Interviewed By TAB RadioFinance
JD Digits chief economist Shen Jianguang explains the Chinese e-commerce giant's fixation on building and operating a dedicated logistics and delivery infrastructure, how it was vindicated during the peak of COVID-19, new opportunities revealed by the pandemic and JD Digits' mission as a financial technology company.
How did JD.com’s supply chain and delivery system remain intact and relatively unaffected by the COVID-19 pandemic? We invited Shen Jianguang, chief economist of JD Digits, to an in-depth conversation with Emmanuel Daniel regarding this matter. Shen shared with us key information on JD’s unique business model, its promising subsidiaries as well as new opportunities the e-commerce giant has found amid a global health crisis.
The conversation’s main points were:
Here is the full transcript of the session:
Emmanuel Daniel (ED): In the midst of this crisis, we are mostly working from home. At the same time, the internet economy is in full force, supporting a whole range of activities around the world. Here, we have Shen Jianguang, the chief economist of JD Digits.
JD Digits is an internet platform that serves 400 million customers, eight million small businesses, 700 financial institutions, cities and governments in China. It has become a bellwether, as it were, to detect how well the new infrastructures and platforms that have been created are and to absorb the challenges that the current pandemic is causing us. It has given opportunities for businesses like JD Digits to shine and become part of the new economy.
At the same time, we want to take this opportunity to understand a little bit better about what makes JD.com work and what makes other models not work as well as JD.com. I'm in Singapore and Shen Jianguang is now in Hong Kong. He is joining us from Hong Kong to give us a sense of JD.com – the mandate that you've given yourself in this crisis, the report card that you give yourself in terms of how you perform or how you're performing and the opportunities that are being created. You have JD Digits, so how does that fit into the overall organisation?
Shen Jianguang (SJ): I'm the head of JD Digits Research Institute and the chief economist for JD Digits. I'm the only chief economist in a big tech company. I’m also the first Chinese chief economist. I used to work for investment banks and international institutions like the International Monetary Fund (IMF) and the European Central Bank. It's very fascinating to join a big tech company and to have witnessed spectacular growth in the last few years.
ED: What are you spending most of your time on and what are the, maybe two or three, top line topics at the top of your mind at the moment?
SJ: What I do in the big tech company is not only use my traditional way of doing economic analysis. Now, I have big data and an army of artificial intelligence (AI) engineers working with me to use big data to detect better signal information and to make better economic forecasts. These are the extra resources and tools I can utilise to complement my traditional economic research methods, as developed in banks and in international organisations.
ED: In the first three months of this year, many governments, including the US, have pumped in liquidity, both at the market level as well as into pockets of people. But you seem to suggest that China might go through a little bit of a liquidity crisis initially at least. Why? Is it because the money did not reach the markets fast enough or is it not responding to certain requirements?
SJ: It’s not a liquidity crisis. The United States (US) is experiencing initially a liquidity crisis, but the Fed acted very quickly to stave off the liquidity crisis in America. They already started unlimited quantitative easing to provide liquidity to all financial organisations or even companies to stave off the liquidity crisis.
In China, things are not that bad as we know. There's no liquidity shock. Because of these measures to contain the pandemic, a lot of small and medium-sized companies in China are facing closures for almost one or two months. Their liquidity conditions are worsening. That's why they need immediate government support, for example, as a form of exemption of fees or taxes to help them to overcome this period of difficulties.
ED: But that would not be so much of a liquidity issue. It may be getting right into a credit issue.
SJ: In China, the first wave of shock is the supply shock. Companies cannot produce because of the pandemic and a lot of companies have been closed down. That's a supply shock. Because China is the centre of the global supply chain, companies in Southeast Asian countries or even Japan cannot get components to make the production. This is the first wave. It also affects the Chinese production and the demand. The second wave is the global demand shock. When the Chinese economy recovers, the outside world continues to struggle with this pandemic. There are a lot of closures in other parts of the world, which means there is a reduced demand for Chinese export products.
ED: In terms of China consumption, will that resume? Was there a hiccup at any point? Now that the cities are being released in terms of daily life, do you see a resumption in consumption or do you think that there's going to be a tail end where affordability is going to be the issue within China?
SJ: If you look at the macro data of the first two months of this year, Chinese retail sales nationwide dropped by 20.5%. That never happened. It's a huge shock to demand. But according to the official data, the internet sales or the e-commerce sales is still growing by 3% nationwide. That is a very spectacular development, given that the nationwide retail sales declined by 20%.
Even today, during this pandemic period – even in Wuhan, the city that has been affected the most in China – JD.com’s delivery men are still delivering goods within 24 hours after they received the orders. Nationwide, there is no stoppage of our delivery service and e-commerce service to billions or hundreds of millions of households in China. But what I’ve heard is in Europe and America – even our global, bigger (competitors) – if they are making orders, sometimes they have to wait for one week or even ten days to get their goods delivered.
