Recently Bronte advertised for an entry level position. We have now hired.
There was one interview question which nobody gave an entirely satisfactory answer to, and many people gave unsatisfactory answers to.
This is not surprising. I don't have an entirely satisfactory answer either. The question was about Alibaba - the Chinese internet giant - and the only reason I am going public is that Barrons has asked several of the same questions and Alibaba has responded.
As preamble I told the prospective employees what Alibaba was and what Singles Day was. This was graduate recruitment so I could not be sure that everyone would know even that. So I said:
i). Alibaba inside China is the biggest but not only online shopping site with Tabao and TMall. These were essentially flea-markets where lots of people had stalls (shops within shops) and they sold a huge number of items. Think of it as a combination of Amazon and Ebay and you will not be far wrong.
I also indicated that the questions would be along the lines of "how interesting is this" and "how much bigger can it get". The rule of thumb of course is that if an internet company can grow 500% from here you probably should own the stock. However if it is near the end of its growth period you should not own the stock - because it will derate.
Here were the articles - and I want you to read as if you were doing the job interview. Allow yourself 15 minutes...
The BBC article...
and the Australian article...
Starting question: How much bigger can this get?
Lots of people started by arguing from China's growth rate - and they got projections 5x, 10x bigger than now. But a few noted that 278 million deliveries on Singles Day was "a lot" and thought that maybe it could double from here but ten times was not likely.
But at this point I wanted to explore the 278 million deliveries number. So the question is "how many internet users in China". Most people guessed a number that was reasonable - so I pointed them to official numbers. Roughly 650 million would be a good guess. The official number at the end of 2013 was 618 million - and the growth rate has already slowed.
So there was 278 million deliveries for a total prospective 650 million users. In one day! The question is how much bigger can this get and what drives it to be bigger?
I then pointed them to official numbers that said that Amazon (worldwide) had 244 million users. That was 244 million separate accounts made at least one order in the past twelve months. The Amazon numbers are here.
Alibaba delivered more parcels in a single day than Amazon had users in a whole year.
Most people then figured that the users had multiple deliveries which is I guess a possibility. However it worth comparing this to Cyber Monday in the US. This article - which I presume is accurate - gives Amazon orders for Cyber Monday. To quote:
In order to uphold its reputation for fast deliveries, Amazon hired 80,000 seasonal workers in anticipation of Cyber Monday and the holiday shopping season, according to a report released by the company. Last year, Amazon sold about 426 items per second on Cyber Monday, and the online retailer expects to sell even more this year.426 items per second is almost 37 million items. This is more directly from an Amazon press release. Singles day is 7.5 times bigger. To match Amazon in timeliness of delivery they would need to hire 600 thousand seasonal workers who work at the same efficiency as Amazon workers. Note that Amazon workers work with a lot of robots and other technology to pick and file and deliver items.
The Alibaba 20-F (the SEC filed annual report) does not show anything like this number of employees... to quote:
- The number of employees presented in this table does not include third-party consultants and contractors that we employ, substantially all of whom are based in China. These consultants and contractors primarily performed work related to sales, research, logistical support and customer service.
- Our total number of employees increased to 34,985 as of March 31, 2015 from 22,072 as of March 31, 2014. Of the increase in employees, approximately 7,300 was due to the completion of our acquisitions including UCWeb, OneTouch, Alibaba Pictures and AutoNavi, and a majority are engaged in engineering and data analysis.
However Footnote 1 on the above table notes that this does not include "third-party consultants and contractors that we employ, substantially all of whom are based in China. These consultants and contractors primarily performed work related to sales, research, logistical support and customer service."
If Alibaba were as efficient as Amazon (meaning just as many computers/robots etc) and had the same delivery schedules as Amazon there would need to be about a million employees at Alibaba and its consultants and another 600 thousand or so seasonal employees around Singles Day.
These numbers are consistent with the annual report.
Again to quote the 20-F.
