JD vs. Alibaba: How Retailers and Marketplace Platforms Compete and Evolve in China (Tech Strategy – Podcast 18)

In this class, I talk about how online retailers like JD and marketplace platforms like Alibaba compete on different dimensions.

You can listen here or at iTunes, Google Podcasts and Himalaya.

Alibaba and marketplace platforms compete on:

  • Cost and / or difficulty of entry – including the chicken-and-egg problem and the cost of the logistics network.
  • Competitive advantages – including network effects (main one) and economies of scale in logistics, marketing and IT.

Early JD and online retailers compete on:

  • Cost and / or difficulty of entry – including the cost of the logistics network.
  • Competitive advantages – including supply cost advantages and economies of scale in logistics (mostly), marketing and IT
This is part of Learning Goals: Level 2, with a focus on:
  • #5 the Basics of JD

Concepts for this class:

  • Digital-Physical Hybrids
  • Competitive Advantage: Economies of Scale
  • Competitive Advantage: Network Effects
  • Digital Platforms: Marketplaces
  • Cost and Difficulty of Entry
  • Linked Businesses

Companies for this class:

  • JD
  • Alibaba


I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

Note: This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.

——transcription below

Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy. And the question for today is Alibaba versus JD, Jingdong. And what are the different competitive advantages of online retailers and marketplace platforms? But first, if you haven’t subscribed, I would really appreciate it if you would do so. You can go over to jefftausen.com and there’s a subscription there with a 30 day free trial. You can also go to iTunes and just click the subscribe button and get the automatic downloads. And I would greatly appreciate that. So it is Sunday night. I am still in Bangkok after three plus weeks because nobody’s flying anywhere in Asia right now due to the coronavirus situation. I’m not really grounded because people are flying. You can fly around. It’s not like you’re not allowed to like some people in China, but basically nobody’s doing any meetings and stuff like that. So things are kind of close to shut down quiet right now and I’m getting a little stir crazy. But I thought for today, this week’s class, we’d get into kind of one of the bigger subjects. This one you hear all the time. It’s Jing Dong, the number two e-commerce player in China and Alibaba, number one. How do they compete? Who’s going to win? People talk about that all the time. You hear this all the time. People say, well, Alibaba is an asset light. business model and Jingdong is sort of asset heavy they build a lot of warehouses and stuff like that and technically that’s true but I don’t think it really matters and it’s not really the way to think about it and people kind of debate these things all the time I’m going to give you sort of my explanation for how this works and let me lay out a bit of how I’m going to structure this today I’m going to basically break this into pieces and argue that retailers online retailers or physical retailers people that buy and sell goods uh… compete very differently than a marketplace platform alibaba is a digital marketplace platform uh… jing dong is a bit of a mix but the dynamics of how you compete on those differing business models is actually different now from the consumer perspective the person buying it doesn’t always seem that way because you’re just buying stuff online or whatever but they’re actually different business models and they compete along different dynamics. So I’m gonna talk first about how retailers compete and then also sort of how they evolve as they go more digital. And I basically lay that in four phases and I’ll show you at what point they start looking a lot more like Alibaba. And Alibaba competes on different dynamics. And you can kind of see that they have different strengths and go from there and we can see where it’s going. So I’m gonna lay it out that way, but in terms of the… course, for those of you who are subscribers, this is under learning goal number five. Learning goal number five of the ten learning goals I gave you for sort of level two. We’re going to do level one, three, four, and five. But right now we’re doing ten learning goals for level two. This is number five, which is listed as the basics of JD, the basics of Jingdong. And I’m going to talk about competitive strengths, competitive advantages. for retailers versus marketplaces, which are different. What we call the cost and difficulty of entry, which is something people often confuse with a competitive advantage, but it’s actually different. So that’s concept number two to be aware of. And then the third one is what we’ll call digital physical hybrids, which is the third concept. So that’ll be it. So we’ll talk about JD, basics of JD, and then three significant concepts that I think people get mixed together when they look at these companies. Okay. So let’s talk about Jingdong. Now the interesting thing about Jingdong is they were founded in, I believe 2001, I may have that off by a year, 2000, 2001, as a physical retailer, right? They were stores, they were not an online company. They were basically started in consumer electronics, some DVDs, some basic equipment in Beijing up in Zhongguancun, which is near Peking University. And it was just one of these small little stalls, tiny stores within a big sea of stores, all basically selling the same thing. And they started out selling basically quality goods. That was their differentiating factor, and it is still their differentiating factor. You have to imagine back in 2000, 1999, you go to any store, particularly like an electronics market in China, I mean, everything’s fake. The DVDs are fake, the software is fake. Getting real stuff was very difficult. And even if you bought it, you didn’t really trust it. You had to negotiate the price, you had to haggle, you had to return things, which was not possible, against this sort of sea of lack of trust, which was really common in a lot of retail in China in the 1990s. Outcomes JD, and they basically come with a very different pitch, which