A logistics provider belonging to the Alibaba group plans to add about four million square metres of new warehouse space to the one million that it already owns by the end of 2016 as China’s biggest ecommerce player pushes to cut its delivery times and stay ahead of a growing group of rivals.
Judy Tong, the president of Cainiao, a shipping network controlled by Alibaba, says that the company will commit a large chunk of its planned $16 billion in investment into setting up the new warehouse space, according to a report in Reuters.
The total value of goods sold on China’s ecommerce networks grew by 21.3 percent in 2014 to reach RMB 12.3 trillion ($1.98 trillion), according to iResearch. The market research firm expects the market to grow still further to RMB 24.2 trillion in gross merchandise value by 2018, but a scarcity of efficient warehouse space is proving to be a drag on deliveries and adds to logistics cost.
Alibaba to Own More of Its Own Warehouses
Speaking at a company event in Hangzhou held two years after Cainiao was founded, Tong said that the logistics network’s warehouses would be concentrated in eight to ten cities which will form the core of the company network. Vendors selling on Alibaba’s sites, such as Taobao and Tmall would still have their own warehouse space, and the system would also rely on warehouse space provided by other Alibaba partner companies.
Alibaba formed Cainiao together with partners Fosun, SF Express, China Yintai, Fosun Group, and Forchn Group in May of 2013. In addition to establishing its own warehouse space, Cainiao – which is 48 percent owned by Alibaba – has focussed on creating systems that will allow for more efficient delivery of packages by linking together shipping, warehousing and order fulfillment.
Making sure that its deliveries are speedier than its competitors is now a major goal for Alibaba. Tong told guests at the event that, “Cainiao has established a complete logistics network and aims to offer next-day delivery service in 50 cities by the end of the year,” up from 34 currently.
According to Cainiao, more than 6.1 billion packages were generated from transactions on its system during the 12 months ended June 30, 2014, representing 54% of packages delivered in China in that period.
Warehouse Expansion is Good News for Logistics Developers
Cainaio’s plans to add four million more square metres of warehouse space in 18 months are no doubt good news to China’s small group of logistics real estate developers, who will likely be tasked with building all of these new sheds. However, even with Jack Ma’s deep pockets funding the effort, putting together that much new space in a year could prove to be a challenge.
In what was considered a rapid expansion in the industry, newly-founded Warburg Pincus-funded logistics developer e-Shang built, acquired, or started construction on 1.5 million square metres of new warehouses in the more than two years between when it was founded in 2011 through June of 2014.
Just last year Singapore’s Temasek Holdings and private equity firm RRJ Capital pledged $250 million to established China logistics player Yupei in the hope that the local firm could expand to 3.4 million square metres of warehouses by 2017.
The bottleneck for all of these developers, as it is likely to be for Cainiao, is the availability of land for logistics – an activity that generates little tax revenue and scant investment for cities hosting the space hogging warehouses.
Local governments that sell residential land can not only get much higher prices at auction, but will also benefit on taxes collected on residents in the new communities. Office development is looked upon even more favorably, with the promise of high paying white collar jobs for residents and tax revenues from service companies working in the area.
But even with China’s ecommerce boom, warehouse developers have struggled to persuade city authorities that adding new distribution centres to their cities will add serious long-term benefits in terms of employment or revenues. Until Alibaba’s software wizards find a way for local governments to get more benefit from building new warehouses, Cainiao will struggle to add one million new square metres of space by the end of next year, and has little chance of reaching its goal of gaining four million more square metres.