How China’s E-commerce Boom Pushes Automation to the Next Level
In a cavernous warehouse on the outskirts of Kunshan, an industrial city in eastern China, the stacks appear to be organizing themselves. Several box-laden towers trundle toward a packing area by the entrance, while others, emptied of their loads, glide silently back to their starting positions.
The shelves are being marshaled by a fleet of squat robots manufactured by the Beijing-based startup Geek+. These Roomba-like devices are capable of crawling underneath and lifting stacks weighing up to 500 kilograms, and then transporting them wherever they are needed.
Geek+ has a team of 120 of the robots—also called automated guided vehicles, or AGVs—working in the warehouse. It operates them on behalf of up-and-coming social commerce startup Yunji.
The AGVs enable the warehouse to process up to 100,000 orders a day with a staff of 20 human workers, work that previously would have required 300-600 people, according to Geek+. The project is part of a huge automation drive taking place in China’s sprawling e-commerce supply chain.
Unlike other sectors, leading online retailers like Alibaba and JD.com have embraced automation enthusiastically. In some areas, they are now ahead even of Amazon.
China accounts for nearly half of global demand for AGVs, and leading domestic robot makers like Geek+ have emerged as formidable global competitors. Alibaba and JD.com have also announced plans to invest billions of dollars to roll out next-generation technologies including totally unmanned warehouses and last-mile delivery robots and drones.
E-commerce firms, as well as the express delivery firms they work with, such as SF Express and ZTO Express, have been forced to adapt to rapid demographic changes. China’s working-age population began to decline in 2013, and the pressure on companies has been increasing ever since.
“China is losing young people quickly and labor costs are increasing tremendously,” says Lian Jye Su, a robotics industry researcher at ABI Research.
The e-commerce industry felt the effects of these changes earlier than others due to the massive growth in the online retail market. Sales increased 32% year-on-year in 2017 to reach $1.1 trillion, making China’s e-commerce market more than double the size of that of the US.
“You can use money to solve the labor costs issue, but for our clients the bigger challenge is that at peak times you just can’t find enough people to get the job done,” says Zheng Yong, CEO of Geek+.
Alibaba and JD.com started integrating labor-saving technologies into their warehouses in 2014, just two years after Amazon acquired robot maker Kiva Systems for $775 million. The decision kick-started a frenzy in the automation solutions market.
By 2016, sales of AGVs in China reached 9,950 units, accounting for 44% of the global total, and were growing 88% per year. The technology was among the first solutions to be implemented because it is easy to introduce to modern warehouses and increases efficiency dramatically.
Nearly every major warehouse run by China’s leading e-commerce and express players now integrates automation technology, according to Julius Shen, a consulting partner at PwC. Firms are also introducing a much broader range of solutions.
In the major cities, rising land costs are pushing firms to create tri-dimensional warehouses. These facilities, whose stacks often stretch several stories high, require automated picking, packing and sorting solutions to manage their massive volumes of goods.
“It’s becoming very difficult to maintain a traditional warehouse in a city like Shanghai,” says Shen. “The only way to expand the capacity is to build upward.”
Automating package sorting is particularly crucial for the major players as they look to cope with a skyrocketing number of orders while also cutting waiting times for customers. China’s express industry delivered more than 40 billion packages in 2017, around half of total deliveries worldwide, and this is likely to hit 60 billion by 2020, PwC estimates.
In many modern facilities, sorting is now handled by dozens of scurrying robots, which dump individual packages down different chutes based on their intended destination.
“Nearly every e-commerce company uses bar codes or QR (Quick Response) codes for tracing, and so using automatic sorting systems not only reduces labor costs but also lowers the number of mistakes,” explains Shen.
At first, the major beneficiaries of this boom in Chinese demand were the major foreign automation solutions providers, such as Japan-based industrial robotics firm FANUC. But Chinese startups like Geek+ have rapidly gained ground.
Hundreds of automation-related startups have emerged in recent years thanks in part to strong support from Beijing, which wants China to become a world leader in robotics by 2025. Beijing has often been criticized for subsidizing robotics startups that remain far behind the leading firms from Europe, Japan and the United States in terms of cutting-edge technology. But in the logistics sector, the barrier to entry is not so high, which handed local players an opening.
“For industrial robots, it requires precision and there is little room for trial and error, whereas with solutions like AGVs people are more open to experimenting and introducing small innovations,” says Su, of ABI Research.
Chinese robot makers gained an edge by focusing on understanding their clients’ needs.
“The local players are humble and willing to really dive into their specific industries,” says PwC’s Shen. “They understand the entire operations process and have designed their products to be 100% customized not only for a single industry, but even for different types of companies within that industry.”
