Last June, Sean Fogelson, a Cincinnati, Ohio-based mailman, took to TikTok to get a work-related gripe off his chest. 

“Hey, you think y’all can like, chill out on the Temu website?” he pleaded in his video. “Every day it’s Temu, Temu, Temu. I’m Temu tired, aight?”

Fogelson’s cri de coeur was liked more than 2.1 million times. It struck a particular chord with many of his fellow delivery workers, who reposted it alongside footage of themselves handling stacks of fluorescent orange bags full of goods from Temu, the Chinese shopping platform that has taken Western countries by storm. On Reddit’s U.S. Postal Service (USPS) community, where postal workers go to talk shop and vent, I’m Temu tired has become something of a punchline.

Temu and another China-founded company, Shein, have been going head-to-head with U.S. giant Amazon for dominance in global online retail, shaking up the industry along with postal workers’ jobs. Together, the two firms are now responsible for an estimated one million packages in the U.S. per day, according to ShipMatrix, a logistics consulting firm.

The new hype over Chinese e-commerce has one glaring omission, however: Alibaba, still the country’s largest online shopping platform. The industry titan has fallen out of the conversation as overseas shoppers have embraced the flashy, gamified apps of its younger rivals. In December, Alibaba fell behind PDD Holdings, Temu’s parent company, as China’s most valuable e-commerce stock for the first time, after losing a staggering $650 billion in market value since November 2020.

Yet investors’ doubts about Alibaba belie the company’s still enormous potential to benefit from the enthusiasm for direct-from-China online shopping. With AliExpress, Alibaba was the first Chinese e-commerce firm to venture into the international market; over the years it has spent almost $3 billion to acquire other successful platforms in Southeast Asia and Europe.

Alibaba failed to capitalize on its early lead, remaining preoccupied, as Rui Ma, an investor and founder of Tech Buzz China, puts it, with the “low-hanging fruit inside China, as well as much stronger competition.” 

The question now is whether Alibaba can stage a comeback, particularly given its weakened position. After a years-long rectification campaign from Beijing reined in Alibaba’s influence and slapped it with fines, the company launched a reset last year with a major overhaul of its business. It has reorganized into six units — five of which it hoped would pursue initial public offerings. 

The group elevated its global e-commerce division to be its own independent unit, teeing the company up for an aggressive expansion outside China, where the slowing economy and intense competition have crimped Alibaba’s growth. Already, overseas e-commerce was Alibaba’s fastest growing segment in the first three quarters of 2023, with revenue up 49 percent year-on-year. 

Just as vital a cog in Alibaba’s international expansion is a little-heralded subsidiary called Cainiao, which focuses on the nitty-gritty of getting packages to customers.

Alibaba may have started the cross-border e-commerce model before anyone else, but for the majority of the last five to ten years it was very passive in its marketing and developing the product.

Juozas Kaziukenas, founder of Marketplace Pulse, an e-commerce intelligence firm

It can be difficult to understand Cainiao’s true worth to Alibaba, because so much of it happens in the background. Unlike a typical logistics company, Cainiao has not historically focused on delivering packages itself, particularly outside of China. Instead, it is adept at linking together third parties and recommending the most efficient routes to make deliveries faster and cheaper.

Sharon Gai, the former head of global key accounts at Alibaba and author of E-commerce Reimagined, compares its contribution to platforms like Uber or DoorDash: “Anytime you want to go from point A to point B, there are many different drivers on the road. Cainiao provides the algorithm to determine which rider is the best,” she says.

In China, where a half-dozen courier companies vie to deliver orders for Taobao and Tmall’s estimated 400 million daily active users, Cainiao helps to match sellers to buyers and couriers while keeping delivery times to two days or less. It is the secret sauce that has ensured orders from Alibaba’s marketplaces arrive quickly and reliably, while allowing the company to largely stay out of the costly business of operating its own delivery network. 

With Cainiao, Alibaba might just have the key to taking on Shein and Temu outside China as well. To address the additional complexity of delivering goods internationally, the company has built huge processing centers in strategic locations around the world, from Liege, Belgium to Kuala Lumpur, Malaysia. The centers, known as eHubs, bring together package sorters, customs agents and courier partners that deliver Cainiao’s packages for Alibaba’s platforms to their final destinations. 

