Summary of the article:
- JD’s Smart Logistics Network and its Structural Advantages: JD’s smart logistics network possesses significant structural advantages including barriers to entry, economies of scale, and network effects. The network is nationwide and expanding internationally, making it difficult and expensive to replicate.
- Growth and Value Proposition of JD Logistics: JD Logistics has seen substantial growth, with revenue increasing from $7.1B in 2019 to $19.4B in 2022. The company attributes this growth to customer acquisition in China and expansion into new markets, such as Southeast Asia and Europe.
- Applications of JD’s Smart Logistics: JD Logistics has been involved in several strategic partnerships and initiatives that showcase its capabilities. For example, it partnered with Nestle China to build a smart distribution center in Tianjin, aiming to improve the efficiency and visibility of the distribution of Fast-Moving Consumer Goods (FMCG) through automation and digitization.
As mentioned in Part 1, I like smart logistic networks. I think they are particularly powerful combination of operations and technology in a physical network.
But I’m a little torn between their attractive structural advantages and their ability to generate operational cash flow as a stand-alone service.
I didn’t have this problem with IT / web services or payment services. These are two other capabilities that were built within ecommerce companies (Amazon, Alibaba, JD) and then taken out as stand-alone services. IT / web services became Alibaba Cloud and AWS. Payment capabilities became PayPal, Alipay, and others.
In those cases, it was really a win-win.
- The ecommerce companies got greater economies of scale in these capabilities for their core business. They also got a unique capability that was hard to replicate.
- These businesses also turned out to be really attractive in their own right. And not just as service businesses, but also as platform businesses.
For smart logistics, this situation is not quite as clear.
We definitely see lots of structural advantages for the parent company and for the spun-out capability. But we don’t get such a clear picture as to the attractiveness of logistics as a stand-alone service. Not yet anyways. These are still early days.
But think of the structural advantages created by JD’s smart logistics network.
- Barrier to entry. It is a nationwide and increasingly international network of infrastructure. That is difficult and expensive to replicate
- Economics of scale in the fixed costs of logistics and IT spending.
- Network effects. Physical networks (like railroads) usually have weaker network effects than digital networks (mobile networks). But with more usage, destinations and linkages, they can usually offer more locations, lower cost, and greater speed than smaller rivals.
- Finally, there is clearly an entirely new business model Smart logistics is still evolving so we don’t know what other strengths it might have.
I really like all of that.
Smart logistics are some of the most well-defended businesses out there. And there are only a few of them. I like them even more when they go international or into specialized geographies. For example:
- Cainiao is building a global smart logistics network. JD Logistics is doing this as well but in a narrower fashion (thus far).
- Shopee and Lazada are building smart logistics networks in Southeast Asia, a region full of islands, jungles, and villages. They are building specialized networks that will be unique.
However, as mentioned, the logistics service to customers is still evolving. It’s not as obvious as with payments and cloud services. So that’s what this Part 2 is about. It’s about what specific services are getting traction with customers.
JD Logistics Is Growing Significantly
Recall from Part 1 that JD Logistics offers integrated end-to-end logistics and fulfilment solutions to clients. Their big point of differentiated (to clients) is that they are integrated and can offer the entire service (not just cargo or express). They argue their integrated, end-to-end smart logistics network has (versus rivals):
- Improved operating efficiencies. The service can (in theory):
- Remove redundant distribution layers.
- Improve agility in the supply chain.
- Increase inventory turnover.
- Optimize inventory management.
- Improved customer experience. They can increase delivery speed but can also improve the accuracy of delivery. And for sectors like apparel, they can increase the ease of returns.
- Better forecastingand intelligent decision-making.
That’s their value proposition. And it’s a pretty solid B2B value proposition. In theory. But adoption is another thing. Here are some of their recent numbers:
- JD Logistics’ revenue was $19.4B in 2022. Compared to $7.1B in 2019.
- Gross profit was $1.4B (7%) in 2022. Compared to $3.4M (7%) in 2019.
- The company reach operating profitability in 2022.
