This week’s podcast is about ANE Logistics, which is a compelling business model for digitizing and consolidating less than truckload logistics in China.

You can listen to this podcast here or at iTunes and Google Podcasts.

Here is my new book:

• Moats and Marathons (Part 1): How to Build and Measure Competitive Advantage in Digital Businesses Kindle Edition

My questions for ANE Logistics:

• Does a franchised logistics network with digital connectivity lower the barrier to entry?
• What happens when the volume is greater a network with the same number of nodes and linkages as another?
• What happens when the geographic density is increased? More nodes and / or more linkages.

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I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

This content (articles, podcasts, website info) is not investment, legal or tax advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. This is not investment advice. Investing is risky. Do your own research.

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Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy. And the topic for today, an introduction to A&E and Franchise to Networks as a Business Model in China Logistics. So yet again, a very wordy title. I’ve probably gotta get a lot better at those. But this is a company, A&E, which one of the subscribers recommended I take a look at a while back and I did. And… It’s really compelling. It’s a really interesting business model. There’s a lot to like. This is a China logistics company, a sort of less than truckload company. So not express delivery like FedEx and SF Express and those, but sort of in between that and, you know, full freight where you’re renting an entire truck. So LTL less than truckload. Going for sort of a national network for logistics in China. Anyways, a lot here that’s very, very interesting to think about. Some good lessons, lessons to and sort of the power of networks. So that’ll be the topic for today. One, it’s an interesting company to there’s some important theory here about sort of networks and why they’re so, you know, pretty powerful as business models. Okay. Other stuff for today. Um, my book is officially out. Well, part one of the book is out. It’s going to come out in probably four parts. So the first part is out, the second, it’s up on Amazon, I’ll put the link in the show notes. Second part’s coming in January and February and so on. I think it’s pretty good. And I know people have been buying it, so I appreciate to hear your feedback. If you have any, definitely any feedback would be greatly appreciated. Good reviews are also appreciated. If you wanna go on Amazon and do that, that’d be helpful. Other little thing, I guess in the last day, there was a Bloomberg report circulating in the last day that China is… stopping the VIE structure for all new IPOs, which is how most China tech companies have gone public in the US. It’s not clear if that’s true or not. Other people have come out and said, no, it’s debunked. The Chinese government has said no. And it was a big story going out. I’ve talked about this before. About six months ago, I sort of talked about the tech government. I don’t want to say crackdown, but You know, all of that going on with China’s tech stocks. And I kind of gave you my opinion on what that was. And I did sort of say, look, one area that I am concerned about is that I don’t think these companies are going to be public in the US long-term. I think the future, in my opinion, which is a guess, is that there is no interest at any level of the Chinese government to have major important companies under the regulatory authority of the SEC and the US government. I just don’t think they see any value in that. But they do wanna access international capital and now Hong Kong is a real good solution to that problem. So I think the future of all of this is Hong Kong and how they get there and what that means for the existing companies that are listed. I don’t know, I floated that as a question for people who day trade and rent portfolios and lawyers. I mean, that’s outside of my expertise, that question. But I do think the long-term picture is pretty clear. And just full disclosure, since that talk, which was probably about five months ago, I have transferred most all shares I own on US stock exchanges in Chinese companies to Hong Kong. And I tend to, you know, some people have done 50-50, I’ve heard of big companies doing that. I moved it all, because it’s not a huge amount of money. But I know that’s what… people are doing. Maybe it’s a good idea, maybe it’s not. I am not the expert on that subject at all, but I think I’m pretty confident in the call that long-term… You can flip this question around in your mind. Would the US government think it’s a good idea if most all of the major US tech companies, Amazon, Google, were all listing in Beijing and therefore under the authority of all the Chinese regulatory authorities? No, they obviously would not be in favor of that. And they would want those companies listed, I don’t know, somewhere else, but you know. So I don’t think it’s surprising. Anyways, that’s what I think is gonna happen. Okay, that said, it’s kind of in the news a lot in the last day, that’s my basic take on that. For subscribers, I’m gonna be sending you a bunch of stuff on A&E over the next couple days. I think it’s a really interesting, I’ve been spending a lot of time on this company in the last week. So I’ll send you that. Those of you who aren’t subscribers, feel free to go over to jeffthousand.com, sign up there. And standard disclaimer, nothing in this podcast or in my writing or on the website is investment advice. The numbers and information from me and any guests may be incorrect. The views and opinions may no longer be relevant or