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Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy. And the question for today, can JD Logistics go from service company to ecosystem? Now in the last week or so JD Logistics, which is the subsidiary of JD, the e-commerce company obviously, this is their logistics and fulfillment capabilities that they have. spun out in 2017, sort of spun out, separated in 2017, and is now ready to go public. And this was kind of a big deal. I’ve been asked for years, what do I think the most important sort of digital phenomenon in China, Asia are? And always on the short list, top three has been this idea that the major e-commerce players, I hate to say revolutionary, but let’s say frontier innovation, logistics networks across mainland China. These are traditional physical networks for logistics and fulfillment, supply chain delivery, everything, but that are being digitized, upgraded, connected, and increasingly automated and intelligent. I don’t see this happening anywhere else in the world like I see it happening in China. It’s a new thing. And it’s pretty amazing, has a lot of important implications. But I’ve never really been able to get much data on it. I’ve asked JD, I’ve asked Sineo for years. And they’re very polite, but it just never really happened. It’s all behind the scenes. You might visit one warehouse, which I’ve done. The drones, see all those, see the robots, things like that, which I’ve all done in China. But you never really get the picture of the entire network. And that’s what I wanted to know. Well, with the IPO filing, we are seeing the entire JD Logistics Network, really for the first time. And it’s pretty awesome. I mean, it’s pretty great. So I’m gonna go into that, and with the goal of sort of deciding, look, can this thing go from a services business to an ecosystem? Because that’s really gonna change the trajectory of the company and the trajectory of its value and valuation. Now, those of you who are subscribers, I’ve sent you two pretty significant… emails, articles about JD logistics so far, probably about 5,000 words, something like that. There’s a lot going on here. There’s a lot of theory aspects, a lot of strategy, which is why I like it. So this is going to sort of summarize and discuss a lot of that. So most of this you will probably have heard before if you’ve gone through all the emails. But I admit that was a lot of sort of thinking and theory and generally going through it a couple times is probably helpful. Also, I did sit down with the CEO of JD Central Thailand. This is the joint venture for JD in this country, which is with Central World, Central Group here. Very interesting. I sat down with the CEO a couple days ago, interviewed him. I will be writing that up, sort of takeaways of them versus Shopee versus Lazada, things like that. Really was a pretty fantastic discussion. JD has been really quiet since they opened here. in Thailand a couple years ago. They haven’t done a lot of marketing, really much of any marketing on the streets, certainly not like Lazada and Shopee. So this is sort of them beginning the process of more engaging with the press and things like that. And anyways, that’s why I got the call for that one. That’ll be going out in the next day or so. And for those who aren’t subscribers, feel free to sign up over at jefftausen.com. There’s a free 30 day trial. Try it out, see what you think. And of course my standard disclaimer. Nothing in this podcast or in my writing or on my website is investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information presented may be wrong. The views expressed may be incorrect or no longer relevant or accurate. Overall, investing is risky. This is not investment advice. Do your own research. And with that, let’s get into the topic. Okay, now the… You know, the logistics aspects of China are really fascinating. I think they’re incredibly important. They don’t get a lot of coverage because they’re not really that sexy. It’s not like e-commerce and short videos and all this sort of cool stuff with the tech CEOs. But, you know, FedEx, DHL, ZTO, STO, all the TOs, which are all kind of ironically, or at least interestingly, based in Hangzhou for the most part. They all kind of sprung up around Alibaba over the years. And there’s some really interesting sort of relationships between the founders of all those companies and in Jack Ma in particular. But you know, this is logistics networks, especially express delivery. It’s been an area a lot of investors, especially value investors have long paid attention to because they can have a version of network effects. You know, you connect a country, you have some local connections within city, pick up packages, drop them off. You have the connections between cities. And then you can have sort of a national network emerge, which as I’ll go into is a physical network. You know, it’s not information, it’s not digital, it’s physical, it’s moving things back and forth. The nodes of the network tend to be the places where you can drop off and pick up. The connections, the linkages tend to be the routes those things can take. And… You know, it does grow as a network that is mostly physical and therefore, like most physical networks, operates like a radial network, a hub and spoke model. And that has implications for network effects. You know, if you’re doing an airline, a train system, pipelines, things like that, you know, you get this sort of network where everything goes in at the local level, let’s say the old local telephone networks all connect to one point and then that city or that region. will have a long distance telephone lines that connect to another city. So there is this sort of hub and spoke model that you see all the time. And that does limit the network effects because the amount of connections you can have is much more limited. Not every node connects directly through a straight line to every other node. They get channeled through certain points. And I’ll talk about how as you start to go from a physical network to a digital or information-based network, Those connections increase dramatically and therefore so does usually the power of the network effect. We see that in airlines, we see it in trains. Although Southwest Airlines is always kind of an exception. Most airlines work by hub and spoke. All the local flights go to one regional hub. Most of the major airlines have one. Southwest is different because they do point to point at the local level. So they’ve always been a little bit different. And then you start to get cross across the ocean out of the country hubs. And pretty much the same things happens with moving packages around. As you get to certain points, then it will go overseas and we can see that say out of Guangzhou, that’s an entry point into China and other places. And at that point, the domestic carriers, I’m sorry, the domestic companies like ZTO, STO, often hand off to the international players like FedEx and DHL who do not operate. Domestically, they do the cross-border aspects. So there’s various aspects to the network within a city, between cities, and