is, we only sell quality goods you can trust. We don’t negotiate on price. and you can do returns, which was a radical approach. So people come up and they say, oh, you’re too expensive, too expensive. Which relative to everyone else selling fake DVDs, fake DVD players, fake stereos, all that, they were. But you could trust them. And so they started to get a loyal consumer base. And if you ask people today, 20 years later, if you’re gonna buy a real Armani, I don’t know what Armani sells, if you’re gonna buy a real Prada bag, if you’re gonna buy a real Sony PlayStation, where you buy it, People will probably say JD and you say why and they say because you can trust those are real. That is still their biggest pitch is we are the brand you can always trust. We never carry fake goods. Everything is real. You can trust us. It was a powerful pitch back then. It’s still a pretty powerful pitch. Okay. So that was kind of their initial thing. They opened some stores. I think they got up to 15 stores. I may have that off a little bit. And then SARS happens. Not unlike today. There was a big. virus that went around everyone had to stay home and because nobody could come into the stores They tried to sell online for the very first time because their staff were there and this is let’s try and sell stuff online They put up a web page and they started trying to sell their stuff there And that’s how gene don’t went into the e-commerce business was during the SARS epidemic Then they sort of that went by, they opened the stores again, and they basically decided this is a much better business, and they closed all their physical stores, which was a pretty bold move. And the chairman, Richard Lille, he is very bold. He makes these big decisions like that. He’s a pretty gutsy guy. So they closed all their stores and went all in on e-commerce. He did a similar move when they started building their own logistics years later and hiring their own staff. I’ll talk about that real quickly, but they basically were a direct retailer. They buy goods, they put them in the inventory, which started as their stores and then it became their warehouses and then they sell them. And they don’t carry fake goods. They care about trust of the consumer and that’s still what they will talk about today. Like you know, what is your business? Who is it about? And they say, we’re all about the consumer, which is actually the same thing Amazon says. That is not what Alibaba says. Remember the difference between a digital platform, really any platform business model and a traditional retailer or product company is the number of user groups you serve. Alibaba has two user groups, well, a lot more, but they have merchants and brands and then they have consumers. And they have to sort of serve both of them, balance their interests and enable them to interact. That’s what they’re doing. JD doesn’t have that problem in their retail business. They are all about the consumers and they’ll get them whatever they think is best for them. So they’re a one user group company, very direct. Now, how that played out over time is when you’re an online retailer, you don’t really have that much interaction with your consumers. They go on your webpage. They may call you if they have a problem and JD has a ton of customer service representatives. which are in the hometown of Mr. Leo, that’s where they built their call centers. And the other big interaction they have with consumers is the delivery people. And they got a lot of complaints early on that they were contracting their delivery to these express delivery companies. These people zoom on up in their scooters, they throw it on the sidewalk, they move on quickly. Scooters are dumpy, not great behavior. So they decided this was impacting the consumer experience too much. And they got rid of all the Contracted delivery people they started hiring their own people and all their people were employees and they weren’t paid per package delivered They were based on salary so they behaved very well and they dress well up and they’ve changed that recently But that was kind of the idea Okay So they start out this way and they start out doing consumer electronics some consumers Computer stuff over time. They start to expand their categories books home appliances And I mean, here’s kind of the first question. How do you compete as an online retailer, not a marketplace, a retailer, where you’re buying and selling the goods yourself, they’re on your inventory, they’re your sales, your revenue shows the sales of goods. How do you compete with a traditional retailer? You know, a Suning or a Guolme store or something like that. Well, the factors they would compete on are price. People like low price stuff, especially if you’re online, because one of the big benefits going online is you get rid of the stores, your cost structure is lower. Quality of products, breadth of products, and then usually what we call sort of convenience, which is usually a matter of timely and reliable delivery. You know, I can order today and I’m confident I’m gonna get it in two days, I’m not gonna have to wait a week, I don’t know. So that’s all sort of a reliability convenience factor, but it’s usually those three factors. Okay. So in the early days, they’re a direct B2C online retailer. Their big factors are we’re lower price than people offline, which is true. We have a bigger selection than companies that are offline, which is true. If you go into any typical store, they can only carry what they have in the back. You know, maybe 500, 1,000, 2,000 SKUs. But if you’re an online retail, you can have 50,000, 100,000. So usually what you’re offering is low price, breadth of selection, bigger selection, that tends to be fairly powerful against offline competitors. Okay. So that would be sort of traditional offline behavior. Now, one of the problems is, then you get another online retailer show up, a digital competitor like you, who’s doing your same business model. How do you compete with them? Well, here’s the problem. It actually turns out it’s pretty easy to match someone’s selection. If there’s an online. e-commerce site that offers a thousand, two thousand items, that’s your breadth of selection factor. It’s