The Story of Richard Liu Qiangdong and JD.com

JD.com stands as one of China's premier e-commerce leaders. While its chief rival, Alibaba, largely functions as a platform for third-party merchants, showcased by its Tmall and Taobao marketplaces, JD.com takes a different route. It emphasizes direct sales, comprehensive supply chain management, and vertical integration. This strategy makes JD.com's operations not only more intricate but also capital-intensive, establishing a formidable competitive barrier often referred to as a "wide moat".

Thanks to its substantial investment in tangible assets, JD has secured a unique stance that's hard to replicate. It's among the select global companies that can match or potentially exceed Amazon in aspects like supply chain efficiency, logistics technology, and vast infrastructure. Currently valued at approximately $40 billion, JD not only ranks among China's largest companies by market capitalization but also parallels Amazon as the world's most advanced logistics operators at scale. Central to this achievement is the captivating story of Richard Liu Qiangdong.

• Humble beginnings to global success: Richard Liu's journey from a poverty-stricken childhood in a small Chinese village to founding JD.com, a global ecommerce giant, is a testament to his ambition and resilience. Despite growing up in a village with limited resources, Liu's aspirations and hard work led him to excel academically and eventually establish one of China's most successful companies.

• Strategic focus on logistics and quality: JD.com's significant emphasis on direct sales and vertical integration sets it apart from competitors. By owning most of its supply chain, JD has developed a robust, fast, and reliable logistics network, critical in a market concerned with counterfeit and low-quality products.

• Diversification and innovation in ecommerce: JD.com has diversified its business model beyond traditional ecommerce, integrating various services such as logistics, fintech, and cloud infrastructure.

• Potential for Growth and Expansion: JD.com's well-established logistics network and strong brand recognition provide a solid foundation for growth and diversification. The company's ventures into new areas, such as waste management and smart city solutions, demonstrate its ambition to leverage its technological and logistical capabilities beyond traditional ecommerce.

Born in 1973 in the small village of Chang'an outside Suqian in China's Jiangsu province, Richard Liu, the founder of JD, had humble beginnings. Growing up, his family lived in poverty and the entire village lacked basics such as running water and electricity. Liu recalls having pork, one of his favorite dishes, only once or twice a year. He aspired to become the village leader as a child and dreamed of providing pork more frequently to Chang'an residents.

Liu was a stubborn saver as a teenager. He eventually managed to save enough money to go on a road trip to Nanjing, a larger city in the Jiangsu province. He did not have any traveling experience at all during the time and got shocked when he reached the city. Something happened to Liu during this trip. He noticed that the kids from the city behaved, spoke, and dressed differently than he did. This trip became a turning point for Liu, serving as a catalyst for both extreme drive and curiosity.

Liu knew that the most secure way out of poverty and the small village was to study hard. Setting high ambitions, he achieved the highest score in Jiangsu province on the Gaokao (China's equivalent to the SAT) in 1992. With his top score, Liu had the freedom to attend any university he desired. He chose to study sociology at Renmin University in Beijing. When he left Chang'an for college, the 76 village elders each presented him with a boiled egg. These eggs sustained him during his early days at the university.

History shows that being poor and determined can be a potent combination. The grit Liu acquired from his background proved vital for JD's success. For instance, during a time when computer programming was a scarce and valuable skill, Liu took the initiative to teach himself. While still at university, he also took on a part-time job and managed to save enough money to buy his own personal computer and cell phone, both considered luxuries in China at the time. He even built a new house for his parents and amassed enough savings to kickstart his entrepreneurial journey.

I've become very excited about Richard Liu as an entrepreneur and leader, even though he stepped down as JD's CEO in 2022. He possesses the characteristics of a hungry and driven entrepreneur with a grand vision. One of his most notable traits is his commitment to creating value for the entire JD ecosystem, including customers, suppliers, employees, partners, and investors. This approach has fostered a strong relationship with the Chinese government, as they both prioritize the benefit of society as a whole over individual companies. Not least has this created an impressive culture.