then between countries. You can kind of break it up that way. And of those, between cities tends to be where the power is. Domestically, it tends to be, I’m sorry, at the city level tends to be a free-for-all. Everyone’s running around, not a very good business. And then between countries, you get another network. So physical networks can have… Very interesting network effects. There’s a reason Warren Buffett has been an investor in companies like UPS and stuff over the years. And I think airlines before he sort of ejected from that idea. The other thing that’s interesting, one of the common things about a guy like Buffett, as far as I can tell, is he loves the competitive advantage idea, but he also looks for sort of longer term demand trends that are very stable, like, okay, Coca-Cola. has competitive advantages and there’s a certain number of people on the planet and they need a certain amount of liquid every day to survive. Therefore there’s a fairly solid trend, demand floor, let’s say. We pretty much see the same thing for moving packages around a domestic economy, whether it’s the US or Europe or China. As a country grows and becomes wealthier, the number of items moving around within the country, physical items, tends to just… go up step by step by step. It appears to be a very stable sort of demand floor. I think you can see that in express delivery and other things as well. Now, getting back to JD. So JD got into this business back in 2007. They launched in late 1999. They were a physical retailer. During the SARS prices, they moved online because you couldn’t come into the office, obviously. But during that period, even when they went from physical to online, they were building warehouses or at least leasing them. And they were leasing them at a crazy speed. They used to move from warehouse to warehouse at a blistering pace. Like month by month, they’d be adding new ones. And the company had always positioned itself as quality. And the three touch points from the consumer perspective. are the app, the delivery person, and the customer service reps. So they’d been building out warehouses, they’d been building out their customer service reps all through that period. And they were getting the most complaints from people about logistics, that they were using outsourced third-party logistics. These people were zooming around on their dingy little scooters up on the sidewalks. You can see this even today. If you go to Beijing or anywhere, you will see all these… contracted and franchise delivery groups. You know, they just literally pile their packages on the street corner. You’ll walk down to the corner and there’ll just be a ton of packages in a pile there and they’re just sifting through them and they got these broken down scooters and they zoom up to you and they basically throw you the package and they get paid on delivery. So that’s kind of their incentives. In contrast, the JD delivery people were brought in house in 2007 and they have uniforms, they have their own trucks. They’re very nice, they’re not paid by delivery. They’re on staff. I hung out with them for an afternoon in Beijing once. It was a lot of fun. They’re really fun dudes. So that was kind of great. So they’ve been building this network for at least 13 years like most of these companies. The ones I generally keep an eye on are SF Express, JD, Tsai Niao, one or two others that are more operating on a franchise model. But this has always been a very labor-intensive business. That’s how you move things around. You go into these warehouses, it’s just full of people moving boxes. So over many years now, JD has not only been expanding its network to cover literally every city, every neighborhood in China, which they have had for quite some time. That’s why they can guarantee 211, order by 11 tonight, you get it the next morning, order by this morning, you get it by, you know, that thing, because they have their own in-house network and it’s complete, but they’ve also been digitizing. They’ve been making it smarter. They’ve been automated. I mean, I went to their robotics lab in Beijing a couple of years ago, and it was crazy. They were building the robots, the picking robots all in-house. And you could walk around the robotics lab and see what they were doing. And some of these machines are massive. And you go to some of their warehouses. Their most advanced warehouse is in Shanghai. And not every step in the process is too far along in automation, but one of the places it is is everything comes in the back door. the supply chain, all the people they work with deliver their goods. Then they put them into massive storage racks that go seven, eight levels high. And once the things are placed in the appropriate storage thing, then they are pulled from there in an automated fashion. And there’s these robots that go up and pull from level seven, which is like 150 feet above you. It’s crazy. And then, you know, another then it sort of goes down and they start putting into various packages and things like that. And then it gets a little bit more human. But that storage and retrieval aspect is pretty automated. Anyways, they’ve been sort of digitizing and automating and they’ve been doing this for quite some time and I was never really quite sure how far down the road they were. They also have a drone fleet, which is really interesting in the hometown of Richard Leo. This is like one of the quirks, you know, how Jack Ma has basically turned Hanjo. into a top-tier city. You know the top-tier cities of China were always Beijing, Shenzhen, and Shanghai. And Guangzhou was always a bit of a question mark. No one ever really knew what happened to Guangzhou. And then Hangzhou has pretty much been added to this list and it’s just a quirk of history that that’s where Jack Ma built Alibaba. That probably had more to do with it than anything. If he had been from Nanjing we’d say that was a top-tier city now. Anyways Richard Liu was you know Shanghai in a fairly small little village. He came from a very poor background. There’s famous stories of him walking to Shanghai And one of the quirks of his company is because they had such a massive need for customer service reps They based those in his hometown And now today I still think now other companies have since built their customer service reps in his hometown and his small little villages as far as I can tell the number one customer service center for China for digital China anyways. Anyways, that’s also where he based his drone fleet. So I didn’t get to go down there. I was supposed to go with JD down there and ended up getting pulled into something else I couldn’t go. But yeah, so the drone fleet and the customer service ops are all in his hometown a couple hours north of Shanghai. Anyways, quirk of history. So now JD Logistics has filed in Hong Kong and here’s basically I mean, I went through the whole thing is 500 plus pages was honestly, this is like my favorite thing to do in life. I only have two hobbies in life. One is to read company filings and the other is to talk with management and visit companies. So this was, I was about as happy as I get in