For the logistics industry as a whole, “cost reduction” has become the key word this year, and even the direction of development for quite some time to come.

In February of this year, for the fourth time, the Finance and Economics Committee studied the issue of effectively reducing logistics costs for the whole society. The conference clearly emphasized that reducing logistics costs for the whole society is an important measure to improve the efficiency of economic operation.

Logistics is linked to production at one end and consumption at the other. The importance of “effectively reducing logistics costs for the whole society” is self-evident in increasing production and stimulating consumption. In 2022, China's logistics cost/GDP ratio was 14.4%, up from 9% in the US during the same period. Although there is a realistic factor in this that the share of China's manufacturing industry is higher than that of the US, the low level of automation, insufficient degree of digitalization, unreasonable allocation of logistics resources, and waste of resources due to inefficient use are also the keys to keeping logistics costs high.

So, under the premise that the strategic position of China's major manufacturing country and manufacturing power remains unchanged, how can logistics costs for the whole society be effectively reduced? Simply lowering prices in the logistics industry obviously won't work. After all, many logistics companies themselves don't have high profit margins or even lose money.

Actually, one side of the coin is “cost,” and the other side is also two words - efficiency. Providing logistics services to society with higher efficiency is the key to solving the problem, that is, complete the transportation and distribution of goods at a lower cost, faster speed, and higher reliability on the premise of ensuring service quality.

Judging from this logic, logistics platforms should clearly play a greater role, such as optimizing transportation routes and reducing ineffective operation and air driving through data analysis; using information technology to improve the efficiency of cargo tracking, warehouse management, and transportation scheduling; integrating the needs of multiple sources or multiple customers to improve the utilization rate of vehicles and transportation resources; and accurately predicting demand to help enterprises reasonably control inventory, avoid excessive reserves or shortages, and reduce the risk of capital consumption and outdated products. All of these are ways for logistics platforms to reduce logistics costs for the whole society by improving efficiency.

As a logistics company that pioneered the freight partner platform model, Eneng Logistics is a good example of observation. Recently, it published the latest financial report, which may reveal the future development direction of logistics platforms.

1. Leading innovators and seeing the dawn first

“High-quality growth” has become Energie's key word of the year.

In 2023, Eneng Logistics achieved revenue of 9,917 billion yuan, an increase of 6.2% over the previous year. It is within easy reach of the “10 billion club”.

What's even more surprising is the profit side. In 2023, the company's gross profit reached 1,268 billion yuan, up 73.6% year on year. The adjusted profit before tax was 654 million yuan, turning a loss into a profit year on year; adjusted EBITDA was 1,730 billion yuan, an increase of 57.8% year on year.

There are many reasons for improving performance.

Looking back at 2023, the logistics industry showed clear “recovery” characteristics. According to data from the China Logistics Information Center, the total amount of social logistics in the country in 2023 was 352.4 trillion yuan. At comparable prices, the year-on-year increase was 5.2%, and the growth rate was 1.8 percentage points higher than the full year of 2022. Meanwhile, according to data disclosed by the China Federation of Logistics and Purchasing, China's logistics industry sentiment index was 51.8% in 2023, an increase of 3.2 percentage points over the previous year.

Despite the overall recovery of the industry, at the company level, the division is still quite obvious. In 2023, JD Logistics's revenue increased 21.3% year on year to 166.62 billion yuan, and non-IFRS net profit increased sharply by 218.8% to 2.76 billion yuan; during the same period, SF Express Holdings' operating income decreased 3.4% year on year to 258.41 billion yuan, and net profit to mother increased by 33.4% year on year to 8.23 billion yuan.

As can be seen, what is more important are internal changes within the company.

The 2023 financial report is the first complete annual financial report for Eneng Logistics to take the lead in launching a new “quality and profit as the core” strategy in the industry. It is also the key that best reflects the implementation of the company's new strategy and whether its direction is correct.

In fact, Eneng Logistics is essentially following the trend in implementing the new strategy.

As a trillion-level racetrack, the logistics industry has attracted many players, but homogenized services are rampant, and the level of industry popularity continues to deepen, and even a price war has started. The entire industry has fallen into a strange circle of “increasing revenue without increasing profit”. This is clearly not a healthy trend in the industry.

