Alibaba’s US$4.5 billion investment in logistic – the key is land

Recently, I talked with a friend who knows Alibaba pretty well and I changed my mind about its investment in logistic. Earlier I believe it is just an idealistic plan. (http://en.technode.com/2011/01/24/alibabas-us4-5-billion-investment-in-logistic-just-a-plan-only/)

But in fact, Alibaba is working on something big. “The key is land,” said my friend. Alibaba is talking to local governments all over the country, asking them for land to build warehouses and logistic facilities.

“Once Alibaba gets lands from the government, they can borrow whatever they needs to build warehouses and logistic facilities from the banks, using the lands as collateral,” said my friend.

When I first heard about the US$4.5 billion investment, I felt that was too much even for Alibaba. Its B2B market only made US$140 million in profit last year. Even if Taobao and Alipay made the same amount, the Alibaba Group as a total should earn less half billion a year. And I don’t think they have more than US$2 billion at hand. They got US$1.5 billion from listing the B2B market and another US$1 billion from Yahoo, but it paid back US$750 million to its earlier investors. Of course, they can get financial support from other investors and they can throw all their profit in the next 5-10 years into the project, but that sounds too risky and full of uncertainties.

Now, I see what they are doing. Alibaba don’t need to spend a dim on the project. Land will be from the government and money to build warehouses and logistic facilities will be from the banks. Once the facilities are built, Alibaba can channel Taobao’s numerous sellers to use the services. If everything works well, apart from dominating e-commerce, Alibaba will be the king of China’s logistic industry, too.

The crucial part of the whole scheme is the first step – getting land. That is why Jack Ma talked about the logistic investment in such a lofty tone – spending US$4.5 billion over the medium term. It gives his subordinates a legitimate reason to go to the local governments and ask for land.

If Alibaba is going to invest billions of dollars in logistic, it will help local economy, and sure, the local government should support it by providing free land. Actually, local governments have been doing the same with other industries, such as software development, clean energy, etc. It sounds very reasonable.

Moreover, China’s logistic industry is indeed a mess. Service stopped during the Chinese New Year. (I talked about these earlier.http://en.technode.com/2011/02/05/problems-with-china%E2%80%99s-logistic-industry/) There are a lot of complaints about how poorly the logistic service is run. Alibaba finds the right moment to pitch government for land.

It is really clever of Jack Ma. Success or not, it is a scheme worthwhile trying – if it works, he will win billions.  If not, it doesn’t cost him a dim.