What I Learned from JD Mgmt About China’s Crazy E-Commerce Growth (Pt 3 of 5)

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This is Part 3 in a series about my 3-4 day visit to JD – and what I learned from meetings with management. (Part 1 is here. Part 2 is here)

After a fascinating tour of JD’s Beijing headquarters (see video below), our small group headed to the board room for meetings with various senior managers. Josh Gartner, Vice President of International Corporate Affairs and one of the hosts for our visit, gave us an extensive rundown on the history of JD. It was impressive. I’ve been studying the company since about 2010 and I still found myself scribbling down things I didn’t know. Josh, a fellow New Yorker, is definitely the “go to guy” for JD history.

I ended up with four main points from the discussion. And they all boil down to the idea that managing the rapid growth of China’s e-commerce market has been one of JD’s biggest challenges.

Here’s my argument:

Point 1: JD has been remarkably consistent in their focus on serving customers.

Richard Liu founded JD in 1998 as a small retail plus wholesale store in Zhongguancun in Beijing. And from literally the first day, he set himself apart by offering set low prices and guaranteed authentic goods. The focus was basically 100% on serving customers and their interests.

So he didn’t make extra money by haggling customers on prices. The prices were set and clear. He didn’t make extra margins by selling fake goods. All goods were guaranteed authentic. He also took back goods if they were defective. And he focused on giving customers the lowest possible prices. All of this was a stark rejection of how electronic goods (laptops, DVDs, etc.) were sold virtually everywhere in China at that time – and especially in Zhongguancun.

For those not living in China, it is hard to explain what an impression this “serving customers” approach makes, even today. When I go to most regular retail stores, I expect an argument on price. I still take the product out of the box and test it while in the store. And I know I still could end up with a fake. A”let the buyer beware” mentality is still normal for a lot China retail. And it was dramatically more back in 1998.

Since its founding, JD has remained remarkably consistent to this “serving customers” approach. It explains their move into logistics in 2007, which was a response to the many complaints they were getting about delivery (both the quality of delivery and damaged merchandise). And again, their approach was a rejection of what everyone else was doing. Most all the other e-commerce companies were using express delivery companies.

And when doing delivery, they took anther contrarian approach. JD did not use freelance delivery agents. In contrast to almost all the express delivery companies of China, JD still uses employed staff, who are trained and paid salaries plus bonuses. If you have ever watched the armies of freelance delivery guys operate in Chinese cities, you will understand the difference. It’s a chaotic process of packages dumped and sorted on sidewalks and moped guys racing around logging deliveries as fast as possible (couriers get paid by # delivered per day). JD’s in-house logistics plus far more professional delivery service is a radically different approach. It is also what lets them guarantee same day service.

I think this “serving customers” approach also explains JD’s big investments in customer service over the years. It is worth noting that the only two in-face interactions a customer actually has with an online retailer is at delivery and through customer service. JD does both in-house and has invested heavily in both.

You can basically go through most of JD’s major decisions and view them through this “serving customers” lens.

  • Their move into cross-border? It gives their customers “hard to get” items and products where safety matters.
  • Their addition of a marketplace model in 2010? It increases the range of products they can offer, especially products that move in small volumes.
  • Why only about 120,000 sellers on their marketplace? Because they limit the merchants and brands to ensure quality. And so on.

Photo of Josh Gartner and the JD board room

Over +18 years, you can see a remarkably consistent focus on putting customers first – which in practice means low prices, quality products and good service. That’s the good news. However….

Point 2: Maintaining this “customers first” approach can be very difficult when you are growing so rapidly.

Josh mentioned that their biggest problem for a long time was ensuring quality services during their rapid expansion. For example,

  • If fast, quality delivery is central to your business, how do you maintain that when your annual active users are growing by 50-100%? Note: from 2016 to 2017, JD’s annual active users grew from 139M to 236M.
  • If quality customer service is critical, how do you maintain that when your employee count has increased from abut 1,000 in 2010 to +120,000 in 2017?
  • If quality, authentic products are central to your brand, how do you ensure that when your GMV jumps 40-100% every year. Note: 2017 Q2 GMV was $35B, up 41% yoy.