If they can order in the morning, we can deliver on the same day. It's effective during the pandemic. It shows how the digital business was developed and how the internet commerce business has a very strong foundation in terms of service and policies. This kind of supply chain has a strong support. It looks like a stress test. Even during the worst period of time, all the households still get the service and delivered to their households.
ED: Are you a net beneficiary of the consumption economy going to digital? I have data here, suggesting that you're up there in terms of sales growth on digital platforms along with Amazon and Suning Commerce. Give us an idea of how JD.com is different from Suning Commerce. And, in terms of actual consumption growth in China, how is that playing out?
SJ: The model of JD.com is quite different from Suning Commerce or even Amazon in the beginning. Almost 10 years ago, our founder, Richard Liu, decided to integrate the delivery system for this e-commerce company. It's a really a big surprise to many of our investors. Everyone was saying that you cannot invest a huge amount of money into the delivery system.
Like the JD.com model, we have our own deliverymen, door-to-door, from the warehouse to their doorsteps. This is a unique creation. Other companies and platforms don't even own their warehouses. Even in China, we are very different from our competitors. We can make sure of the quality of the goods because all the goods are owned by JD.com. During very difficult times, if you rely on forwarding networks, you have to rely on other companies’ capabilities.
ED: In about the time that Richard Liu started his business model of owning the whole supply chain, there were different models being created. Your competitor Amazon probably started thinking like that. They thought that they weren't going to move fast enough and delivery quality issues were going to be an issue. They absorbed a lot of capital in order to run the model that JD.com did and took the federation model. In every major city in China, Alibaba works with local distributors, local warehouses and so on. That's a different business model from JD.com. Amazon probably started the way that Alibaba did, but eventually like today, Amazon also owns a lot of its warehouses and so on.
In the case of JD.com, you own your inventory, which then adds a cost element to it. Last year, you had $82 billion in revenue, $70 billion of that was the operating costs and you had an asset of about $36 billion. At the same time, your return on asset is 4.5%. From a banking perspective, that's very good. From a logistics industry perspective, was yours an expensive model to pursue? It is bearing fruit today because that helps you to fulfil orders very quickly and provide a very strong supply chain capability. Defend your model against the approaches taken by your competitors.
SJ: There are two different models. With our model, we own the goods ourselves. Our competitors normally have a platform, so they don't own their goods. They only have a sales platform to match the sales and the buyers. If the buyers complain, they come to us. But in a platform model, they cannot go to the platform to say, ‘Just tell me the figures’. They have to find the buyers or the sellers, which are not owned by the platform. We have our own delivery men to deliver the goods. Initially, they don't have this model, but later on, they also moved into that direction. Of course, it’s more expensive. It’s more capital intensive because you have to build all the warehouses and you have to hire all the workers.
In China, JD.com is probably the only one that pays all the staff and the deliverymen. All these government regulated payments – the pension funds, the insurance and unemployment benefits – all these benefits are paid by JD.com. But in other types of models, they probably don't even hire those deliverymen as their regular staff. In JD, because it's a more expensive model, we can better assure the quality. Not only the quality of the goods, but also the quality of the delivery service. And those deliverymen know the buyers very closely. They know because they are responsible for the delivery in the area.
I visited some clients with our deliverymen door to door. They are like friends. Our deliverymen are paid very well and they make serving clients their most important event. For this expensive model, the result is good quality and safety. JD.com, especially during this pandemic, is considered as a very trusted company.
ED: In that process of building all that infrastructure and incurring all the asset costs, was there a time when you were not sure? When you were neck to neck with the ones that took the federation approach, they seemed to be just as profitable as you were and the cost of delivery was about the same as you were. The whole idea of delivery and the high level of automation today have reduced the cost of delivery a lot, but that process was only in the last two years. There was a time when you were labour-intensive, and you probably still are in certain aspects. In a running match, over a three- to five-year period, what were some of the things that you were worrying about?
SJ: I’ve been with JD.com for three years. I heard a lot of stories about our founder. The vision at the beginning had a lot of oppositions even from within. Even our investors and our staff felt it was too expensive. Why waste so much money and why our profits are so low? But you stick to that, then you get a lot of trusts from our clients. We also ensure the quality of the delivery.
For example, this time, our competitors have certain difficulties with their delivery networks. They cannot sell very well. But in JD.com, we don't have this problem. Everything is under one roof. Everything is under control. Another thing that is very important with this model, we can invest heavily on warehousing technology and warehousing delivery service. For example, in Wuhan, we can deliver the medical supplies using drone, using these unmanned vehicles. We can experiment with all these kinds of high technology to improve the efficiency of the delivery.