Liu achieved his childhood dream of supporting his village by setting up JD's customer service center there, and he remains committed to its growth. The village also acts as the hub for JD's drone operations. Liu's journey bears similarities to Jack Ma's, the founder of Alibaba. Notably, while cities like Beijing, Shenzhen, and Shanghai are considered top-tier in China, Guangzhou — where Ma launched Alibaba — also holds a prestigious position. While Ma's influence may not be the sole reason for Guangzhou's prominence, his contribution to the city is significant. In China, entrepreneurs like Liu and Ma are celebrated as superstars.

JD predominantly operates within online retail. However, to label JD merely as an online retailer would be a significant understatement. Its core business is high-quality online retail, which accounted for approximately 83% of its revenue in Q2'23. This revenue share includes both 1p (first-party) and 3p (third-party) sales. Logistics services make up about 15% of the revenue, while the remainder is attributed to "new businesses," an area that is expanding with diverse options. My focus will be on JD's main business segments, namely direct sales, marketplace operations, and logistics.

The numerous success stories in e-commerce underscore its potential as an excellent investment opportunity. Many of the world's largest companies as measured by market capitalization are often primarily e-commerce businesses. Examples include Amazon in the U.S., Alibaba and JD.com in China, MercadoLibre in South America, Coupang in South Korea, and Sea Limited in Southeast Asia.

The value proposition for customers is clear: it offers affordability, a vast selection, and enhanced accessibility. E-commerce not only saves consumers time and money but also broadens their choices. Furthermore, in many regions, e-commerce platforms have evolved into leading fintech providers, substantial logistics operators, and cloud infrastructure suppliers, providing color to the optionality for e-commerce businesses.

The physical aspects of e-commerce serve as a barrier to potential threats from disruptive technologies. This is because anyone attempting to gain market share in e-commerce must establish their own logistics network, distribution centers, and, in the case of B2C operations, their own production. Such endeavors are not only time-consuming but also require significant capital investments.

JD has always placed significant emphasis on 1p sales and vertical integration. Direct sales constitute the largest portion of the company's operations, meaning JD owns the entire supply chain for the majority of its total topline. This ownership has led to the development of the fastest, most reliable, and largest logistic fleet in China. JD's vertical integration enables them to ensure a consistent quality level more easily, a critical advantage in an economy like China's where concerns about counterfeit and low-quality products and services are prevalent. This focus on 1p sales distinguishes JD from many of its fiercest competitors, particularly Taobao and Pinduoduo.

Consider the magnitude of JD's logistics operation: it is continuously working to maximize utilization and efficiency for its 75,000+ trucks, 2,200+ warehouses (including the cloud warehouses), and over 300,000 delivery personnel. Such an operation is highly complex and labor-intensive, with mistakes likely occurring regularly. It's not something that can simply be replaced by a new, globally scalable digital product. Replicating this would take years if not decades. In fact, JD has been aggressively investing in logistics for almost 20 years.

Therefore, it's reasonable to argue that the primary moat of JD's business is their extensive logistics fleet, which, of course, relies heavily on tangible assets. Capital-intensive businesses often trade at much lower multiples than less capital-intensive counterparts. However, high capital intensity can conceal robust competitive advantages. The crucial consideration for investors is understanding the rationale behind the high capital intensity. As you'd likely agree, a company's valuation isn't solely based on future cash flow; that future cash flow must also be adjusted for risk.

In other words, the business is digitally scalable but relies on a giant physical network. It both has huge CAPEX needs and enormous network effects on top of this. However, when tied to an appropriate digital service, like a leading e-commerce platform, logistics networks become fascinating subjects of study. Their network effects grow in tandem with increasing digitization, especially when they begin transmitting information and connecting people.

For example, I think there are good reasons why Warren Buffett, who loves moats, has invested in airlines (even though he has now sold his last share). It's evident that he was drawn to the industry's strong moats due to its capital intensity. He seemed to make a tradeoff, favoring greater investment security over potential upside—a strategy he often employs.