So their focus on serving customers is a powerful value proposition in China. But it also makes managing rapid growth far more difficult for them than for virtually any other China e-commerce company.

And it gets worse. Because not only are they dealing with rapid growth, they also have to deal with the fact that China loves big shopping festivals like Singles’ Day. These festivals cause huge spikes in peak volumes. The volume of orders processed, of packages shipped and of customers calling goes crazy. How do you maintain your quality and service guarantees during such peaks? Note: on Singles’ Day 2017, JD did $19B of transactions across 10 days. How exactly do you delivery 20,000 tons of infant milk powder in one week anyways?

For many of the early years, JD’s response to these peaks was for everyone from headquarters to go work in the warehouses 24/7 for a couple of days. But they are far too large for that now.

Point 3: JD’s approach required a lot of capital.

In Parts 1 and 2, I argued that JD is famous for its ability to execute. That’s how it slowly took down its many competitors one by one. And it’s how it grew so fast. But doing both of these things while maintaining the “customer first” approach, required a ton of money.

Josh told us the story of how JD first raised money in 2007. Richard met with venture capitalist and asked for $10M. The reply he got was that he should not ask for $10M. He should ask for $100M. That was the start of their fundraising, which then began to accelerate rapidly. For example:

  • When JD first moved into logistics, they planned to spend over $1B.
  • Between approximately 2011-2014, JD raised about $2B (some of it from my former boss Prince Alwaleed). And the IPO later brought in another wave of capital.

Very large fundraising and spending was a big part of how they built so quickly and how they won the fight for Chinese e-commerce. But their quality focus made this more difficult than for most.

***

Ok. I’ve think I’ve made my point. I just hadn’t really appreciated the herculean effort that managing such growth required, especially when you have a “serving the customer” approach.

Photo and video: The view from the JD board room of Beijing’s Yizhuang district

Final Point: Chief Technology Officer Chen Zhang has an awesome job.

Our next discussion was with JD CTO Chen Zhang, a fascinating guy with an impressive background (including 18 years at Yahoo in China and Silicon Valley). I’m not a technology person, so I’ll just provide a brief rundown of the discussion. Note: These are my impressions and are not statements or quotes by Mr. Chen or JD.com.

  • At JD, Mr. Chen oversees all the technology initiatives, which currently include drones, automated trucks and vehicles, AI, fully automated warehouses and security.
  • Traceability is critical. How can JD ensure the products they sell are authentic? How do you know if the Prada handbag is real? How do you check the quality of beef sold anyways? Mr. Chen discussed how traceability is critical and how it creates a positive feedback loop for the reputation of JD.
  • Quality customer service requires automation. He mentioned they are focused on using AI and bots to handle customer service. If you are growing at 10x, you don’t want to have to add 10x customer service representatives. Plus customer service reps have a fairly high turn-over rate, and you have to be continually training new people. One solution is automation. Chat bots are already handling 60-80% of JD’s customer service inquiries. They are aiming for +90%.
  • The future of autonomous vehicles is pretty cool. He speculated a bit on what it would be like to have a million autonomous vehicles operating a city like Beijing (note: I wrote an article about this here). These vehicles could deliver everywhere and he referred to it as a “new retail infrastructure”.
  • On how JD relates to Tencent. He described this partnership as combing Amazon and Facebook. Personally, I think JD is more like “Amazon + Facebook + UPS”, as they have their own logistics.
  • JD is a “retail service” company. He used the term “retail service” to describe JD and I thought that was a nice term. It does capture their focus on serving the customer, which in practice means low prices, quality products, faster delivery and better service.

That’s it for Part 3. Thanks for reading. In Part 4, I detail lessons from a visit to JD Logistics. Part 1 is here. Part 2 is here.

Cheers, Jeff

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I write and speak about the fight for Chinese consumers and digital China. Photos by Jeff

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