not that hard for a couple people with a laptop to offer the same breadth of selection. And it’s actually not that hard to get pretty close to the price. So you have a very powerful business model when you’re competing against offline retailers because you don’t have the stores, you don’t have the staff, although you actually have to hire a huge amount of marketing staff and you have to hire a ton of customer service So your actual staff number is actually not always lower, but you don’t have the real estate. So, but if you’re competing against a digital person, it’s actually pretty easy to enter. And this is an important distinction, which is, this is sort of the one of the factors, concepts for today is, there are factors that help you win competitive advantages over the longterm, like I can outspend you on marketing. There’s other factors that are just ease of entry, where, okay, you have 50 stores. You don’t, maybe you don’t have an advantage on, in terms of ability to outspend me on marketing, that would be a competitive advantage, but you have 50 stores and it’s actually kind of hard for me to build 50 stores. So the ease of entry, the cost or difficulty of entry is actually high. It’s hard to jump into the business, but once I’m in it, I can compete, as opposed to. online e-commerce, it’s actually pretty easy to jump in. And then the factors that help you win or lose are about the ongoing competitive factors, not the ease or difficulty of entry. Anyways, when you’re doing the digital game, the online commerce game, it really doesn’t tend to be about price as much, and it doesn’t tend to be about breadth of selection. Those are pretty easy to replicate. What you end up competing on very quickly is the user experience. That’s kind of what Amazon has. That’s what JD has is, is it more fun to use your site? Is it more enjoyable? Is it more convenient? Is it just something that sucks you in and you read the reviews and you watch the videos and you like to shop around? That user experience factor is the big deal when it’s one e-commerce site competing with another. Now, as you get bigger, you tend to get more data. and you tend to get more active users. Who’s ever bigger has those two things. Those things usually if you’re a well-run company help you craft a better experience. So I’ve sort of said these marketplace models have three main intangible assets, number of users, amount of participation and data. If you have more of those than a smaller online e-commerce site, you can usually craft a better user experience and you have to keep improving it all the time. You can personalize the page, you can personalize how it looks, you can curate the items for each individual person, you can tailor your marketing to each individual person. You can do a lot of things, the more users participation and data you have, but two e-commerce sites are usually competing on the basis of user experience. That’s kind of how that game works. Okay, so I call all of this, Jingdong phase one. Jingdong phase one was about being an online retailer competing with traditional retailers as well as online other online retailers and Generally, it was a game of getting to scale. I’m sorry. Generally against the traditional Retailers the physical ones you were beating them mostly on cost and breadth of selection against online competitors You’re competing pretty much on user experience. Now what happens over time, and this is, this is really Jingdong’s strengths as an online retailer. It does have a couple big competitive advantages. Number one, if you are buying and selling goods, You’re not just enabling interactions like Alibaba. You’re actually buying the goods yourself. So you’re negotiating with the merchants. I wanna buy this many Prada bags from you. I’ll give you this price. Then I will sell them. The bigger you get, the more power you have to get discounts from suppliers, merchants, brands. And then you can turn around and sell them to your customers cheaper than your competitor. So you get a cost advantage in terms of supply costs. That’s exactly what Walmart does. That’s why Walmart is so cheap, because they’re so big, they get cheaper goods from people because they’re so powerful as a negotiator, then they turn around and sell it to their consumers cheaper. And that’s why their tagline is everyday low prices. That’s their big leverage against smaller retailers, and they slowly crush the other smaller retailers with that factor. That’s a big competitive advantage. The other thing, And that’s exactly what Jingdong does. And their CFO, if you ever listen to him talk, this is what he talks about, is we have a cost advantage based on superior scale as a retailer. The other factor they have is they outspend their competitors, both physical and online, in IT. And this is not IT like we’re building call centers or data. This is IT where their logistics and all that supporting infrastructure becomes more and more efficient. So they’re building warehouses, they’re automating their warehouses. And by doing that, they become even more efficient and they become cheaper again. It’s not as direct a, you know, I’m gonna negotiate the supplier down and get a lower cost of goods sold. This is more sort of long-term. We keep investing in our warehouses, our automated systems, our IT systems, and we will become more efficient and cheaper as a retailer. So both of those sort of advantages, we have scale in purchasing of goods and we have scale in IT spending, both of those play out over time as a lower cost. And that’s pretty much what Walmart does, that’s what Carrefour does, and that’s what JD has been doing. Now there’s actually a little bit more to this that JD is doing which is pretty cool. They’re also doing a game I call Profitless Growth. If you actually look at JD’s numbers as a retailer, not as a marketplace, what you’ll see is they have a gross profit of about 16%. So for every $100 of goods they sold, they make about $16. That is higher than an offline retailer, significantly higher because, as I just said, they’re buying goods for cheaper and they don’t have the same cost structure because they’re not, you know, they don’t have all those stores. However, if you actually look at