life was hanging out, drinking my iced coffee and going through all 500 pages. But here’s how they describe themselves. Here’s the sort of picture of what they have built is. They call it a, quote, integrated logistics and fulfillment network. Now that word integrated is important, I’ll go into that. But basically they’re trying to make the contrast between a series of services, like last mile delivery, bulky cargo, cold chain, warehouse management, first mile shipment, things like that. Those are all single services, and companies are very specialized against those. FedEx only does express delivery. Other companies only do bulky furniture delivery, things like that. They’re saying integrated, we do the whole thing, front to end, front to back, end to end. Now I would call that a suite of services, but they use the word integrated. I would call it a suite of bundled services and customized solutions. But anyways, anyways, that’s kind of what they’ve been building and they describe it as six synergistic networks. I don’t really think it’s six networks. I think it’s one network, maybe two or three, but not six. But this is how they break it down. So I’ll just lay it out. I think it’s one physical logistics network with six types of components. Number one would be the warehouse network. Obviously, 800 warehouses across China. Those are in-house operated by the company, the assets physical and intangible, which is software. by them, plus another 1,400 cloud warehouses. This is where other parties own and operate the warehouse, but JD supplies the software, the software for the warehouse management, and it also enables those warehouses to connect with their core network and to use their brand. Second network, Linehall Transportation Network. You know, this is their fleet of 7,500 plus trucks and vehicles and other things, plus 200 plus sorting centers. This is how things actually move. If the warehouses are where things are kept, this is the part that moves things. Well, most of it. They have a third last mile delivery network. This is, you know, getting it to the final destination. 72. 100 plus delivery stations, 190,000 plus delivery people. And then they have some additional people that are, you know, on contract or outsourced as needed. But mostly this group, which is the bulk of their workforce, has really always been in-house, at least for the last 10 years. Parts of it, you know, are a bit contracted, but most of it’s been in-house, which makes it very different than other logistics networks in China. Number four, the bulky item logistics network. You know, when items are very, very heavy, when they’re irregular size, when they’re large sofas, home appliances, things like that, well, they have 86 warehouses and 102 sorting centers for these sort of bulky and or heavy items, which can be, have to be handled, obviously, a bit differently. Cold chain logistics network, again, special requirements. This can be fresh produce. perishable items, pharmaceuticals, which is interesting, where you have to guarantee storage and temperature control throughout the journey. You can’t have a question, oh, I hope this drug didn’t accidentally go above the appropriate temperature at some point. So that’s a lot to do with the guarantee. They have 86 warehouses, I’m sorry, 87 warehouses and 2000 plus vehicles. And then last is the cross border logistics network, which is them extending their domestic network outwards. Obviously Southeast Asia, Greater Asia, big part of that. Although you hear them announcing deals into Europe and other parts of the world fairly regularly. This is mostly inbound stuff. I mean, this is their supply chain, bringing things in to eventually serve Chinese consumers. I mean, they’re not serving a lot of receivers outside of China. yet, although they could. Asia’s a different question. Anyway, so six synergistic or components, really one network more or less. You could describe cold chain and bulky item logistics as a separate network, I suppose. I think it’s sort of one. Anyways, it’s a mostly physical network. It’s a lot closer to building a railroad or building, I don’t know, pipelines than it is to building a digital network, which is something like I don’t know, TikTok, Facebook, where you are connecting people, but these are digital connections to people via their smartphones. Okay, and also it’s operationally incredibly intensive. You’re talking about a couple hundred thousand people, and that is consistent with what you see at Amazon. I mean, Amazon, I believe they have about 800, 900,000 employees at this point. So a labor-intensive physical network that is stunning in size. It covers all of China, which is geographically about the same size as the US. All right, that’s the physical network. And if I was talking to you in 2015, the story would have been about like that. However, as mentioned, they have been digitizing the process. What does that mean? It means taking the various components and moving them into software the same way. If you give someone a smartphone, you’ve digitized that person, a customer, because you can now connect with them. You can interact with them. Once you do that, connectivity becomes possible. So they’re digitizing their network. They are standardizing. the interfaces. This is like you’ve got a railroad, I’ve got a railroad, your tracks are five feet wide, my tracks are four feet wide. Let’s standardize at five feet wide and therefore our tracks can connect. The whole network became more valuable. So they’re digitizing but then they’re standardizing the interfaces between all the components, between warehouses. everywhere between trucks and warehouses, between communications, between one robot talking to another robot, cameras, you know, everything. So digitization, standardization, once you get that in place, you can start to connect everything to everything. Suddenly all the data is flowing, things are a lot more interesting. So within that phase, they have been building out in addition to their mostly physical labor intensive network, they’ve been building out. software and various data technologies and hardware technologies as well like robots and cameras and things like that but the software components that matter are What they call WMS TMS and OMS WMS is the warehouse management system You know That’s their software for everything that happens within Warehouses and how all the warehouses connect and if they bring in someone through the cloud warehouse program They give you this software you start to operate your warehouse that way You’ve standardized everything you can connect to their network. And it gives you, let’s say, transportation management system. That’s TMS. That’s tracking orders. And that’s managing the transportation assets. The trucks. And deciding the routes is actually kind of a massive problem. I mean, let’s say. We have a warehouse management system and we’re dealing with a fast moving consumer goods company. I don’t know, Coca Cola. I got to think of more examples in Coca Cola. They’re going to want their inventory located in all the optimal locations such that they’re closest to the consumer