I joined CNBC last night to chat about ZTO Express (ZTO) earnings.
Emerging markets have had a really rough time over the past few years, due to weak demand from The US and Europe, slower growth in China, weak commodity prices, the threat of populist anti-trade politicians and a host of other issues. But around the beginning of this year, things finally stopped getting worse. Emerging markets in general are showing signs of life, and China in particular is looking good. Chinese GDP growth rates had been trending lower since 2010, but they’ve been rising since late last year. Growth in Chinese parcel volume would have been very strong even without this recent uptick in growth as more and more Chinese commerce moves to the internet. Adding some better than expected economic growth only makes this trend stronger.
The U.S. is a mature economy with the most established e-commerce economy, and even here parcel rates are growing at roughly twice the rate of GDP as more and more shopping moves online. Imagine how much more potential a company like ZTO has in China, which is both growing at a much faster rate AND has less developed e-commerce infrastructure.
Amazon (AMZN) is a tough competitor anywhere they go because they’re willing to operate at a loss (or close to it) in order to grow and build market share. Alibaba (BABA) has advantages over Amazon in that it is the first mover and has a long history navigating a market, China, that a lot of Western companies have a hard time navigating. Amazon is still little more than a bit player in China at this time. But like I said, Amazon is a brutally tough competitor, so Alibaba had better stay on its toes.
The larger question is what does this mean for the parcel industry. Amazon made big news last year announcing plans to massively increase its logistical presence in China, and Alibaba has been growing its empire as well. This makes all the sense in the world. A UPS strike or some sort of logjam that delayed delivery would be disastrous for Amazon and completely outside of its control. By building out its own infrastructure (in the U.S., China, or anywhere else) Amazon reduces a major risk and maintains better control.
If you’re currently delivering packages or handling logistics for Amazon or Alibaba, you have to be worried about them eventually cutting you out. It’s worth noting that Alibaba accounts for 70% of ZTO’s parcel volume. That’s huge concentration with a single customer.
For now, the total deliveries are growing at a fast enough rate to accommodate everyone. Last year, Jack Ma commented that he expected parcel deliveries to grow by a factor of 10 over the next 8 years to more than a billion packages per day. Even if growth ends up being only half that rate, that’s still phenomenal growth.