their operating costs, which would be their IT spending, their R&D spending, their logistics spending, that’s at about 15%, which is higher than their competitors. So their total profit is like 1% if that. So people say, oh, they’re not making money, not true. What they’re really doing is what I call sort of profitless growth. They do have a higher gross profit than their competitors, both because they’re bigger than the other online retailers, and they also have a better cost structure than the physical retailers. But they’re not taking that 16% and taking it as profit. Instead, they’re upping their spending on the things I just mentioned, IT, R&D, logistics. They’re outspending their competitors in those areas because they know it’s gonna capture them even more cost efficiencies down the road. And basically, because they’re doing that, well, they’re doing two things with it actually. Like one, they’re outspending their competitors on those numbers, R&D, logistics, but they’re also lowering their prices. If you’re cheaper than your competitors, you can lower your prices or you can take profits. They’re lowering their prices as well so that they’re cheaper than their competitors. And what happens? Well, if you’re cheaper than your competitors, more people come to you. So their market share expands. What do they do with that bigger market share? Well, they use that to get even greater bargaining power with suppliers, which gets them even cheaper cost of goods sold, which gets them an even better gross profit. And again, instead of taking those profits as profits, they pass those onto the consumers. They basically run at zero profits. That expands their market share even more. So it’s like a virtuous cycle is what they’re doing. They keep growing, keep growing, keep growing, because they’re not taking any profits and they’re cheaper. and then they’re investing in IT and all of those things. And it is a very powerful strategy. Walmart and these other companies have done the same thing for a long time and basically crushes your competitors. And that’s kind of been their online retailer game. So the takeaways from this, I know I just gave you kind of quite a bit of theory. If you’re a traditional retailer, whether physical or online, your biggest two strengths are usually, you use superior size to get a lower cost of goods sold than your competitors. You can get cheaper products from your suppliers because you have five times the volume of your competitor. So you have a higher gross profit. You can either take that gross profit and spend it on things like IT, or you can drop your prices relative to your competitors and pound them with that. That’s your number one sort of competitive advantage. Number two, you can outspend them on IT logistics, IT and logistics, which if you do it well on your warehouses, your robotics, all that, it should get you a cheaper cost structure in the long term. That’s a secondary cost advantage, which again, then you can pound your competitors with that. Those are the two big competitive advantages of retailers. Okay. So that’s kind of point one for today is, is what are the major competitive advantages of a traditional retailer, whether online or a physical store? However, there’s a distinction here which I’ve made, and this is the second sort of key concept for today, which is this idea of an ongoing competitive advantage versus cost or difficulty of entry. Cost of or difficulty of entry. People often confuse this with having a competitive advantage. If you’re gonna build a hospital, you don’t actually get that many competitive advantages with a hospital. Hospital’s kind of a hospital. But there is a significant cost to jumping into this business, because you have to buy the whole hospital. You have to build the thing. Very expensive. You have to hire tons of staff. They’re very hard to get. You need doctors and specialists and nurses and all this. It’s a difficult first step. There’s a cost to it. And you can also say it could cost you a lot of money or it could just be difficulty. Let’s say if you wanna get into a pharmaceutical product and you wanna build a hypertensive medication. Now, it may be a well-known hypertensive medication. So you don’t have to discover anything new. but you actually have to go through clinical trials and get it approved by the FDA. That may not cost that much money, but it’s actually quite difficult. So that cost and or difficulty of entry is sort of a first step that sometimes is difficult. It stops people from entering a business. That is different. than having an ongoing competitive advantage like the two I just mentioned. Okay, so if the two competitive advantages for a traditional online retailer, like Jingdong or Walmart, are basically supplier power, cost of goods sold, and you can outspend people on your IT and logistics, if those are the longer term advantages you use against your competitor, the cost or difficulty of entry for a physical retailer is opening the stores. you very well could compete with 7-Eleven. There’s nothing stopping you from doing that. It’s not that hard. But you do have to open like 100 of those outlets and that’s actually kind of a pain. You gotta get the land, you gotta get the location. Kinda difficult. Or the bio, you know, when it comes to online retailers, it’s either getting those physical stores, which is pretty difficult, on the physical side. It turns out they’re… is no real difficulty or cost of entry to getting into the online retailer game. Pretty much anyone can jump into that. I could jump into e-commerce in China tomorrow as a retailer, open a website, put up 20 items, start taking orders. So there’s no cost or difficulty of entry, but once I’m in that game and facing Jingdong, I can’t beat them on their competitive advantages long term. They’ll crush me. So that’s kind of one version of that. There’s other versions where some businesses, it’s actually difficult to enter, but once you get in, it’s actually pretty easy. Opening a hospital, it’s hard to get into that business, but once you’re in, you’re not at a disadvantage. So those are two different factors. And when Jingdong has its strengths in sort of ongoing competitive advantages, those two, they