Chinese E-Commerce Giant Eyeing Digital Supply Chain to Create Competitive Advantage
Battle of Titans
Every competitive edge matters in the battle over the hearts and wallets of Chinese online consumers in the world’s largest e-commerce market, totaling $750 billion of sales in 2016.[i] JD.com, China’s second largest e-commerce company, is betting on smart logistics to keep up with its larger rival, Alibaba Group. Unlike Alibaba, which mostly relies on third-party logistics providers to fulfill its orders, JD has built its own nationwide logistics infrastructure to promise faster deliveries to more far-flung locations in a cost effective manner. As of December 2016, JD operated 256 warehouses with a total space of approximately 5.6 million square meters in 54 cities, and 6,906 delivery and pick-up stations in 2,655 counties and districts across China.[ii] So far, the huge investments JD made in its infrastructure has not translated into tangible profits – despite fast revenue growth, the company has had a cumulative deficit of $3.1 billion since its $1.8 billion IPO in 2014.[iii] Using technology to reduce cost in the supply chain and create values for its retail partners becomes paramount to the long term viability of JD’s business model.
Data is King
Management’s near-term strategy is to leverage JD’s rich customer and warehouse data to upgrade JD’s physical infrastructure to a digital supply chain. Project Y, an internal department launched in November 2016, is applying Big Data and Artificial Intelligence (“AI”) to predict customer demands for products directly sold by JD. Based on demand projections and real-time data on remaining inventory, automatic procurement orders are issued to upstream manufacturers to restock.[iv] The company expects to increase the percentage of inventory under the automatic refill program from 30% in 2016 to 60% by 2018.[v] Rather than separating supply chain decisions from JD’s customer facing platform, Project Y aims to create a fully integrated supply chain from manufacturers through to end customers, and incorporate analytical demand planning into the procurement process.[vi] This will help JD reduce inventory holding costs and better match product supply with customer demand.
Sharing is Caring
As a longer-term strategy, JD plans to offer its home-grown smart logistics services to third-party retailers selling through its platform. One example is JD’s recent partnership with Nestle, whereby JD shared its AI-driven demand forecast with Nestle to guide the French food giant’s production and inventory management.[vii] Another example is JD’s value add in the product development process of Quaker, an American oatmeal producer. Through big data analyses of tens of thousands of customer feedbacks, JD identified a product gap for instant oatmeal drinks in China. Quaker used the insight to develop a new oatmeal drink for the Chinese market, which achieved 450,000 cases of sales volume within two weeks and 37% repeat purchase rate.[viii]
E-commerce Logistics Lab
To prepare JD for the future of logistics, the company also partnered with hardware company Zebra Technologies to work on the applications of the Internet of Things in the e-commerce supply chain. The joint research lab created by JD and Zebra will look for ways “to help JD.com improve the productivity of its current picking and packing operations using mobile devices…and to seek potential of applications of machine vision and data analytics in the logistics industry.”[ix]
The Road Forward
The future of online retail will require lower cost logistics to fulfill more individualized customer demands. While mobile devices and machine reading are good starting points to streamline warehouse operations, bolder investments in robotics and unmanned vehicles are needed to upgrade JD’s logistics capabilities. On the demand side, consumers’ increasing preference for customized orders over mass merchandise calls for more seamless integration between the e-commerce platform and the upstream suppliers to reduce lead time and predict end demand. Given JD’s access to valuable customer data, it might want to consider ways to monetize the data by offering value-added analytics services to upstream manufacturers.
How Much Disruption is Good?
Today, JD likes to brand itself as a channel partner for global consumer brands. But as more consumers buy online and the e-commerce logistics industry consolidates, a selected few players like JD could hold monopoly power over customer demand data and product distribution, enabling them to squeeze margins from the Nestles of the world. How might that affect upstream manufacturers’ profitability and product innovation, and the long-term welfare of end consumers? The jury is out on JD’s impact on the retail value chain.
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[i] National Bureau of Statistics of China.
[ii] JD.com Annual Report 2016.
[iii] Ibid.
[iv] Shengbo. 2016. “JD Enters Logistics 4.0 Era by Building Smart Supply Chain”. http://baijiahao.baidu.com/s?id=1561946273642376&wfr=spider&for=pc.
[v] Ibid.
[vi] Alicke, Knut, Daniel Rexhausen and Andreas Seyfert. 2017. Supply Chain 4.0 in Consumer Goods. McKinsey & Company.
