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JD.com elevates drone delivery efforts targeting rural China

As part of a push into China's remote areas, e-commerce company JD.com Inc. is forming a low-altitude drone logistics network that will cover the country's northwestern province of Shaanxi.

With help from the Xi'an National Civil Aerospace Industrial Base, JD will also develop new drones that will be capable of carrying more than one ton of goods in a single trip. The planned drone network will span 300 kilometers in the province, with hundreds of routes and bases for drones. It will enhance JD's logistics network that serves more than 236 million customers in China, according to an announcement about the project.

The company has run drone trials since June 2016, using the devices to deliver goods to rural China, where "last mile" logistics can be challenging due to complex terrain and poor infrastructure, JD explained in a factsheet about its drone delivery program. It has a fleet of 30 drones comprising five models.

JD did not respond to requests for comment by S&P Global Market Intelligence.

The company is not the only one in China looking into drone delivery. Logistics company SF Express was one of the first to explore it and operates around 500 drones on a daily basis around the Pearl River Delta.

Globally, companies such as Amazon.com Inc., United Parcel Service Inc. and DHL have been exploring unmanned delivery services. In December 2016, Amazon made its first drone delivery in the U.K., 13 minutes after the order was placed.

Drones could play a significant role in helping e-commerce retailers boost delivery speeds while driving costs down, according to Lei Zhang, CEO of Chinese drone maker Xunyi Technology.

His company partnered with China Post starting in 2016 to fly letters and other small-sized packages from town centers to mountain villages in Zhejiang province. The new drone routes have cut delivery time to less than 15 minutes compared with up to one hour by automobile, while costing half as much, according to Zhang.

"The initial investment into hardware is normally paid back within two to three months into operation," he said in an interview.

China's remote areas have become a prime target and testing ground for drone delivery services, as soaring rural e-commerce demand remains hindered by high delivery costs caused by limited infrastructure. It's also relatively safer and less complex for drones to operate in these less-populated areas compared with dense urban areas, according to Zhang.

On the regulatory front, Chinese authorities appear to be more lenient on drone delivery than other countries such as the U.S., where Amazon faces Federal Aviation Administration restrictions on flights of its parcel-carrying quadcopters.

In contrast, JD's drone operations have gained the support of the Shaanxi provincial government. In addition to bringing shopping convenience to villagers, the drone logistics plan is also expected to stimulate the local economy by facilitating shipments of fresh produce from far-off rural villages to urban shoppers. This can help keep the shipments from spoiling, which becomes more likely when they are taken by truck along rough and winding country roads.

The Shaanxi government is aiding JD with its 20.5 billion Chinese yuan plan, offering up provincial airspace and providing R&D factories along with more than 133,000 square meters of testing ground.

The Chinese e-commerce giant also differs from its Western counterparts in drone operation strategies. According to JD's drone program factsheet, the company's drones can carry packages from regional delivery stations to about 300,000 dedicated "village promoters," who then distribute them to shoppers in villages around China. Meanwhile, Amazon aims to deliver packages directly from its warehouses to customers' homes.

JD's distributor-plus-drone model requires fewer routes to be tested and programmed, according to Zhang, while Amazon's model is suited for locations where people typically live in single-family houses and less population-dense areas.

Looking ahead, drone delivery will "undoubtedly" play a key role for e-commerce companies to tap into the rapidly growing rural consumer market, China E-commerce Research Center analyst Jianfang Yao said in an interview.

Online shopping volume in China's rural areas jumped more than 36% to about 482 billion yuan in 2016 from 353 billion yuan in the previous year, according to the research center. The figure is expected to top 600 billion yuan by the end of this year.

"Logistics and product quality will be at center stage of the competition among e-commerce retailers," Yao said. "Whichever one that can deliver quality products in the fastest possible way to the customers will become the e-commerce market leader."

As of May 30, US$1 was equivalent to 6.86 Chinese yuan.