The competition between Alibaba (BABA) and JD.com (JD) over China's massive e-commerce market intensified Tuesday with the two e-commerce giants announcing plans to tackle growing demand for courier services.
Alibaba's logistics arm, Cainiao Network, announced Tuesday that it was manufacturing one million delivery vans equipped with artificial intelligence (AI) technology. Alibaba's announcement comes as JD.com announced that it's working on drones that will be able to deliver parcels weighing one ton or more.
The announcements look to aid in the companies' abilities to handle increased e-commerce activity in China. According to AliResearch, the research arm of Alibaba, about 80 million packages are delivered per day in China currently, though that number could jump to 1 billion per day.
For the past quarter, JD.com reported a 41% year-over-year growth in revenue to $11.05 billion. For the 2016 fourth quarter, Alibaba reported a 60% year-over-year growth to $5.6 billion. A Goldman Sachs report earlier this year estimated Chinese e-commerce sales for 2016 at $750 billion and predicted sales of $1.7 trillion by 2020.
For Alibaba the move to manufacture smart vans, an endeavor it will undertake in partnership with Chinese automaker companies SAIC Motor and Dongfeng Motor, could cut back on delivery costs by up to $1.45 billion a year.
Cainiao's technology will allow the delivery drivers using the vans to receive the most efficient delivery routes based on real time traffic information. The updated technology will even allow drivers to talk to the voice-activated system to speed up planning. According to the announcement, the system has already been tested in Shanhen and Chengdu in April and was able to cut back on vehicle use by 10% and on travel distance by 30%.
Still, their primary purpose is to help with the surge in the country's deliveries.
During its earnings call last week Alibaba also gave an update on its efforts to reach more rural areas of China, saying it wanted to help farmers from villages across the country sell their produce in cities in addition to helping these villagers receive parcels from the cities.
"This surge will bring with it huge challenges to every logistics company. The only solution to this challenge is to invest in cutting-edge technology and cultivate young talent, and all of us need to work together collaboratively," said Alibaba executive chairman Jack Ma, according to techseen.com.
Currently, China delivery company ZTO Express (ZTO) gets about three-fourths of its business from Alibaba, which is just one of its about 7,700 network partners. The company went public in October 2016 and reported parcel volume increase of about 42% year-over-year to 1.2 billion for the past quarter. Sales for the company rose 33.5% year-over-year to $379.9 million for the 2017 first quarter. Other competitors in the Chinese delivery market include Alibaba-backed YTO Express and SF Express, owned by SF Holding.
For JD, its new drones are a big step forward from the smaller drone deliveries that it has been performing since November. "We envision a network that will be able to efficiently transport goods between cities, and even between provinces, in the future," JD.com senior vice president Wang Zhenhui said in a statement.
The company plans to build an R&D center in partnership with the Xi'an National Civil Aerospace Industrial Base to create its fleet of drones. The delivery network for the heavy duty drones would cover a 200-mile radius in Shaanxi as a way to better serve customers in more rural parts of China, JD.com said. Like Alibaba, JD.com will be able to cut down on the cost of deliveries with this updated delivery method because shipments to rural areas are lower volume but higher cost.
In the U.S., Amazon (AMZN) is struggling to get its drone delivery system known as Prime Air off the ground due to more stringent regulations. So far, commercial drones are only allowed to run test flights in the U.S. In March, Amazon showed off its Amazon Prime Air to the U.S. public for the first time with the help of the FAA. Amazon's drone deliveries are meant to deliver packages weighing up to five pounds in 30 minutes or less.
Amazon previously said it would like to start using Amazon Prime Air by the end of 2017. The program currently has development centers in the U.S., the U.K., Austria and Israel, with vehicles being tested in multiple international locations.
While speculators say that Amazon is aiming to replace FedEx or UPS in the same way it replaced the bookstore Borders, Amazon CEO Jeff Bezos denied these rumors at Recode's third annual Code Conference in Rancho Palos Verdes, CA this past June. "We will take all the capacity that the U.S. Postal Service can give us and that UPS can give us, and we still need to supplement it," he claimed. "So we're not cutting back. We're growing our business with UPS. We're growing our business with the U.S. Postal Service," Bezos said.
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