Even if leading companies take advantage of scale and can fight a war of attrition with their peers, it is not conducive to the long-term operation of the company. In the context of internet traffic dividends peaking and the early days of horse racing being basically completed, it also follows the old strategic idea of “leading by scale, or even burning money to expand”. Not only will it not be able to effectively expand the scale of the company, but on the contrary, it will only increase losses and damage the company's long-term interests.

As a result, Eneng Logistics launched a new strategy and proposed the “top five” development goals of the best cost, the best quality, the most stable timeliness, the fastest service response, and the tightest network coverage.

As can be seen from the annual report, the company's overall service efficiency has improved significantly. In 2023, the average shipping time was reduced by 10.1%; the time-based delivery rate increased by 73.2%, an increase of 12 percentage points over the previous year.

Furthermore, there has been a marked improvement in the quality of service. The loss rate (number of lost items per 100,000 items) fell from 1.2 in 2022 to 0.2 in 2023, a year-on-year decrease of 83.2%. The breakage rate (number of damaged items per 100,000 pieces) fell from 49.0 in 2022 to 32.6 in 2023, a year-on-year decrease of 33.6%.

The improvement in service levels has brought about a simultaneous increase in customer experience and positive reviews. The complaint rate (number of complaints per 100,000 votes) dropped from 1294 in 2022 to 461 in 2023, a sharp drop of 64.4% over the previous year.

The absolute scale of cargo volume is no longer the focus of the company. In 2023, Eneng's total LTL freight volume was about 1.04 million tons, which is basically the same as last year. Some people commented that Eneng's cargo volume growth rate has slowed, and there is a suspicion that it will be overtaken by later players, but from reality, we can see that in order to achieve effective scale growth, Eneng Logistics actively optimized the supply structure. The average annual ticket weight dropped from 106 kg in 2022 to 93 kg in 2023, a year-on-year decrease of 12.3%. Among them, the volume of mini small tickets with higher profit margins increased by 9.1% and 2.4%, respectively, making it possible to replace high gross profit with low gross profit or even negative gross profit volume.

The refined control of costs is also the key to achieving impressive results in this performance. In terms of transportation, the total cost of main line transportation was optimized by 4% year on year, saving about 160 million yuan; the unit transportation cost was 317 yuan/ton, down 3 yuan/ton; in terms of distribution operations, the total cost of distribution centers was optimized 7.6% year on year, saving about 168 million yuan; and the unit distribution center cost was 170 yuan/ton, down 8 yuan/ton year on year.

Companies that can achieve phased success often develop path dependency. They are not sensitive enough to changes in the external environment, and even if they do, they are difficult to implement changes due to various internal and external resistance. Eneng Logistics can overcome path dependency and resolutely take the lead in initiating reforms within the industry. The final results have once again verified the fact that those who actively seek change are the first to see the light of day.

2. It is a leader and a “long-distance run”

This financial report, which exceeded expectations, verified the forward-looking and accurate transformation of Eneng Logistics, but the data verifies past results and focuses on the future. How should we view the long-term value of Eneng Logistics?

First, the LTL market in which Eneng Logistics is located is a market full of opportunities.

According to the McKinsey report, the size of China's LTL market has reached 1.5 trillion yuan, and in the medium to long term, its growth rate will be slightly higher than the growth rate of China's GDP.

At the same time, in the process of switching from “scale dominance” to “profit leadership,” the LTL market is currently experiencing a stage where production capacity is being cleared. A large number of small and medium-sized players will not be able to adapt to the new competitive environment in the market. They will only gradually withdraw or be integrated by mergers and acquisitions by industry giants, and industry concentration will accelerate towards leading enterprises.

According to iResearch's statistics, according to the process of changes in the US LTL market share, it is expected that China's LTL CR10 will increase from 4.6% in 2020 to 34.4% within 10 years. As one of the leading LTL companies, Eneng Logistics should benefit from the trend of increasing industry concentration.