accurate. Overall, investing is risky. This is not investment advice. Do your own research. And that applies doubly to my previous statement on listing in Hong Kong versus the US. That is not my expertise. So that’s just kind of how I think about it. Okay, with that, let’s get into the topic. Now the key ideas for today, the key concepts are franchise to networks, which is now in the concept library, it’s listed there. I’ll talk about what that means. And also something I called three networks, five platforms and three network effects. If you go to the concept library, you’ll actually see at the top, three networks, five platforms. Three networks. Basically the idea is networks are not the same thing as platform business models, and that is not the same thing as a network effect. These are three different things. They all relate to each other, and I’ve kind of identified three common types of networks, five common types of platform business models, and three common types of network effects. There’s more of all of these, but those are common ones. Anyways, you can find that in the concept library. Really, I want to talk about the difference between networks, platforms, and network effects, and then franchise networks. Okay. Now, when you start to think about A&E, before we get to that, we start to this idea of networks. What is the difference between a network and a platform business model? Platform is a network-based business model in that it is a, you know, could be a payment system, it could be a marketplace, could be a lot of types of platform business models. These are business models that are based on networks. And in my mind, a network is a series of assets. Not unlike, you know, we could be in the Coca-Cola business, that would be our business model, but our assets would be, you know, a factory that makes syrup, a logistics network, those would be the core assets on which we have built this business model. It’s the same idea. Platforms are business models that are built on networks, which are assets and they can be tangible, physical, railroads, streets, and they can be intangible. They can be virtual networks. They can be your phone is connected to my phone is connected to someone else’s. That’s all pretty intangible. So tangible or intangible assets that make up networks. And a network at the end of the day is really simple. It’s a bunch of nodes and it’s a bunch of linkages between the nodes. There’s one bus stop, that’s a node. Here’s another bus stop, that’s another node. The linkage between them is the route that the bus takes from stop A to stop B. Now with the railroads, it’s very easy to see because we can physically see the linkages. It’s the railroad tracks. between the train stations. And over time, we see national networks of railroads that cover the US, that cover Europe and Japan in particular. You know, those are physical networks made up of stations, rail, and you could say the, you know, the cars themselves are also the physical assets. So when we start thinking about that stuff, there have always been networks. There’ve been roads. There have been canals, there have been railroads, there have been streets within a city. We could say an electrical grid is a network. You know, and these things are kind of easy to see and they’ve all been around for a long, long time. And within those networks, there’s not really a distinction between the network and the business model, the platform and the assets. because they were always kind of the same thing. It was the railroad company was the business and it owned the assets. It owned the rail and the train stations and all of that stuff. And it usually owns the cars and other things. Now they may allow other companies to build on top of them. They may let a freight company use their tracks, but usually there wasn’t a huge distinction between the network itself and the business. So let’s say electricity. I mean definitely it’s kind of the same thing. The electrical company owns the generators, the wires into everyone’s house, and their business, their service is electricity. It’s kind of the same thing. Now in the age of physical networks, we can also talk about network effects. You know, the more train stations on a particular train network, the more valuable it is to the shippers. One, because let’s say if you’re shipping goods as opposed to moving people. One, you can go to more places. That’s valuable. A closed network, if one train company owns the Northeast of the United States, and another one is also in the Northeast, but it has a smaller number of stations, it’s less valuable. So coverage increases with scale. The more outlets you have, the more nodes you have, the more valuable it is, generally speaking. It also tends to be cheaper because If you want to ship cargo from point A to point B, you don’t have to go through a hub in St. Louis, then to get over to Chicago, you can go directly there. So generally the more nodes you have within a network, it’s more valuable, that’s a network effect, tends to be lower cost. The more direct routes you have between nodes, the better it is. That also tends to lower cost. And really the three dynamics, the three variables tend to be the amount of places you can go or ship to, more is better, the cost to get there, that cost tends to drop the more dense your network, and then also how fast do you get there, the timeliness. All of those tend to improve when you have a denser network with more nodes, more linkages, more routes, more trains on the network, all of that tends to be better. And that was kind of how physical networks evolved for a long, long time. Um, and generally we would have called those radial networks. We would have called them hub and spoke networks where, you know, if you get on a train in St. Louis, there isn’t a separate track