That is solid growth. We can point to some macro factors like he continued growth of e-commerce in China. But I attribute it mostly to customer acquisition in China and expansion into new markets, such as Southeast Asia and Europe.
Ok. With that, let me go into 4 examples.
JD Logistics’ Domestic FMCG Service Is Compelling
In 2020, JD Logistics announced a partnership with Nestle China to build a smart distribution center in Tianjin. It’s a good example of the problems of outbound logistics in FMCG in China. And the Swiss conglomerate Nestle has an extensive portfolio of FMCG products in China – dairy products, water, coffee, ice cream and lots of other food and beverages. Note: Nestle has long been remains one of the favorite companies of value investor Thomas Russo, mostly for its ability to tap into consumer spending growth in developing economies.
Think of frequency and complexity of distributing to Nestle FMCG products to its clients, which include retailers (supermarkets, convenience stores, hypermarkets, etc.), distributors, and online and offline wholesalers. Think about the frequency of replenishment of these products in all these often-small retailers. Think about the amount of manual handling required for dispatch and outbound operations. Think of all the inventory you have to manage. And the difficulties of predict demand on an hourly basis basis. As mentioned in Part 1, FMCG is an attractive space for smart logistics.
For the Tianjin project, Nestle and JD designed a system for automatic QR coding and with scanning and stamping equipment on an adjustable conveyor belt. Goods are moved to the operations terminal via the conveyor belt for automatic QR code scanning and coding, and then transferred into trucks for delivery to clients. It’s about reducing the manual labor. And it’s about getting better visibility through digitization.
From Yunfeng Shi, general manager of JD Logistics’ North China branch:
“JD Logistics covers the whole process from inbound of goods to the warehouse to the transportation to end retailers, so as to provide faster delivery and better service.”
This is similar to a deal JD did with Unilever China in 2018.
The British consumer goods giant was already a partner of JD’s retail business. It was natural next step to go from being their retailer to selling them logistics services for their many FMCG and other consumer products. Think food, bottled water, soft drinks, ice cream (Ben & Jerry’s), coffee, healthcare products and beauty products (especially Dove soap).
What’s important in both of these cases is that the vast majority of product sales were happening in offline channels. This is common for FMCG. Digitizing this complicated and inefficient offline channel makes it more efficient. It also gives greater visibility and insights into a previously somewhat opaque process.
Smart Logistics for Domestic Auto Is Also Compelling
In my Moats and Marathons books, I wrote about O’Reilly Auto Parts, an American auto retailers and distributor that mostly serves local auto repair shops.
It turns out local auto repair shops need to access lots of different types of products immediately and reliably. They don’t want to hold such a big inventory themselves. They also don’t want to wait for parts to ship, during which their repair bays are not being used. The solution has been a local auto parts retailer with the biggest inventory and low prices. That’s O’Reilly Auto Parts. It is an interesting example of a local service business with compelling competitive advantages. It was also a Thomas Russo investment for a while.
But this business model might also be getting disrupted. Or at least transformed.
In 2021, JD Logistics and Volvo Cars signed a partnership to build a supply chain service for the middle and high-end auto aftermarket. The idea was to digitize and improve the warehousing and transportation networks for Volvo’s auto spare parts supply in China. Basically, the space where O’Reilly Auto lives in the US.
The idea is that all the dealers and repair shops should be supplied dynamically and intelligently. They should be able to access all the parts they need reliably. But they should also avoid the large inventory carrying costs of holding lots of different parts for different cars. You could call it “smart replenishment based on big data”. The can (in theory) both streamline the operations and improve inventory management. JD and Volvo said this was expected to significantly improve the delivery lead times to over 50% of its dealers.
It’s pretty compelling and an area I’m watching.
Note: In late 2022, JD Logistics announced a partnership with SGMW (SAIC-GM-Wuling Automobile). The automobile giant said it would transfer the operations of its four auto parts warehouses in China to JD Logistics. So, this is more of traditional supply chain digitization.
The International Expansion of JD Logistics Surprised Me
If you’ve pioneered software and hardware for smart logistics facilities, why not take that abroad and sell it as a service?