Zheng and his co-founders followed this approach when they set up Geek+ in 2015. “Relatively speaking, AGVs are not the most advanced technology,” says Zheng. “But we formed an innovative system to solve real problems for our customers.”
Geek+ thrived by offering clients a level of service that companies based overseas could not match, Zheng explained in a recent interview.
“At Alibaba, they set up tents in their offices in the month leading up to the ‘Double-11’ e-commerce shopping festival,” Zheng said. “So do our colleagues. Our workers have to go to the warehouses in the suburbs and stay there overnight to guarantee the system operates stably.”
The sheer size of China’s e-commerce market also offers firms like Geek+ a unique advantage in terms of gaining know-how and honing their products. In less than four years, the company has shipped more than 3,000 robots, making it the leading provider in China.
“We have accumulated a lot of experience with different clients,” Zheng says. “That level of shipments and on-the-ground experience is unheard of in other countries.”
These advantages have enabled domestic firms to dominate the Chinese AGV market, where local companies now have an 85% market share, according to market researchers Research in China. Geek+ now considers its products to be more advanced than any others on the market, including in Europe and North America.
This is not an empty claim, says Su of ABI Research. “Geek+ can offer comparable technology at a lower price [to their Western competitors] due to the tremendous economies of scale offered by China.”
The Chinese firm will soon put this to the test. It set up its first overseas office in Japan last year, and its warehouse robots have received the CE Mark approval for sale in the European Union.
Spreading the Revolution
Whether Geek+ will replicate its success abroad remains unclear, but the way domestic firms have caught up and overtaken their competitors in the local AGV market could be a harbinger of things to come.
Nevertheless, there are still huge growth opportunities for automation in China. Even in the e-commerce industry, one of the earliest adopters, only new-build warehouses run by leading firms tend to use new technologies. In the logistics sector as a whole, the penetration ratio for automation technology is around 20-30%, whereas the average in most Western countries is 70-80%, according to Shen.
However, most of the untapped opportunities in e-commerce are with smaller firms and local distribution centers that foreign companies will find hard to reach. The fact that most of the low-hanging fruit have now gone is one reason why Geek+ is looking to expand internationally, Su notes.
Integrating new technologies is more challenging in smaller facilities since the solutions function in closer proximity to staff. This could, in theory, favor foreign companies. North American firms, for example, are the leaders in manufacturing autonomous mobile robots (AMRs), more sophisticated robots than AGVs with greater spatial awareness that are easier to introduce to brownfield sites.
But domestic AGV makers are closing this gap. “Chinese companies are now investing a lot more in AMR technology,” says Su. “They are not very far behind—it’s a matter of scale and time to market.”
Other opportunities are opening as the leading e-commerce players ramp up investment in logistics. Per capita warehouse space is still far lower than in the US and will expand by 20% per year for the next several years, according to Shen.
Firms are also experimenting with completely unmanned warehouses, a major technological undertaking that requires a complex system of synchronized solutions. JD.com opened its first such facility on a trial basis earlier this year, and Geek+ aims to follow suit before the end of 2018.
JD.com has also been operating drone delivery services to rural areas for 18 months, and raised $2.5 billion through a stock sale in February to invest in last-mile delivery and other logistics solutions. Alibaba, meanwhile, has pledged to invest $15 billion to build a logistics network capable of delivering packages anywhere in China within 24 hours and globally in 72 hours.
But Shen expects that, even in the most cutting-edge areas, foreign providers will come under increasing pressure. “We expect import substitution to be a trend in China’s e-commerce industry.
“The market share of foreign automation solution providers is still relatively high in e-commerce, but we believe local players will increasingly penetrate into these areas.”
Up to now, domestic firms have mainly been small-scale and offered highly specialized solutions for very specific markets. But this is changing as the automation solutions market consolidates and firms look to expand into new areas.
Geek+ has already developed moving and sorting robots in addition to its AGVs, which will allow it to move into manufacturing. Like many firms, it also aims to broaden its logistics client base from e-commerce into a number of less-automated industries.
“We are targeting all retailers,” says Zheng. “That includes brick-and-mortar retailers, pharmaceutical companies or makers of fast-moving consumer goods, shoes or apparel. As long as it is retail-related, our products can be used.”
As a new generation of larger Chinese automation companies offering a broad range of solutions emerges, they may even pose a threat to global rivals in their home markets.
Will the warehouses of the future be run by robots designed in Beijing? It is possible, especially when you consider that it has taken the Chinese players less than five years to get where they are now. But, for Shen, the unique conditions that made this revolution possible may also prevent it spreading further.
“If we are talking specifically about e-commerce, China is already the world’s largest market, but it’s unique,” he says. “It’s not easy for these companies to adapt to new markets when they go overseas.”
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