Market Insights: Pre-IPO Review of Cainiao's Performance in Southeast Asia

Written by Chester

Article Highlights:

• Southeast Asia is a key focus for Cainiao's overseas expansion efforts, with the company establishing warehouses and logistics hubs in the region.
• Cainiao has significantly contributed to Lazada's success in Southeast Asia by providing fast and efficient cross-border logistics services.
• Despite challenges such as high logistics costs in Southeast Asia, Cainiao, backed by Alibaba, has a competitive advantage in the region and aims to continue its expansion after going public.

After Alibaba's latest financial report, the plans for Cainiao's listing have been further confirmed. According to the financial report, the board of directors has approved the exploration of Cainiao Group's listing, with the goal of completing this listing plan within the next 12 to 18 months.

Prior to the listing, Cainiao has demonstrated commendable revenue performance. After offsetting the impact of cross-department transactions, Cainiao's revenue increased by 18% year-on-year to 13.62 billion yuan, mainly driven by the increase in average revenue per order for international logistics fulfillment solutions and the growing demand for consumer logistics services.

Among Cainiao's international logistics markets, Southeast Asia is one of its key focus areas. Wan Lin, the former vice president of Cainiao Network, has stated that Southeast Asia will definitely be a key focus for the future overseas layout of cross-border logistics. With 10 years of establishment, how has Cainiao positioned itself in Southeast Asia? How will it contribute to Cainiao's listing plan?

Building Hubs and Warehouse Networks, Connecting Logistics Chains Internally and Externally

According to Alibaba's latest financial report, Cainiao has been continuously strengthening its end-to-end fulfillment network in the global logistics market. By the end of May, Cainiao plans to establish over 20 selected warehouses to further optimize international express delivery efficiency and support more efficient overseas expansion of domestic brands. Although Southeast Asia was not specifically mentioned as a key market, Cainiao has made significant moves in its layout in the region in previous years.

It is reported that Cainiao started building its global logistics network in 2015. However, unlike many domestic logistics companies, Cainiao made significant investments in the construction of a global intelligent logistics network from the beginning. This is particularly important for Southeast Asia, which has fragmented geographical environments and lagging infrastructure development.

• Building eHubs as International Logistics Hubs

In 2017, the Malaysia Digital Economy Development Agency announced a strategic partnership with Alibaba Group to jointly create the first overseas eWTP (Electronic World Trade Platform) "trial area" in Malaysia. As part of this collaboration, Cainiao Network and Lazada took the lead in building an eHub (international logistics hub) at the Kuala Lumpur Airport. The eHub, located adjacent to the Kuala Lumpur International Airport, covers an area of over 240,000 square meters, with warehousing areas exceeding 100,000 square meters. It includes air cargo terminals, distribution centers, and order fulfillment centers, operated independently by Cainiao. To promote local exports, Cainiao provides B2B logistics services at three major ports in Malaysia, covering 174 ports in 55 countries.

• Establishing cHubs to Expand Warehouse Networks

In November 2021, Cainiao announced plans to expand its warehouse network in Southeast Asia. It will establish an intelligent warehouse network called cHubs in Vietnam, Indonesia, Malaysia, and Singapore, covering an area of nearly 2.5 million square meters. cHubs aim to enable Southeast Asian e-commerce merchants and local businesses to stay ahead by providing end-to-end and cost-effective logistics services without traditional intermediate distribution layers.

• Promoting Digital Customs Clearance to Enhance Logistics Efficiency

At the beginning of the eWTP collaboration with the Malaysian government, Cainiao partnered with Malaysian customs to launch a fast customs clearance system, reducing the clearance time from one day to three hours for paperless clearance. From 2018 to 2019, Cainiao also signed memorandums of understanding with customs authorities in Singapore, Vietnam, Indonesia, and Thailand to promote digital customs clearance, smart logistics technology, logistics information sharing, and the implementation of electronic single windows for cross-border trade in these Southeast Asian countries.

However, it is not enough to solely rely on self-built logistics infrastructure and provide intelligent logistics solutions. The Southeast Asian logistics market is highly fragmented and requires more cooperation among stakeholders. From 2018 to 2020, Cainiao has invested in or partnered with several local logistics companies in Southeast Asia to promote cross-border logistics and digital logistics services.

• Cooperation with Flash Express to Build the Largest Local Automated Warehouse System

In January 2022, Cainiao completed the construction of the largest automated warehouse system in Southeast Asia for Flash Express, a leading express delivery company in Thailand. The warehouse system utilizes flexible automation technology, allowing the warehouse's capacity to be adjusted based on actual order volume. Currently, the warehouse has a daily output of 6,000 orders and can handle up to 20,000 orders per day.

• Cooperation with Best Inc. to Launch Full-Chain Cross-border Direct Delivery Service

In August 2021, Cainiao and Best Inc. jointly launched a full-chain cross-border direct delivery service from China to Thailand, Vietnam, and Cambodia. Local online consumers can select the "official direct delivery" service when placing orders through Tmall Global and Taobao Global, ensuring end-to-end delivery to their doorsteps in approximately one week.

