Today we will talk about a recently emerged transport enterprise structure called Cainiao, a delivery network that has risen quickly in the fastest growing consumer market on the planet. That market would of course be China.
And what does China now mean to the largest publicly traded stock company on the planet – Apple?
“Apple is becoming a tech company with Chinese characteristics. About 24% of the $51.5 Billion of sales booked in its latest quarter – and two-thirds of its revenue growth over the last year – came from China.”
www.breakingviews.com/apple-a-tech-company-with-chinese-characteristics/21222211.article
Putting China aside for a moment, we would like to firstly speak about some emerging transport networks and dynamic volume growth paths that we have encountered in the past. A little while ago, I mentioned a German transportation business called DPD; or more precisely Deutsche PaketDienst (German Parcel Service), as it was then. DPD was a German domestic express parcel carrier owned by a group of general German carriers. It was also a franchised network in the operating sense.
DPD was a business in which my then employer (Union Transport) owned a significant voting share. Union were also the operating franchise partner for the express network in two major slices of German geography, and operated the sort hub facilities that served them. These facilities, & the fleets that operated from them, were separate to the normal Union Transport LTL (less-then-truckload) trucking operations & depots.
The DPD business may have been a so-called hidden-hand nurtured response to the growth of the UPS domestic express package business that had then recently gained traction in Germany. The enterprise participants in DPD were all German transport companies and there were a limited number, but the size of their allocated exclusive physical territories, and their voting rights, were many-and-varied. Basically, a shared line-haul system connected the express network participant’s hubs and depots in the various West German regions (the wall was to fall mid-course during my time in Germany).
It happened, that a little while before arriving in Germany, I had been through an engagement of sorts with the UPS international planning team after introducing myself to their management at their headquarters, then in Greenwich, CT. One of the things I learned from these same folk, at the time, was that it was a fine-run thing that UPS had stayed the course in the German domestic express business venture due to them having “encountered significant headwinds” (the German domestic express venture was at that time their only significant international operation).
I was also to find upon arrival in Germany (after being appointed by Union Transport’s International Forwarding Managing Director), that the appointed Managing Director of the Union Transport Group had also previously been the head of the UPS venture during its formative German years (nb: “my, how the world turns!” might also be the most repeated background theme in this series of blog posts).
The German constituent character of DPD was eventually to be unwound after the sale of Union Transport. The business ownership was diversified, set free of its founder's constitution, and it expanded its service territory throughout Europe. Later a majority stake was sold to the French Post office subsidiary Geopost, and it was renamed Dynamic Parcel Distribution. The fact remains, however, that this was a cooperative network enterprise that turned on & handled 1.4 million parcels effectively in its very first year of operation, and it was a tough competitor for the world’s largest package delivery company - UPS.
When I looked at the evolution of Cainiao Network Technology Co. Ltd in China (with the not-so-hidden hand of Alibaba behind it), and heard that the name in translation means “Rookie”, my first thoughts were of the emergence of DPD. The scale of this enterprise is, however, considerably greater. We are talking 300,000+ independent delivery partners.
And what does China now mean to the largest publicly traded stock company on the planet – Apple?
“Apple is becoming a tech company with Chinese characteristics. About 24% of the $51.5 Billion of sales booked in its latest quarter – and two-thirds of its revenue growth over the last year – came from China.”
www.breakingviews.com/apple-a-tech-company-with-chinese-characteristics/21222211.article
Putting China aside for a moment, we would like to firstly speak about some emerging transport networks and dynamic volume growth paths that we have encountered in the past. A little while ago, I mentioned a German transportation business called DPD; or more precisely Deutsche PaketDienst (German Parcel Service), as it was then. DPD was a German domestic express parcel carrier owned by a group of general German carriers. It was also a franchised network in the operating sense.
DPD was a business in which my then employer (Union Transport) owned a significant voting share. Union were also the operating franchise partner for the express network in two major slices of German geography, and operated the sort hub facilities that served them. These facilities, & the fleets that operated from them, were separate to the normal Union Transport LTL (less-then-truckload) trucking operations & depots.
The DPD business may have been a so-called hidden-hand nurtured response to the growth of the UPS domestic express package business that had then recently gained traction in Germany. The enterprise participants in DPD were all German transport companies and there were a limited number, but the size of their allocated exclusive physical territories, and their voting rights, were many-and-varied. Basically, a shared line-haul system connected the express network participant’s hubs and depots in the various West German regions (the wall was to fall mid-course during my time in Germany).