(Source: Prospectus, iResearch, Anxin Securities Research Center)

In addition, Eneng Logistics focuses on full-network express delivery, that is, it covers most regions of the country through the establishment of outlets and distribution centers using a radiated network model.

With the rapid rise of China's high-end manufacturing industry and the increasing improvement of supply chains for large brands, the supply chain needs to become more flexible and able to respond quickly to the immediate and personalized needs of the market. Furthermore, some manufacturing industries are gradually shifting from coastal regions to central and western cities, promoting a more rational geographical distribution of China's industrial clusters. These two major changes will increase demand for network-wide express shipping.

In fact, with network advantages, full-network models are already entering the regional network and dedicated line markets. According to iResearch, the share of full-network express shipping in the LTL market will increase from 7.2% in 2022 to 10% in 2027.

Looking at another level, full-network express delivery usually involves cross-provincial transportation, which requires higher investment resources in the early stages of the platform, which means higher entry barriers.

And after 14 years of development, Eneng Logistics has established a huge scale advantage. By the end of 2023, Eneng Logistics had 81 self-operated distribution centers across the country, and together with more than 28,000 outlets, it covered about 98.2% of the country's counties and towns.

(Source: Eneng Logistics Annual Report)

At the same time, the number of customers served by Eneng Logistics continues to rise. By the end of 2023, Eneng Logistics and its freight partners and agents provided services to approximately 5.5 million end customers, an increase of about 17% over the previous year.

Seen from this perspective, the larger the service network attracts more end customers, and the more end customers feed back the service network, and a network ecosystem with fair and impartial coverage, sustainable profit, and common prosperity is also established.

At the same time, the continuous expansion of the network ecosystem also poses greater challenges to the platform's ability to operate. To this end, Eneng Logistics has strengthened both organizational structure and technology.

In terms of organizational change, as Qin Xinghua, CEO of Eneng Logistics, said, “Let people on the front line who can hear the fire make decisions”. Eneng Logistics has eliminated provincial and regional levels, created a flat organizational structure, shortened business processes, and enabled the frontline to have more resources through authorization, activation, and empowerment.

Technology is also at the core of Eneng Logistics's operations. On the basis of the past, Eneng Logistics has further strengthened digital technology, covering all application scenarios such as “people”, “fields”, “vehicles”, “points” and “goods”. Through self-developed IT systems, it can comprehensively digitally manage every link. Through full-link digital operation and intelligent decision-making, it can achieve real-time data tracking, intelligent network management, route planning, distribution management, and intelligent customer service for terminal customers.

If the above changes are more of Eneng's focus over the past year, then its layout in terms of new quality productivity is the key to ensuring that it continues to surpass its peers.

First, in order to broaden the path of growth, Eneng Logistics is actively expanding the e-commerce customer base, drawing a clear new growth curve for the company.

Second, the introduction of automation technology is the key for Eneng Logistics to improve efficiency and reduce costs. The company is piloting automated assembly lines at multiple distribution centers, which will greatly improve the speed and accuracy of package processing, reduce human error, and improve overall operational efficiency.

In terms of promoting clean energy transportation, Eneng Logistics is investing in large-scale new energy and autonomous vehicle fleets in regions such as Northwest China and East China. Through these pilots, the company will explore how new technology can help improve transportation efficiency while reducing energy consumption and operating costs.

Finally, Eneng Logistics is also vigorously promoting carbon neutrality and energy saving and emission reduction measures, and is committed to reducing carbon dioxide emissions in logistics operations. The company reduces the environmental impact of the entire logistics process by optimizing transportation routes, improving energy efficiency, and using clean energy vehicles.

III. Concluding Remarks

Regarding the report card handed over by Eneng Logistics, in fact, when the company released Yingxi, major companies such as CICC, Guohai, and J.P. Morgan all gave positive reviews, acknowledging Eneng Logistics's strategic transformation results centered on “quality and profit.”

Looking forward to the future, competition in the logistics industry is still fierce. Technological innovation and improving service quality are the keys to the continuous growth of enterprises. Eneng Logistics, which has already taken the steps of reform ahead of schedule, is more likely to take the lead in the LTL track, which has the greatest hope of running to the 50 billion class leader.