JD’s Emerging Competitive Advantages? (Asia Tech Strategy – Daily Lesson / Update)

Long-term investors search for high quality companies they can buy and hold. They ignore the near-term swings in stock prices and, instead, try to capture the larger creation of value in the enterprise over time. It’s a long-term wealth creation strategy.

And it really works…

…for a small number of companies.

Yes, the results of this approach can be fantastic. They can far exceed the returns from buying and selling bargains. As Charlie Munger says “the big money is not in the buying and selling, but in the waiting.”

But the trick is identifying the small number of high-quality companies capable of such value creation. And getting them at reasonable prices. Getting in at a decent price usually means identifying such companies earlier than others. Or in understanding their future value creation better than others.

My most basic approach for this is to look for:

  1. Stable and predictable long-term trends that will grow demand.
  2. Competitive moats that will capture this growth. And make a particular company somewhat predictable in its performance.

That’s pretty much Value Investing 101 for long-term growth.

Which Brings Me to JD

One big problem buy-and-hold value investors have is the increasing impact of technology on sector after sector. They want predictability which means avoiding uncertainty and change. Which means avoid regulatory and technological changes. There is a reason why Warren Buffett likes to buy Coca Cola and candy bars.

But avoiding the impact of software and digital is getting harder and harder year after year. Software is eating the world.

This is why my research is on the intersection of digital and competitive advantage. I build models for how digital creates and destroys moats. I like to know which traditional moats (like local newspapers) will be wiped out. And which more digital moats (like Google) are going to emerge. Note: Apple is now the #1 holding of Berkshire Hathaway.

JD has long been on my radar for this reason. It has digital moats by virtue of its marketplace and IT capabilities. But it also has traditional moats via its logistics capabilities, purchasing power and economies of scale. It is a digital-physical hybrid and has an interesting mix of competitive advantages. It is a good company to think about for #2 above.

What’s more, it also has a great story for #1. It is hard to find a better long-term trend than the increasing spending power of Chinese households. Spending in Chinese retail keeps going up and up. And ecommerce benefits from this – as well as from its expanding share of this growing pie. In my One Hour China Book, I cited rising Chinese consumers and digital China as two of the 6 mega-trends powering long-term growth in China. JD benefits from both.

So my question for today: Does JD have any other competitive advantages emerging? What is around the corner that investors aren’t seeing yet?

I don’t have a solid answer yet. But I am looking closely at following three 3 factors, all related to moats.

#1: JD and WeChat Appear to be Creating Data Ecosystems. Which Could Be Formidable Moats.

JD and Tencent have a strategic partnership, which has meant a lot of the traffic to JD comes from WeChat. And they appear to be increasingly integrating their data. This be really powerful. And it raises the question of ecosystem advantage. Because Tencent works with JD, Meituan, Pinduoduo, Epic Games and many others. It is a very big ecosystem. Of similar scale to Alibaba’s.

I have described ecosystem vs. ecosystem competition as 3D chess. It’s really complicated. In contrast, platform vs. platform is regular chess. And product vs. product is like checkers.

But what is not complicated is when an ecosystem competes with a platform or traditional product / service business. Ecosystems can have powerful advantages against such lesser rivals. If Alibaba decides to compete with your hotel chain, there isn’t much you can do. Ecosystems have so many big advantages. They have massive scale. They have resources. They have users. They have network effects. They have massive data. They have low customer acquisition costs. And so on.

What could this mean for JD?

I don’t think JD is going to integrate that deeply into the Tencent ecosystem. But I do think we could see a “data ecosystem” emerge. What if WeChat and JD continue to pool their data. And then the other parts of the Tencent ecosystem start to pool as well. That would be easy to do. And such a data ecosystem would create a unique resource. How could any company possibly replicate that?

For example, Alibaba and JD have both been expanding their marketing and data services for merchants. Alibaba calls it “uni-marketing”. And JD has a similar program. The idea, which has real power, is to offer a unified view of consumers to brands and merchants on the platform – and to complement this data with a suite of digital tools they can use to engage more effectively and efficiently. It basically combines the ecosystem data with digital tools to give merchants greater customer understanding and engagement, in one dashboard. Only a handful of China companies have the data to create something like this for merchants.