It happened, that a little while before arriving in Germany, I had been through an engagement of sorts with the UPS international planning team after introducing myself to their management at their headquarters, then in Greenwich, CT. One of the things I learned from these same folk, at the time, was that it was a fine-run thing that UPS had stayed the course in the German domestic express business venture due to them having “encountered significant headwinds” (the German domestic express venture was at that time their only significant international operation).
I was also to find upon arrival in Germany (after being appointed by Union Transport’s International Forwarding Managing Director), that the appointed Managing Director of the Union Transport Group had also previously been the head of the UPS venture during its formative German years (nb: “my, how the world turns!” might also be the most repeated background theme in this series of blog posts).
The German constituent character of DPD was eventually to be unwound after the sale of Union Transport. The business ownership was diversified, set free of its founder's constitution, and it expanded its service territory throughout Europe. Later a majority stake was sold to the French Post office subsidiary Geopost, and it was renamed Dynamic Parcel Distribution. The fact remains, however, that this was a cooperative network enterprise that turned on & handled 1.4 million parcels effectively in its very first year of operation, and it was a tough competitor for the world’s largest package delivery company - UPS.
When I looked at the evolution of Cainiao Network Technology Co. Ltd in China (with the not-so-hidden hand of Alibaba behind it), and heard that the name in translation means “Rookie”, my first thoughts were of the emergence of DPD. The scale of this enterprise is, however, considerably greater. We are talking 300,000+ independent delivery partners.
Image: Big Orange International Group (reproduction)
Image: The Economist (reproduction) In respect of conveying an enterprise's scale and capacity, I find it more useful to reflect on specific operating events. The upcoming 11/11 Singles Day in China affords this opportunity. This event is expected to generate ten times the normal amount of E-Commerce deliveries in the surrounding days (last year Cainiao handled 278 million packages for the event).
“Cainiao estimates more than 1.7 million delivery personnel, 400,000 vehicles, 5,000 warehouses and 200 airplanes will be deployed by its logistics partners to handle deliveries on the PRC’s busiest shopping day.”
There is further detail on Cainiao & 11/11 alongside the citation above within the following report:
http://foreignaffairs.co.nz/2015/10/30/cainiao-gets-ready-for-a-global-11-11-sale-infographic/
In respect of the Cainiao network there are three points of interest that we wish to raise today.
The first is the significant difference between it and the DPD model (ie: the territories and pricing structures for Cainiao participants are not as locked-down or exclusive as they were in the initial DPD enterprise).
The second point is our guess that yet another older hidden-hand German model (that of competitive tendering by pre-qualified suppliers) may have been one of the inspirations for the Cainiao enterprise designers/modellers.
The third point is that, given the extremely varied nature of the participants in the Cainiao enterprise, the economic underpinnings of such a model may be enhanced by means of employing another disruptive technology called Blockchain. A report on Blockchain (the engine behind Bitcoin) follows:
www.economist.com/news/briefing/21677228-technology-behind-bitcoin-lets-people-who-do-not-know-or-trust-each-other-build-dependable
It is this last point that we will elaborate on a little more, based upon our experiences, before closing today.
In the emerging years of the global courier & express industry, a practice called “knock-for-knock” was practiced widely by aggressive entrepreneurial network enterprises. This practice saw individual parties in a pre-determined geographic territory delivering each others shipments without charge to the counter-party. It was conceived as a disruptive force that would release animal spirits, and hence drive sales growth. The individual businesses in the network, would of coarse become primarily cash-flow driven [ie: as long as your growth rate and debtors receipts kept ahead of your creditors payments and direct costs, constructed pricing calculated from a door-to-door cost-plus formula might be set aside in order to release below market rates that would in turn provide impetus for compound volume growth].
The "knock-for-knock" practice induced network participants to funnel any available liquidity into sales growth efforts, and equally importantly, it slashed the administrative expenses for billing and collections among the network participants. In practice, however, there were many qualifiers that determined whether the individual businesses in the network would remain viable at any given point:
So of course, as a result of the above, these "knock-for-knock" network models were seen to fall apart in the real world time-and-again.
We are not suggesting that Cainiao is operating under the above model, and given the one-way flow nature of its largest (B2B and B2C) E-merchant market participants, it would probably be immediately unstable if it were. However, there are similarities in the dynamic of fast network volume growth blinding investors until such times as costs come home-to-roost for the most vulnerable participants. Hence, any inherent instability in Cainiao's network model is likely to emerge more quickly as volume growth stabilises and it moves into maturity.
