China’s Amazon Battles Alibaba Online

JD.com is No. 2 in China but hardly known in the west

A JD.com employee checks goods from a conveyor belt at a warehouse in Langfang, China's Heibei province, on Nov. 3, 2015. (WANG ZHAO/AFP/Getty Images)

Sales at Chinese online retailer JD.com Inc. reached 127.1 billion yuan ($19.1 billion) during Singles’ Day week in November, the biggest annual shopping event in China.

To fully grasp the magnitude of that figure, consider the biggest shopping event in the United States: Thanksgiving weekend. According to Adobe Analytics, this year’s Thanksgiving Day, Black Friday, and Cyber Monday generated a combined $14.5 billion, online and in stores, for the entire country.

China has the most consumers in the world, and it’s also where online and mobile shopping has the greatest penetration. JD.com is China’s second-biggest e-commerce company behind Alibaba, and so far, it is largely unknown in the West.

But among all Chinese companies, JD.com has the closest resemblance to Amazon.com. And it’s gaining market share from leading e-commerce giant Alibaba Group.

Privately held, Beijing-based JD.com controls 33 percent of all retail e-commerce in China, as of the second quarter 2017. It competes with Alibaba’s Tmall unit, which has a 51 percent market share, according to eMarketer. Alibaba has a hugely successful business-to-business operation, but in retail ecommerce, its Tmall has been ceding market share to JD.com. Three years ago, JD.com’s market share was a paltry 17.7 percent, while Tmall’s market share had a commanding 55 percent in 2014.

Most Amazon-Like

Alibaba is widely known as China’s biggest internet retailer. But it operates like eBay, offering e-commerce solutions to other third-party businesses to sell to consumers. Alibaba generates the bulk of its revenues not from product sales, but from platform fees, sales commissions, and online advertising.

JD.com’s business model is completely different from Alibaba’s. Founder and CEO Richard Liu has built JD.com as a vertical operation very similar to Seattle-based Amazon. JD.com has warehouses across China, with logistics operations that manage the sourcing and shipping, and it has built a sprawling network for its so-called “last mile” delivery service to reach customers’ doors. The company has also been extensively testing robotics and drone-delivery services, in some respects more successfully than Amazon. Earlier this year, JD.com unveiled a drone that can deliver items as heavy as a metric ton.

Like Amazon, JD.com is known for its fast shipping. In China’s large urban areas, consumers can receive many items on the same day if they place an order before 11 a.m. Similarly to Amazon’s next-day or two-day “Prime” service, JD.com offers next-day delivery on most products, and users can also choose to receive their purchases at a delivery window.

Beating Alibaba

Back in 2011, Alibaba founder Jack Ma wanted JD.com to open a storefront on Alibaba’s platform to avoid direct competition, according to sources interviewed by The Information.

Liu rejected the overture, and during the last several years, he has built up JD.com to become Alibaba’s chief rival. The company has enlisted the help of other powerful companies in its fight with Alibaba.

Last year, JD.com formed an alliance with Walmart, the world’s biggest brick-and-mortar retailer. JD.com hosts Walmart’s Chinese e-commerce storefront, which has proven beneficial for both companies.

The two companies work closely on inventory management and customer service. Chinese online shoppers, through JD.com, have access to around 1,700 U.S.-made products carried by Walmart’s 400 China-based stores.

“We bring the online traffic to Wal-Mart,” JD.com’s international president, Winston Cheng, told CNBC Television in August. In turn, Walmart is “offering space in their stores for our inventory ... so we have expanded our fulfillment capabilities as a result of that.”

Chinese internet giant Tencent Holdings is another partner of JD.com and a minority shareholder. Tencent allows JD.com to aggressively promote its goods within Tencent’s WeChat, the world’s biggest social networking platform, which has almost 1 billion monthly active users.

WeChat and JD.com both have access to customers’ shopping preferences, which JD.com uses to make targeted suggestions and advertisements to WeChat users. JD.com also grants WeChat customers certain discounts if they use WeChat’s mobile payment app.

JD.com has been aggressive in making acquisitions in recent months. In June, it invested around $400 million in London-based Farfetch, an online marketplace startup for luxury goods. China is a crucial market for luxury goods, and JD.com could benefit from having the trust of Chinese consumers worried about the authenticity of luxury goods.

Big Sales, No Cash Flow

On Nov. 30, JD.com acquired Tqmall, a Chinese e-commerce platform for aftermarket automotive parts (Tqmall is not affiliated with Alibaba’s Tmall), according to a Caixin report.

JD.com reported a blowout third quarter 2017, with a 39 percent increase in revenues year-over-year. On its Nov. 12 earnings call, the company said it expects fourth-quarter revenue growth to remain in the 35 to 39 percent range.

But the company maintains negative cash flows as it builds up inventory and invests in new warehouses and logistics capabilities—expenses its competitor Alibaba largely doesn’t have. Free cash flow during the third quarter was negative 9 billion yuan ($1.4 billion) due to inventory purchases, capital expenditures, and marketing costs.

Can JD.com ever overtake the formidable Alibaba?

JD.com’s bigger rival said it recorded 168 billion yuan ($25 billion) in sales on Singles’ Day. Those figures have since been questioned, with noted Chinese short seller Muddy Waters Research tweeting on Nov. 20 that it believes Alibaba’s Singles’ Day sales figures are “fake,” citing a blog post research showing transactions that were never shipped or delivered.

Alibaba also supposedly employed questionable tactics to undermine JD.com’s business. JD.com’s chief financial officer, Sidney Huang, said on the company’s third quarter analysts call that certain apparel and general merchandise merchants have recently left its platform.

This is “mainly due to the coercive tactics from our competition,” Huang said, “which, if proven true, would be illegal and clearly against the merchants’ will.”