that goes to every single city in the U S that would be more efficient. I mean, it wouldn’t be more, it would be more valuable to consumers, but it would be incredibly expensive. It’s not the way those work. Usually you have to go to Chicago. Then you transfer. So these were sort of hub and spoke networks. And the network effects of a hub and spoke are generally less powerful between let’s say a network effect for payment or let’s say WeChat, WhatsApp, Line. Everyone on WhatsApp, everyone online can connect with everyone else directly. There’s no hub and spoke. Every user connects to every other user directly. That tends to have a much more powerful network effect. Okay, but those are the early days of physical networks. Then I think really the turning point in my mind was telephones. AT&T, it’s really funny if you read the old annual reports by AT&T in the 1920s, 30s, 40s, the CEO was talking about network effects. It’s some of the first CEO language you ever hear about network effects. where look, the more phone lines we put into people’s houses, these are physical fixed line networks, the more valuable it is to everybody. And AT&T had a monopoly, I forget what the numbers are, 70 years? Now they also got government help with that because they convinced the government that having one company for the entire network was more valuable, which is kind of true, but not really, but not really, I mean that was. No, not really. But they basically built a natural monopoly with some government help on top of that. You could argue that phone lines started out as a fixed sort of a physical network. We lay the cables, copper wires, into everyone’s house, into every business. That’s your physical network. And what is the service? Well, it’s making phone calls. So the network was the service yet again. Like… with trains. But then something kind of important happened because you start in the 70s and 80s, and you realize that the information traveling down these copper wires is digital information. Well, it started out with analog, but became digital information. The physical network, phones in people’s houses, lines under the street, became separate from the platform business models you could build on top of that. Suddenly you could start to sell ISP services, you could start to sell data services, AOL companies like that. And once the information started moving, you could start to build lots and lots of platforms on top of this network that AT&T didn’t own. eBay is a marketplace platform that uses you know, well now it uses people’s phones in their hands, but for a long time it was in their homes back in the 90s. So that’s when we started to see the separation from this idea of a physical network to a digital network to a platform business model that might be owned by a company that doesn’t own the network. Facebook doesn’t own everyone’s phones. You know, so that’s when we start to see this separation between lots of types of networks. lots of types of platforms that run on them, and then lots of types of network effects. The question kind of fragmented, and it got more interesting. Now within networks, in my little three networks, five platforms, three network effects, the three types of networks I pointed to are physical networks, which I’ve just sort of talked about, protocol networks. Protocol networks is more like the ICP, TCP of your computer links in with every other computer. So that’s, it’s a network, it’s a type of connection that connects all the world’s computers, all the world’s devices, but really it’s not about the lines, it’s really about the protocols and the standard interfaces that allow these things. So we kind of call those protocol networks, and there’s several of those. And then we really start to get people and company networks. You know, your company has an app. It connects with lots of consumers. Well, in that case, the connections on Facebook, we could look at Facebook as having its own network of people and companies. It’s not really the phones, and it’s not really the lines under the street of fixed telephony, and it’s not really the mobile networks. Now, Facebook’s network is really the people and the companies that have a presence on their system that connect to each other. So I kind of, in my mind, I think physical networks, protocol networks, and then people and company networks. That’s the three networks, then we can move to lots of types of platform business models, and then we can move to types of network effects. Okay. And these things do kind of keep evolving. I mean, you know, newer types of devices are in people’s pockets. Computers can talk to each other. The cloud is a type of network that connects. And as you sort of build these network assets, people start to build. platform business models on top of them. And some are different and some are marketplaces and some are communication and some are payment and they have different types of network. I find it helpful to break those things apart. And arguably the biggest frustration has to be for AT&T because they’ve enabled everything and yet they don’t own any of the powerful platform business models that run on the networks that they spent a huge amount of money building. You know, the gripe from, I think it was the CEO of AT&T like 10 years ago, he said, you know, we’re ending up as just a series of pipes. And meanwhile, like, you know, Netflix and, you know, we, Chad and all these companies are making fortunes using their networks. But what you also see is you see one network built on another network built on another network, you know, so eBay built a network of people and companies that were buyers and sellers, merchants. But then PayPal came along and built their network on top of that using the same network of buyers and sellers people, and they did payment for them. And