The numbers within a 2014 study shown following on the Chinese domestic logistics market indicates that such a volume stabilisation trend is already established:
www.academia.edu/11522191/China_Logistics_On_a_structural_uptrend
While not having access to the intimate details of the constitutional model for Cainiao, there well may be a need to further balance the inordinate level of market power for major shippers, especially in respect of their dealings with the smaller network players. There was such provision in the initial DPD model. Moreover, the smaller DPD transport territory players were also contributing higher relative levels of outbound volumes than we would expect with sub-regional players in the Cainiao network. The outbound volume in turn provided the said group a little more buy-in to the viability model than would be the case for a small transport depot or logistics operator at the end of Cainiao network routes dominated by one-to-many shipping originating from large outbound locations.
Indeed, if any large express transport network is seeking to incorporate independent players that combine to provide integrated services, active constitutional measures will be required to ensure network stability and endurance. Intra-network financial receivables, investment liquidity, and price-testing should be the priority focus areas for large transport networks seeking to fortify their network model.
During the high-growth phase, there were benefits to all independent network parties within the "knock-for-knock" network model as a result of the removal of high cost inter-company receivables processes. One opportunity to reduce administration costs. gain trust to generate more investment liquidity, and address market power issues (in part), may be the employ Blockchain at the back-end. And, from the outside, it appears to us that sustaining the required level of surety for investment in infrastructure among the Cainiao participants over time is reason enough to seek to quell excessive animal spirits.
Perhaps some in China entertain the idea of using a transient unsustainable independent network model as merely an interim measure to generate scale and new consumer markets. We could not rule out thoughts that the network may later be floated successfully during a bullish market, or that owners might source a significant party to acquire it, or plan at a later time to withdraw support piece-by-piece yet replicate it in major areas with owned-asset operations supplemented by a more limited number of independent partners. The problem with these thoughts is the dubious track record observed in extreme past cases where we saw awry enterprise results (as a result of bad pricing & investment signals) just shifting from one ownership group to another.
Although steep volume growth can mask underlying network stability issues for a while, as it was seen to do in the case of the "knock-for-knock" and other poorly designed express transport network models, the level of endurance will always limited by the fundamentals. Further, the employ of part-timers (sourced mainly in low income areas) for last mile delivery, and small businesses as pick up kiosks, have yet to be adequately tested for performance or endurance. The past Australian experience in sub regional areas, those that have necessarily employed these methods for a long time, is that the costs come back to mean over time.
For the largest E-merchants, a market-dominant small package distribution network's stability is more material than it is for the B2B market. Given the existing dearth of earnings, E-merchants generous share prices are currently fundamentally based upon both a promise of future revenue growth, and a projection of contained future supply chain and distribution costs. Hence it would be problematic should instability arise in Cainiao’s network model. We contend, that in the case of significant network performance or earnings degradation, it is less likely that a single enterprise successor structure to Cainiao could be cobbled together to deliver approximate capacities and prices as was the case with DPD.
“Cainiao estimates more than 1.7 million delivery personnel, 400,000 vehicles, 5,000 warehouses and 200 airplanes will be deployed by its logistics partners to handle deliveries on the PRC’s busiest shopping day.”
There is further detail on Cainiao & 11/11 alongside the citation above within the following report:
http://foreignaffairs.co.nz/2015/10/30/cainiao-gets-ready-for-a-global-11-11-sale-infographic/
In respect of the Cainiao network there are three points of interest that we wish to raise today.
The first is the significant difference between it and the DPD model (ie: the territories and pricing structures for Cainiao participants are not as locked-down or exclusive as they were in the initial DPD enterprise).
The second point is our guess that yet another older hidden-hand German model (that of competitive tendering by pre-qualified suppliers) may have been one of the inspirations for the Cainiao enterprise designers/modellers.
The third point is that, given the extremely varied nature of the participants in the Cainiao enterprise, the economic underpinnings of such a model may be enhanced by means of employing another disruptive technology called Blockchain. A report on Blockchain (the engine behind Bitcoin) follows:
www.economist.com/news/briefing/21677228-technology-behind-bitcoin-lets-people-who-do-not-know-or-trust-each-other-build-dependable
It is this last point that we will elaborate on a little more, based upon our experiences, before closing today.
In the emerging years of the global courier & express industry, a practice called “knock-for-knock” was practiced widely by aggressive entrepreneurial network enterprises. This practice saw individual parties in a pre-determined geographic territory delivering each others shipments without charge to the counter-party. It was conceived as a disruptive force that would release animal spirits, and hence drive sales growth. The individual businesses in the network, would of coarse become primarily cash-flow driven [ie: as long as your growth rate and debtors receipts kept ahead of your creditors payments and direct costs, constructed pricing calculated from a door-to-door cost-plus formula might be set aside in order to release below market rates that would in turn provide impetus for compound volume growth].
