Alibaba-backed company eyes scale over profit

The delivery affiliate of Alibaba Group Holding Ltd will continue to prioritize growth over profits as it builds the logistics network at the heart of the Chinese e-commerce giant's global expansion.

While Cainiao Smart Logistics Network Ltd needs funds to continue its investment in its distribution network, it only wants the backing of investors who endorse its model of incurring losses to build scale, chief executive officer Judy Tong told partners at a conference in Hangzhou, Zhejiang province.

Those losses have prompted a US investigation into why largest shareholder Alibaba doesn't fully fold the smaller company into its own results. But she says both companies have provided data to prove they've played by the rules.

Founded in 2013 by Alibaba and a small group of initial backers that includes trucking companies, Cainiao underpins the e-commerce giant's expansion. It is building distribution hubs in remote provinces and around China's biggest cities, including one near Beijing that spans 37 football fields.

The company handles some 42 million packages daily, or 70 percent of the country's deliveries, and provides a central system that directs delivery firms moving goods from seller to buyer.

"I definitely need more financing because we're making such a big platform," Tong says. "But we're being picky with investors. We don't want those who tell us every day 'you must make money tomorrow.'"

Unlike Amazon Inc and JD.com Inc, Alibaba eschews owning its own transport network, preferring to farm out distribution. That less capital-intensive model can be scaled up to match demand, its executives say.

Alibaba announced in 2014 a plan to invest 10 billion yuan ($1.5 billion; 1.3 billion euros; 1.1 billion) in logistics and training to push its e-commerce model into 100,000 villages over three to five years, about five times the current number. That's something like a sixth of the country's rural settlements, Jefferies & Co estimates.

Cainiao has also set its sights on extending a network reaching Russia, Brazil and Spain to complement existing bases in seven countries, including Amazon's home turf. Alibaba's billionaire chairman, Jack Ma, wants more than half the company's revenue to come from outside China within a decade.

A $1-billion investment in Southeast Asia's Lazada Group SA helped open a window to six major markets in the region, and the former Rocket Internet SE unit will work closely with Cainiao on regional infrastructure.

"Two months ago, I was talking with Jack Ma and asked him if he wanted me to think of how to turn a profit next year," Tong says. "He said, 'Don't you dare think like that, because if you do, you'll definitely make Cainiao small.'"

Tong says last year the company was angling toward an initial public offering. It attracted 10 billion yuan in its first round of external fundraising in March, from investors including Singapore's Temasek Holdings and GIC, and Malaysia's Khazanah Nasional.

Cainiao's relationship with Alibaba, which owns a 47 percent stake, has, however, caught the attention of regulators. It's one of several issues that prompted a Securities and Exchange Commission inquiry into how Alibaba accounts for its investments, sales and affiliates.

The watchdog questioned why Cainiao wasn't fully incorporated into financial statements. Alibaba says the company isn't a subsidiary and is a venture between several backers, including department-store chain Intime Retail Group Co and industrial conglomerate Fosun International Ltd.

In 2015, Cainiao posted a net loss of 617 million yuan on sales of almost 3.1 billion yuan. That year, Alibaba recorded its percentage of the loss on its books - $46 million. At the same time, it reported a $128 million gain on investments in Cainiao and other entities. The SEC hasn't requested any new information from Cainiao since the probe opened, Tong says.

(China Daily European Weekly 09/23/2016 page28)