“With Cainiao, Alibaba’s approach is to control key nodes in the network, and then work with a variety of partners for all the other pieces that would require considerable investment,” explains Mark Natkin, founder and managing director of Marbridge Consulting, a market research and business consulting firm.“It’s very consistent with their marketplace approach. They provide a platform, but they don’t invest in all of the infrastructure because it’s incredibly expensive.”

That strategy has already made Cainiao the world’s largest cross-border delivery firm, surpassing both DHL and FedEx by freight volume. Every day, it directs more than four million packages globally, mostly from China to the rest of the world. That’s four times the number of packages sent by Temu and Shein to the U.S. daily. Deliveries from AliExpress that took up to two months back in 2017 can now take as little as five days, the company says.

“When you look at e-commerce, the key to who succeeds is actually logistics. Most of the time, it is what makes the difference for the customer’s experience,” says Jonathan Reeve, author of Retail’s Last Mile: Why Online Shopping Will Exceed Our Wildest Predictions. 

Such thinking has put Cainiao at the center of Alibaba’s big comeback plan. Joe Tsai, who was one of the handful of people who co-founded the company alongside Jack Ma in 1999, now concurrently chairs Alibaba and Cainiao. It has already filed for an initial public offering in Hong Kong from which Cainiao hopes to raise at least $1 billion, valuing the company at around $20 billion, according to reporting by Bloomberg. A significant chunk of the proceeds, Cainiao’s prospectus states, will go towards its global expansion plans. 

A spokesperson for Alibaba and Cainiao declined to comment on the record for this story, citing Cainiao’s quiet period ahead of its IPO.

While a successful listing for Cainiao may not immediately turn around Alibaba’s fortunes, it would be a much needed win. Analysts initially welcomed the break-up announcement last March as a way for the company to unlock more value for investors and to insulate individual units from disruptive shocks such as the recent antitrust probes. But actually listing the units has so far proven challenging: In November, Alibaba ditched IPO plans for its supermarket and cloud computing units due to weak market conditions and the impact of U.S. export controls. 

Even if it pulls off the IPO this year, Cainiao’s global expansion faces headwinds. Western politicians have grown suspicious of Chinese investment, particularly in critical infrastructure such as logistics. The company faces an uphill battle dispelling politicians’ concerns about data privacy and security.

But most of all, given Alibaba is Cainiao’s largest customer, Cainiao’s success is deeply linked to Alibaba’s ability to replicate the phenomenon that has made Temu and Shein so popular in the West. 

“Alibaba may have started the cross-border e-commerce model before anyone else, but for the majority of the last five to ten years it was very passive in its marketing and developing the product,” says Juozas Kaziukenas, founder of Marketplace Pulse, an e-commerce intelligence firm. “Shein innovated on this by focusing on clothing, a much more tightly controlled supply chain. And Temu launched with very aggressive marketing and budgets nobody else has applied before to Western markets. Only in the last year has Alibaba woken up.”

Still, given what Alibaba has accomplished for e-commerce in China, few analysts are ready to write it off.

“At the end of the day, there’s no part of the e-commerce world where it doesn’t have one of the leading platforms,” says Natkin. “Alibaba has the assets to weather the storm, but some of it is a question of how well the people at the helm steer the ship.”

GOING FOR GOOD ENOUGH

For more than a decade before China’s e-commerce titans set their sights overseas, they were preoccupied with the fierce battle for customers at home. The contours of one e-commerce rivalry explain how Chinese platforms have more recently won over Western consumers.

Alibaba pioneered online shopping in China with the creation of Taobao in 2003, but the company resisted setting up its own courier service. Operating as a marketplace akin to eBay, Taobao didn’t even have warehouses. Instead, a ragtag cluster of third-party companies with names like ZTO Express, STO Express and Yunda Express delivered packages direct from vendors to consumers. These couriers became known by their cargo tricycles clustered on street corners, but were otherwise largely interchangeable.

Early on, “there was a lot of variability in quality, and you never knew how a package was going to arrive,” says Natkin. He compares package delivery then to an old commercial from luggage maker American Tourister, in which airport goers’ bags are conveyed into a back room, only to be gleefully bashed around by a gorilla.

