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As people buy more—and ship more—the logistics industry’s capital inflows and business trends are changing. All three of China’s main e-commerce platforms, Alibaba, JD.com, and Pinduoduo, have begun dedicating more resources towards investments in logistics.
Logistics courier companies are also making big moves. Best and Zhongtong Express (ZTO Express) are seeking secondary listings in Hong Kong, while SF Express’s stock price has been rising rapidly enough for its founder Wang Wei to dole out red packets to his employees.
In light of the COVID-19 pandemic, e-commerce and logistics companies have put the pedal to the metal as they race to transform the industry.
Rethinking the value of an asset-heavy business model
“The world holds many misunderstandings about JD.com,” said the company’s founder, Richard Liu, in an interview with CNBC in 2017. “They believe that JD building its own logistics and warehousing system is tantamount to burning money.”
Indeed, JD.com struggled with breaking even as it shored up logistics capabilities in the firm’s first ten years of operations, making it easy to side with critics of JD.com’s asset-heavy business model. E-commerce companies could cut straight to making bank, the logic went.
The COVID-19 pandemic, however, has confirmed the wisdom in JD.com’s original aspirations. JD Logistics stood out during this trying time, hitting a 24.8% year-on-year increase in annual active users.
A competitive moat in logistics
For e-commerce companies, the value of a well-functioning logistics system is now evident. It is not just a matter of user experience, but a critical matter of retaining customers or losing them to competitors. Alibaba, JD.com, and Pinduoduo have heavily invested in building competitive moats based on logistics.
Alibaba is known for its ability to build robust, tight-knit platform communities. Alibaba’s logistics platform, Cainiao Network, was established in 2013, while Alibaba is also among the three largest stakeholders for each of Best, STO Express, YTO Express, and Zhongtong Express.
The ‘Tongda Operators’ struggle
China’s leading logistics companies, YTO Express, STO Express, ZTO Express, and Yunda Express are collectively known as the “Tongda Operators.” These firms share a similar franchising model for their business. However, new entrants such as SF Express, J&T Express, and Zhongyou Express are competing for business, placing Tongda operators’ market positions under strain.
The original advantage that Tongda Operators held over their peers was low prices, but with new and old rivals angling for a chunk of the market, Tongda Operators have been slashing prices, pushing the industry toward a risky price war. Any further reductions in prices will mean substantial evaporation of profits for these companies.