I recently sat down with William Xiong, Senior Vice President for Cross-Border Logistics at Cainiao. That was a pretty great opportunity. Cross-border logistics has been a key part of Cainiao’s strategy for the last several years. And it’s one of the reasons Alibaba’s international business (especially AliExpress) has been showing such great growth recently.

So, I traveled out to the Cainiao headquarters in Western Hangzhou. Did a tour and then sat down with William. This article has my lessons learned.

Background on William Xiong and Cainiao

William is originally from the Jiangsu province a graduate of Tsinghua University. For those not familiar, Tsinghua is the MIT of China. And getting in as an undergraduate is exceptionally difficult. Basically, if someone tells you they went to Tsinghua undergraduate, you know they have some serious IQ points.

At university, William did a bachelor in Automation. And after graduation, he spent 5 years doing coding related to storage. After that, he went to Michigan State and did an MBA, with a focus on supply chain. And then he went to Accenture Consulting (in Shanghai) where he focused on logistics and transportation in China and AIPC. Basically, William has been doing “logistics meetings digital and automation” his entire professional life.

William joined Cainiao in 2018, which was about 5 years after its founding as a separate company. And that was at an important juncture in Cainiao’s strategy and focus. You can break their strategic priorities into 5-year segments.

• 2013-2018 was about digitizing logistics and delivery. It was about building their networks and making them smart.
• 2018-2022 was more about deepening the cross-border networks. It was about helping Chinese and global sellers operate internationally. And building end-to-end networks. Note: About half of Cainiao’s revenue today is cross-border (inbound plus outbound).

Here’s a good summary of the company (from its exhibition hall in Hangzhou). Note that both the express delivery and supply chain businesses are now global.

In this article, I am mostly talking about the express delivery business. Note the focus on China local, cross-border, and overseas local services. That progression will be an important part of the strategy.

Today, the focus is more about going global. In still includes cross-border but is increasingly centered on building local express networks outside of China. This means lots of warehouses (i.e., e-hubs and c-hubs) in Europe, APAC, MENA, and other locations. And it means new local-to-local services in places like the US, Spain, Poland, and Mexico.

Going forward is also about opening new global-to-global routes. China-to-the-world has been the core of this. But this should increasingly this will be about routes like SE Asia-to-Europe. And Latin America-to-Asia.

All of this sits within William’s responsibility for strategic thinking.

• How to build out local networks?
• How to deepen global-to-global networks?
• How to benefit from global trends?
• How to offer differentiated services?

And as mentioned, I am mostly talking about the express delivery networks. Cainiao also has its supply chain network. And it has its technology services for merchants / brands.

Here’s my summary for the strategy. This is my understanding and explanation (not William or Cainiao’s).

Cainiao’s Strategy Is About Leveraging Superior Scale to Offer More Cost- Effective Services

Ultimately, Cainiao is building a smart, global logistics network. Which sounds clear. Until you ask what that actually means. You build the networks (warehouses, trucks, planes). Add lots of increasingly smart and automated tools (robots, IoT, data centers, AI).

But what services are you offering to customers? What is your winning customer value proposition?

Cainiao’s answer to this question (for now) is to offer more cost-effective logistics services to merchants and brands. Especially within ecommerce.

Which I interpret as “we’re cheaper than our competitors with the same quality service (my words)”. Which, by the way, is similar to the winning strategies used by BYD, Shein, Huawei and many other Chinese giants that have gone international.

If you look at the current Cainiao express delivery services, the key offering is 5-day delivery for $10 (approximately) for a route such as China to Spain. That is what they are offering between China and +14 countries.

That’s just fantastic for merchants and consumers. And brutal for competitors. Ordering something on ecommerce cross-border can be expensive and/or slow. With a lot of uncertainty about how it will take to get through customs. Guaranteeing your ordered items from China will arrive in Madrid in 5 working days is fantastic.

Big express delivery companies like FedEx and DHL certainly offer delivery in 3-5 days. But not for $10. Think $50-100. Note: Cainiao also offers 10-day delivery for $5.

That’s a great value proposition. And it’s part of a winning strategy. It’s a virtuous cycle. Here’s how I break it down. Again, this is my thinking, not Cainiao.

• Step 1: Use superior scale (and revenue) to outspend rivals building out the network. That means adding hubs. Adding routes. Leveraging more planes than competitors. This is mostly growth capex.
• Step 2: Use superior scale (and revenue) to outspend rivals in R&D and technology. These are largely fixed costs.
• Step 3: Cainiao has superior scale (network size and volume) in cross-border express delivery by virtue of its large China network and volume. Use this to offer a service at a price and speed that rivals cannot match. This is why they are focused on affordability and 5-day delivery in 14 countries. This is detailed below, but there is an economies of scale advantage that gives Cainiao a lower per unit cost.
• Step 4: This superior offering should allow them to grow faster than rivals. Either by taking their market share or riding growth trends more effectively. This should increase their scale advantages with rivals.
• Repeat Step 1. From a position of even greater relative strength.

It’s a very effective strategy and they are currently leveraging this into Europe and Southeast Asia. But I think we will see this in Latin America and the Middle East as well (guessing). I expect them to keep growing their network and business volume. And to keep offering differentiated services that get them even greater relative strength.

So, I keep watching how many warehouses they are opening around the world. I look at how many trucks they are buying. And I look at how fast their tech is advancing. Here are some pictures from the headquarters.

This Is About Building Scale Advantages in Networks and Tech. First at the Local Level. Then Cross-Border. And then Global.