Into this market came JD.com, founded by Richard Liu Qiangdong with backers including Chinese private equity giant Hillhouse Capital, around 2007. Embracing a model similar to today’s Amazon, it invested heavily in its own shipping network, including large, well-stocked distribution warehouses and its own last-mile delivery service. The company targeted top-tier Chinese cities, betting that wealthier consumers would pay more for a higher quality, more reliable shopping and delivery service.

For a while, JD’s approach worked, enabling the platform to eat into Alibaba’s near-monopoly position. In response, Alibaba invested in improving the quality of its deliveries and set up Tmall, a higher-end platform for official brands and authorized merchants. 

But it remained reluctant to set up its own courier business. Instead, in 2013, Alibaba founded Cainiao, which means “rookie,” as a joint venture with seven smaller investors, including four courier companies, the conglomerates Fosun and Forchn International and China Yintai, a commercial property developer. 

After taking an initial stake of 47 percent, Alibaba paid $807 million in 2017 to raise its stake to 51 percent, following scrutiny of the company’s accounting practices by the U.S. Securities and Exchange Commission. It raised its stake again in 2019 to 63 percent. 

What these businesses have picked up on is that there may be quite a large segment of [Western] consumers that are willing to trade away delivery speed for value, particularly for certain product types.

Jonathan Reeve, author of Retail’s Last Mile: Why Online Shopping Will Exceed Our Wildest Predictions

Despite increasing its stake in Cainiao, Alibaba has resisted developing it into a full-service delivery company. Although it set up Cainiao Express, a domestically-focused premium delivery service in 2023, it remains a fraction of the size of larger couriers. Today, Cainiao has about 14,000 employees, less than a tenth that of a major courier like SF Express, which has more than 177,000.

Instead, Alibaba has made the most of Cainiao’s technological prowess by opening it up to third parties. Its software pools data from delivery providers to recommend the most efficient routes for pickup and dropoff. To support sellers on Taobao and Tmall, it also provides services like demand forecasting and supply chain tracing. 

Through Cainiao, too, Alibaba has deployed a standardized digital waybill — those ubiquitous white, barcoded labels that tell a computer where a package is going — enabling customers to track their orders from a single app. And through a service called ‘Cainiao Post,’ it has over 170,000 package lockers where customers can pick up and drop off parcels, accelerating deliveries in dense urban areas like college campuses, and hard to reach rural places.

Such improvements have helped to narrow the delivery gap between Alibaba and JD. A recent search for a Xiaomi smartwatch on the two sites, for example, showed JD advertising same-day delivery, while a seller on Taobao offered it with next day delivery and for 20 percent less. A 100-piece box of face masks, meanwhile, could be bought from Taobao, again with next day delivery, for a third of the price. 

“At a certain point [the difference] becomes minimal, in the sense that, for most people, what’s the difference between getting something in six hours versus just waiting a day?” says Gai, the ex-Alibaba employee.

At the end of 2022, Alibaba accounted for 46 percent of China’s e-commerce market; JD came second, with about 20 percent, according to an estimate by Guosen Securities. The lesson, according to Natkin: “On quality or delivery time – especially for lower-value product categories like daily necessities – people are willing to compromise if the price is low enough.”

As Chinese e-commerce platforms set their sights abroad, incumbents like Amazon should take heed. Like JD, the U.S.-headquartered online shopping giant has built its system around the premise that consumers will pay a premium for speedy and reliable delivery. That gamble is looking vulnerable to emerging Chinese competitors.

“What these businesses have picked up on is that there may be quite a large segment of [Western] consumers that are willing to trade away delivery speed for value, particularly for certain product types,” says Reeve. 

Amazon may aspire to be the “everything store,” but for certain products, Reeve says, a cheaper competitor could conceivably grab market share. “If I’m ordering a liter of milk, there’s a good chance I need it tomorrow or the next day. But if I’m ordering some earrings or new shoes, it could be that I’m willing to trade a longer delivery time for a better price.”

One dynamic keeping Amazon safe, for now, is that the trade-off remains fairly stark. AliExpress’ standard delivery times are improving, but still inconsistent in the U.S. and Europe. 