then, you know, so everyone builds on each other. It gets real confusing at a certain point. But that’s kind of how I think about it. Anyways, so what’s the point of this? Because this is this idea that logistics has traditionally been a physical network. You know, what is a logistics network? Well, it’s a bunch of warehouses. It’s a bunch of dude in jumpsuits, usually. It’s a bunch of trucks. It’s a bunch of boxes. It’s a physical network in every sense of the word. And what does this network do? Well, it does pretty much what trains used to do. You know, it moves, well, really, but they still do. It moves physical items around a big continental economy. It’s a physical network, but… Lots of companies, Amazon, Alibaba, JD, this is arguably their biggest strategic priority, let’s say in the top three, is to digitize this physical network. And that makes it start to look like AT&T in 1985. Like you are clearly doing something beyond, hey, let’s just move a bunch of boxes from trucks to people’s mailboxes to whatever. We’re gonna digitize the process. We’re gonna, one, we’re gonna connect everything with software. Every truck is tracked, every package is tracked, everything connects to everything else. We don’t have to own a warehouse anymore for it to be part of the DHL network. We can let some other company own the warehouse and we will just plug our software into them, into their warehouse and suddenly it’s part of our network. So that’s kind of interesting. We will start to have more and more autonomous vehicles moving the trucks themselves. Within the warehouses will have fleets of robots that do everything like ants, kind of like how ants build bridges. It’ll be like a hive mind and these robots move around. This thing is, a couple of things are happening with these logistics networks. The first thing is they’re being digitized. Every aspect of them is becoming hardware and software. Two, they’re becoming standardized and connected. They’re… they’re sort of standardizing the interfaces between warehouse A and warehouse B so that they’re connected in real time. And you can start to connect to any building anywhere. That’s kind of like we had five railroad companies and they were all building their own cars, but the rail gauges were different size. But now we’re mandating that all the rail gauges have to be five feet. And suddenly all the rails of Northern Japan can connect with the rails of Southern Japan and it becomes one big network. So we’re seeing digitization, we’re seeing standardization and connectivity, and then we’re seeing an opening of the system and all its data to application developers who are gonna start to build new businesses on top of this, maybe. So that’s kind of been this big idea floating around for a couple of years. I’ve looked at it quite a few times. And so when I looked at A&E, the question was, look, this is a… traditional logistics company made of people and warehouses that is going digital and that is really targeted towards e-commerce. That’s who they’re really focused on to a large degree. So the question is, you know, what are logistics network gonna look like in five to 10 years? Because they could be very, very different than they are today. Not unlike how the stuff that runs in a phone line, whether it’s a mobile phone line or a fixed phone line, is dramatically different than it was in 1980. So we’ll see, I’m not sure, but I know when I talk to Alibaba and JD and I ask them, what’s the most important three things you’re doing, both companies say digitizing logistics. And then it’s domestic, because it’s China, but it also becomes cross border, it becomes regional. The big logistics companies of the world, the DHL and the FedEx, they have been global for a long time. Sineo, Alibaba’s logistics arm, they are trying to build a global logistics network. And that’s what they’re doing. Okay, so anyways, with that background, and the key concept for all of this is to think about networks versus platform business models versus network effects. Lots of variation between those three. That’s kind of concept number one for today. But based on that, then let me jump over to this company and sort of tee up why I think this is relevant. Also, if you wanna know more about this, just go to the concept library and click on that. Or you can look in the show notes. There’s two podcasts, I’ve talked about this before, which is… Podcast 71 and Podcast 26, which is like a year plus ago. I talked about sort of like JD logistics as a type of new ecosystem, and I talked about AT&T and some pretty good depth and physical networks. So I’ve touched on those before, but the links for both of those podcasts are in the notes. Now let me give you the basics of A&E. I’ve got about 50 pages of notes I’ve made on this company over the last week. It’s a huge stack. It’s kind of ridiculous. The story is interesting. It’s a well-written annual report. It’s publicly traded in the US. A very well-written strategy. Whoever wrote this understands business models. I mean, they went into real specificity on the economies of scale they have and how they’re building them. And I mean, it’s actually pretty impressive. I mean, some of it’s a story because they always have to have a story, but some of it’s quite good. Okay, so what do they do? Quote unquote, they are going for efficient logistics for commerce in China, fine, focused on less than truckload with national coverage. Now, for logistics, people often talk about express delivery, FedEx, small packages, things like that, and then they tend to talk about less than truckload. This would all go under freight. Less than truckload, which is, you’re not. if you’re a, and this is mostly B2B at this point, you’re not renting an entire truck to move from your manufacturing, you fill it up to your distribution