Why is online shopping so popular in China?

Alibaba‘s Taobao marketplace deserves part of the credit. Its 10 million merchants, most of whom are small traders with their own limited inventory, offer things at prices well-below those at brick-and-mortar shops. But, the biggest savings comes from ridiculously low overnight shipping costs in China. Alibaba doesn’t directly arrange shipping for Taobao merchants. It’s up to each seller to sort things out with one of the country’s big nationwide private courier companies.

There are four giants, market leader Shunfeng and three almost identically named firms, YTO, STO and ZTO. Those three were started and are owned by entrepreneurs from the same small county in Zhejiang, called Tonglu, about 50 miles from. Alibaba’s headquarters in Hangzhou.

By some counts, ZTO has now moved ahead of Shunfeng in volume, if not revenue. At year-end of 2015, ZTO was said to be delivering 10 million parcels a day. ZTO is mainly a network of independent local franchisees, with the ZTO parent owning and operating the main warehouses. ZTO is planning to IPO sometime soon in Hong Kong. Warburg Pincus and Sequoia Capital are both investors.

The other three big courier companies are also doing well along in their IPO planning. Each is saying they need billions in new capital. They can’t be earning much if anything and continue to plow money into infrastructure. Parcel shipping is still growing by about 30% a year. Every week, courier companies deliver about 500 million packages in China.

All four big courier companies are saying they want to buy or lease jets to move things around, to save on gasoline and tolls. They’re also all looking to use drones for the last mile. As of now, parcels in China are delivered by an army, perhaps as many as one million strong, of electric-scooter riding delivery guys. And all those delivery guys are equipped with a GSP device each, so parcel tracking status can be updated in real time. Contrary to what you may think, those delivery guys are quite well-paid in China. You can earn at least double what you’d be paid for factory work. A lot of recent college graduates are taking their first job delivering packages. The career ladder for many is to move up from YTO, STO and ZTO, who get most of their business through Taobao, to work for either JD.com or Amazon in China. Both have their own in-house courier staff, with better pay, hours, equipment and beautiful uniforms.

Alibaba doesn’t directly own or control a courier company. So far, that strategy has worked out splendidly. As long as the courier companies are competing furiously, things on Taobao will remain dramatically cheaper than in stores. If the couriers ever decided to seek profits rather than market share, it would certainly put a dent in Taobao’s growth. An Alibaba-backed logistics company called Cainiao just raised $1.5bn, at a $7bn valuation, to better coordinate the deliveries made by ZTO and the other Tonglu firms.

Ecommerce in China works like nowhere else in the world. Sales are still growing at breakneck speed and are on course by 2017 to reach $1 trillion annually, far higher than anywhere else. Cheap delivery makes it a bargain not only to buy imported products, but even the lowest-priced goods on Taobao.

For years, Chinese law made it illegal for Fedex and UPS to enter the domestic delivery business in China. The Chinese government finally rescinded the law two years ago. The two American giants took one look at the cutthroat competition and ridiculously low prices charged by their Chinese counterparts and chose to stay out of the fray. In the US, they get paid $15.50 a kilo to move goods by ground in two days between two far-off cities. In China, the going rate is about four Renminbi, or 60 cents.

We’ll likely know soon, once IPO prospectuses appear, if ZTO and the others are making any money at all. An IPO requires a GAAP audit and full compliance with China’s burdensome tax code. This often extinguishes all profit.

E-commerce in China has so far created only two big beneficiaries. Taobao is one. It earns billions a year in ad fees paid by merchants trying to get noticed. The other is China’s 500 million online shoppers. We save big, and enjoy the luxury of cheap home delivery, on just about everything we care to buy. Low cost delivery and GPS trackers are behind China’s prosperous E-commerce market.