“For many folks that have bought from AliExpress, the experience is sometimes it comes in a week and sometimes in three weeks,” says Marketplace Pulse’s Kaziukenas.

But as Alibaba’s rivalry with JD suggests, it knows how to narrow the gap, thanks to Cainiao. Last March, the company launched AliExpress Choice, a service supported by Cainiao that promises free shipping and guaranteed delivery for customers in the U.K., Spain, the Netherlands and Belgium in five days or less. That’s still twice as long as what Amazon promises, but perhaps closer to the “good enough” window that allowed Alibaba to undercut JD. 

As Alibaba picks up the pace, however, it faces a different problem: foreign governments that can’t keep up.

HUB TROUBLE

Belgium’s fifth largest city might seem like an unlikely place for international intrigue. But since 2021, Belgium’s state security service has been monitoring Liege airport, the center of Cainiao’s European expansion, for possible spying, as first reported by the Financial Times.

The suspicions around Cainiao’s business in Liege show the uphill battle Alibaba faces as it moves into Western markets. The group has a foothold on the continent via two e-commerce brands, AliExpress and Trendyol, a Turkish company that Alibaba acquired in 2018. Part of its plan involves making the most of Cainiao’s logistics prowess to get cheap Chinese packages to consumers’ doorsteps quicker and more reliably.

The catch is that Western governments have grown wary of Chinese investment in critical infrastructure, including in airports like Liege’s, into which Cainiao has invested about $120 million. 

“Europe is very much the centerpiece of Alibaba’s global logistics strategy right now,” says Rebecca Arcesati, lead analyst at the Mercator Institute for China Studies, a Berlin-based think tank. “But after China’s overhaul of the digital platform economy, which has resulted in increased control by the party-state over private companies, Europe is increasingly worried that those companies could facilitate Chinese government strategic objectives in the region.”

To European officials, it can be hard to see where Alibaba’s corporate interests end and China’s national interests begin. The airport in Liege, for example, is vital for Cainiao, but also a major hub in China’s “air silk road,” an expansive air transport strategy tied to the Belt and Road Initiative which encompasses more than 20 European countries, according to China’s National Development and Reform Commission. Cainiao is a minority investor (with a 20 percent stake) in Air China Cargo, the state-controlled airline that operates direct cargo flights between Liege and more than half a dozen freight hubs across China, including Hangzhou, Shanghai, Guangzhou, Urumqi and Wuhan.

Belgium’s state security service, the VSSE, did not respond to a request for comment. At the time of the FT’s story, Cainiao strongly denied any connection with espionage saying the allegations were “pure speculation”. 

In 2018, Cainiao agreed to collaborate with China’s controversial LOGINK platform, a piece of logistics software administered by China’s Ministry of Transport that has been adopted by more than 450,000 users in China and at least two dozen ports around the world.¹The agreement was a three-way collaboration between Cainiao, LOGINK and the International Port Community Systems Association, a U.K.-based industry group.

Much of international shipping remains reliant on paper-based documentation, as various entities from ports, to couriers, to customs officials rely on different software. China pitches LOGINK as a “one-stop shop” for shipment tracking, data management, and information exchange between merchants and traders, and has been offering it for free to countries involved in the BRI. 

Western lawmakers have become alarmed by its growing adoption, which could hand China access to huge amounts of sensitive commercial data, even when a trade doesn’t involve Chinese parties. In December, Congress banned the U.S. military from using any port in the world that utilizes LOGINK. 

“There’s been a lot of focus on LOGINK from a military-risk perspective, but the biggest risk is that the platform could be weaponized in a commercial competition,” says Gabriel Collins, a fellow at Rice University’s Baker Institute for Public Policy, where he has researched LOGINK. “If you build this big data lake with a lot of unique and proprietary access, and you’re selective about who you allow to access that data, it can actually confer a huge set of commercial advantages.” 

“The more you outsource your data sovereignty, the more you outsource your national sovereignty,” he adds.

There are no signs that Cainiao’s partnership with LOGINK has advanced beyond the 2018 agreement, whose stated aim, according to Cainiao’s then-chief technology officer Gu Xuemei, was to collaborate on technology standards and “promoting visibility in the logistics supply chain.”  

Other experts suggest that the threat posed by LOGINK to the security of western supply chains largely lies elsewhere.