or whatever. It’s less than a truckload or full truckload FTL, which is when you’re renting the whole truck. Now, why is less than truckload so interesting? Because it immediately creates new activities. If you’re doing less than truckload, then you’re doing B2B services basically. You contract with a lot of manufacturers, a lot of merchants. They all deliver their goods to a local outlet or they take it to your regional hub. And then you immediately have to sort and consolidate. That’s a big activity that happens within this company because you have to decide what package from what merchant am I putting in what truck. and I’ve got to try and maximize my utilization, my timing. I got to figure out what routes I’m gonna, there’s a whole sorting, assortment, and consolidation activity that happens that the less, you know, the full truckload people don’t do. They’re just moving this truck full of stuff from point A to point B, that’s it. So there’s a lot sort of more operationally going on. Now within less than truckload, they’re focused on China, domestic. The logistics freight by both volume and money in China dwarfs everywhere else. Everyone knows China is very big in e-commerce. The money spent is stunning. The logistics volume moving around China over the last 10 years has absolutely skyrocketed. It just dwarfs the US. Express delivery companies have been rocketing upward. They’re all based in Hangzhou, which is really interesting, the express delivery companies, which is where Alibaba’s from. It’s kind of funny. They all have the same name, ZTO, STO. They’ve all got the TO name there. Anyways, but what this company is saying is, look, we are focused on the fact that less than logistics is being rapidly modernized in China because of a couple things that the, E-commerce is becoming very, very important. So all the manufacturers, all the merchants, all the distributors are having to respond to a much smarter and data-driven type of logistics. So they are turning to LTL companies to operate much faster than they ever have before. So it’s kind of like e-commerce has been driving express delivery and now it’s driving LTL, which is a lot of B2B stuff. Faster, high frequency. lots of inventory turns. You’re trying to sort of bring merchandise to warehouses, to stores and get closer to consumers. And so the whole thing is sort of becoming more data-driven and smart. And that is a big contrast to how LTL logistics has traditionally operated. Historically in China, it’s been incredibly fragmented. It’s been very local. lots of random truck people, lots of small little companies, maybe they have a little bit of a regional presence. Hey, we’ve got quite a few routes in Hangzhou, but we certainly don’t cover all of China. And then we have these sort of point to point people who are like, well, we do routes between Shanghai and Beijing and that’s it. So very fragmented, lots of small players, very inefficient. And so what these companies like, A&E are trying to do is basically digitize the whole thing into one nationwide company that can offer you LTL everywhere, data-driven. And that’s pretty much what we’ve already seen in express delivery. We are very used to the idea that there’s a handful of companies that do this, DHL, UPS, FedEx, and even in China, we’re down to about five to seven companies. So the idea is LTL is also gonna consolidate to five to seven companies, but today it’s still very inefficient, very fragmented. So that’s kind of what this company is positioning itself to do with the idea that we could be the FedEx for this, and we could be one of three to five players that dominate this whole space in China, which is a very big secular trend logistics growth. And then they tell you their growth numbers, which are pretty good. You know, total freight volume, which would be your kind of key operating number. You know, 2020, about 10 million tons up from 8 million the year before up from 7.3 the year before that. So not, you know, not astronomical growth, but good growth. Their revenue, 7.1 billion rem and B, 2020 up from, let’s say, two years earlier, 4.8. So almost double. And then you look at their gross profit about, you know, it’s growing in line, but their gross profits are about 15% right now, but it’s been changing pretty good. So they’ve got this sort of big idea. They’ve got the financial, you know, the growth looks good. The financials look okay. I mean, it’s not an e-commerce company. It’s gonna be, you know, they got a lot of trucks and warehouses, so it’s gonna be a smaller margin business. And then they sort of tee up the idea of, you know, if this business is successful, and they argue they’re the market leader by now, but I mean, you’re still talking, there’s a lot of players on the field. With this, they will say they are the market leader within this particular business model type, which is not the same thing as the whole space. But they will say, look, if we do this, you will end up with basically an express freight network. that covers the whole country. It will have network effects, just like FedEx, just like railroads, just like AT&T, although it’s very different. But the idea is, look, a national network would have network effects, true. They will also have operational efficiencies and a lot of economies of scale that would kick in, which would be true if they pull it off. We would be the tech leader. in the idea of digitizing logistics networks. They’d certainly be one of the biggest in the world. And that would basically put them in a tremendous position of strength if this model works, and if you believe in the model. And yeah, I by and large agree with that. I think this is a business model we have seen. We know how it works. If they pull this off, and if they are the winner, Yeah, this could be a FedEx DHL type company and