E-commerce and logistics companies fit neatly into this category. However, unlike airlines, e-commerce companies possess a very digital and scalable distribution model. Still, their business model shares characteristics with that of airlines, especially in being shielded by a broad physical infrastructure. It's essential to remember that much of their brand recognition is rooted in these tangible assets, which further facilitate a range of strategic options as mentioned earlier.

Further, Buffett loves long-term trends of which can be trusted to the dawn of time. McDonald's, Amex, and Coca-Cola serve as prime examples. McDonald's and Coca-Cola have capitalized on the universal needs for food and beverages respectively, while Amex has tapped into the trend of digital payments. It's intuitive to recognize that people will always need to eat, drink, and transact. Similarly, there will always be a need for logistics to transport items. However, unlike the consistent trends of food and beverages, logistics holds the potential to become fully automated and digitized.

If another player attempts to launch a similar business, they'd need to invest equivalently in physical infrastructure. Such a venture doesn't merely span years; it often extends into decades. Furthermore, only a select few players globally can genuinely compete in this domain. Typically, about three dominant entities emerge within the e-commerce/logistics sector for each continent. I foresee a time when e-commerce will constitute over 50% of total retail, with deliveries predominantly routed through these vast fleets.

E-commerce is challenging however because competitors often sell similar or identical products, and there are low customer switching costs. This dynamic is particularly pronounced in China due to the aggressive mentality among its founders and businesses. This typically results in intense price wars, which compress margins. This mirrors the trajectory physical retail has followed over the last 50 years in the U.S. It's crucial to recognize that a business can only be as successful as its competitive landscape permits. A question that continually arises for me is: How can an e-commerce company maintain its edge when current differentiators might become outdated in the future?

I'm convinced that the secret lies in consistently prioritizing the customer and enhancing the value proposition through bundled products or services. Consumers fundamentally seek convenience, selection, price, and entertainment. Yet, the definitions of these aspects change over time. Historically, convenience was equated with proximity, selection was measured by the size of the store, a reasonable price was satisfactory, and entertainment could have been a sporadic special event at the shopping venue, such as a live music performance.

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Today's definitions are different: convenience signifies one-day delivery, selection refers to millions of online SKUs, price must be among the lowest nationally or even globally, and entertainment pertains to the overall online experience, with branding playing a significant role in its appeal. Furthermore, industry leaders like Amazon are integrating services such as video and audio streaming into Amazon Prime. This trend is mirrored by other giants, with Walmart launching Walmart+ and JD introducing its JD Plus subscription.

As previously mentioned, JD has always prioritized its customers. In the early days, 70% of customer complaints were related to delivery service. To address this, Liu chose to bring logistics operations in-house. JD now stands alongside Amazon as a global leader in large-scale logistics efficiency. However, as other businesses eventually bridge the gap, the pressing question is how JD will differentiate itself in the future.

One intriguing strategy for JD is to expand its private label business further. Developing private brands can benefit not only customers but also digitize manufacturers and enhance supply chain efficiency. This approach has gained traction among global retailers. Walmart boasts labels like Marketside and Great Value; Costco has Kirkland; Chinese supermarket chain Yonghui features “Super Select”; and Amazon offers several private label brands. According to a white paper on private label brands by Daymon Worldwide's Shanghai branch and the Kantar Consumer Index of the U.K., the market size for private label brands grew by 22.7% in 2020. This growth rate outpaced the broader consumer goods market, which saw an increase of only 1.8%.

By integrating more deeply into the supply side, JD can harness its vast consumer data to produce products tailored to its customers' preferences. Chinese consumers already equate the JD brand with quality. Thus, I believe it's a logical expansion for JD. While private-label products typically come at a lower price for consumers, they often yield higher margins for retailers. This is partly because there's no "brand tax" or premium associated with established brand names, and an additional layer of the supply chain is eliminated.