do have one significant. difficulty cost of entry factor, which is their logistics network that they’ve for the last like 12 years, they’ve spent billions and billions and billions of dollars to build 600 warehouses. I don’t know what the number is right now. It used to be 600 like a year ago across China, all the robotics, all the IT system that is actually very difficult and expensive to replicate. So there’s a big first step if you’re going to do that in house. You could do it by contract, but that’s kind of how I view them. Okay. Now I think that’s enough for sort of how you fight and win as a sort of online or traditional retailer. And that was sort of what I call phase one for Jingdong. However, then you get to Alibaba, which is the other company we want to talk about. Now Alibaba is not playing that game. Everything I just told you, Alibaba is not doing. Mostly. They… they’re a marketplace business, they’re a marketplace platform, which we’ve talked about. They are serving two user groups, not one user group, which is consumers. They’re serving merchants and brands and consumers, and their job is not to buy and sell goods, but to enable interactions between those two user groups. So you often hear Alibaba talking about there’s a lot of fraudulent goods on the platform, which there are, and they have a real. difficulty finding those fraudulent goods and weeding them out. Jingdong doesn’t have that problem because they’re buying the goods themselves. Jingdong buys far fewer SKUs than Alibaba. Well, Alibaba doesn’t buy any of them, but the amount of goods available on JD is much less than Alibaba because they’re just enabling anyone to come and do this. And so they have a problem with fraudulent goods, but they also scale much more rapidly. They’re playing the marketplace game, which we’ve talked about, and I’ve sort of said like, you know, the advantage there is you wanna get to demand side scale, and then you wanna get network effects. That’s your big competitive advantage as a marketplace is network effects. Now, when you get network effects, you can get secondary advantages like switching costs, which you can build in with merchants, can’t really build them in with consumers, and you can start to get some supply side scale in things like. spending on IT and spending on logistics. But really the big, big bat, you know, the big competitive advantage that Alibaba has as a marketplace platform is the network effect. That dwarfs everything else. It may be the most powerful thing out there in the modern business world is a big network effect. And then they get some switching costs and then they also get some economies of scale in logistics. So that’s sort of. their three big competitive advantages, and then do they have an entry issue? You know, do they have a cost or difficulty of entry, which is a separate factor? And it turns out they do. They have the same logistics one as Jingdong. It’s actually hard to replicate Sineo, their logistics platform, but they also have a second one, which is something we call the chicken and the egg problem. It’s actually very difficult to get a marketplace platform going. because you have to get the merchants. To get the merchants, you have to show them you have consumers, but to get the consumers, you have to show them you have merchants. That first step, even though it’s not expensive, it’s not a cost of entry problem, it’s a difficulty of entry problem. And that’s the phrase I’ve been using. Is there a cost and or difficulty of entry? It turns out the chicken and the egg problem gets you a difficulty of entry problem. So they, like Jingdong, they have… certain competitive advantages which they will use over the long term in the ongoing back and forth of competition, which in their case is network effects, switching costs, and some economies of scale and logistics. But they also have a cost and difficulty of entry hurdle, which is mostly about the chicken and the egg problem. So you can see like Jingdong as an online retailer and Alibaba as a marketplace have completely different strengths competitively. They really are different playbooks. And that’s what makes this pretty, I think, fascinating. Now, if we consider sort of the Jingdong story phase one of online commerce, they, around 2010, they went into the marketplace business as well. So they started their own marketplace business that sits right next to their online retailer business and their GMV, their gross merchandise value is about 50-50 between those. So now they’re doing both playbooks and they’re still doing both. So they’re doing traditional retailer competition and they’re doing marketplace platform competition at the same time. And that’s kind of how I look at these businesses. And I’ll put in the show notes for this and on my webpage, I’ll list out the competitive advantages and the cost and difficulty of entry factors for both types of businesses in their more pure form. Okay, how are we doing on time? This is a lot of theory today. Alright, so I’ve been going about a half hour. I want to make one other point. So let’s say, if we look at the evolution of Jingdong, it started out as an online retailer. I gave you that story, the competitive factors, how you do it, and they were a very ferocious competitor, did very, very well. 2010, 2011, they went into the marketplace business, which Alibaba had been in from 2002-ish when they did Taobao. So now, you know, that’s sort of a call that phase two. There is a phase three here. And phase three is when you’re a digital business, whether you’re an online retailer or a marketplace platform or other type of platform, one of the real strengths you can have there is you can begin to link businesses together. And linked businesses is a pretty powerful move. We actually see this in the real world as well. Linked businesses have been around for a long time. You know, you can have hotels that have a management company and an asset company. You can have hospitals, which actually also have a facilities company linked to a medical group company. You can have, you know, one business that is… unprofitable but necessary and another business that is profitable and by linking them together it gets you a couple advantages like