because that means it’ll get to them faster. But also… You also want to keep a lot of that within the central warehouses because it tends to be cheaper. So there’s a lot of planning for, hey, this is what we think the demand is going to be in 72 hours. Therefore, we need to reallocate your Coca-Cola inventory across these 187 sites. You’re kind of always optimizing that scenario to balance speed versus cost versus everything else. You know, that’s warehouse management in a data-driven system. Well, transportation management is a more complicated version of that because we need to be routing goods between locations. So do we put this package on that truck and then it ends up going to that warehouse and then to that delivery station and then to eventually the customer? Or is there rain in that part of town and we don’t have enough slack capacity there? We want to route it this way. You’re always optimizing the routes of all your vehicles to sort of maximize utilization, but also you maybe want speed sometimes. It’s a very complicated equation to sort of, and these things obviously depend on each other. Where you keep things depends on what routes you can use. So, they have a whole software system for deciding optimized routes, for real time tracking and tracing of goods and vehicles, that’s the transportation management system, TMS. Last one, the order management system, OMS. You know, you place an order. I wanna buy, I don’t know, 25 items from JD, let’s say. Okay, is that gonna be one order where they wait until all the items are at one location and then it’s consolidated and shipped to me? Or is that seven or 10 different orders that all take different routes and then they are consolidated at the point closest to me? I mean, how you split and merge orders. Maybe we wanna combine my order with someone else who ordered something similar. and we’ll put those all in the same box and ship them from here to there. So splitting, merging orders that come in from various channels, modifying these orders in route in a dynamic system, that’s really complicated too. So I mean, this is really cutting edge AI software and data technology going on. And that’s, you know, that’s, let’s say the software component, so I’ve given you the physical component of the network. This is the software and data technology component. But then, unlike a lot of software companies, they have a hardware component. They’re building the robots. They’re building the forklifts. They’re building the pickers. They’re putting cameras everywhere that have AI and can understand what they’re saying. They’re trying to automate the trucks. And we could have robots not just doing individual tasks, but working together to accomplish tasks. I mean, this is more like organized. You ever watch… Well, you know I like to watch a lot of animal documentaries. Like you ever watch ants build anything? How they all work in a coordinated fashion and they all hang on each other and climb up each other and then they build this bridge and that bridge. I mean, this is in theory, all these automated robots, trucks, cameras, pickers, whatever, can work in sort of a swarm. So there’s all this sort of AI branch in swarm intelligence which is really kind of freaky. Anyway, so you’ve got. Three major buckets of software, you’ve got all this hardware that’s being built into it. It’s just, it’s crazy. Now the hardware they mention is mostly related to automated inventory handling. So storage systems, robot picking, packaging, to some degree unmanned delivery, although that’s I think still something they’re just sort of prototyping. But the three they mentioned, AMR, AGV. and self-driving vehicles. AMR is autonomous mobile robots. AGV is automated guided vehicles and then sorting robots and self-driving vehicles. So they’re all over the place. And this is a massive expenditure. It takes decades to build something like this. And there’s very few companies that have the financial power to do it. That’s why Alibaba, JD, maybe Amazon. There’s only a handful of companies on the planet that could do something on this magnitude. And that’s why I always thought this was so interesting and I wanted to get a look at the whole system. So that’s basically an overview of what they’ve been building. Okay, so what does that mean in practice? I mean, you’re building this sort of unique, almost unique capability. What do you do with it? And I think they’re doing three things. The first thing is, you know, It’s a very unique capability that JD, the parent, the e-commerce company is using as a very unique and powerful capability against competitors. I mean, this is the kind of system that they can guarantee delivery to any city within hours. They’re getting smarter and smarter. I mean, it is just, you know, this is similar to… Amazon building Amazon Web Services. It started out the same way. It was their in-house capability in IT and web services. It got very, very advanced. And it was, you know, it’s not just the money. People think it’s about the money. When I look at assets like this, I think about my standard is money, time, and difficulty. If I’m a competitor. This is a barrier to entry to me because I have to replicate this. So if you’re doing, let’s say, evaluation, you could look at reproduction value. What would it take for me to reproduce this asset and be a competitor? And sometimes it’s just about money. Okay, I’d have to spend a ton of money to catch up. They’re spending, they’ve spent over the last five to 10 years so much money. I’d have to replicate that, plus I’d have to match their spending this year. But then there’s often a difficulty aspect. Look, maybe it’s not about the money, maybe that’s part of it, but how difficult is it to do this? I can’t replicate Pixar. I can’t replicate, I don’t know, YouTube. Because it’s not just about the money, it’s the difficulty of the activity. It’s very hard, and often it’s very unclear what it takes to make like a hit movie, or a hit song, or a drug. So it could be money, it could be difficulty. And another aspect is sometimes, like it doesn’t matter how much money you spend, there’s no way to reproduce this asset quickly. It just takes time. You can’t reproduce the Coca-Cola brand just by spending money. Because it took them decades of spending to build a legacy brand that is deeply in the minds of, effectively, the whole human race. Doesn’t matter how much you spend today, it takes decades to match that no matter what. As Warren Buffett says, you can’t make a baby in one month by getting nine girls pregnant. It just takes time. And that’s actually a very powerful barrier to entry, is time. Now when I look at what JD is doing, it’s at least a cash issue. That would be very hard to replicate. There’s very few companies that can spend this much year after year, and they’ve been doing this for a long time. So yeah, there’s a big hurdle in terms of money. There’s also a big hurdle in terms of difficulty. What they’re doing, nobody has really done before. So even if you try and catch them, and plus they’re still moving ahead. This is one of the questions. people are talking about with regards to