How is China’s logistic landscape outlined?

China, the world’s second largest economy and third largest country by area, is experiencing insatiable demand for transportation and logistics services – so much so that dedicated service providers are struggling to keep up, causing some of China’s biggest retailers to strike out on their own with in-house logistics. It is estimated that US$ 2.5 trillion will need to be invested in logistics development over the next 15 years to meet this demand, which would bring China’s per-capita logistics space up to just one-third that of the U.S.

The high demand for logistics and transportation services in China is attributable to a number of factors. Firstly, rapid economic growth and domestic consumption have created a need to deliver a greater number of goods to a greater number of destinations, as the Chinese government attempts to transition away from an export-driven growth engine. Global Logistic Properties Ltd (GLP), the biggest foreign builder of logistics facilities in China, has said that 80 percent of its total leased space in China in 2013 was used in connection with domestic consumption.

Second, improved infrastructure, particularly in the second- and third-tier cities of China’s northern and western regions, has opened up new markets for retailers. Western China, for example, now supports over 710 billion tonne-kilometers of road freight. In time, this is expected to break up the concentration of transport and logistics companies around the Pearl River Delta, Yangtze River Delta and Bohai Rim.

More than any of these growth factors, demand for logistics and transport services in China is the direct outcome of the unexpectedly strong performance of e-commerce in the country. GLP, for example, has seen its share of property leased in connection with e-commerce rise from four percent in 2010 to 22 percent in 2013. The connection between e-commerce and warehousing demand should be obvious to anyone who has seen photos of Amazon’s massive “fulfillment centers”, which employ hundreds of employees and manage millions of daily transactions.

Amazon’s dominance of international e-commerce is mirrored in China by Alibaba, which controls 80 percent of domestic online retail and delivered some 5 billion packages last year through its logistics partners. Recently, the company announced plans to lead a group of investors in building a nationwide logistics company with an investment of US$ 16 billion. Meanwhile, Alibaba rival, JD.com Inc., plans to invest up to US$ 1.2 billion into its warehousing and transportation operations over the next three years. Given the high costs of developing in-house logistics, however, outsourcing remains common among companies in China, with 61 perent opting to use third-party service providers, equally split between Chinese and international logistics firms.