Retailers find opportunities when customers are less brand-focused and can enhance their offerings with access to their private-label products. For instance, JD might develop an appealing bundle with its JD Plus subscription, which already has over 30 million subscribers. While JD Plus currently provides perks like free shipping, discounts, and rewards, there's potential to incorporate access to private-label products, and financial services, or even leverage its partnership with Tencent for services in entertainment, local amenities, or transport. This is reminiscent of the collaboration between MercadoLibre and Disney.

Both JD and Alibaba are pioneering revolutionary logistics networks throughout China. These are traditional physical networks, which are becoming increasingly complex, automated, and intelligent. Much about these operations remained hidden from public view until the JD Logistics IPO prospectus was released on 17 May 2021. With this filing, we gained comprehensive insight into the entirety of JD's logistics network for the first time.

When asked about comparisons, the CEO of JD Logistics, Yu Rui, made some intriguing remarks:

He delineated the company’s evolution into three phases and expressed his belief that we're now in phase 3.0. He projected this phase to span a decade, so traders might be cautious.

JD describes its logistics operations as an "Integrated Logistics and Fulfillment Network." This includes their warehouse network, transportation system, last-mile delivery, bulky item logistics, cold chain warehouse management, and cross-border logistics. What sets JD apart is its claim to be a one-stop solution. Unlike many logistics companies that specialize in particular delivery types, JD aims to manage the entire spectrum of items that need shipping.

From observing the brief history of e-commerce, it's evident that those companies willing to invest in physical infrastructure tend to dominate the industry. Amazon, Mercadolibre, Coupang, JD, Rakuten, and Ozon stand out as market leaders in various regions and countries. It's likely no coincidence that giants like Alibaba, Shopify, and Sea Limited have begun significant investments in logistics in recent years. However, investing in logistics doesn't necessarily mean owning every segment of the value chain. For instance, in some lower-tier cities, full ownership might not be economically viable. Nevertheless, maintaining a strong influence over the distribution channel is vital for ensuring an excellent customer experience.

JD describes its logistic infrastructure as consisting of six synergistic networks:

• Warehouse-network: This is where items are stored. JD Logistics reported ownership or operation of 1,600+ warehouses covering over 32 million square feet during the last quarter.

• Transportation network: This pertains to movement, encompassing over 75,000 trucks and other vehicles, along with more than 200 sorting centers.

• Last-mile delivery network: This includes over 72,000 delivery stations and more than 300,000 delivery personnel.

• Bulky item logistic network: This focuses on large, irregularly sized items that are challenging to transport, such as sofas and home appliances. JD has approximately 90 warehouses and 185 sorting centers dedicated to these items.

• Cold chain logistic network: This is designed for fresh products and pharmaceuticals. JD maintains 100 warehouses and over 2,000 vehicles specially equipped for fresh and perishable SKUs.

• Cross-border logistics: JD is expanding its network to Southeast Asia and Europe with a primary focus on China. JD International Logistics' supply chain spans over 220 countries and regions. The company is committed to building two-way 48-hour pathways and establishing a robust and efficient cross-border infrastructure to serve global sellers and shoppers.

JD's software for logistics can be divided into three parts; warehouse management software (WMS), transportation management software (TMS), and order management software (OMS).

The WMS determines how inventory should be organized, which presents a considerable challenge. JD derives a revenue stream from B2B customers who pay a premium for optimal storage locations, ensuring quicker deliveries. This arrangement is analogous to advertising, where businesses pay for prime placement within a store. A challenge arises when JD needs to rearrange their storage to accommodate businesses paying for this service. Naturally, agility is essential in this process. The WMS streamlines the organization of goods, providing benefits like faster transit through the warehouse, accurate product identification, and optimal space utilization. It also minimizes product handling, ensures inventory precision, guarantees prompt and accurate deliveries, elevates staff productivity, and cuts operational costs. Additionally, it facilitates warehouse automation through integration with drones.