China developing its own semiconductors. And they look at the idea of, well, this is how much TSM on the manufacturing side, they look at TSMC out of Taiwan and they look at Samsung out of Seoul. And the question is, you know, how much would they have to spend to match that and have that capability? Yeah. but that assumes those companies are standing still. As you’re trying to catch them, they’re still racing forward. You could be moving very fast down the path to catch them, but the distance between you and them may not be closing. And I think that’s kind of what’s happening in manufacturing production of semiconductors. You could see that as well. You could spend a lot of money and maybe even do pretty quick, but this company is still moving fast down the field. You may not catch them. As for timing, Yeah, there’s probably a timing component to this. You could maybe just buy a bunch of warehouses. That’s a money issue. But you’re training a lot of people. It does take time to build a workforce of 140,000, 150,000 people, a culture. Those things often can’t be done quickly no matter how much money you throw at it. So when I look at barriers to entry, this looks like the mother of all barriers to entry to me, which is one of the reasons I like. JD, I like Alibaba, I like Amazon, I like Copang, I like Shopee, because I like the digital aspect. I like that it’s an attractive digital business, a digital platform, but it also has a physical component that creates a really massive and in many cases insurmountable barrier to entry. I like that. TikTok doesn’t have that. So JD is… Now this is a unique capability for them that they can use. It’s a pretty great advantage against their competitors. JD looks like it’s about 50% of JD logistics revenue right now. That’s been falling from 60% I believe more or less last year, 70% the year before that. So it’s trending down, but it’s still the major source of their revenue. Okay, second thing this is, it’s a service business. That’s what’s really going public is it’s a service business. They are doing what Amazon Web Services. did they built an in-house capability, they’ve externalized it to the market and they’re selling it to everybody as a service. One that gets them revenue, which is nice, it becomes a business, it keeps them on the frontier of competition because you’re facing competitors. That’s very helpful for the innovation of the capability to have competition. And third, it gets you increasing economies of scale. You know, they have JD as a major customer. But if they grow that dramatically beyond JD, they’re increasing their economies of scale versus other e-commerce companies that have in-house logistics capability. So it’s a pretty standard move. We’ve been seeing this from a lot of companies. This is how AWS got launched. They’re doing IT and web hosting and all sorts of services, cloud services. JD Logistics is doing logistics services. I don’t know why AWS hasn’t… gone public in its own right. I mean, it could be an unbelievable IPO if AWS ever goes public. Okay, I’ll talk about the service business next, but you know, it’s integrated services. That’s how they position themselves against their competitors. Integrated versus single service logistics. And third, and which is the point of this podcast, is this capability, this network, may well become its own ecosystem. And that’s kind of the big question, because if you’re gonna value this company, if you value it as a service businesses, that’s one level. If it becomes an ecosystem, that it could be dramatically bigger. And anyone trying to price this thing is gonna have to grapple with that question. Can JD Logistics become an ecosystem? And I’ll talk about what that means ecosystem, but generally I’m talking about things like Apple, Google, Tencent, Alibaba, maybe Epic Games, handful of companies. have gotten to that level. And let me go back to services business quickly and then I’ll get into this question of ecosystems. Now JD Logistics as a service business, it’s kind of an interesting question. The language they use is integrated logistics. Okay. I think it’s a suite of logistics services. They have a full suite of these. They can offer customized solutions. They can offer complete solutions, whether it’s freight shipping, furniture delivery. Anyways, I’ll use the word integrated because that’s what they use. And it’s important when you listen to management to talk about who they’re competing against and how they see themselves in the market. And the contrast they keep making when I read this document is they talk about how they’re different than single service logistics. They interestingly don’t mention Alibaba, I think, by name ever. I looked. I never see. They refer to like one or two other integrated logistics services companies, which is really Alibaba. I don’t think they actually mention them by name in the document at all. I haven’t checked explicitly, but I think that’s the case. Okay, we’ll say integrated logistics as a suite of services that can provide a complete and often customized solution for a corporate customer. So this is a B2B business. You could call this a service bundle, you could call it a complete solution. We’ll just keep using integrated logistics as the language. Okay, how big of a business is that? Is this a small sub-case within logistics? Now the numbers they give, which is an IPO filing, so anytime an IPO filing starts talking about, oh here’s our total addressable market, yeah, whatever. I mean it’s always huge, you know the growth rate is always massive, and you know it’s always super optimistic. But well here’s their numbers, and they always hire a consulting firm that does this, and you know, whatever. They say that logistics services within China, 14 trillion renminbi, so 2 to 3 billion US dollars in that range. However, that includes first party logistics, which is you have a company and you do your own in-house stuff. Let’s pull that out. And so really their target market is outsourced logistics or third party logistics. And they say that’s about half of that. So 7 trillion renminbi. you know, just about $1 billion, I’m sorry, $1 trillion. And the growth rate, seven to 8% is what they cite, which is faster than the total market, which was a couple points lower. Okay, fine. It’s really big. The growth rate is not astronomical. Let’s say solid and steady, something like that. Okay, but, you know. I don’t think those numbers help too much to tell you the truth. I mean, really the question is what is the total addressable market for integrated logistics solutions? Is it a subset of the numbers I just gave you? Or is this like so many digital products and services when you create something new, you create new markets for it? you bring new customers into this that were never part of this before. I mean, when people used to argue about the valuation of Uber, like, you know, the NYU professor who does valuation famously got the valuation of Uber wrong because he viewed it as a subset of the taxi market. And venture capitalists responded to that and said, you know, you got to think this is going to increase the market