Delivering Lazada Packages from China to Southeast Asia in 3 Days

According to Alibaba's latest financial report, the overall order growth of Alibaba's international retail business increased by 15% in the three months ending on March 31, with AliExpress, Lazada, and Trendyol all achieving double-digit growth. In particular, Lazada achieved double-digit year-on-year growth in orders in the Southeast Asian market by optimizing the buyer experience, strengthening its customer base, and improving monetization rates through value-added services. During the process of improving Lazada's services, Cainiao provided significant support, thanks to its well-established logistics infrastructure.

On the buyer service front, Cainiao assists Southeast Asian consumers in receiving Lazada packages within 72 hours through the eHub and Cross-border Expedited Delivery service.

In March 2021, Cainiao Network and Hong Kong Air Cargo announced a partnership and jointly launched the first cargo flight from Hong Kong to Southeast Asia, with package processing handled through Cainiao's Hong Kong eHub. The delivery time to the Philippines, Malaysia, and Thailand was shortened by 60%. Southeast Asian consumers can receive their orders from cross-border merchants on Lazada within 72 hours.

In June of the same year, Cainiao and Lazada began trial operations and officially launched the Southeast Asia Cross-border Expedited Delivery service in August, achieving a nearly 50% increase in logistics speed. It essentially realized "72-hour delivery" to countries such as Singapore, Thailand, the Philippines, and Malaysia.

During the major promotional event in 2023, Lazada, in collaboration with Cainiao Network, continued to enhance the cross-border logistics experience. On the first day of the promotion, a consumer from the Philippines placed an order for a UGREEN computer stand, and it was delivered and received the next day after waking up (8:30 am).

On the buyer service front, Cainiao and Lazada encourage Chinese sellers to expand into Southeast Asia by promoting industry chains and overseas warehouses.

In September 2022, Cainiao and Lazada launched a dedicated line for the fashion industry's overseas expansion. The first station set up collection points in three cities in the Chaoshan area of Guangdong province, allowing local businesses to transport goods to the collection points for same-day transfer, outbound processing, flight scheduling, and timely arrival in Southeast Asia. This service enables delivery to Southeast Asian consumers within as fast as five days.

In September 2021, Lazada announced an upgrade to the platform's three-dimensional cross-border logistics network in partnership with Cainiao, allocating 50 million RMB in incentive funds to support merchant overseas warehouse businesses and assist Chinese merchants in expanding into the Southeast Asian market.

Backed by a Strong Parent Company while Facing Southeast Asian Challenges

Cainiao Network was established in May 2013, and news about its plan to go public emerged in May 2023. In these ten years, Cainiao has not only gained a market share in China's domestic logistics market but also established a certain position in the international logistics market. Concerning the Southeast Asian logistics market, Cainiao has a deep and well-coordinated layout, particularly with Lazada. However, Cainiao will still face various challenges in Southeast Asia, such as high logistics investment costs and increasing competition.

According to Rocket Equities, the complex geography and poor road, rail, and ferry networks in Southeast Asia present significant challenges for cross-border logistics and last-mile delivery, resulting in logistics operating costs accounting for approximately 60% of expenses. It is worth noting that the logistics costs as a percentage of GDP in developed countries are around 5-6% for the United States, 7-8% for Japan, and 13-15% for China. Meanwhile, the logistics costs as a percentage of GDP in Southeast Asian countries average around 20%, meaning that approximately one-fourth of the economic value is consumed by logistics.

In the aforementioned context, Cainiao's substantial investment in infrastructure and the establishment of logistics hubs and warehouse networks covering the entire Southeast Asian market are particularly noteworthy. Considering the complexity of the logistics network in Southeast Asia, Cainiao may bear additional costs in building this infrastructure. According to Alibaba's latest financial report, Cainiao's adjusted EBITA for the segment was a loss of 391 million RMB.

Due to the fragmented nature of the Southeast Asian logistics market, many logistics players have emerged. For cross-border logistics, international logistics companies such as DHL, UPS, and FedEx have become important participants. Andalin, an Indonesian import-export freight forwarding platform, offers end-to-end solutions for international trade activities. In terms of fourth-party logistics, Waresix, Janio, Kargo, Ritase, Haulio, and CEVA Logistics are local players in Southeast Asia.

Undeniably, Cainiao has a significant competitive advantage as part of Alibaba. In addition to Alibaba, Cainiao has also received support from Southeast Asian investors, such as Singapore's sovereign wealth fund (GIC), Temasek Holdings, and Khazanah Nasional Berhad of Malaysia. However, Alibaba remains the major shareholder, holding 67% of Cainiao's shares.

What will Cainiao's future strategy be in the Southeast Asian logistics market after going public? We will wait and see.