you can use one to subsidize the other. It actually turns out that when you have a linked business model it is very difficult to replicate oftentimes. The famous one people always study in business school is NASCAR, you know the racing company in the United States. Well I think it’s international now but it’s an American company. where the NASCAR, it’s actually two companies. I’m saying this off the top of my head. I haven’t read it in 10 years, but I’m pretty sure I’m right. It’s actually two companies. It’s one company that owns the racetracks, and it’s another company that owns the sports franchise of all the teams that race and compete against each other. They’re two separate businesses, although they’re owned by the same guy. And so how do you compete with that business? If you say, oh, we’re gonna start a new… you know a new sporting event racing car company so we’re gonna contract a bunch of teams they’re gonna put uh… the teams together and we’re gonna host the races if we’re gonna be the racing company okay well we need facilities to host our races well we call up who owns all those facilities our competitor owns them they’re not gonna let us race on their tracks okay i guess we have to open our own tracks well if i’m gonna open my own tracks i have to get a racing car company to contract them and pay us to use them. Well, the same company owns that. It turns out if these two businesses are linked, and if one company owns both, it’s a pretty formidable model to sort of break into. Anyway, so we can see that with a lot of digital businesses where you link one to the other. Amazon’s e-commerce business is linked to Amazon Web Services, their IT services business. And you can get all these sorts of benefits between those two things. You can get externalizing of capabilities, which we talked about previously. You can subsidize them. You can have one that makes a lot of cash, you flood it into the other. You can decrease your customer acquisition costs. You can coordinate on marketing. You can begin to bundle services, which is something we’ve talked about, that when you bundle services, that’s a pretty powerful move, which Alibaba is doing. You can get a membership. that gets you discounts across all the Alibaba services. So you can do bundling, and it was linked businesses are a really interesting move. Obviously Alibaba has been doing this. They have a marketplace platform, Taobao Tmall. They have their Ant Financial, which is a digital platform for financial services. They have their logistics business. They have their entertainment business. They have movie studios. They own a soccer team. They’re open. They’ve got a lot of linked businesses. Now Jingdong also does this. Jingdong is not, everyone thinks Jingdong is a standalone company. It’s really not. It’s part of a larger conglomerate, which is the Tencent conglomerate. I mean, they are a strategic partner of Tencent, which is basically, Tencent doesn’t do e-commerce yet, although they’re starting to do it in a major way with their mini programs, but they have always sort of done that outside through strategic partnerships. They have one with Jingdong, which is their major strategic partner. They also have a Pinduoduo and Meituan. So when people go on to Jingdong to buy stuff, approximately 25% of their new customers are coming from WeChat. So they have a linkage with WeChat, which is very powerful. Everyone says Jingdong is like Amazon of China. No, no, no, no, that’s not true. Jingdong is like Amazon plus Facebook of China, because they have WeChat tied. So there’s a powerful linkage there. That’s one of their strategic partners. Another one of their strategic partners is Walmart China, which they’re starting to integrate their data, which they’ve pretty much integrated their data, and they’re starting to integrate their inventory and their delivery services between the Jingdong platform and all the Walmart stores. So if you order something on Jingdong, they may fulfill that from their warehouses or they may fulfill it from the local Walmart because that inventory is now integrated. So they have that. And then they also have a new strategic partnership with Google. Although I don’t think they know what that is yet. I’ve asked them and I think it’s just like, they did the partnership and then they’re gonna figure out what to do. So they are really a linked business model as well, as is Alibaba. And you can almost consider these things like digital conglomerates, where there’s so many businesses that are all interacted. It’s almost like a conglomerate at that point. And… You know, that’s kind of how I view phase three. And then sort of what’s coming next is new retail, where we’re integrating more and more physical stores. They’re starting with the Walmarts, but they’re opening, they have a lot of new retail initiatives where they’ve got this, like when I went to Chongqing and they had their new sort of try anything model and you can go to their eSpace, that’s them experimenting with new retail. And so you can ask yourself, well, how would that impact their competitive advantages? Cost of Good Purchases? Not really. Cost of Goods Purchased? No. Does it create a new cost or difficulty of entry barrier? Probably. So that’s changing the dynamics too. That new retail phase is the next thing coming. I’m keeping an eye on it. I don’t really have it figured out yet. And I think people are mostly experimenting at this point anyways. Okay. That’s been about 40 minutes of me talking at you. Let me… We’re not going to do a question today because I’m giving you a lot of theory, but let me sort of review. All right. I outlined one, two, three, four concepts today that all go under learning goal number five. On your list for the subscribers, learning goal number five is the basics of Jingdong. And I have sort of four concepts that are important. Okay. First one. What are the ongoing competitive advantages? for a retailer, whether an online retailer or a physical retailer. And I’ve basically said there’s two big ones. Cost of goods sold. By being larger than your competitor, you can squeeze the suppliers more and get better prices. That means your goods are cheaper. That’s what Walmart does, everyday low