Keep in mind, there are no network effects in logistics (unfortunately). This is about build a physical network asset and then using that to deliver services. But it’s not a platform business model. And there aren’t network effects.

The scale advantages mentioned are economies of scale in fixed costs in physical networks.

These fixed costs include by fixed operating costs and ongoing capital expenditures. And in logistics networks, these are mostly fixed costs. And they play out in city-to-city logistics networks (not within cities). It’s about the warehouse network. And the truck and plane networks.

Think about how having a larger network lets you offer greater affordability with the same delivery times.

Think about two identical networks with same size (warehouses, trucks, etc.) and delivery speed between two points. But one network has lower volume and therefore has a higher per unit cost. It will not be able to offer deliver at the same price. Unless it cuts the number of trucks or warehouses so its fixed costs per unit match. It can do that. But then it would deliver slower. The bigger network with greater throughput can almost always achieve a lower price and/or faster delivery time. Which customers really like.

Now think what happens when you build out your network even more. As a network adds a new warehouse hub, it can take a more direct route between certain locations. That means you can deliver faster and cheaper (more direct routes means less fuel and shipping). So as Cainiao builds out its network density, it can offer services that are even faster and/or cheaper than smaller rivals.

That’s how I think about scale advantages in networks. You are building economies of scale in fixed costs that play out in unit cost and/or delivery speed.

However, economies of scale in R&D also matter.

This another fixed cost advantage. A tech company (like Alibaba) will often spend 15-20% of revenue on R&D. So, the larger firm is perpetually outspending the smaller rival in technology. That’s automated warehouses, AI, IoT, etc. And as your logistics network gets smarter and more automated, you can capture lots of smaller efficiencies. Especially in automation, batching and routing.

So, you always want to be building economies of scale in fixed costs related to R&D. Which is exactly what we see at Cainiao.

However, Last Mile Delivery Is Still a Problem

The scale advantages I just described are all about the core warehouse and line network. Which has lots of fixed costs.

Unfortunately, last mile delivery is mostly about variable (not fixed) costs. These costs are much more difficult to decrease by scale and/or automation and IT. The last picture is one of Cainiao’s automated delivery vehicles. There is lots of investment into this, but we still don’t see large scale deployment anywhere. It’s still mostly guys in trucks and scooters dropping off at doors and kiosks.

That said. Cainiao has come up with some pretty effective last mile solutions in China. Cainiao Post in particular is really impressive. They have built +170k pick-up and drop-off stations around China. Which are increasingly automated and/or unstaffed.

You use the Cainiao app and it tells you a package has arrived. You walk into one of these stations, an in-app QR code scans you in. A lighted tag goes off telling you which package is yours. You pick it up and scan it as you walk out. The entire process takes under 10 seconds.

And you can also send from these stations. Here is a typical station for scanning parcels (after you pick them up from the stocks).

You can take a reusable box for your shipping. You print a tag, scan and drop it off. Reusable packaging is a really good project by Cainiao.

Covering the entire country with Cainiao Post locations does work. However, this is still mostly in China.

For getting greater efficiencies in delivery in other countries, you have to focus on achieving greater order density within a specific geography. Then you can use machine learning to do smarter routing and batching. That gets you economies of scale by geographic density. Delivery companies like Didi and Grab are really good at this. But it’s hard.

What’s Next for Cainiao?

During this discussion, my main question for William was: How affordable can this ultimately become?

Yes, you get great cost savings with network density and tech. But there must be a limit.

His answer (of course) was that cost ultimately depends on how fast you want to get something from point A to Point B. But he did mention that 20-30% of the total budget is a reasonable target for cross-border logistics cost.

And Cainiao has definitely chosen $10 for 5 days delivery as the sweet spot for their target market right now.

So, what’s next?

For Cainiao, he said the next step is to keep adding countries to their 5-day delivery guarantee. This has definitely been really successful. And then to decrease this from 5 working days to 5 calendar days.

He also mentioned they could ultimately deliver cross-border with China in 3 days. In theory. It would be one day for processing in China. Then one day cross border shipping. And one day for in the delivery target country.

However, even this depends on the specific country as some are much bigger and more spread out than others. For example, 3 days in Asia seems reasonable given the dense cities and smaller distances.

But this also depends on customer behaviors. For example, he mentioned that Poland likes out-of-home deliveries. And Europe cares about a lot about both the experience and the price. It’s needs to be an acceptable experience, not just cheap. In contrast, Southeast Asia is much more about being low price.

The biggest move on the horizon for Cainiao appears to be going into local-to-local express services. That means going from delivering from China to France to delivering from France to France. Or just within France or the EU.

And I suspect the strategy for this is the same. They will keep building out their network. Then they will offer a differentiated service. Which will likely also focus on affordability. They will leverage their greater tech and network scale (cross-border) into local-to-local. If express delivery within France is typically 3 euros, they will try to do it for say 2 euros. If express delivery within the EU is 8 euros, they will offer it for like 5 euros.

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Overall, it was a really fun conversation. Cainiao has a pretty great strategy and is executing well. I’m keeping a close eye on it.

Cheers, Jeff

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Related articles:

• Why I Really Like Amazon’s Strategy, Despite the Crap Consumer Experience (US-Asia Tech Strategy – Daily Article)
• Why Netflix and Amazon Prime Don’t Have Long-Term Power. (2 of 2) (US-Asia Tech Strategy – Daily Article)

From the Concept Library, concepts for this article are:

• Economies of Scale: Fixed Costs
• Economies of Scale: Geographic Density
• Logistics

From the Company Library, companies for this article are:

• Cainiao

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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.

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