We believe that orders from transactions generated on our marketplaces represented a significant portion of our delivery partners' total delivery volumes in the twelve months ended March 31, 2015. According to data provided by them as of March 31, 2015, our top 14 strategic delivery partners employed over 1,400,000 delivery personnel in more than 600 cities and 31 provinces, directly controlled municipalities and autonomous regions in China. Collectively they operated more than 100,000 delivery stations. This network managed the delivery of over 8.6 billion packages from our China retail marketplaces to consumers in the twelve months ended March 31, 2015.
We should also note the scale of the 8.6 billion packages the network claims to have delivered. UPS delivered 4.6 billion packages per year and had 435 thousand employees, 539 aircraft (including charters), about 100,000 delivery vehicles and almost 2000 operating facilities. [UPS factsheet here.]
To truly deliver at a larger intensity than Amazon Alibaba and its outsource network would need more staff or capital (or both) than Amazon and UPS combined.
At the peak of the event, 2.85 million transactions were processed every minute by Alipay.
A pretty good guess is that the peak day should be between 4 and 9 hours of the peak minute (in other words the peak day is somewhere between 2.85*60*4 million transactions and 2.85*60*9 million transactions). This seems sensible. I have discussed with several people in the payment industry the ratio of peak minute to peak day volumes and got numbers in this range - but I do not have definitive numbers. [If someone from PayPal or Visa wants to come through with something definitive I would like it.]
I should be clear that I do not have the extraordinary evidence - but I do think it is a thesis worth testing...
Ramping something with this lack of automatic sorting technology up for Singles Day would require a lot of staff. Some candidates thought of trying to count them.
With 100,000 delivery stations it is unlikely to be possible to do it on a statistical basis by counting trucks. There are far too many locations and they are too heterogeneous.
Alibaba's own promotion material contains several videos of their logistic operations. Here is a video interview of a woman describing the seasonal work packing boxes for Singles Day.
The woman states she will normally pack about 200 packages a day but on Singles Day she will do 800-900. If it takes her 50 seconds to pack a package (reasonable looking at the process) and she takes 5 minutes break per hour packing 800 packages will take about 12 hours. I guess that is reasonable. But to do the volume for Singles Day would require 350 thousand such people just in packaging, not even delivering.
The company has videos of its logistics as well. Here is a summary video - with pictures of the delivery network:
(The original can be found here...)
The company also has b-roll material (which they license widely) which has quite extensive video of the conveyor belt systems and the sort.
Strangely much of the material involves people standing around and multi-handling material on conveyor belts rather than doing the real function of a sorting facility (that is making choices therefore sorting).
Similarly there is b-roll material of packaging happening in one of Tabao's merchant shops. This involves distinctly low-tech (and slow) packaging and sorting for Singles Day. It is however clearly in part aimed at a Western audience (and presumably Western investors) as the whiteboard is in part in English.
We have some data about the size and the amounts of capital deployed in this delivery network. Here is a relatively old fact sheet (stated volume has risen substantially since then).
Here is an article and video about Alibaba/Tabao rural service centers:
There is some evidence in this video about people making multiple orders as in some rural centers there is a single woman who places multiple orders for an entire village. The distribution center however is not heavily endowed with advanced technology. There is no evidence that in any way the capital equipment at Alibaba and its distribution partnership comes close in scale and quality to the infrastructure of (say) UPS. However the delivery volumes are larger than UPS and Fedex combined and the employment levels are similar (in aggregate).
It is worth comparing this to videos of Amazon's warehouse and packing system.
There is also a Fedex and UPS documentary on Bloomberg which gives some idea of the scale of these behemoth organisations. When this was filmed (2012) the combined volume of UPS and Fedex was well below the volume of Alibaba's delivery network. Still it is worth comparing how much capital equipment the US giants have to how little is in the Alibaba network:
At this point I know the numbers are wonky - but working out whether this is material or not (or how material) will require some fine measurement techniques.