dramatically. And, you know, to his credit, he basically came out and said, yeah, I was wrong. So I don’t really think those numbers are terribly helpful. I think we’re in blue ocean strategy area here. We are in something new. We’re gonna see changes in customer behavior. We’re gonna see changes in usage. You know, this is, it’s something new what they’re doing. So I wouldn’t do a top-down market sizing for this. I would do more of a bottom-up, look at various companies, look at various use cases, and you know, somewhere between those two. I don’t know. So single service logistics companies, they do express delivery, they do freight, they do shipping across the ocean, they do air freight. Those services tend to be industry agnostic. Pretty much any business can use FedEx. The idea with an integrated solution is these are going to be much more like industry specific solutions where you’re offering an entire capability for a CPG company or for a fresh produce company or a supermarket. It could be a standardized solution or it could be a customized solution. The more digital they get, the more they’re going to be able to do that. You know, the same way Amazon can customize what you see on their store, as opposed to walking into a supermarket where everything is the same for everyone, we should expect to see a digitized logistics network able to personalize what they’re doing company by company. Maybe not to every individual company, but to a significant degree. So that’s really interesting. JDL, JD Logistics. They kind of argue that the advantages of their integrated approach over single service logistics competitors is, number one, a company doesn’t have to engage multiple companies. That’s not an insignificant thing. If you’re a retailer or a supermarket or a complicated operation, you’ve probably got five or six contracts going with the people that deliver your supplies to your warehouse, the people that do the rapid delivery, the people that do the slow delivery, the stuff that you have to move in cargo. ships across the ocean. You’ve probably got a whole bunch of different contracts and they probably don’t connect or coordinate with each other terribly well. Well, an integrated logistics company can offer the full solution. That’s interesting, especially if you are, you know, if you’ve got a complicated operation, you could see how that would be compelling. And when you do it that way, you get sort of… a greater ability to start to build technology on top of it. It’s very hard for express delivery companies like FedEx or DHL to invest in technology that isn’t just about their little piece of the operation. And a lot of these companies are just labor intensive. They don’t invest in this stuff at all. Your typical local delivery company is just a bunch of people on scooters and a bunch of warehouses where people are just Unloading stuff and loading stuff all the time when you’re doing sort of pieces of the whole Solution, it’s very hard to spend a lot of money doing tech Well, if you have an integrated solution you can do that So, you know JDL is doing a lot of advanced tech a lot of data systems That could be a pretty impressive thing over time. You know logistics has mostly been manual especially in China industry specific knowledge. If you’re creating a full logistics and fulfillment solution end to end for a retailer, that is going to be very different than for a manufacturing company, or for a supermarket, or for a CPG company, or for a pharmacy moving pharmaceuticals. You can see that those industries are going to be very different and you’re going to have really some different And then of course, once you build this thing and you’ve got the whole system working, you can start to add other services on top of that. Sales planning, forecast, demand projection, SKU, inventory management, production planning. I mean, you know, an integrated solution has a much more powerful ability to add services on top. There’s not that much that a company like FedEx can add on top of what they’re doing. You can add some things, but there’s a limit. Okay, and basically the industries they cite within this is fresh produce, fast-moving consumer goods, apparel, automotive, home furniture and appliances, and then 3C sort of electronics, computers and things like that. And they had some outstanding charts for this. These are some of the coolest charts I’ve ever seen in an IPO filing. They have mapped out their offering for FMCG. for apparel and for home furniture. They did some others, but I put those online and I’m putting them in the show notes for this. Those are some really compelling maps for how this works for an industry specific solution. I don’t know what banker, whoever did this, probably wasn’t the banker, it was probably a manager, probably the head of those divisions, but those were, you know, take a look at those. It’s really worth your time. Okay, so you know, that’s kind of their advantages. Fine, all business. B2B, B2C comes down to pitching it to a customer and seeing if they say yes versus someone else. What is JDL gonna pitch to a customer? I think it’s three things. Operating efficiencies, a better customer service, better forecasting and intelligent decision making. I think those are their three big so what’s. Hey, we’re cheaper than everybody else. We can give you far greater operating efficiencies. We’re gonna remove some redundant layers. We’re gonna make you much more agile in your supply chain. You’re gonna have improved inventory turnover. You’re gonna have a better optimization of your inventory management. That’s all gonna show up in your bottom line, bam. And a customer should be able to see that. Second, better customer service. Delivery speed, we can do that. Delivery accuracy is gonna go up because the whole thing’s digital. And in sectors like apparel, where returns are kind of a big deal, people return clothing a lot, handling those returns can be a real nightmare. So we’re going to make that better and more effective. Okay, that’s something else that’s a pretty good so what to a customer. And the third one, better forecasting and intelligent decision making. When you can see the whole system through a dashboard at your headquarters and see all your items moving and all the data in one picture, suddenly when you make decisions, you can see the results in. days, hours, maybe minutes. That makes you a much smarter management team when you can get data-driven results for all of your decisions. It’s pretty powerful. Anyways, I think that’s all okay. I’m impressed. If they can deliver on those three bottom lines to a customer, that could really matter. But I’m punting the question on the total addressable market. I think we’re too early in the game to really, I think the most you can do is sort of, map it out at a high level. It could be A, it could be B, it could be C, but beyond that we don’t really know. And that brings us finally to the so what of this podcast, the main question, can this platform become an ecosystem? I’ve heard JD and Tsai Niao saying that is what their goal is, explicitly for years. This has been kind of a staple of some of my