Warehousing in China Displays Distinct Dynamics

On May 15, China Europe International Business School (CEIBS) and the ZGC Innovation Center organized a forum on digital innovation at Z-Park in Cambridge, MA. While attending the event, I had the opportunity to speak with Dr. Xiande Zhao, Director of CEIBS-GLP Centre of Innovation in Supply Chain and Services. He provided me with some valuable insights on warehousing and logistics in China.

Warehousing in China

China is an increasingly important market to international warehouse automation and WMS providers. It is large, growing rapidly and offers great growth opportunities. As a result, the topic of warehouse technology investment in China comes up often in my discussions with technology providers. However, I have found it more difficult to engage in direct discussions with Chinese practitioners. My discussion with Dr. Zhao bridged that gap and provided me with the pulse of warehousing in China.  Our discussion focused on the competitive dynamics in the Chinese warehousing environment, the forces at play, and ways in which it differs from the environment in the United States. The hard factors at play are similar in both markets. Warehouse automation investments are capital costs that reduce the variable costs of fulfillment, increase throughput, and decrease manual labor costs. However, the differences lie in the relative impact of these factors, the broader warehousing environment, and the secondary effects and competitive opportunities that can arise from these investments.

China Warehousing Market Dynamics

For starters, e-commerce represents almost 25 percent of retail sales in China, compared to approximately 10 percent of US retail sales. E-commerce growth is placing high demands on warehouse throughput and labor requirements in both countries. However, the magnitude of change is notably larger in China. The difference in labor cost growth is also substantial. Dr. Zhao stated that labor costs in China have risen approximately 500 percent since 2005. In addition, labor-related management costs have also increased substantially over the last few years. Therefore, Chinese companies incorporate substantial labor cost increases (and therefore savings) when evaluating returns from warehouse technology investments. This cost-justifies automation investments for high-volume warehouses.

Perhaps most interesting is the competitive advantage that advanced fulfillment capabilities, based on warehouse automation, can provide to companies in China.  The logistics services industry (3PLs) in China is not nearly as advanced as it is in the US and Europe. Therefore, it is more difficult for shippers to secure advanced fulfillment capabilities. The leading e-commerce providers invest in modern logistics capabilities to support their own fulfillment operations. In turn, the resulting high service levels and expedited delivery capabilities attract more business to these companies. The increase in volumes reduce variable costs of fulfillment, providing payback to the warehouse automation investments. Subsequently, these companies expand their fulfillment capabilities and offer logistics as a service to other companies looking to fulfill expedited e-commerce orders. The large e-commerce companies are using their scale to invest to develop more scale, to reduce variable costs, to increase business, to further increase scale.

Suning – A Large Scale Warehouse Automation Investment

I was speaking to executives at SSI Schaefer three or four years ago about its global warehouse automation business. These executives told me about a large, multi-year warehouse automation project in China that was expected to bring in hundreds of millions of Euros worth of business to SSI Schaefer. I assumed that only JD.com, Alibaba, or a large Chinese ocean shipping company could justify such a large warehouse automation investment.  I was wrong. The customer was Suning – a company name I did not know. Fast forward to today, and SSI Schaefer proudly publicizes this project. The Suning warehouse holds around 20 million items, handles up to 1.8 million picks per day, and is serviced by a range of SSI Schaefer automation including a high-bay warehouse and miniload system with 12 miniload cranes.

I was please to see that a Suning executive was sitting on a panel at Z-Park Digital Innovation forum. Jie Tang, GM of Suning.com, USA provided context into Suning’s large warehouse automation investment. Suning was historically a brick-and-mortar retailer that has transitioned into an omni-channel business. The company realized that its ecommerce capabilities were well behind those of Alibaba. Suning’s warehouse automation investment was part of Suning’s larger corporate strategy to increase market share through digitization of it supply chain and demand management efforts, and to make better use of its physical store presence. Needless to say, Suning is a much larger company than I would have imagined, with revenues of more than $20 billion. It is clear to me that I did not appreciate the sheer size of some warehouse investment initiatives in China.

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