they would be in the largest logistics market in the world by far Okay, that’s all compelling now when we look at freight in China traditionally what we’ve seen for LTL is Kind of what I mentioned lots of regional small players and then some direct lines for longer businesses But it’s very fragmented. So what they call themselves is Express Freight, which is an analogy to Express Delivery, the same way sort of FedEx and them have created a national, I mean you could say the same, you could basically go back in time and they put this in their 10Ks. You can go back and look at Express Delivery in the past, and it was very fragmented and then it all sort of consolidated to these Express Delivery companies, which we know so well like FedEx. So the argument is this is Express Freight, we will connect everything with a national network. and it will provide a superior service to businesses who are our customers. We will offer them national coverage. They can ship anywhere they want within China. It will be faster than anyone else because we have a denser geographic network. We have more nodes in our network and more routes between the nodes than smaller players. So we’ll be faster. And because of that, we will also be cheaper. So we’ll be cheaper, we’ll be faster. and we’ll cover everywhere, which is more or less the, well, FedEx is a bit more of a premium product. They don’t sort of compete on cost as much, but when they compete on the first two, we cover everywhere and it’s faster. So the same idea, that would be the Express Freight business model. And that brings us back to digital, because I mean, everything I just told you, we don’t even have to bring up digital. We could have said Express Freight, you know, it’s just a physical. model with lots of people and warehouses and trucks and you know, that’s all fine. But what’s the digital aspect? Well, the digital aspect is they claim to be, A&E claims to be sort of the pioneer, the first mover of what they call the freight partner platform model. Now the way a company would traditionally build a physical set of, you know, physical network to do logistics try to grow your business. As you got a little bigger, more volume, you would open another warehouse in a new location. You might open in new cities. As your traffic, your volume increased, you would increase the frequency of your trucks moving back and forth. You would add direct lines between two nodes of your network that used to go through another node. You might buy bigger trucks, higher capacity trucks. And that’s kinda, you know, you would build the physical network as your volume grew. And so these networks, you know, they take a long, long time to build. And most of the major companies took decades to get where they are today. Now, what A&E says is they said, we have pioneered their freight partner model, which is basically kind of claiming to be a platform model. I don’t really buy it. I don’t really think that’s how I, that’s not how I think about platforms, but basically They have put together about 26,000 freight partners and agents. And these are just separate companies that have small operations all over the country. And those companies get to use their name. And they are basically the intake points and the delivery points. And they go out and they sell the service. You want to ship something somewhere, come to us. We’re one of the freight partners for A&E. They use A&E software. They use their billing, they’re tied into their digital network. These freight partners collect the money. The customer, the shipper drops it off, and then these partners have to deliver it to one of the hubs of A&E. So within A&E, they only operate themselves part of the network. They basically have 147 sorting centers. And between those 147 sorting centers, they have about 2,000 routes that connect them. And these routes are both two-way, so the trucks go back and forth. That’s the network that stitches together the whole country, but they don’t then deal with the shippers directly themselves. They have these 26,000 freight partners who receive packages and sell their services and operate as their agents. But those… agents are digitally connected. So there’s one digital network that covers everything, but the physical network is broken into the part that they control themselves and that their agents control. Now that’s nothing new. We’ve seen this sort of model before, but usually when you look at companies like, let’s say if we’re talking about express delivery in China, we’re talking about companies like STO, ZTO, they have traditionally operated by this type of franchisee model. where they, you know, the core company will control the core routes that connect the cities, but not the delivery within the cities. Now in contrast to that, a company like FedEx or SF Express in China, they have an integrated model where they control everything themselves. So there’s a trade-off between, do you want to go by the franchisee model, which lets you grow a lot faster, but you have far less control and your service tends to be much worse. Or do you want to be the in-house model like FedEx and let’s say SF Express in China? And they are doing this model with franchisees, but they have far greater control because the digital aspects are connected. It’s only the physical aspects that are franchised. So that’s kind of this new thing we haven’t seen before. It’s an interesting sort of new evolution of this whole model. That’s why I think this is so interesting is that when you digitize this traditional physical network, it’s allowing them to do a business model we haven’t really seen before. At least I haven’t seen it a lot. And that’s kind of the other key concept for today is to think about, I call this a franchised network. Now we’ve seen franchisees before, you know, you have