That’s what JD Logistics has done. Logical but it still surprised me.
Probably because JD has traditionally had a somewhat limited presence outside of Greater China. There were joint ventures in Thailand (closed) and Indonesia. But it certainly never went international the way Alibaba did with AliExpress and Lazada.
But it appears that JD Logistics has really been going international, mostly as a service to local retailers and ecommerce companies.
In Poland, JDL partnered with Bierdronka, the largest retail chain in the country. The Polish grocery giant has said JD will operate warehouses and will do its distribution for online orders. That’s interesting because it’s the opposite of what we saw in FMCG.
In FMCG, it was about the about high frequency going to physical stores. But in Poland, it’s more about providing digital capabilities to physical retailers so they can do online orders. JD has a 15,000 sqm warehouse in Poland that can fulfil such online orders within as fast as 24 hours.
From Jakub Knauer, logistics projects manager at Biedronka:
“E-commerce logistics demands deep expertise, and we are glad to have JD Logistics as a powerful partner in our online retail development…Together we were able to build a landscape of integrated IT systems for efficient inventory, and outbound and inbound management. JD Logistics’ services have enabled us to efficiently fulfill online orders, even in the face of 17-fold increase in the daily number of orders.”
However, in the USA JD is doing something a bit different. They are planning to open a third self-operating warehouse and distribution center in California. This will enable them to offer omnichannel fulfillment services – basically fulfilment for both online and offline orders.
From Gordon Lu, General Manager of JD Logistics United States:
“Demand has shifted from the major e-commerce platforms to smaller independent operators, which has led to fragmented supply chains, adding further complexity and challenges to supply chain management…As more and more retailers are shifting from brick-and-mortar stores to e-commerce platforms, retailers continue to sell their products on multiple e-commerce platforms, which requires utilizing multiple warehouses to handle B2B and B2C orders, dramatically increasing their holding costs. This is a challenge JD Logistics is uniquely equipped to solve.”
Note: In addition to its three California warehouses, JD Logistics United States also operates two warehouses in New Jersey and one in Georgia. The company is going for coverage for most of the US.
“Two-to-three-day delivery currently covers 90% of our regions, and we’re aiming to ensure two-day delivery across the entire country in the future,” said Lu.
Finally, compare these to JD’s new warehouse in Dubai, located near the Jebel Ali Port. This is their second one in Dubai and the new warehouse near the port can provide end-to-end supply chain services that cover Asia, Africa, and Europe. This can serve both local and cross-border merchants.
From JD (I added the bold):
“It can provide logistics services ranging from concentrated transportation, sea transportation, air transportation, transition, customs clearance to warehousing, sorting, labeling, drop shipping and more, for both bulky and small to medium-sized products, and meeting both B2C and B2B fulfilment requirements. “
Last One: Cold Chain and Specialty Warehouses Are Areas to Watch
In 2022, JD Logistics and Tyson China announced an automated cold chain warehouse in Rizhao, Shandong province. This is a port town, just south of Qingdao. And they have plans for similar cold chain warehouses in Tyson’s smart factories in Xiaogan, Hubei province and Nantong, Jiangsu province.
According to JD, the Rizhao warehouse has a 17-meter-high automated storage and retrieval system, with double extensor stacker, pallet-type conveyor, AGVs and four-way shuttles. Ok. Interesting. But it was the fact that this warehouse is maintained at a temperature of -18℃ that got my attention..
Cold chain is a very different animal. The goal is the same, to create a big data-enabled replenishment model to reduce logistics costs while improving the inventory turnover.
But in cold chain, most every step in the logistics chain is more difficult and less tolerant of errors.
It appears that JDL is mostly providing software and hardware to Tyson. They are providing their warehouse management system (WMS) and warehouse control system (WCS), but Tyson is managing the inventory. Given the size of Tyson, that is not surprising.
Ok. That’s it for this two-part series on JD Logistics. I really wanted to the balance the theory with some real-world cases.
From the Concept Library, concepts for this article are:
From the Company Library, companies for this article are:
- JD Logistics
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