The TMS is software designed for determining routes, and it's arguably the most intricate component. Some packages might transit through multiple trucks and warehouses before arriving at a last-mile delivery station. Decisions regarding these transitions need to be made within a few hours, especially given JD's commitment to almost exclusive two-day deliveries. External challenges, such as inclement weather, traffic congestion, and accidents, add to the complexity. Errors frequently occur in this process, but JD.com's rapid digitization of its network offers a significant advantage. Consider that the JD network continually strives to maximize the utilization and efficiency of its 75,000+ trucks and 2,200+ warehouses (including the cloud warehouses). Thanks to advancements in AI, their software is now adept at intelligently allocating resources. This system not only decides on optimized routes but also provides real-time tracking and tracing of goods and vehicles.

The OMS determines the packaging of orders. For instance, if a customer orders 10 different items on JD.com, there's an optimization challenge concerning whether to consolidate these into one shipment or divide them. To achieve the most efficient solution, JD must determine whether to create four, eight, or some other number of separate shipments, and decide which warehouses these shipments will traverse. Typically, the entire order is consolidated at a last-mile delivery station, as a singular delivery provides a better user experience. In the realm of group buying—a prevailing trend in China—a sophisticated, data-driven ordering and tracking system is crucial for success. The breadth of JD’s network is remarkable. They ensure two-day deliveries across all of China, a country roughly the size of the U.S.

What's currently intriguing about JD is the evident shift in its narrative. They are digitizing their network, standardizing interfaces, and harnessing technology to bolster the efficiency of their massive network. Back in 2017, Liu emphasized JD's focus, stating they would concentrate on "Technology, technology, technology". The goal is automation across the board, encompassing even their trucks. This trajectory is why I believe it's valid to see JD and Amazon as potential rivals to Didi and Uber—and perhaps even to Tesla and the broader auto industry. If they become the quickest, most efficient, and data-driven entities in goods transportation, why wouldn't they venture into transporting people?

JD.com distinguishes itself in the global e-commerce landscape by offering a diverse range of services. These include small-to-medium-sized warehousing, oversized storage facilities, cross-border operations, cold chain delivery, frozen and chilled warehousing, B2B solutions, and crowdsourced logistics. By opening their logistics platform to partners, JD allows others to harness its unparalleled nationwide logistics network, delivering an industry-leading service level. Impressively, JD boasts an approximate 90% rate of orders being delivered either the same or the next day—a level of fulfillment that, at this scale, is rivaled globally perhaps only by Amazon.

Warehouses are typically designed so that goods enter from the back and are stored on shelves reaching up to 50 meters in height. JD constructed the world's first fully automated warehouse in Shanghai and is currently making significant investments in delivery drones and automated delivery robots. Their most advanced warehouses, located in Beijing and Shanghai, set the standard for what the rest of JD's warehouses might resemble in the future. Currently, storage is the most automated segment of the supply chain, with robots in the warehouses retrieving goods to transport them to trucks or moving them between shelves.

So, why is logistics garnering so much interest? The evolving narrative surrounding logistics is particularly intriguing. Both JD in China and Amazon in the U.S. are currently demonstrating that logistics is poised to become a massive service industry. As they outsource their logistical capabilities to other firms, they're also increasingly integrating technology into their physical infrastructure, enhancing its efficiency. This trajectory suggests an eventual transformation in the industry.

To establish a thriving ecosystem, the opportunity hinges on creating a robust network and crafting a value proposition that resonates with both customers and companies. As previously noted, the logistics fleet and brand recognition—both challenging to replicate—are JD's cornerstones. These assets present JD with tremendous potential for diversification. For instance, JD can leverage these components to attract more third-party sellers to the platform, thereby enhancing margins and reinforcing network effects. JD has already positioned itself as the preferred logistics provider for other e-commerce platforms, even those that are its direct competitors in some ways. Brands like FarFetch, Pinduoduo, CPMG, and Tencent Mini Programs have reaped substantial capital savings by opting for JD's logistics solution instead of constructing their own fleets. With JD Logistics holding a mere ~10% market share, there's significant room for growth in a still fragmented market.