“I would worry more about LOGINK’s own partnerships with several European ports than about Cainiao’s collaboration with the platform,” says MERICS’s Arcesati.

Cainiao’s more than 1,100 highly automated warehouses worldwide are key to its relentless push to accelerate its delivery processes through digitization. But on the ground in Liege, this pressure to move ever faster has been a source of consternation. 

“The volume [Cainiao] was importing was just staggering. It was a tsunami of packages arriving,” says Jonathan Holslag, a professor at Vrije Universiteit Brussel who has researched the impact of Alibaba’s mega-hub in Liege. 

The issue, Belgian customs officials discovered, was that Cainiao’s approach differed from their expectation that the firm would operate more akin to Amazon — namely, by importing bulk quantities of goods for distribution from a centralized warehouse. 

Instead, Cainiao was importing goods using a method akin to Temu’s, involving hundreds of millions of individually packaged items, all en route via Liege to buyers across the continent. Customs data and Cainiao’s IPO prospectus shows that the carrier’s annual package volume through Liege surged from about 400,000 packages in 2017, to over 180 million in 2023. 

“Customs officials approached me with quite ominous figures, saying they could only check 7 percent of packages that were being shipped from China,” says Holslag. “It posed both a grave safety risk and challenges in terms of fiscal revenue.”

…Temu and Shein have massively subsidized their logistics costs, so everything going out is an express order… That was a cost that AliExpress didn’t want to get into for a very long time.

Sharon Gai, the former head of global key accounts at Alibaba and author of E-commerce Reimagined

Belgium’s customs service did not respond to a request for comment.

In the U.S., similar anxieties have elevated an arcane trade provision known as “de minimis” into a top priority for China hawks. Under this loophole, small international packages worth less than $800 are exempt from tariffs, allowing them to slip past customs scrutiny, giving their senders a sizable commercial advantage.

In October, Kim Glas, president of the National Council of Textile Organizations, a U.S. apparel industry advocacy group, described the loophole in congressional testimony as rewarding China with a “de facto free trade agreement with no strings attached.”

A bipartisan report by the House Select Committee on the Chinese Communist Party recently recommended significantly lowering the de minimis threshold. In June, Rep. Mike Gallagher, the committee’s chairman, accused Temu and Shein of “building empires around the de minimis loophole in our import rules — dodging import taxes and evading scrutiny on the millions of goods they sell to Americans.”

Still, it’s not clear that eliminating the provision would stem the flow of e-commerce exports from China. In July 2021, a rule change by the European Commission removed the duty free exemption for small imported packages worth less than $24 (22 euros), a loophole the commission had described as “highly susceptible to fraud.”

The move raised prices for Alibaba’s customers in Europe, but international e-commerce sales from its four consumer platforms still grew by 34 percent in the 2022 fiscal year.

Alibaba’s pesky challengers at home, meanwhile, aren’t likely to give an inch more. Shein and Temu’s willingness to lose money in order to win a ruthless battle for global e-commerce market share could more than offset any edge Cainiao can give to Alibaba. Temu’s aggressive price discounts, for example, means it is losing around $11 per order, according to one estimate by Goldman Sachs.  

“Because AliExpress has Cainiao, it should have that advantage of high-speed delivery,” says Gai. “But what’s happening right now is that Temu and Shein have massively subsidized their logistics costs, so everything going out is an express order. It’s a mad dash to get users. That was a cost that AliExpress didn’t want to get into for a very long time.”

This, perhaps, is the biggest test for Alibaba as it reasserts its presence overseas. Temu and Shein may be willing to burn money to amass users, but Alibaba has several other priorities competing for the company’s funds. Under Alibaba’s new CEO, Eddie Wu Yongming, the company is investing heavily in AI, another money sink. 

A costly push into international markets may run counter to shareholders’ desires, says Tech Buzz China’s Ma. “Shareholders are punishing Alibaba, but not because of its lack of overseas business,” she says, noting that growth of the company’s domestic e-commerce business has been lackluster even relative to the broader market.

“If they had a really kickass core business, people would want them to invest in other opportunities,” she adds. “But it’s tough for them to do that right now without getting more shareholder ire. It’s just a really big ship to turn around amid all the other problems it’s going through.”

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