China’s biggest e-commerce site Alibaba just announced an additional $807 million investment in Cainiao Network, lifting its holding in the logistics affiliate from 47% to a controlling stake of 51%. The giant will, in turn, be able to beef up its capacity in shuttling parcels in China and overseas.

The news comes ahead of China’s “Singles’ Day,” an online shopping spree between November 11 and 16. China’s State Post Bureau forecasts demand for parcel delivery to hit a new record of one billion units (in Chinese).

Unlike its arch-rival JD.com, which prides itself on in-house logistics, Alibaba assumes a platform approach that relies on third-party courier services. This keeps Alibaba asset-light and highly profitable but leaves a hole in controlling the logistics flow. In 2013, Alibaba co-founded Cainiao alongside eight partners, including five top Chinese logistics companies, to make up for its weakness in the field.

Rather than running the actual courier services, Cainiao is a logistics “network” billed with the mission to bring together organizations in Chinese logistics. In practice, courier companies have to rely on Cainiao’s platform to receive business, the same way sellers have to go through Alibaba’s e-commerce platform Taobao to reach buyers.

JD’s founder Richard Liu once described Cainiao’s model during a CCTV show:

“Fundamentally, Cainiao is building a data system on top of several courier services. To put it mildly, it’s improving the efficiency of these courier services. To put it bluntly, Cainiao is going to suck up the profits of these courier services… And they are unable to separate from Cainiao already.”

Upping the ante in Cainiao, however, will mean consolidating around $2 billion losses onto Alibaba’s own balance sheet, the Financial Times is reporting. A major allure of Alibaba for investors is its lucrative model. Alibaba’s Adjusted EBITA margin for core commerce in the fiscal year of 2017 was 62%. In comparison, JD’s direct sales unit for 2016 had less than 1% non-GAAP operating margin.

The hefty Cainiao investment underscores a major shift for Alibaba. Founder Jack Ma recently told Bloomberg that Alibaba will need to move away from its asset-light approach if it wants to grab a bigger share of global trade.

Rita Liao

Telling the uncommon China stories through tech. I can be reached at ritacyliao [at] gmail [dot] com.

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