a lot of agents that sell for you and all that. But this one is where, you know, The separation between the digital and the physical makes it interesting. So I think this is a new thing. So that’s the other concept for today. And the question I’m struggling with on this new evolution is a franchise network can grow much faster. It lowers the barrier to entry, to breaking in and doing this. If you have to build all this stuff yourself over decades, it takes a long time. If you can use a franchise network, One, you can grow much faster, which A&E has done. And it also lowers the capital and effort you need to break in, because all you have to do is sign up a lot of other companies and they do the work for you. Now traditionally that hasn’t been that much of a problem because the in-house versions like SF Express had such better service quality that, okay, the franchisee was faster, but the service wasn’t nearly as good. does the fact that they’re digitizing this network change that? Does a digitized logistics network let you operate like a franchisee model and dramatically lower the barrier to entry? And I think it might. I think it really might. So I really have two questions for you on this company and I’m struggling with them. The question number one is what I said is, when you digitize a traditionally physical network, does it lower? the barrier to entry to building one of these things because you can franchise effectively with very good service levels in a way you couldn’t before. That’s question number one. Is this a change to the traditional barrier of entry we’ve seen to these types of companies? Question number two, which is not specific to A&E, but I think it’s a super useful question to think about when you look at a company like this. What happens, think about like, if you are, if you are, building a physical network like this. Trucks, warehouses, packages moving back and forth. What happens to your cost structure when your volume increases in a physical network versus your competitor? And actually A&E writes about this and they track these numbers and their thinking is quite good. Basically you get a couple things is if you have a network of the exact same size as your competitor in the sense that we have the same number of nodes and we have the same number of linkages, routes between them. If I have higher volume, I should see higher utilization and that will get me economies of scale. in the sense that we’ll have the same cost structure, but all of our volumes might per unit, cost will go down. We call that economies of scale by virtue of fixed costs. The other thing you can do is when you’re bigger, you can start to add more trucks. So we have the same size network and we have the same number of routes, but I am running more trucks per day between Shanghai and Beijing than you are. So you can, that from a shipper perspective, means you’re usually faster. So that sort of the first one, the economies of scale, that makes you cheaper. This one makes you faster. And timeliness of delivery is one of the factors you compete upon. The other thing you can do, and Annie talks about this, is you start to buy bigger trucks, higher capacity trucks. That also gets you a cost reduction, because you get higher utilization. So if we have the same size network, same number of linkages and nodes, and I have higher volume than a competitor, I’m gonna be more timely, and I’m gonna be cheaper by virtue of economies of scale, truck size, and fixed cost structure. So when you hear about networks like this, you’ll hear a lot about economies of scale and network effects. However, there’s another factor here, which is geographic density, economies of scale of geographic density. If I start to add more nodes in my network versus a competitor, I start to get increased speed and I start to get lower costs as well. It’s a different mechanism. My simple example of this is, you actually have to think about, I have more nodes and more linkages between nodes. That would be geographic density. Let’s say you’re shipping between two cities, A and B. Both competitors, those would be two nodes, but there is no direct route. between city A and city B. You have to go through city C first, which is most likely not within a straight line between A and B. More than likely, it’s off in another direction. You go from A to C, then you transfer, then you go C to B. So even though we have sort of, now let’s say my competitor launches a direct route between A and B. Suddenly, if we’re doing the same shipping rate, they’re gonna be cheaper for that route because they’re going direct and I’m still going through a hub somewhere else. So that kind of idea, one, you’ll be faster and you’ll be cheaper. So generally speaking, the more direct routes you have and the more nodes you have, both of which we would consider geographic density, you get cheaper and faster. And that’s kind of the other big effect. And when we look at companies like Food Panda, a lot of the way they have brought their cost structure down is by having superior geographic density within certain cities. So there’s kind of two big ideas there when you think about physical networks like this. One is economies, well actually the three ideas. Economies of scale, which was the example, we have the same number of networks and nodes, but I have higher volume. There’s network effects, and then there’s geographic density economies of scale. All three of those are really important. And A&E to their credit, They actually lay out all of the costs associated with those three effects, and they tell you like, our cost per ton is this much based on geographic density. And versus, I mean they actually lay it out number by number and they track them. I’ve never seen a company do it like that. Anyways, it was pretty cool, it’s worth