To cap it off, JD and Tencent recently fortified their collaboration in warehouse management and logistic services. This augmented partnership is considered one of the most pivotal steps in JD Logistics' expansion strategy.

JD shouldn't just be seen as an e-commerce and logistics company; they're in the business of moving things. From my perspective, JD has already established the most complex and costly foundational components of their platform. This foundation positions them to layer on one or several high-margin ventures. As JD continues to evolve and the market recognizes this shift, they could soon be viewed as an e-commerce platform rather than a brick-and-mortar retailer like Walmart or Costco.

Over a 10-year horizon, JD's current stance suggests immense potential for diversification. Consider this: they might evolve to be the logistics backbone for powerhouses like Walmart, Tencent, Pinduoduo, Bytedance, and maybe even Google (Walmart, Tencent, and Google are equity owners in JD). The optimistic outlook positions JD Logistics as the AWS equivalent in the logistics sphere.

Moreover, their vast array of IoT hardware, equipped with advanced cameras on all robots and vehicles, hints at the possibility of pivoting into security services. Their continuous investment in automating their logistics network positions them in the running for the autonomous vehicles market, potentially rivaling giants like Uber and Didi in the future.

JD's venture into waste management, a sector forecasted by MarketsandMarkets Research to be valued at $543 billion by 2026, aligns seamlessly with their infrastructure and capabilities. While this might seem distant now, it's essential to recognize that JD's expansive physical assets, combined with significant technological investments, give them the potential to expand beyond just e-commerce. Reinforcing this sentiment, the CEO of JD Logistics announced in 2020 that over the next five years, they expect 100,000 robots to be incorporated into their logistics operations. This ambition, coupled with JD’s organizational culture and visionary leadership, paves the way for numerous growth opportunities.

I'd like to highlight two of JD's most promising avenues: JD Mini Programs and JD's Infrastructure as a Service (IaaS) offering. JD Mini Programs is a comprehensive platform that grants merchants access to JD's entire suite – from marketing and transactions to payment, membership, and logistics – allowing them to craft their own online storefronts. This not only empowers merchants with JD's advanced technology and services to elevate the user experience, but it also offers them a choice. Merchants can either opt to sell via the traditional JD.com interface or leverage the Mini Programs. The latter allows them to foster a tighter bond with their customers by presenting a storefront that emphasizes their own brand, even though it operates on JD's underlying technology. Essentially, it's like JD offering their robust infrastructure as a white-label solution.

JD's Infrastructure as a Service, also termed "smart cities," is essentially a sophisticated operating system consisting of both hardware and software. This system was initially piloted in parks during H1'21. By harnessing advanced technologies like AI, it aims to manage and operate public spaces, such as parks, more intelligently and efficiently. This ensures streamlined public services and a hassle-free experience for visitors.

For instance, screens display heat maps to guide visitors away from overly congested areas, providing estimates on crowd durations. These systems also notify park management about peak traffic in specific areas. Another innovative feature: when trash bins are full, the system automatically sends alerts to nearby park personnel, guiding them to the overflowing bins using app-based map navigation.

Furthermore, JD integrates contactless offline features to enhance the user experience, such as autonomous delivery vehicles and self-operating park entrance and payment solutions. As previously discussed, waste management and various surveillance methods present substantial long-term opportunities.

Richard Liu's journey from the humble beginnings of Chang'an to the pinnacle of e-commerce success with JD.com is truly inspiring. His early life was marked by poverty, ambition, and an innate drive that pushed him to excel academically and secure a brighter future. As the e-commerce industry continues to show growth potential worldwide, JD.com's approach, rooted in a comprehensive logistics network, sets it apart. While many companies chase the allure of digital transformation, JD understands the intrinsic value of marrying technology with tangible infrastructure. Through its integrated logistics approach and commitment to excellence, JD.com is not only redefining e-commerce but also ensuring that it continues to thrive in the face of global challenges and competition.

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