The "knock-for-knock" practice induced network participants to funnel any available liquidity into sales growth efforts, and equally importantly, it slashed the administrative expenses for billing and collections among the network participants. In practice, however, there were many qualifiers that determined whether the individual businesses in the network would remain viable at any given point:
- First gross margin was usually anticipated from predicted revenue growth over past local expenses (local pick-up and delivery system costs) together with the line-haul costs to move the shipments into another’s territory.
- In most instances, your business security depended on you sending more shipments into the network’s other delivery territories than they sent to you.
- If the costs for delivery in your territory were lower than your network partner's, you might gain at the expense of other network parties. ie: a network partner with a higher cost territory or large hinterland might be injured unless they shipped far more volume to the network than shipped to them.
- If a network partner's business failed in any territory, those remaining in the network would have to pay an independent party to deliver in that territory.
So of course, as a result of the above, these "knock-for-knock" network models were seen to fall apart in the real world time-and-again.
We are not suggesting that Cainiao is operating under the above model, and given the one-way flow nature of its largest (B2B and B2C) E-merchant market participants, it would probably be immediately unstable if it were. However, there are similarities in the dynamic of fast network volume growth blinding investors until such times as costs come home-to-roost for the most vulnerable participants. Hence, any inherent instability in Cainiao's network model is likely to emerge more quickly as volume growth stabilises and it moves into maturity.
The numbers within a 2014 study shown following on the Chinese domestic logistics market indicates that such a volume stabilisation trend is already established:
www.academia.edu/11522191/China_Logistics_On_a_structural_uptrend
While not having access to the intimate details of the constitutional model for Cainiao, there well may be a need to further balance the inordinate level of market power for major shippers, especially in respect of their dealings with the smaller network players. There was such provision in the initial DPD model. Moreover, the smaller DPD transport territory players were also contributing higher relative levels of outbound volumes than we would expect with sub-regional players in the Cainiao network. The outbound volume in turn provided the said group a little more buy-in to the viability model than would be the case for a small transport depot or logistics operator at the end of Cainiao network routes dominated by one-to-many shipping originating from large outbound locations.
Indeed, if any large express transport network is seeking to incorporate independent players that combine to provide integrated services, active constitutional measures will be required to ensure network stability and endurance. Intra-network financial receivables, investment liquidity, and price-testing should be the priority focus areas for large transport networks seeking to fortify their network model.
During the high-growth phase, there were benefits to all independent network parties within the "knock-for-knock" network model as a result of the removal of high cost inter-company receivables processes. One opportunity to reduce administration costs. gain trust to generate more investment liquidity, and address market power issues (in part), may be the employ Blockchain at the back-end. And, from the outside, it appears to us that sustaining the required level of surety for investment in infrastructure among the Cainiao participants over time is reason enough to seek to quell excessive animal spirits.
Perhaps some in China entertain the idea of using a transient unsustainable independent network model as merely an interim measure to generate scale and new consumer markets. We could not rule out thoughts that the network may later be floated successfully during a bullish market, or that owners might source a significant party to acquire it, or plan at a later time to withdraw support piece-by-piece yet replicate it in major areas with owned-asset operations supplemented by a more limited number of independent partners. The problem with these thoughts is the dubious track record observed in extreme past cases where we saw awry enterprise results (as a result of bad pricing & investment signals) just shifting from one ownership group to another.
Although steep volume growth can mask underlying network stability issues for a while, as it was seen to do in the case of the "knock-for-knock" and other poorly designed express transport network models, the level of endurance will always limited by the fundamentals. Further, the employ of part-timers (sourced mainly in low income areas) for last mile delivery, and small businesses as pick up kiosks, have yet to be adequately tested for performance or endurance. The past Australian experience in sub regional areas, those that have necessarily employed these methods for a long time, is that the costs come back to mean over time.
For the largest E-merchants, a market-dominant small package distribution network's stability is more material than it is for the B2B market. Given the existing dearth of earnings, E-merchants generous share prices are currently fundamentally based upon both a promise of future revenue growth, and a projection of contained future supply chain and distribution costs. Hence it would be problematic should instability arise in Cainiao’s network model. We contend, that in the case of significant network performance or earnings degradation, it is less likely that a single enterprise successor structure to Cainiao could be cobbled together to deliver approximate capacities and prices as was the case with DPD.
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