reading. Anyways, for those of you who are subscribers, I’m gonna write a lot about this, because it’s kinda hard to explain. on a podcast, you kind of need to show it. But anyways, there’s two to three really important ideas in there within physical networks. And we’re seeing this in companies like Ding Dong, Food Panda, Maytuan, Grab. We see these same three effects all the time. Okay. Anyways, I went down the rabbit hole a little bit on that in terms of theory. Let me give you the so what. Okay, about A&E. I think it’s a potentially great business model. right up there with FedEx and these others, which I think are great business models as well. There is a lot to like in what this company is doing. However, this is still early in the game. This is going to be a game of growth and consolidation. Whoever grows the fast is going to start to consolidate the market to themselves, and we’re going to see this market come down from the 10 to 15 players down to three to five. most likely. So yes, it’s a great business model. If it works, there’s a lot to like within it. This is not a speculative model. We’ve seen it in a lot of other companies, but we’re early in the game and it’s not clear who’s going to win this game and whether A&E is going to be the winner. We’ll know by whoever grows the fastest. It’ll consolidate to them. We’ll see. It’s also not 100% clear to me that Express Freight will end up being that similar to express delivery. There’s gonna be a lot of dynamics we don’t know yet. And third and final question, take away on this is, okay, even if you have a powerful business model that is consolidated to three to five players, it still depends on management behavior. If the management of this company gets into price wars day after day, you can have three very attractive business models and nobody makes money. because of management behavior. And that is something we do see in China a lot. If these leading companies would just get along a little easier, everyone would do better. But they slug it out forever and often nobody makes any money. So those are kind of my standing questions. Who’s gonna win? It’s early in the game. And then how is management gonna behave? Those are kind of my two. Those are basically, in my notes, those are the two questions I circled at the end. Okay, and that’s basically my take on A&E. I’m going to write a lot more about this. I think it’s a really cool company to think about in a really exciting space, which is the digitization of logistics in China. That’s a huge idea. Very cool. And the two concepts for today, franchise network and networks versus platforms versus network effects. As for me, I’m having kind of a weird week. I didn’t end up going and looking at farms and stuff last weekend. I got postponed. I’m heading out in the morning. So we’ll take a look then. That should be fun. This is not a good idea. I don’t know why I’m looking at farms and such. You know what I’m doing? This is, I don’t know, maybe this is useful to you. I used to work for a billionaire prince for a long time and the thing about billionaires, they are very good at having a good life. Like they have advisors. They think about it a lot. They really spend a lot of time and effort to have fantastic lifestyles. So they’re good people to copy. And you don’t have to be super rich to copy, you can just do a cheaper version of their lifestyle. And that’s kind of what I’ve been doing. I’ve been copying the Al Waleed lifestyle, which is to have one home in a major city that you like being in, which I do. He spends usually all July and all December or January, somewhere else. So closes down the office and every, usually it was August. He’d spend the entire month in, usually in Nice and Cannes. Just as part of life, just to keep life interesting, is like every August we live somewhere else. And then usually it’s December, it’s the same thing, they would go skiing. So I’ve started basically doing a cheap version of that where every July I’m just gonna spend somewhere. And I went to Rio this year and I was gonna go to Greece next month. And I’ve sort of copied that. Anyways, the other thing he does, is outside of Riyadh. He has a big palace in Riyadh, 200 rooms and all that. I think it’s 200. It’s crazy. He has a desert camp outside of Riyadh about a couple hours driving and on the weekends, usually every weekend or every other weekend more likely, he just sort of leaves the city and he goes a couple hours out into the desert and he has a camp and they sit around the fire. And camp is a, let’s not kid ourselves, this thing is his current camp is I think managed by the Four Seasons, because he owns the Four Seasons. And so he put in a management contract. So, you know, luxurious. But yeah, it was great. And they sit out under the desert in Saudi Arabia, which is absolutely beautiful at night. Campfire, people stay up all night. It’s really pretty spectacular. If you ever go to Saudi Arabia, the cities are not pretty. I mean, Riyadh is not a pretty place. But if you ever go out to the desert, it’s really beautiful. And it’s usually at night because it’s too hot during the day. So that’s what he would do. Anyways, that’s kind of what I’m thinking about with this idea of a farm, is to have somewhere to go for the weekends and sort of be out under the stars at night. Maybe have a campfire, do barbecue, have friends out, and then just something to do every maybe once a month, once or twice a month, couple days. That’s kind of the idea, and we’ll see if this makes any sense at all. Maybe not, but I think copying rich people and their lifestyles is a pretty good idea. I found that to be pretty effective. Anyways, so that’ll be my weekend. Okay. Anyways, that’s all for me. I’m hope this is helpful. I hope everyone is doing well and I will talk to you next week. Bye bye.