29 October 2019

Introduction: Boom in Chinese E-commerce

The massive boom in the Chinese e-commerce industry has been staggering. The world's second-largest economy is home to the largest e-commerce market across the globe – at over $1 trillion in size, it is three times larger than the runner up, the United States. It’s a behemoth, and it’s only getting bigger. KPMG has predicted that by 2020, China's e-commerce market will be larger than those of the U.S., Britain, Japan, Germany, and France - combined.

While the exponential increase in the size and strength of the Chinese e-commerce market has been a gold-mine for certain companies and investors, it’s also created a potential opportunity for those looking towards alternative investments as a source of alpha returns.

China is currently facing two problems here: first, there isn't enough warehouse space to accommodate this surging growth in e-commerce, and second, the warehouses that are currently in operation are not modernized. The figures here are quite shocking. Although China's e-commerce market is currently dwarfing the rest of the world, less than 20% of its warehouses are considered to be modern.

Jean-Eric Salata, the CEO, and founder of Baring Private Equity Asia has an even more extreme estimate, believing that only 2% of existing Chinese warehouses have been modernized. A modernized warehouse will have computerized tracking systems and robotics, but many of the Chinese warehouses don't even have raised loading docks, allowing automatic unloading of truckloads onto the conveyor belt systems - this is still done manually.

In order to bring the warehousing system up to the standards required to handle China’s e-commerce market, it's estimated that an investment of as much as $2.5 trillion will be required over the next 15 years. Part of this will need to be allocated to upgrading current warehouses, which isn’t a cheap exercise - the unit price range of a palletizing robot can run up to $15,000 and the average price of a sorting robot is in the region of $20,000.

"We're really at an apex point now where logistics is the hottest real-estate sector in the country."" (Stuart Ross, head of industrial at JLL in China).

Investments of these sorts aren't a luxury though, they are a necessity in order to stay competitive. A predominantly automated warehouse can reduce labor costs by up to 70% and a modern sorting machine has the ability to process 40,000 items per hour, with 99.99% accuracy. This is 10 times the amount that a human-operated warehouse can get through.

Clearly recognizing that these kinds of innovations are going to be necessary for the survival of e-commerce firms heading into the future, JD.com is leading the way forward. In 2017, they built the world’s first fully automated warehouse; less than 10 humans are employed in this facility and their only function is to service the robots.

With modern consumers expecting orders to be delivered within days, sometimes even hours, it's going to be a logistical and technological race to the consumer's doorstep for these companies.

The e-commerce revolution has filled the bank accounts of many businessmen and investors, and filled the homes of millions of online shoppers. In an industry where an emphasis is placed on speed and efficiency, modern warehousing located as close as possible to the homes of customers will be the base requirement in order to stay competitive. This will predictably lead to a logistics real-estate revolution and the investors at the forefront of this revolution are going to be reaping incredible rewards.