ED: In the logistics business, you have the issue of efficiency on one hand and on the other is the issue of capacity – over capacity and under capacity at certain points, both ways have a carrying cost. We got a huge airport here in Singapore, which is always 40% under capacity in order to make sure that it can absorb a growth trajectory. You get a crisis like this, and that 40% becomes 60% or 70%. What do you think about the management of capacity cost at different points in the business? Today, I'm sure that your capacity is very high and is being absorbed, and then there is a bad day when your capacity is much lower. That would be one of the things in logistics business that fluctuates a lot.
SJ: That's why we started. It's not just a win-win model. Our model is a retailer model. We own our goods, so there is fluctuation. That's why we now started this with the platform business. We are using our platform and we can facilitate not only our own goods, but the suppliers and buyers can also match. Around 10% to 20% of our business volume is due to another type of model. The buyers or sellers can also use our warehouse. That's why we do not only manage our own staff and our own goods, but we also have this capacity for other suppliers.
ED: Explain to me a little bit about the fact that you have 700 financial institutions as your customers and you are working increasingly with cities. What is the ecosystem being created with cities today? And tell us about the smart cities as a concept.
SJ: We have 400 million retail clients. We also have around 250,000 supplier companies. The 400 million retail clients are bigger than every country in the world except China and maybe India, but bigger than Indonesia and the US.
Retail clients not only have the need to buy goods, but they also have the need to manage their assets. They also have the need to borrow money to finance their consumption. That’s consumer financing. That's why JD Digits enters this picture. We are not only providing goods, but we are also providing financial services to the retail clients and 250,000 suppliers. They also have this supplier financing need.
But then, after we provided this service, we found that we are moving to a fintech business model. We are not only providing this service by ourselves, but we are also helping the banks, the asset management companies and the securities companies to better serve our clients.
We are providing financial technology to banks. For example, the risk management models, to help these banks better serve the financial needs of our clients and our suppliers. This is how JD Digits entered the picture, the fintech business. Later, we found out that this kind of know-how technology can also extend to smart city businesses.
ED: How many cities are you working with at the moment in an integrated manner?
SJ: Dozens of cities. Cities have various needs. For example, some have medical and transportation, while some have consumer, trust and commerce. The cities’ main shopping streets have a lot of different needs. We are using big data and AI to help them use it to better manage and provide better services.
ED: In providing fintech services, do you take the risks on to yourself or is that taken on by your participating financial institutions? Is there a temptation to be a finance company like GE was in the US in the 1990s and early 2000s to provide credit on the supply chain? A number of fintech companies and a number of supply chain companies are going into that business right now, during the pandemic, which is strengthening the supply chain and supply chain relationships by providing direct credit to their partner organisations. Are you doing that?
SJ: No, we are not doing that. If we were to do that, we will not change our name from JD Finance to JD Digits. The name change is to show that we are not doing financial services anymore. JD Digits means we are going into the technology part of the job. We are now helping the banks. We are not taking risks, but the banks are taking risks. What we can do, our value added, is to help the banks better manage and provide better information and better risk management tools. Because we know the consumption behaviour of so many clients and we have a better sense of their risk profile, the banks can use our input to reduce their risks. That's why they are willing to cooperate with us together to serve the clients.
ED: Would it have been different if you had a payments wallet layer in your business?
SJ: We have JD payments. It's the same as WeChat Pay. We have payments, e-commerce, consumption finance and we have fintech that helps the companies, especially in doing e-payments. Some smaller banks don't have the technological capability to provide all the digital services. That's how we enter the picture. We cooperate with these banks and provide this knowledge so that they can serve our clients better. They provide the financing and we share the technology fees.
ED: Do you believe that in the platform industry and the platform warfare, the winner takes it all? When we think about Google and Facebook as platforms in the US, they are way past all of their competitors and created a certain dominance in the marketplace. Where, if you wanted to use any platform, you use the big ones, and then by using them you make them larger.
In Southeast Asia, we see that certain platforms, like in Singapore there’s Grab, in Indonesia there’s Gojek, in India you have Ola and so on. The platforms that develop a certain critical mass pull away from all the other players. But in the case of China, it's very interesting. You do have Alibaba, you got Tencent and WeChat for communications, but JD.com is more of a retail platform. You seem to have pulled away from the rest. This idea of ‘the winner takes it all in the platform warfare’, do you believe in that?
SJ: In America, normally you have this kind of ‘winner takes all’, almost like a monopoly. In China, every sector that I look at, there is no one dominant player. There are always two to three players, and they are competing fiercely. There are newcomers as well. Why is there this kind of competitive landscape in China? The competition is fierce. What's the mechanism that allows the newcomers to come at all times? Why is it that in America you have a very stable situation, there’s a winner and dominant players in each sub sectors of the internet world, but in China there are always two to three players?
