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The Best Investment In China Today

Courtesy of Hedge Fund Insight, here’s a deep dive into JD.com (NASDAQ: JD). Note that this is an abridged version, the full version is 14 pages - free activist investing email subs got the full version. 

All visionaries share the same attribute – the ability to remain focused on the long term. Everyday investors talk about how long-term oriented they are, yet when stock prices begin to fluctuate, another part of them take over. I am also vulnerable to these tendencies, and focusing on the long-term can be as illusory and similar to hoping/wishing.

Visionaries and successful entrepreneurs go through these obstacles everyday. For every successful one, there are millions that give up on their dreams. For every billionaire, there are billions who don’t get the opportunity to become one.

The story of Amazon’s Jeff Bezos or the story of Facebook’s Mark Zuckerberg and how they became successful are no different than other successful entrepreneurs. The vision to remain focused on the long-term while executing in the short run requires tremendous amount of foresight and discipline.

Today, I want to present to you whom I believe to be one of China’s greatest entrepreneurs, JD.com’s founder Richard Liu.

His story of how he built up JD.com from nothing all started with the desire to survive in the cutting throat environment of business, and how his childhood influenced him to be the great visionary he is today.

The desire to succeed and survive is easily illustrated by JD’s company saying of, “我们要是 今天不努力,明天就要倒闭,” which means, “If we don’t work hard today, tomorrow we will go bankrupt.”

JD Present Day Business Analysis

Like JD’s unique founder, Richard Liu, JD’s business model is one of a kind. In order to understand JD’s business, one must understand the strategy listed above, which will be emphasized over and over again throughout this write up. The focus on customer service, product, and price are the only things that will win consumer mindshare in the future.

Ecommerce companies that focus on near term profitability are kidding themselves. A classic example for industry watchers is the comparison to Amazon. With Jeff Bezos, Amazon’s near term profitability has never been a focus for the company.

“We see customers as our invited guests to a party, and we are the hosts. It’s our job every day to make every important aspect of the customer experience a little better.” ~ Jeff Bezos

In order to provide the best customer experience in China, an ecommerce retailer needs to be able to control two aspects of the business most U.S. companies would never have to worry about:

1. Counterfeits

2. Package Delivery

Competitive Advantages

JD has two distinctive and obvious competitive advantages.

- JD controls its own logistical infrastructure, which allows it to control delivery quality, speed, and accuracy. If done correctly, the delivery process adds a lot of consumer mindshare as a word of mouth effect impacts the e-commerce reach. JD has grown faster than the industry’s CAGR of ~30% because of this distinctive advantage.

- JD’s obsession with controlling the authenticity of its supplies. Although most won’t consider this to be an edge in the U.S. This edge will be very apparent when the Chinese consumers spend more money for goods that require authenticity verifications. JD has taken advantage of its platform and its reputation for never selling a counterfeit to team up with global brands to offer consumers authentic products. If JD continues its pursuit of never selling a counterfeit, then it can take mindshare from consumers.

To explain in lengths why other competitors can’t do this would take a great deal of page space, so I will attempt to highlight it below:

- Chinese logistical infrastructure is very dated. Couriers ride bikes with capacity of 5- 10 packages per delivery. The quality level of these mom and pop couriers are rock bottom, but so are the prices. Due to the competitive landscape, and low barriers to entry into the shipping business in China, there are currently ~35,000 couriers competing against each other for business. Alibaba’s Taobao has always had a problem getting the packages delivered in a timely manner, and so has its Tmall platform. Customer’s number one complaint is the unreliability of the shipping and the quality it’s delivered in. Some packages would be delivered damaged, which then would frustrate customers to have to pay for return packaging. JD, on the other hand, would send delivery personnel to pick up return packages saving consumers from the hassle of having to pack and ship the packages themselves. Due to the competitive landscape, industry competitors are deterred from investing heavily in the quality of its delivery system, and the speed in which it delivers products. Because shipping rates are so low ($1.50 to ship a product), companies do not find it enticing to invest in logistical infrastructure. This combination of massive competition, low barriers to entry, and low economic return will make JD the leading logistical company in China.

- A bulk of the current e-commerce sales belong in the C2C segment of the market. Market research have indicated that C2C comprise 60% of e-commerce sales with C2C contributing far less by 2020 (35%). As JD belongs in the B2C segment, Alibaba’s Taobao is currently dominating the C2C market with 80% market share, while its Tmall (B2C) platform is 50% of the market. One aspect that makes JD so attractive is that there’s no way to control counterfeits in the C2C market as Taobao relies on third party suppliers to sell and ship products directly to consumers. This aspect of the business is overlooked many times as Alibaba is currently producing amazing quarterly profits. But similar to eBay and Amazon, eBay’s scale became its own worst enemy as counterfeits began ruining eBay’s reputation. Alibaba’s Taobao has already started facing allegations that more than 60% of its products are counterfeits, but it’s not physically possible to control counterfeits with no warehouses to verify the third party goods, or the delivery channel that can quality check each product. Tmall faces the same issue as third party delivery services deliver products, which could be damaged or swapped out for counterfeit goods during the delivery process.

Thanks to the guys over at Hedge Fund Insight, we play on bringing you more of their great insights. 

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