prov­ince.

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