Alibaba pens delivery deal with China Post to boost e-commerce

Alibaba Group Holding Ltd inked a strategic cooperation agreement with the State-owned China Post Group on Thursday, a move that is expected to boost the e-commerce giant's presence in lower-tier cities.

Under the partnership, Alibaba Group and China Post, the world's largest postal network, will collaborate on logistics, e-commerce, finance and information security, jointly developing new business and new markets.

The area of e-commerce logistics is no doubt where the two sides see the most potential. In a statement issued by China Post, the two will open up their warehouses, processing centers and delivery resources to each other, building an e-commerce logistics platform that will serve third-party couriers in China.

China Post is expected to open up its 100,000 service points in China's developed first-tier cities to less-developed villages, providing both delivery and pickup services for online retailers and shoppers in order to give these remote areas an improved e-commerce experience.

Jack Ma, chairman of Alibaba Group, said at a signing ceremony in Beijing that "China will see the emergence of online platforms that can handle transactions of more than 10 trillion yuan ($1.6 trillion) a year. We need to make sure that the development of a logistics system in China can support the surging development of e-commerce," he said, adding that third - and fourth-tier cities and rural areas offer "unimaginable growth potential".

Lin Wenbin, an analyst with IT consultancy Analysys International, said that the partnership with China Post is in line with Alibaba's goal of lower-tier city penetration. "Third - and fourth-tier cities all have greater potential in terms of e-commerce because there is a lack of business infrastructure, such as shopping malls," he said.

"Moreover, people there have less pressure from high housing prices and tight work schedules compared with those who live in mega-cities in China, so the consumption power in lower-tier cites cannot be underestimated," he added. Despite the fact that most of the express delivery market in first-tier cities is handled by private couriers, China Post has the most delivery networks in lower-tier cities, especially villages, he said.

In December of last year, Alibaba Group invested $240 million into Goodaymart, a Haier Electronics subsidiary that includes extensive warehouses and distribution sites in more than 2,800 counties across China and operates more than 17,000 service points.

Alibaba Group's e-commerce rival in China, JD.com, also sees lower-city penetration as a priority in 2014. Earlier this year, the second-largest business-to-customer e-commerce business in China teamed up with more than 10,000 convenience stores from 15 cities - mostly in third-tier cities in western and central China.

"Through helping convenience stores reorganize their resources and training their employees, we are going to build an integrated system that allows people to make online purchases from the nearest convenience store and receive their delivery within one hour," Hou Yi, who is in charge of logistics planning at JD, said at a news conference in March.

The Alibaba-China Post partnership represents the e-commerce's giant's logistics strategy of investing in, rather than owning, distribution infrastructure such as warehouses and delivery vehicles. Creating logistics systems from scratch and running a national delivery team is an expense that eventually would put pressure on online retailers' profit margins, analysts said.

But Lin of Analysys International said that the effectiveness of this collaboration is yet to be seen. "After all, China Post is a State-owned enterprise, and Alibaba Group has deep roots in private sectors. They need to find a way to make the cooperation work despite the difference in corporate culture," he said.