Logistics Gets Boost With Dutch Investment
China’s fast-growing logistics sector got 2 shots in the arm last week, first when leading e-commerce company Alibaba made a major new offshore investment and then when a major foreign fund formed a domestic warehousing joint venture. The pair of investments are part of a flurry of new developments being driven by e-commerce, which is fueling huge demand for behind-the-scenes services like order fulfillment and product deliveries.
E-commerce is an emerging area where China has the potential to become a global leader due to its later economic development compared with the west, where traditional brick-and-mortar retailing still dominates. To ensure its leading position, China should work hard to promote parallel development of a strong logistics sector to complement e-commerce. It can do that through economic incentives, and also by giving domestic and foreign capital the flexibility to invest in the space without government interference.
China’s e-commerce sector has grown by more than 50 percent annually over each of the last few years, and is expected be worth some 3.3 trillion yuan ($530 billion) in annual sales by 2015. To facilitate the efficient flow of this huge volume of goods, some analysts estimate the nation’s logistics sector could need as much as $2.5 trillion in new investment over the next 15 years.
Alibaba has been on a major buying binge over the last year, and made one of its biggest international investments last week with its purchase of a stake in Singapore Post (Singapore: SPOST), one of the city state’s leading logistics firms. (previous post) Alibaba paid $250 million for 10 percent of the company, giving it access to new resources and paving the way for potential moves into Singapore and nearby Southeast Asian nations as it tries to go global.
The investment was part of a bigger commitment announced by Alibaba last year, which will see the company spend a massive 100 billion yuan ($16 billion) over the next few years to build up its logistics networks.
That commitment was especially important for Alibaba due to its business model that relies on individual merchants that open stores on its platforms. Many of those store operators have limited geographical reach and resources for quick product fulfillment and delivery services, meaning their future survival could depend on logistical assistance from the wealthy Alibaba.
Shortly after Alibaba’s announcement, Dutch pension fund APG Asset Management announced separately it would invest $650 million in a major new tie up with e-Shang, a start-up logistics firm backed by US private equity giant Warburg Pincus. (English article) Under that deal, APG paid $650 million for 20 percent of e-Shang, and the pair set up a joint venture to operate logistics warehouses around China.
The e-Shang investment is just the latest in a steady string of China-based warehouse building projects by major companies looking to cash in on the nation’s e-commerce boom.
Last year US private equity giant Carlyle teamed up with another US partner and a Shanghai-based firm in a $400 million joint venture to build and operate up to 17 warehouses providing logistics services. Global delivery giant UPS (NYSE: UPS) also announced a plan around the same time to add 2 massive new warehouses to its China network to expand its capabilities.
Most of China’s other major e-commerce players are also spending heavily in the area, with JD.com (Nasdaq: JD) and Amazon China (Nasdaq: AMZN) both engaged in major warehouse building plans to improve their product deliveries.
While the warehousing sector is gaining momentum, the product delivery space has been slower to welcome foreign participation and is still highly fragmented. That fragmentation leads not only to stiff competition and quality issues but also real dangers. The issue made headlines in several recent cases last year, including one where one person died and 7 others were sickened due to mislabeling of a hazardous product.
For years Beijing excluded foreign companies from offering domestic delivery services in China, though it relented in late 2012 and allowed UPS and FedEx (NYSE: FDX) to provide such services. Still, the market remains difficult for foreign firms, and last year saw Dutch delivery giant TNT Express leave the market due to intense competition.
Despite the occasional setbacks, the overall trends are broadly positive, which is giving both domestic and foreign investors the confidence to pour billions of dollars into new investments. Beijing should do its best to continue dismantling barriers and promoting development of new facilities and services to ensure the sector’s healthy development. Such support could ultimately produce a world-class logistics sector that could become a global leader to complement China’s rising prowess in e-commerce.
Bottom line: China’s logistics industry could see a multibillion-dollar spending spree on new investment over the next 5 years if Beijing plays an active role to encourage the sector’s development.
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