E-commerce driving demand for warehouses

An automatic distribution center, the largest in terms of daily handling capacities in Asia, will be in operation in July in Shanghai. To cope with the e-commerce surge, as much as $2.5 trillion may need to be invested in land and warehouses over the next decade and a half, one builder said. Pei Xin / Xinhua

Alibaba Group Holding Ltd's plans for a giant initial public offering in New York highlight the vast potential for e-commerce in China - and the weak link the logistics industry must fix if those explosive growth projections are to be reached.

The aging warehouses that supply goods to customers across the world's second-largest economy are already creaking under the strain, lacking the state-of-the-art technology that has fueled the rise of Amazon.com Inc.

By 2020, China's e-commerce sector will be larger than those of the United States, Britain, Japan, Germany and France combined, KPMG reported. To cope with this surge, as much as $2.5 trillion may need to be invested in land and warehouses over the next decade and a half, one builder said.

That's drawing the attention of global private equity firms like Blackstone Group LP and Carlyle Group LP.

"The real cost of building warehouses is going to be staggering," said Jeff Schwarz, cofounder of Global Logistic Properties Ltd (GLP), the biggest foreign builder of logistics facilities in China. That translates to about 2.4 billion square meters of new warehouses - or two-thirds of the land mass of Taiwan.

Alibaba controls 80 percent of all online retail in China, and its logistics partners delivered 5 billion packages last year. While transport has kept pace with Alibaba's rise, warehousing is in serious need of a makeover. Fewer than 20 percent of China's warehouses are categorized as modern, with fully computerized tracking systems and the latest in retail technology, according to GLP.

And many facilities serving Alibaba and its peers are in areas that are tough for trucks to access. They often lack raised loading bays to let packages roll off conveyor belts: Instead, the vehicles are loaded by hand.

That can cut into profits. Despite China's wages being much lower than those in the US, it can cost over twice as much to transport goods in China, GLP said.

Improving the logistics of China's warehouses has been prioritized by none other than Alibaba cofounder Jack Ma. Last year, Alibaba announced plans 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 haven't gone unnoticed. US 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 in China e-commerce, is also investing. In a filing for its own US 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 to build warehouses.

Meanwhile, 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 favorable valuations. In China, logistics space per capita is only 1/12th of that in the US, and providers stand to benefit as e-commerce expands," said Tony Hsu, a portfolio manager at Dalton Investments.

So far this year, GLP has built 280 warehouses in China, creating about 2 million square meters of floorspace at a cost of $1.2 billion.

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.