* $2.5 trln upgrade seen needed as online retail booms
* Warehousing viewed as weak link in China supply chain
* Blackstone, Carlyle among those eyeing investments
* More modern warehouses in Boston than China - consultancy
By Stephen Aldred and Clare Jim
HONG KONG, May 12 Alibaba Group Holding Ltd's
plans for a giant initial public offering in New
York highlight vast potential for e-commerce in China - and the
weak link the logistics industry must fix if explosive growth
projections are to be reached.
The ageing warehouses that supply goods to customers across
the world's second-largest economy are already creaking under
the strain, lacking the automation and state-of-the-art
technology that has fuelled the rise in the United States and
Europe of Amazon.com Inc. By 2020 China's e-commerce
sector will be larger than those of the U.S., Britain, Japan,
German and France combined, KPMG said in a recent report.
To cope with the China surge, as much as $2.5 trillion may
need to be invested in buying land and constructing warehouses
alone over the next decade and a half, according to one builder.
That's drawing the attention of global private equity firms like
Blackstone Group LP and Carlyle Group LP as they
seek to benefit from an anticipated investment boom.
"Over the next 15 to 20 years, the real cost of building
warehouses is going to be staggering," said Jeff Schwarz,
co-founder of Global Logistic Properties Ltd (GLP), the
biggest foreign builder of logistics facilities in China.
With each new facility the size of several large sports
stadiums, that translates to around 2.4 billion square metres of
new warehouses - an area close to two-thirds of the total land
mass of Taiwan. And GLP estimates the $2.5 trillion needed over
the next 15 years will still only increase per capita fully
automated modern warehouse space to just a third of that of the
Alibaba controls 80 percent of all online retail in China,
and its logistics partners delivered five billion packages last
year from deals struck on its internet marketplaces.
While transport infrastructure has kept pace so far with
Alibaba's rise, warehousing is a key to the supply chain across
the e-commerce industry that logistics specialists say is in
serious need of a makeover: Boston has more modern warehouses
than the whole of China, says Stuart Ross, head of Industrial at
real estate consultancy firm JLL China.
Less than 20 percent of China's warehouses are categorised
as modern, with fully computerised tracking systems and the
latest in retail technology, according to GLP and other
warehouse builders. Many facilities serving Alibaba and its
peers are located in areas that are tough for trucks to access.
They often lack raised loading bays to let packages simply roll
off conveyor belts into the back of trucks: Instead, trucks are
loaded and unloaded by manual labour.
That's a headache that can cut into profits for e-commerce
firms. Despite China's wages being much lower than in the U.S.,
it can cost over twice as much to transport goods in China
compared with the U.S., says GLP.
"Logistics is one of the major building blocks for a
successful e-commerce business model," said Praveen Sengar,
principal analyst at Gartner in Singapore. While a lack of
infrastructure could be an impediment to growth, Sengar said,
Alibaba and other e-commerce firms are investing heavily, and
have been able to cope with peak demand so far, offering
next-day or even same-day deliveries in many large cities.
A MA MUST
Improving the logistics of China's warehouses has been
prioritised by none other than Alibaba co-founder Jack Ma. Last
year, Alibaba announced a plan to lead a consortium to invest
$16 billion in the first phase of building a national logistics
business, a unit of Alibaba to be chaired by Ma. Alibaba
declined to comment for this article.
Alibaba's efforts to update logistics in China haven't gone
unnoticed. U.S. e-commerce company ShopRunner, a rival to
Amazon, will use Alibaba's domestic logistics network when it
launches in China later this year.
JD.com Inc, ranked second behind Alibaba in China
e-commerce if a long way behind, is also investing. In a filing
for its own U.S. listing worth up to $1.7 billion, it said it
plans to spend up to $1.2 billion over the next three years to
buy land and vehicles and build warehouses for its logistics
Since the beginning of 2013, around $22 billion has been
earmarked by buyout firms, including Blackstone and Carlyle, and
private companies to buy land and build new warehouses in China.
That is just a fraction of what the logistics industry
expects will be needed to keep pace with the country's consumer
Beijing has also made a modern supply chain a priority as it
looks to build a consumer-driven economy. The warehouse building
boom has lured not just buyout firms such as Carlyle, China's
Hopu Investment Management and RRJ Capital, but specialist
international companies like GLP, Goodman Group and
Prologis Inc are already sinking money into building
large warehouses in China.
The sector is also attractive to investors seeking a proxy
for e-commerce industries, while real estate developers such as
China Vanke Co Ltd are diversifying into warehousing
as a hedge against a faltering residential property market.
"China's warehouse and logistics providers are trading at
favourable valuations. In China, logistics space per capita is
only 1/12th of that in the U.S. and providers stand to benefit
as e-commerce expands," said Tony Hsu, a portfolio manager at
hedge fund Dalton Investments.
So far this year, GLP has built 280 warehouses in China,
creating around two million square metres of floorspace, at a
cost of $1.2 billion. That represents a cost of $600 a square
metre, a figure the firm estimates will rise 6 percent each year
to hit around $1,357 in 2029.
Blackstone, Asia's largest private equity real estate
investor, said it is in talks with several China real estate
developers as it eyes the warehouse sector. Carlyle declined to
"Usually in China what we see is oversupply," Chris Heady,
Blackstone's head of Asia real estate said. "This is a highly
unusual situation where there is a lack of supply, and every
time a new facility opens up the space just flies off the
shelf," he added.
While Beijing is backing a revamp of the country's supply
chain that should mean new business opportunities, foreign firms
face some resistance from local governments with other ambitions
in mind. Warehouses don't bring in as much tax revenue for a
municipality, nor create as many jobs as a factory or shopping
"In the West, whoever stumps up the money gets the
opportunity, but here it's heavily regulated so logistics
companies are competing with manufacturing firms," JLL's Ross
While Chinese e-commerce firms like Alibaba already have
political clout, foreign investors are teaming with influential
local partners to help them buy land.
GLP, for instance, linked up with politically connected deal
maker Fang Fenglei's Hopu for a $2.5 billion deal earlier this
year, which also included Bank of China. Since signing that
deal, GLP has also established partnerships with China's largest
food and agricultural products supplier COFCO and
logistics company Sinotrans.
(Reporting by Stephen Aldred and Clare Jim; Additional
reporting by Nishant Kumar, Paul Carsten and Yimou Lee; Editing
by Denny Thomas and Kenneth Maxwell)