prices. The second one is you outspend your, if you’re bigger than your competitor, you outspend them on IT and logistics and… By doing that over time, you should get greater and greater efficiencies, which is also going to make you cheaper. That’s the game. The secondary factor, okay, so the next idea is ongoing competitive advantages for a marketplace platform, which is Alibaba. And I basically said there’s one big one and then two smaller ones. The big one is always the network effect. with very, very powerful scales beautifully. And the second one is sometimes you can build in switching costs for your merchants and brands. If they’ve built a store on your platform, you know, they’re continually having to stay there. They don’t really wanna leave and close their shop on Tmall and Taobao, because that’s where their customers go. That’s where their data is, you know. So they build in a switching cost, they’re probably gonna stay. And then the third one would be economies of scale and things like logistics and IT. Which is pretty important as well. So that’s sort of the ongoing competitive advantages for a marketplace platform and the takeaway from today the big one is These businesses compete on different factors and on different dimensions Okay Big concept number three for today. There is a difference between an ongoing competitive factor competitive advantage versus a cost or difficulty to jump into the business of entry. Sometimes businesses are hard to jump into, but then they’re pretty easy. Other businesses, very easy to get into, but then you can’t win because the competitors have massive advantages, like Coca-Cola. I could open a soda company today. It wouldn’t be difficult. I go buy the soda, I put it in the cans, I put it on the shelves. I can jump into that business, no problem. So can anyone, but… Once you jump in, you realize Coca-Cola has massive competitive advantages and you can’t beat them. Other businesses, it’s the opposite, like the hospital. Difficult to get in, but once you get in, not so hard to compete. And some businesses have both. Mobile networks. China Unicom, China Mobile, Vodafone. Those businesses have both. It turns out they’re actually very difficult and expensive to jump into because no one wants a mobile network that doesn’t cover the whole country. You can’t sell a phone service and say, sign up for my phone service. It only works in one city. From day one of entering that business, you have to offer the whole country, which means you’ve had to build a network that covers the whole country from day one. And then that’s a big difficulty and cost of entry. And then once you get in, you realize that you’re also at a competitive disadvantage going forward in terms of ongoing IT spend and some other factors. So some businesses have both, and most businesses like opening a restaurant have neither. Restaurant, nothing’s stopping you from entering. And when you get in there, nobody has any competitive advantages. It’s a tough business. Don’t get into restaurants. I’ve opened two, it was a nightmare, never do it. So those are kind of the two factors. And within that factor, cost and difficulty of entry. Some things are expensive to get into, but not difficult. Some things are difficult to get into, but not actually that expensive. Getting into Alibaba’s business is not actually difficult in terms of cost. You just build some software and put it online, but it is very difficult to replicate the network effect and to overcome the chicken and the egg problem. So a company like Alibaba, they have a cost and a difficulty of entry situation where the cost of building all the logistics is high and then getting over the chicken and the egg problem is difficult. Jingdong sort of cost and difficulty of entry is mostly about replicating their logistics network. All right, so that’s factor three. And the last big concept for today, I’m just gonna mention briefly is something we’ve talked about before, which is the idea of digital physical hybrids. This is, I forget which, this was a previous lecture we talked about digital physical hybrids, that people like to build digital businesses. They love the economics of digital. You know, I talked about this, the sexy but dangerous economics of digital, because if you have a company like Ctrip, I mean, there’s no operational component. It’s just booking hotels and booking flights. It’s all software. Well, then you need a lot of customer service reps, but apart from that, it’s all software. So the economics are beautiful. The problem is most businesses that are made of software entirely, mostly, are very competitive, they tend to be commodities, they tend to have zero ability to price. So they tend to be awful businesses. Go online and say, I’m gonna create a software company that has a dictionary. Everything we you know all those things when you online they’re all free all that stuff’s free Dictionaries online free calculators online free spell check online free most software businesses that have these amazing economics you never see them because Anyone can do them. You can’t price. There’s no cost structure and they’re awful. So people love the The economics of digital because it looks so profitable, but then it turned out. It’s really difficult So what a lot of companies like Jingdong and Meituan, what they do is they do digital physical hybrids, where they pair a digital business with a business that has a large physical component, and that physical component keeps people out of their business and protects them. Now they do pay for it because they’re not as profitable because they’re not a pure online creature, but they are far more protected. If you look at the numbers for Meituan, they have a delivery business, and the economics are not good. because it’s a physical business. You gotta have all these people on scooters. It’s not great. However, paired with their delivery business, they have a restaurant and a hotel reservation business. And the economics for those two businesses are beautiful because it’s just software. You just, I want a table at this restaurant, it books it into the table, I go and I sit down. So they’ve paired a physical business, delivery with a pure digital business, online