This is Part 2 in a series about my visit to JD and meetings with management. In Part 1 (located here), I talked about JD’s robotics, drones and autonomous vehicles initiatives. On day 2 of the visit, our group went to the new JD headquarters in Beijing’s southeastern Yizhuang district. They moved into this new headquarters about two years ago and already have around 13,000 people in the first building. Note: since 2008, JD has grown from 300 to +120,000 staff.
I was part of a group of 15 professionals (show below) who were invited to spend 3-4 days at JD in Beijing and Shanghai. By profession, we were a mix of analysts (L2 Inc, Bain), retail experts (National Retail Federation, Export Now), professors / researchers and fashion experts. We even had the dean of fashion from Parsons School of Design Institute in our group (hey Burak). As always, my interest was competitive dynamics, especially digital competition.
We started our HQ tour by going through JD’s latest initiatives. These included:
- The cashless and cashier-less convenience stores, where you can enter and buy by phone or facial recognition.
- JD’s fresh food store Fruit Day.
- The drones. As these are designed to carry heavy packages, I was curious whether they could they carry a person. They said no. I suspect someone at JD has tried this. Say at a party one night? Maybe on a dare?
- The autonomous vehicles, which move throughout the HQ delivering packages.
- The digital lockers for picking up orders.
- And, of particular interest to me, the JD Smart initiative, in which they are embedding their platform into lots of smart devices (refrigerators, washing machines, small drones, rice cookers, temperature controls, coffee-makers, etc.). Smart products are a big deal in China this year and lots China’s manufacturing giants are jumping into the space.
As mentioned in Part 1, JD is a company that is stunningly good at execution (I call them the “Spartans of Chinese e-commerce”). You can see it in their explosive growth over the past 5 years. You can see it in their slow but steady dismembering of competitor after competitor. And I think you can see it in the slew of initiatives they always seem to have running. I haven’t even mentioned JD Cloud, JD Finance, JDX, JDY, JD Insurance and so on. And across all of these projects, I think four initiatives jump out as potential game changers in Chinese e-commerce.
Game Changer 1: The extension of e-commerce into “smart devices” (i.e., JD Smart)
Making devices and durable goods “smart” is basically about adding software and services to hardware. Steve Jobs famously did this with the iPhone (the first smartphone). Mobike did it for bicycles (the first smart bike). Elon Musk is now doing this for cars. “Hardware + software + services” is a powerful business model. This combination can create stickiness with customers (i.e., switching costs). For example, Americans don’t change from the iPhone because their photos, music, tv shows and contacts are usually on them. So while +90% of Apple’s revenue is from the sales of the iPhone, it is the 10% of revenue from software and services that creates most of the switching costs. Note: Apple’s lack of services and software in China is a big problem. And you can see this in their fluctuating China marketshare. So smart devices are a change from how most most durable products (air conditioners, washing machines, etc.) are typically sold. There is usually little brand loyalty and little ongoing interaction with customers. The big manufacturers compete with tons of marketing and it’s a tough business. But as software and services are embedded in these products, people will switch brands far less frequently. Smart devices can also change the economics of sales. For example, JD’s smart refrigerator (shown below) knows when you are out of milk and you can place an order for more directly on its screen. And as JD is making money off the sale of products, it can charge less for the refrigerator itself. This change in economics could be a real problem for some manufacturers.
Finally, there is now a massively well-funded fight happening for ownership of the operating system for these smart devices. Microsoft won the fight for the operating system for PCs. Android and iOS won the fight for the operating system of smartphones (although WeChat may have trumped this in China). Who will win for smart devices and smart cars is not yet clear. I think this is all a big deal and very cool.
Game Changer 2: JD’s fully automated fulfillment centers.
In Part 1, I talked about my visit to JD’s robotics lab, where they are building robots to fully automate their fulfilmment centers. These automated centers should be 10x more efficient than manual centers. And the first one will open in Shanghai in 2018. JD’s in-house logistics network is one of its big advantages. And the speed and quality of their delivery are a big part of their value proposition to consumers. A fully automated logistics network will increase this and will also be very difficult for other logistics networks to replicate, especially networks built on a franchise model (ZTO, STO, etc.) or as a data-sharing association (i.e., Cainiao).
Game Changer 3: The 2016 deal with Walmart China.
In 2016, Walmart sold its Yihaodian e-commerce grocery platform to JD.com. And Walmart got 5% of JD.com (which they later increased to 9%). This deal had a couple of immediate benefits. For Walmart and Sam’s Club China, they got increased access to JD’s online customers. They got access to JD’s same day delivery capability. And they were able to switch their focus back to their offline China business. For JD, they leapfrogged into physical retail. And I think the deal raises two big possibilities (at least) for them going forward. The first is that these two mega-retailers will increasingly combine their sourcing and supply chains. Both companies are very powerful in procurement and this is a big part of their cost advantage. The second is they will expand into O2O or “new retail”, similar to Amazon’s purchase of Whole Foods and Alibaba’s recent purchase of hypermarket Sun Art. It appears JD.com is increasingly going to fulfill customer orders from Wal-Mart inventories. How much Walmart’s 400 China stores will integrate into JD’s platform is an important question.
Game Changer 4: The partnership with Tencent and WeChat.
The 2014 deal with Tencent was arguably JD’s biggest move since their jump into logistics in 2007. Tencent is now JD.com’s largest shareholder at 20%. And WeChat and Mobile QQ are now generating about 25% of JD’s new customers. These two companies are also increasingly sharing data, most recently with the launch of the JD-Tencent Retail Marketing Solution. Similar to Alibaba’s new “uni marketing” program, this will combine data from Tencent’s social platforms with online and offline e-commerce data from JD. The result will be a data and digital toolkit that brands and merchants can use for more precise target marketing on JD.com. That’s really going to be interesting to follow. But this partnership between JD and Tencent is really just beginning. I keep a short list of business questions that I consider very important. One of the those is:
What does competition between “Alibaba + New Retail + Cainiao” and “JD + Tencent + Wal-Mart” look like?
I think this is just about the most interesting competitive question in China today. And while JD technically only competes with B2C Tmall (not C2C Taobao), ultimately it’s going to be a fight between two huge online-offline “uni-commerce meets uni-marketing” retailers. It’s really a fascinating question to think about. *** Ok. That’s it for the tour of headquarters. Our group then headed up to the JD board room for discussions with management. I will detail that in Part 3. Thanks for reading, jeff —– I write and speak about the fight for Chinese consumers and digital China.