Logistics In Focus With Carlyle Investment

Carlyle in new China warehouse venture

Just a couple of weeks after US delivery giant UPS (NYSE: UPS) unveiled a major plan to expand its China logistics infrastructure, private equity firm Carlyle is announcing an even larger $400 million venture to tap the nation’s booming e-commerce market. These 2 mega investments could well be followed by similar plans from both domestic and international firms, resulting in a multibillion-dollar spending spree over the next few years on new warehouses and other logistics facilities to help speed the delivery of goods ordered online to users’ homes and offices.

Word of this latest investment, a joint project between Carlyle and partners Townsend Group and Shanghai Yupei Group, also comes the same week that a new report from Bain & Co forecasts that China will pass the US this year to become the world’s largest e-commerce market. That explosion is fueling this concurrent logistics boom, as fiercely competitive e-commerce firms look for any way to gain advantage over their rivals. While prices are always a major point of competition, delivery times have also become a major selling point in recent months, with top names like Tencent (HKEx: 700) and Jingdong announcing major new initiatives to cut delivery times to as little as 2 hours.

All that said, let’s look at the latest announcement from Carlyle, which will contribute up to $200 million for the venture with Townsend, a financial company focused on real estate investment. Yupei will contribute another $200 million, bringing total investment to as much as $400 million. The partnership will use the money to build warehousing and other logistical facilities in first-tier cities like Beijing and Shanghai, and in second-tier Chinese like Tianjin and Chongqing. (company announcement)

The partnership will ultimately own 17 warehouses, including 5 existing ones now owned by Yupei and another 12 in the planning stages. Altogether they will encompass a massive 1.8 million square meters of warehouse space. In making the announcement, the group specifically pointed to the “exponential expansion of e-commerce” as one of the main factors behind the investment.

The Carlyle announcement comes the same month that UPS announced its own major expansion, adding more than 100,000 square feet of space to its existing network of warehouses through the opening of new 2 new centers in Shanghai and the interior city of Chengdu. (previous post)

This explosion in logistics centers looks similar to a concurrent boom in China for more high-tech data centers. The data center boom is being driven in large part by Beijing’s desire to promote the emerging field of cloud computing. But whereas data centers are a bit more sensitive due to their high-tech nature and telecoms focus, logistics warehouses are much less so. Accordingly, I would expect we’ll see a lot more similar investments in the next couple of years, including many by foreign partnerships like this one with Carlyle and Townsend.

These infrastructure investments come as major e-commerce firms like Jingdong, Tencent and Amazon (Nasdaq: AMZN) are all spending heavily to build up their own networks of logistics centers to make their product deliveries more efficient. Carlyle and other operators of these new privately run warehouse networks will most likely lease their space and services to not only the big players like Jingdong and Amazon, but also to the many smaller, more niche-oriented e-commerce firms that are also quickly springing up but don’t want to build their own warehouse networks.

All this comes as Bain predicted that China’s e-commerce market will pass the US this year, fueled by explosive growth that has seen online sales expand by 71 percent annually over the last 3 years. (previous post) Bain predicted that Chinese e-commerce sales will hit 5.5 trillion yuan by 2015, and that online purchasing could account for up to half of all retail activity in China within a decade.

Bottom line: Carlyle’s new China logistics venture will be followed by many similar investments in the next 2 years, fueled by a boom in e-commerce.

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