Alibaba Group Holding Ltd. will buy control of unprofitable delivery business Cainiao for 5.3 billion yuan ($800 million) and spend billions of dollars more to expand a shipping network that spans the world’s largest e-commerce market.
China’s largest web marketplace agreed to increase its stake in Cainiao Smart Logistics Network Ltd. to 51 percent. Under the deal, Alibaba plans to consolidate Cainiao’s financials into its own books, eroding Alibaba’s bottom line, and will get an additional seat on Cainiao’s board, taking its representation to four out of seven seats, the company said in a statement Tuesday.
The company co-founded by Jack Ma is taking control of a little-known but rapidly growing business run with partners that sits at the heart of Alibaba’s expansion — both in China and abroad. It oversees a coterie of more than a dozen shipping partners, orchestrating deliveries carried out by about 2 million people across more than 600 cities. Cainiao’s operation had enabled Alibaba to maintain what it called an asset-light model that eschewed expensive warehouse construction.
Now that Alibaba’s taking control, it plans to consolidate Cainiao’s financials under its own books and is committing to spend another 100 billion yuan over the next five years to further expand the network. That will help address U.S. regulators’ questions about why Cainiao, of which Alibaba owned 47 percent, wasn’t previously included. But it also takes Alibaba deeper into the business of setting up and controlling its own infrastructure, much like Amazon.com Inc. The unit made a net loss of 2.2 billion yuan in calendar 2016, tripling from 2015. Revenue however also tripled, to 9.4 billion yuan.
“They’re realizing that it’s much more capital-intensive than they expected to build this out,” said Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen. “Right now they are essentially obligating themselves to report profit and loss on the income statement every quarter, which they probably should have been doing.”
Alibaba created Cainiao with the department-store chain Intime Retail Group Co. and industrial conglomerate Fosun International Ltd. The trio led an initial investment of 100 billion yuan into the company to build out its logistics network.
The company has since managed a delicate relationship with its delivery partners, as players jostled for business and valuable user data. This year, billionaire Wang Wei’s SF Holding Co. accused Cainiao of removing the company as a shipping option and blocking access to vital data. Cainiao fired back by saying it was SF that first walled off information it needed to get parcels to customers. The spat was eventually resolved.