talks. The name of it has changed and kind of evolved. For a while it was being called Smart IoT Logistics Network or a Smart IoT Logistics Platform. But basically the idea is, look, we’ve got the whole system. It’s all been digitized. It’s all connected. It’s covering every single street in China. Rather than keeping that in-house, we are going to open up the APIs. We’re going to open up the data and it’s going to start to look more like the operating system on your smartphone where anyone can write apps for this thing. You know, the difference between the open system and the closed system was when Steve Jobs launched the iPhone. It was just Apple apps that they had built, mapping some basic functions. But originally he didn’t wanna open it up to other developers because he thought it would ruin the experience. But then eventually people convinced him that he should, he opened it up, and that’s what got us the App Store, right? And the iPhone, the smartphone, Android Voins, that is an ecosystem. It is not just one company with a platform business model. It is a, I hate to use the word see, it is a huge number of partners. developers, users who are all building this thing together and working together to create and offer something that no single company could ever do on their own. That’s kind of how I view ecosystems when it moves up to that next level. Like there’s a basic type of business service product, you move it up to a more complicated thing, which is a platform business model, and then you can move it up to another level where it is a large number of partners working together. I often consider platform business models as sort of a simple case of an ecosystem. So you open this thing up, it becomes an ecosystem that everyone’s building on. And then the next step happens, which is they make it smart and automated, right? Suddenly the robots are doing things themselves. Suddenly the AI in the cloud that’s connected to all of these systems through 5G is able to do this stuff themselves. So there’s two… more steps that could happen. It could move from the service business we see today to something that is smart and automated and something that is an operating system or ecosystem. Both of those ideas are really cool and I’m curious how far down those paths we’re going to go. And I’ve been thinking a lot about AT&T as a model. AT&T started out as a physical network. That’s what it was like train It’s a physical network. You lay the wires. But unlike the networks that had come before it, this was a physical network that carried electronic information, voice. And therefore its network effect was not like what we saw with railroads and planes and things. Every single user could connect to every other user. And that was kind of, it’s interesting. You can read, there’s old sort of press releases and statements by the CEO of AT&T back in the 1930s and 1940s. And he was really talking about network effects, that there’s something very, very powerful going on with network effects based on digital connections as opposed to physical connections. And then from that, obviously what happened is they started building on top of this, let’s say hybrid network. It’s physical, but it’s carrying information. They started building out voice information is what started. That had a network effect, but then they started carrying data, not just voice. And so suddenly apps started to be created. Suddenly things, SMS, text, other types of things could travel as long as they were digital information. Phone books got created, which were kind of interesting. The phone book is basically like a very crude version of a search engine. And the white pages, okay that’s a search engine, look who you’re trying to reach on the network. The yellow pages turned out to be a profitable platform business model that sat on top. It’s almost like an early version of a Craigslist or something, you know, you list things and you make advertising money and all that. Yellow pages was a really awesome business for a long, long time. And then of course the phone lines eventually gave rise to the internet. I mean the internet came out of phone lines. you know, eventually moved to cable and other things, but that’s what did it. Okay, so we see a transition from a purely physical network to an information-based ecosystem that was the foundation for so many other things, you know, almost impossible to predict. But it all began as phone lines being laid in the ground, telephone poles, lines going under the ground or in Bangkok hanging over the streets. So what could JD Logistics turn into? It’s a mostly physical network today, but it’s becoming smart and automated and their intention is to open it up. I don’t know. Now in podcast 58. I talked about some of the aspects of ecosystem management, ecosystem design, and I described this as sort of 3D chess. Building a regular business is checkers and building a platform business is chess. This is 3D chess. There’s only a couple companies that really do this. The thinking on this is still evolving. I’ve cited a couple professors who are very good at this. Cambridge professor, Peter Williamson, who’s kind of an old buddy. He wrote a book called Ecosystem Edge, which talks about why ecosystems can do things that other entities, organizations can’t do, which is a very good book, very well thought out. I talked about that in podcast 58. Link is in the show notes. But the idea was ecosystems are very inefficient. It’s lots of companies working together, trying to coordinate their activity. It’s inefficient. cost more than say a stand-alone firm which is designed to be efficient. But what ecosystems are very, very good at is handling uncertainty and technology disruption. When the world changes dramatically like the introduction of the smartphone or the PC, it is very hard for one company to figure out what to do. Things are changing too fast. And almost for sure when you have a major technological disruption, no one company has the resources to build what comes next. They all have to work together. When the PC was launched, it was because Intel and Microsoft and other companies all work together in an ecosystem to create the next thing. Ecosystems are adaptive. They can respond to the unknown very quickly. They have tremendous resources, particularly in R and D. and they’re able to sort of navigate their way across major tech disruptions. So they’re very good at that. The price you pay for that, they’re not terribly efficient compared to single firms. So usually when you see a major disruption, you see an ecosystem emerge. That figures things out. And then after that, we start to see more traditional firms doing parts of the new ecosystem, or parts of the new design. So the standard example of this is the iPhone. The iPhone gets designed. It gets released. Technology paradigm shift. Nobody knows, well not nobody, a lot of people don’t know what to do. Microsoft basically just watched it and did nothing and their smartphones died away. RIM tried to engage BlackBerry. They got it wrong, they died away. The company that managed it well was Google, which launched Android. And what was