reservations for hotels. and restaurants and the economics of that are great. And it turns out you can’t really offer that one if you don’t offer the delivery. You have to offer both at the same time to keep your customers. So you see these physical digital hybrids and Jingdong has really done this where yes, they were an e-commerce player and it turns out it’s really difficult to compete in e-commerce. People can replicate your breadth of goods pretty easily. but they built this huge sea of warehouses across China with robotics and IT systems. And that is a physical aspect that hurts their economics, but it gives them great protection. So physical digital hybrids, we see this a lot in China. We see it a lot in Asia. We don’t see it in Silicon Valley, which is really funny. Like Silicon Valley firms are afraid of getting their hands dirty. Like Facebook is just software. Google is just software. Twitter is just software. They’re all depending on network effects to protect them. But there’s something about Western digital companies. They’re not willing to deploy 10,000 people on the streets in bicycles. And they do have staff and stuff, but they seem to like to stay, I’m sorry, they seem to like to stay software companies as opposed to software paired with physical operations and lots of tangible assets. They don’t seem to like it. Okay. That’s the last point for today. Now, if maybe you’re feeling a bit lost or maybe a little bit overwhelmed with content, or maybe this is new, we have quite a few new members, so if you’re new and just tuning in, this could be quite confusing, it could seem like a lot, you might feel like you don’t know what’s going on. That’s totally okay, I mean, it’s really okay. Well, the process here is sort of a… It’s sort of a long walk together where every week I’m going to talk to you about stuff and we’re going to introduce some concepts and the first time each concept might be a little confusing or you might forget, oh it might make sense but then you forget about it a week later. Because I often forget stuff the first time I hear it and but then I’ll bring it up again and I’ll bring it up again and I’ll bring it up again and slowly things that were a little bit foreign or maybe just. Peripheral they’ll start to be comfortable and familiar and as I start I talk more about these companies and start citing things like oh, okay Alibaba has some good switching costs on the merchant side that will start to make more and more sense to you and I’ll start to point out subtleties of while it’s different and You know sort of step by step step by step Your toolkit and your sort of list of concepts that you understand that we’re applying to these companies Will grow and it takes time I mean, this took me, this took me decades, literally, of going through companies to build up frameworks for how to take these apart. But I’ll keep repeating, I’ll keep repeating, I’ll keep repeating, and all you have to do is just keep walking with me. I mean, just show up once a week and put on the headphones and maybe go for a run or sit and veg out and listen. And then, you know, for those of you who are members, you know, take a look at the emails I’m sending every, you know, I’m sending minimum three, for per week. I try and make them very short. Well, not short. I try to make them very readable. I may end up putting those in in sort of a private podcast just for members. I’m working on that right now. But a lot of it’s just going to be reiterating and doing these things over and over. And, you know, if you’re feeling a little maybe like it’s too much content or you don’t quite get the structure, look at the 10 learning goals and just focus on those and then listen in and, you know, things will start to be more familiar. Now, if you’re a new member, and this might feel like you’re jumping in the middle of something, as I sort of sent out in the sort of welcome email, I really recommend you start with the 10 learning goals for level two, which I’ve sent you the link for that, and start going through those, because that covers a lot of these concepts that I keep citing, and that’ll get you upset. So I would say go through those first, and then listen into the podcast. as you sort of get through those. And now if you don’t, it’s fine, because I’m gonna keep repeating stuff. Don’t worry about it. I’ll repeat the heck out of all of this. But that’s how it’ll happen. And over a month or two, three months, four months, you’ll start to really develop some sophisticated thinking about these companies and these concepts. There aren’t a huge number of concepts. I mean, there’s probably 20, let’s say 30 to 40 big ideas. that carry most of the weight. And if you get those, you can start to take things apart pretty systematically. There are subtleties to it, but that’s most of it. And same thing with when you go from concepts to companies, companies that you didn’t know anything about, you’ll start to feel a little more comfortable with step by step. Okay, now maybe you know VIP shop, maybe you never heard of them before. Now you kind of have a sense of what they do. Well, we’re gonna talk about it again, and we’re gonna talk about it again. And as these companies do things, we’ll talk more and more about them. So this is sort of a long walk together. And I just, you know, my job is to get you to show up every week and I’ll push you a little bit. That’s basically the situation. Okay, and that’s pretty much it for today. Thank you so much for listening. For those of you who are members, we’re gonna send out some pretty good content this week. A lot of new stuff on WeChat. We’re gonna talk about TikTok, dough in, which is pretty cool. then we’re going to talk a bit about digital Chinese consumers and we will cite all of these sort of ideas we keep touching on. I’ll keep pointing back to them keep pointing back to them. So we’re gonna have some good content and that’s for the members. If you’re not a member and you want to sign up that would be awesome. I would appreciate it. Go to JeffTowsend.com there’s a quick free trial there and anyways that’s it for this week. Have a fantastic week and I will talk to you next week.

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