[vii] “Analyzing JD and Nestle’s Supply Chain Partnership”. China Economics Network. http://news.xinhuanet.com/tech/2017-06/12/c_1121129171.htm
[viii] Shengbo. 2016. “JD Enters Logistics 4.0 Era by Building Smart Supply Chain”. http://baijiahao.baidu.com/s?id=1561946273642376&wfr=spider&for=pc.
[ix] “Zebra Technologies Launches Joint Lab with JD.com and Digital China”. PRNewswire. https://www.prnewswire.com/news-releases/zebra-technologies-launches-joint-lab-with-jdcom-and-digital-china-300418006.html
I found this article to be very interesting because I believe JD is currently at the center of a wave of transformational changes taking place in the retail industry in China, and that most of JD’s experience has more generalizable implications on the broader sector.
On the data side, I agree with growing importance of data where big data and artificial intelligence can really have strong impact in not only product design but also supply chain financing and other areas along the supply chain. For example, I’ve spent considerable time with Fintech firms in China to work out the details around ways to leveraging data to enhance the lending quality. Areas such as leveraging JD’s inventory info to make better lending decisions for small to median sized manufacturers and wholesalers and using the inventory data to lower overall logistics costs are just some prime examples of such trend.
In terms of the potential to create monopoly like platforms, I believe this is where the government need to step in to prevent the potential damage to other players along the supply chain and the end consumers. This is evident in the winner take all nature of the e-commerce sector and therefore government intervention is likely needed to prevent predatory actions by the dominate market players.
Really good post, Panda! I think the topic of Chinese ecommerce is fascinating and this post was a really great summary of the industry and one of its key players. I really liked your explanation of how JD.com is going to implement anticipatory ordering in its supply chain and found it really useful in conceptualizing how JD.com will grow/ maintain its future competitiveness. I think it is especially interesting that JD.com is selling this automatic refill process/ data-mining capabilities to established CPG companies. I know that Alibaba has recently rebranded itself as a ‘data company’, and I am very interested to see that JD.com is investing in similar capabilities and in your idea of selling its big data capabilities to other companies.
To address your question about JD.com holding monopolistic power over consumer data/ retail – I understand your concern. But, from a data perspective, I personally believe that Alibaba is much more likely to achieve more control over consumer data. Alibaba’s data capabilities is much more developed, as the company services a much wider number of consumers with a much larger number of merchandise value, has access to a large amount of financial data (via its relationship with Alipay and Ant Financial, one the biggest finch companies in the world), as well as data on how consumers consume media (via its media investments) and on distribution/ logistics (via Cainiao platform). From a retail perspective, I believe Alibaba’s platform as well as a wide variety of other physical retailers offers competition to JD.com.
Thank you Panda, this post is a great comprehensive introduction to the Chinese retail space and JD.com in particular. I found the large capital expenditures you cited interesting, but do not think the fact they have not yet reached profitability should be worrisome. Amazon was famously unprofitable for almost a decade before turning in a profit [1] as it sought growth in an expanding market; this is even more pertinent for a Chinese retailer that seeks to grow with its target home country demographic. Investments in supply chain infrastructure are perhaps the most important aspect of this, as the largely rural geography of China is tricky to serve and offers its own challenges. The cost to serve some remote areas is currently prohibitive, and requires significant innovation as you correctly pointed out. An emphasis on next generation data manipulation and artificial intelligence is evident in their management’s representations, with their head of robotics saying AI is the future of all Chinese retail [2].
An example of digital innovation you touched on was a focus of one of my consulting projects: JD is actually at the forefront of developing its own commercial delivery drones, with an eye to have a working product within the next year [3]. The drones could make round-trip or hub-and-spoke trips to and from rural destinations, and be combined with more traditional solutions like delivery vans. Incorporation into the overall supply chain network would allow for route optimization akin to ride-sharing service technologies. This level of technical expertise is at the global cutting edge, and is required to keep the more refined western competitors at bay when they enter the market in earnest (similarly to how Alibaba battled with eBay).
[1] Amazon, once a big spender, is now a profit machine, https://www.theverge.com/2016/7/28/12313526/amazon-q2-2016-earnings-report-aws-cloud-profit
[2] AI Is The Future Of Chinese Retail, Says JD.com’s Head of Robotics, https://aibusiness.com/ai-future-chinese-retail-jd/
[3] Chinese e-commerce giant JD.com is developing a drone that can deliver packages weighing as much as one ton, https://www.cnbc.com/2017/06/08/e-commerce-jdcom-alibaba-amazon-drone-delivery-china-asia-technology.html