Android? Android was an ecosystem strategy. That’s what they did. They said, we’re gonna create this operating system. They already owned something called the Android. They had bought it years before. And they launched the Open Handset Alliance, which basically means they went out to the manufacturers, HTC, Sony, Samsung, T-Mobile, Sprint, Qualcomm, chip makers, mobile carriers, smartphone makers. And they said, let’s all work together as a partnership on this. Now Nokia tried the same thing and it didn’t work. But. Android got it to work. It’s hard to get everyone on board because you have to kind of figure out all the incentives. Everyone sees the benefit of the ecosystem, but at the same time, they also have their own interests. So you have to kind of convince everyone that, look, you’re gonna put your own interests secondary to the group, but the overall benefit to everyone is so great, you’ll still do better. It’s a hard pitch to make. They basically got everyone to go along, which was impressive. Then they took their tech, their operating system, Android, they made it open source and they made it free. So anyone can use it. So developers started to build on it. Xiaomi and Kindle both took it and forked it. Kindle died away, but Xiaomi is still using a fork of Android as their operating system. Now, if you want to use the licensed version, that’s for the app store. But, you know, the basic version is still free and pretty much open source. And then they supported a huge developer ecosystem. They got everyone to start writing apps for this thing. They had the $10 million Android challenge. But that’s all sort of how they negotiated this play and launched something new, which is the smartphone system. And it worked. And most people didn’t make the transition. The other company that survived this transition was the iPhone and iOS. And how did they do that? Well, Steve Jobs. So my little working theory is if you’re facing a major technological leap, you either need to do an ecosystem strategy with partners or you got to have a genius. Both of those work. The first one seems much more reliable, but Steve Jobs pulled it off. So anyways, but when you look at what JDL, I mean, what was Android facing? They were facing a major tech disruption. with to a large degree unpredictable evolution. It was very hard to see what’s coming next. They adopted an ecosystem with partnership strategy. They pulled it off. Doesn’t that kind of sound like JD logistics, what they’re doing? It’s very hard to see down the road on this one. So what I’ve been watching them for is, are they building out their partner network? And are they building an ecosystem based on partners? or are they gonna try and do the Steve Jobs run? Now, ironically, the other company with a similar situation right now is Huawei. They are trying to build out a new smartphone operating system and they’re trying to recruit developers and partners and things like that. They’ve made their operating system, HarmonyOS, open source, so anyone can use it. I’m actually talking to the… the head of, I think the head of Huawei consumer business in a couple of days. We’ve been setting up an interview. So I’ll ask about that stuff. But anyways, that’s kind of what I’m looking for when I look at this company is, is can they pull off the ecosystem? Can they go far beyond? This is just a service business. And it’s hard to know. So I’m kind of keeping my eye on, are they putting together partnerships? Are they operating like a company executing an ecosystem strategy or not? So far, I would say mostly not. The indication that I saw in their filing was their open warehouse program. where they were offering their software for warehouse management to the 1,400 non-owned warehouses. And that was enabling them to sort of take that, join their connected network and other things. Okay, so that’s a movement in that direction. I think the bigger move will be is if they open up the APIs and the data to developers and business partners, and everyone starts to build this thing. We’ll see. But, you know, looking at sort of evaluation for this company, you know, this is right in my strike zone because this is mostly a strategy question as far as I can tell. We can look at their service business, we can take that apart, but depending on the strategy aspect of the ecosystem, this could really swing the number dramatically. So anyways, I’m going to keep coming at it. I’ve only been looking at the numbers for about a week or so, so I’m going to keep coming at this company. You’ll probably hear me talk about JD Logistics a lot. I think it’s really kind of a big deal. As for me, I’m having, this has been one of my best weeks ever. I don’t, not for any particular major reason. It’s just, things are just working well. Life has been great. I spent the afternoon with a group here in Bangkok, who just, they did a great presentation on Maytwan. talking about how to think about it. I like when they use my own charts. It always makes me happy. But it’s just a lot of fun, and just being down in town, Bangkok, on a Sunday afternoon, walking around the streets, everybody’s out. It’s just a really pleasant place to be. It’s a really nice place. And then yesterday I did a talk with the London School of Economics, just sitting here, a lot of students from China, which was interesting. I mean, they were in London, but it was… looking at who was sort of in on the call in the audience. It sure looked like a lot of folks from China. That’s kind of interesting. So it’s just been a great week, and I’m enjoying myself. I’m finishing up a class I’m teaching at SAS in a couple of days. So that’s one of the problems with teaching. I really like teaching, but when you teach at universities and such and business schools, it locks you down, which this year has not been that much of a problem. But generally that’s my biggest problem because so much of this is just flying around and suddenly you’re locked into a city usually for let’s say four to five weeks. That kind of throws a wrench in the normal lifestyle. Anyways, that class should be done in the next couple days so that’ll free me up to bounce around a little bit. I think I’m going to head down to the beach and see things there. If I can get a vaccine shot, hopefully I can get on a plane soon. I’m hoping that we’re almost done. Like I really want to get rolling again. I am chomping at the bit to get on a plane. We’ll see. I keep calling, I’ve been emailing the hospitals here when are the vaccines going to be available and I saw a chart floating around of like all the countries in the world that haven’t started vaccinations yet. It’s like half of Africa, maybe four or five countries in Eastern Europe and Thailand. Like it’s just everyone else has been doing this for weeks if not a month plus at this point Hasn’t really rolled out here yet. So, um, oh well, it’s not a very inspiring Graphic but anyways, that’s it for me. I hope everyone is doing well I hope you’re all enjoying yourselves and I hope these are Helpful valuable to you. I appreciate you listening in and have a great week and I will talk to you next week Bye. Bye