Deal focus: Ruiyun heats up China’s cold chain industry

Ruixiang Zheng quit his job as head of JD.com’s cold chain operations in 2020 to launch a new business. Having tracked the situation for more than six months – maintaining a line of dialogue with Zheng – Zhanbin Dong was ready to act. Qingsong Fund, the China VC firm of which Dong is a founding partner, led the first funding round at a valuation of CNY 150m (USD 21.5m).

At the time, spinouts like Ruiyun Cold Chain were all the rage and venture capitalists agonized over how to get access to these deals. Zheng used no financial advisor, placed little information in the public domain, and he closed the deal quickly without notifying most investors. These dynamics underline the scarcity value of an experienced entrepreneur from an industry-leading corporate going independent.

Two years on, China’s investment has noticeably worsened but Ruiyun is still raising capital. The company recently closed a CNY 200m extended pre-Series A round led by Mitsubishi Corporation and Mizuho Leaguer Investment Fund. All four existing investors – Qingsong, Panlin Capital, Eight Roads Ventures, and China Merchants Venture – re-upped.

The deal, which represents Mitsubishi’s first post-COVID-19 investment in China, gives Ruiyun a 50% higher valuation than the previous round in 2021, according to Zheng. The capital-raising process launched at the start of the year and ended in August, a lengthier than the founder had expected.

“The pandemic has helped us scale because many small players have collapsed. We have taken on the role of market consolidator,” said Dong. “Meanwhile, the business model has been refined, we’ve become more efficient, and we have realised a gross profit. It’s unusual for a start-up to have such a market-leading position and VCs are unwilling to back new platforms in the current environment.”

Mitsubishi and Mizuho Leaguer proactively reached out to Ruiyun ahead of the latest round. The former is participating as a strategic investor. As the owner of Lawson, one of Japan’s largest convenience store chains, which also has a sizeable presence in China and Southeast Asia, Mitsubishi was keen to build exposure to cold chain infrastructure as part of its broader supply chain strategy.

“Mitsubishi lacks cold chain infrastructure layout in China. They screened targets in this area and chose to pursue Ruiyun,” said Zheng, adding that the company can leverage Mitsubishi’s Southeast Asia network to support its own regional expansion plans.

In the past two years, Ruiyun has built what Zheng claims is one of only four national cold chain networks, following in the footsteps of SF Express, JD.cm and ZTO Express.

These networks are more asset-heavy than those of their peers in the traditional logistics space: cold chain trucks and refrigerators are expensive. This creates a high barrier to entry for high-end service providers. SF Express and JD.com both own and operate their own networks, while ZTO Express relies on a franchise model with a view to achieving scale in short order.

Asset-heavy vs asset-light

Ruiyun has taken a different path. There are direct operations in 15 provinces designated key markets, which account for about 70% of China’s cold chain industry. In other provinces, specifically targeting major cities, the company has established joint ventures with local players, holding a 51% interest in each one. Finally, in lower-tier cities and at the county level, Ruiyun operates under a franchise model.

“In 2015, when we first entered the space, cold chain only needed to cover major cities and provincial capitals. Now, though, with the rise of e-commerce and as supermarkets and caterers expand into lower-tier cities, cold chain services must have a broader and deeper reach,“ said Zheng.

The logic of combining asset-heavy and asset-light business models is that it enables greater control over key parts of the network. Ruiyun has 23 trans-shipment centres across 62 so-called backbone lines that cover more than 1,200 districts and counties. These are supported by 40 third-party partners and 150 regional franchises.

“If your cold chain network is too asset-heavy, you won’t be able to make a return for a long period, but if it’s too light, you can’t meet the quality control requirements,” Zheng explained.

Ruiyan claims this network has turned it into the largest player in China’s less-than-truckload logistics space. Full truckload or whole vehicle transport is also being targeted, but with a different approach. The network doesn’t feature. Rather, Ruiyun has built its own platform – Lengyunbao – that operates through an app and a WeChat mini-program and connects 60,000 cargo owners and 100,000 cold chain drivers. This equates to nearly 30% of China’s total 350,000 cold chain drivers in China.

Lengyunbao’s services extend from transaction and delivery to settlement and tax collection. It fulfils 800-1,000 orders each day with a gross profit margin of about 10%. Ruiyun takes a commission from each order as well as from value- add services such as insurance, oil card, and tax services. The company says that by bringing the entire trade cycle online, it has reduced customers’ logistics costs by 10%-15%.

Lengyunbao is more than just a matchmaking app. The platform also aggregates the transportation capacity of individual drivers and runs a carrier-focused sub-platform called Ruiyun. Through Ruiyun, the company can oversee the entire fulfilment process, ensuring that deliveries are made in accordance with pre-set temperature and humidity levels.

“The value of goods in the cold chain is very high, and if your temperature does not meet the standard, the user can reject it. In that event, we must pay the bill. We must address the biggest pain point of the industry - the safety and quality delivery of the food,” said Zheng.

Last week, a truck carrying a full load of tiger prawns from Shanghai to Shenyang encountered technical difficulties on a highway near Qingdao and its refrigeration system stopped working. Thanks to Lengyunbao's efforts to bring fulfilment processes online and make them more transparent, Ruiyun learned of the problem immediately and had a replacement truck on site within 30 minutes.

Most recently, Ruiyun has added a third pillar to its offering with the acquisition of a software-as-a-service (SaaS) provider that mirrors its whole-supply-chain coverage. The business was formally launched in June and now has more than 30 customers.
Zheng is bullish on the potential synergies: the SaaS platform targets cargo owners and is linked to Ruiyun’s network, which should help the company grow the customer base for its full-truckload and less-than-truckload services.

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• Topics
• Greater China
• Support services
• Technology
• China
• Logistics
• Qingsong Fund
• Eight Roads
• China Merchants Capital