ED: These new players coming on stream, are they providing variations? Maybe because in China you have a critical mass, even when you're a new player, the platform ‘winner takes it all’ model has space for smaller players who can sort of pick niches. Do you see niche being created? Maybe a high net worth niche or niche for mass market?
SJ: That’s one aspect, but the Chinese market is huge. There are a lot of possibilities. We can also see that they are introducing new models. Before, people used Weibo, which is for social media communication, and then WeChat came in. There’s also Jinri Toutiao, another new company. They are using this AI-based information feeding system, which immediately picks up the news. It's not only the niche market. They become bigger than e-commerce, and this is happening all the time.
ED: But since you have capacity, are you the kind of organisation that will absorb these new players, provide them a niche and then retain your platform model as it were? Is there an opportunity for that kind of model to evolve, especially after the crisis?
SJ: That's right. For example, at JD Digits, we already have a unique model. We are now providing not just financial services but technology services to all the financial institutions. We are developing not only the banking technology, but also the equity (securities) technology and the asset management technology. This can expand to different areas.
This model is for digitalising all the capabilities in different industries now. In China today, in order to recover from this pandemic, the Chinese government is raising talk on this issue about new infrastructure. But what is new infrastructure investment? In my view, it is the digital world. It is making the economy more digitalised and making everything online. Internet of Things, AI and big data, we all have more opportunities to grow during this pandemic and become a new engine of growth. The government is very keen to support and develop this internet-related business.
ED: Out of the different JD.com businesses, are there cross subsidies taking place? We noticed that on the logistics front, especially during the crisis, you are struggling to keep your costs down. What about the cross subsidies within the JD.com group? Is logistics a huge cost carrying component of the business? You also have the other parts of the business that benefit from generating the profit element in the model.
SJ: Not now. In the beginning, it's one company. But now, JD Digits has become an independent company. Two years ago, JD Delivery has also been incorporated as an independent company. The main part is the JD.com e-commerce. All these companies have now been incorporated as independent entities. Even though as a group it supports each business, these are all quite independent financially. Everything is very clear, whether you're losing money or you're making profits, there is no such thing as a cross subsidy.
ED: Are there any initiatives on the group structure front that you're doing at the group level that will sort of rationalise the whole business model? Or, because you are preparing to list JD Logistics as a separate arm, it will have its own issues as a logistics company, which is totally different from the credit aspect, the supply chain aspect and so on, what is the working model that unifies the model? If there's no cross subsidy, what is the unifying model that holds the whole business together?
SJ: The quality of the delivery, the network and the coverage are very important for the e-commerce business. For our group level, everyone has to perform its role. E-commerce is a main part, but without the better differentiated delivery service, the whole experience of the consumers will be very different. That's how it has been affected. For example, JD Digits, how can we fulfil this financing need? Which kind of partner we choose, since the experience of payment network also affects the JD.com e-commerce clients’ experience? Each will have to have their very independent business model, and this will also be verified by the market.
ED: As the chief economist of JD Digits, what are the indicators that you've set for yourself that you're looking at in order to see how the industry is shifting in your favour? What are you working on? What milestones are you giving yourself that you can tick as things are either getting back to normal, changing for better or creating new opportunities for you?
SJ: The first thing we are looking for is whether we will return to the normal time. We are seeing where the growth is in the special time to the normal time and where the economy will return to normal. Secondly, we are looking for more opportunities due to the government's new investment infrastructure plan to fight the pandemic. For example, the 5G network deployment. We can utilise the health business to facilitate distant diagnosis and not only to sell the medicines, but also to have an online doctor, diagnosis and even distant operations. This kind of new line of business will emerge and will become more and more prominent.
Also, regarding the logistics business, the pandemic shows that there's a huge demand for fresh foods. There's a logistic network infrastructure to store and transport fresh foods. There’s a need for investment in this area. There is an opportunity for these new business lines or new business opportunities that we are waiting. We always want to stay ahead of the trends.
ED: You're looking for the sales growth to go back to what it was last year at 20% to 30%. There are new areas because of new technology, health, cities, smart cities and so on. There are also improvements on your core logistics capability because of the demand for things like fresh food. The demand of customers is going to increase as a result of this crisis. You've given us a lot to think about and you put into perspective about how your business is evolving and how the whole logistics industry is responding to the challenges that have been with us in the last few months. Thank you very much.
The COVID-19 Series is a collection of radio sessions that will be broadcast live on social media platforms to about 30,000 listeners in the financial services sector to survey the impact of the pandemic across the globe, potential aftershocks businesses may face and possible line of action in the days ahead.