I think a Tencent + JD “data ecosystem” could be a unique resource and a competitive barrier.

#2: JD’s Partnership with Walmart is Expanding in Inventory and Logistics

As mentioned, JD has a strategic partnership with Tencent and they are the primary partner for Tencent’s move into e-commerce (Meituan is another). Walmart is another of JD strategic partners. JD has also signed one with Google, although nobody seems to know what this means.

JD and Walmart China appear to be increasingly integrating their inventory and inventory data. So consumers buying stuff on JD can have their order fulfilled with the inventory in JD’s warehouses or at Walmart (and its warehouses). That should mean they have a larger inventory closer to the consumer. And having the inventory closer to the consumer is how you make deliveries faster. As Amazon Prime has shown, consumers usually choose the company that delivers the fastest. This integration probably also means a bigger selection of items as well (not sure).

Keep in mind, Walmart has 5(?) types of stores in China. And they have their own delivery service as well. JD has its internal delivery people plus it also has DaDa and JD Dao Jia. So there are lots of moving pieces for the last mile. I’m curious if they are going to eventually turn all this into something no competitor can match. The integration of JD and Walmart could involve inventory, delivery, stores and other stuff.

It’s also worth keeping in mind that JD’s biggest challenge has been managing its growth. Their revenue has increased 10x in the past five years (not counting 2020). It’s been a huge challenge just to keep expanding delivery, logistics, and customer service and keep up with this. Think of how many delivery drivers and customer service reps they have to hire every year just to match this growth. Projects like chat bots, AI and autonomous vehicles (below) are a lot about managing this growth. As a result, they have been building out a lot of capabilities at a rapid pace (like the Walmart partnership). There might be some big opportunities here to restructure and improve efficiency and performance.

#3: Logistics Plus Supply Chain are JD’s Primary Strategy Going Forward

Every now and then, I come across a group that I just really like. Usually because they are really daring. And can execute well.

I really like JD Logistics. Take a look at the below video (link here and here). It is one of their presentations (filmed on my phone in their HQ lobby. Sorry for quality). It has some of their vision for how logistics is going to work one day (maybe). I don’t know how much of this will happen or when. But it’s really cool.

I think logistics plus supply chain is the #1, #2 and #3 priority for JD. They are definitely building a smart IoT network that will be matched only by Cainiao. And they are likely going to open it as a service to B2C and B2B customers. And to developers as an operating platform to build on. And as a place to deploy AI tools and autonomous robots. It looks like a smart, automated IoT platform that will serve shippers, receivers and developers.

It’s a big idea.

I like when companies turn their internal capabilities into a service. When they digitize and standardize a core capability and then offer it to the market. Amazon famously did this when it took its internal data and software capabilities and turned it into Amazon Web Services.

I think JD’s current logistics footprint and growing international supply chains are getting a major IT upgrade. And then they will be externalized as a service for customers and developers. Like the data ecosystem, I just don’t see how this can be replicated by a competitor (except for Alibaba). Another unique resource. Plus, the tech is going to continue to advance rapidly over the next 5-10 years, which should prevent commoditization.

***

That’s where I am focusing my attention for JD. We’ll see.

Cheers, Jeff

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I write and speak about digital competition and China / Asia’s leading tech companies.

I also run Asia Tech Strategy, a podcast and subscription newsletter on the strategies of China / Asia tech companies.

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.

3 thoughts on “JD’s Emerging Competitive Advantages? (Asia Tech Strategy – Daily Lesson / Update)

  1. Ruangwith Viwathanatepa

    December 4, 2020 at 5:02am

    I will try to write something about this. The moat can not be view in isolation and needs to be compared to the moat of other competitors and the paramount objective of E-commerce is to gain market share.

    one of the point I’m skeptical about is regarding JD logistical advantage. I do not understand why Cainiao network which has a larger market cap (the last time I checked) than JD logistic can be much less competitive than JD.

  2. Fu Ming

    July 24, 2021 at 10:17am

    Interesting angle. At the same time, Logistics is by nature very labor and capital intensive and low margin. Now with JD Logistics spun out and listed separately, will it be worthwhile to have a look at it on its own merits?

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