Richard Liu Strikes Back 刘强东铁腕“归来”，京东重回青春期

How JD’s founder saved his company by making it act like a startup again

By staff reporters Song Wei and Liu Yiming

JD.com’s stock is now at the highest it has ever been. The company’s share price has risen by more than 90 percent over the past year, reaching a market value of US$60.96 billion as the market closed June 25, 2017, just US$830 million below Baidu (US$61.79 billion), the third biggest Internet company in China in terms of market value. On May 8, 2017, JD.com announced a non-GAAP net profit of 1.4 billion yuan for the first quarter of 2017. Before that, the company had suffered losses for 11 years in a row.

There seemed to be no warning of this. Most people do not know that just a year ago, JD.com was going through its roughest period since its founding. Also, few people know how JD.com got into trouble in the first place, much less how the company got itself out of the woods.

JD.com’s woes began as soon as it became a large company. 

JD.com was listed on the Nasdaq in May 2014. Richard Liu Qiangdong, the company’s founder, resigned as CEO of JD Mall the same year, and continued with the company’s decentralization efforts. But two years later, Liu found that many managers were not making the  necessary decisions, so much so that many issues were discussed but nothing was being done about them. A former JD executive said that “It’s not that we don’t want to innovate. We just don’t want to make mistakes.” By the time he left JD, he found that the company had grown more and more risk-averse. A source now working as a director at JD said that many new businesses are suffering major losses. Investing in certain businesses is like digging oil wells. But just when you’re about to strike oil, you give up at the last moment. 

JD’s past success was built on cost-effectiveness, sacrifice, and hard-work. Richard Liu was at the core of JD and had a strong grip on the company. JD staff used to be considered rebels--young and full of energy. But now JD has more than 120,000 people. Over all these years, JD has experienced centralization, decentralization, and a new centralization campaign, its original values had been diluted by 2016, and morale was low among some staff. Some long-time employees interviewed by Caijing complained that the company had gone soft. 

Alibaba’s attack on JD was intensifying, and the traffic dividend brought about by Tencent after it invested in JD, was decreasing. JD.com CFO Huang Xuande said at the earnings conference call for the first quarter of 2016 that the conversion rate of traffic from Tencent had experienced a notable decline throughout the entire vertical, which had an adverse effect on growth.

“JD had its most difficult time around last August,” said Richard Liu. At that time, JD’s share price almost hit its lowest point. But even more dangerous, the company’s efficiency and drive to compete  both dropped--something intolerable for Liu, who feared the company would become bloated and complacent. 

On the surface, it seems that JD was still operating normally. Its GMV (Gross Merchandise Volume) was still growing by more than 40 percent annually, exceeding the 25 percent increase in transaction volume achieved by Alibaba’s e-commerce business. Maybe JD had done nothing wrong, it just entered a stage every big company does － a plateau. In that light, perhaps the disorganization, tardiness, and a lack of diligence among employees might even seem inevitable.

JD’s operating loss expanded to 864.9 million yuan in the first quarter of 2016, and its share price dropped to US$19.51, the lowest since its listing. Revenue and GMV (total transaction) growth also continued to decline － JD’s revenue growth fell below 50 percent for the first time in 2016, in contrast to up to 95.85 percent in 2012 and 57.64 percent in 2015.

“What is stable? I’ve never heard of the word. A plateau means you will be surpassed, at least that is the case in the Chinese Internet industry,” says a former JD employee who launched an e-commerce startup. It seems that JD, which had always been making progress, suddenly fell into mediocrity at the beginning of last year.

That’s when Richard Liu returned to JD.

(Richard Liu Qiangdong applauds during an IPO ceremony at the Nasdaq MarketSite in New York, U.S., on May 22, 2014. Photo: VCG) 

Iron-fisted Personnel Adjustment

The final figure of JD’s GMV reached during its June 18 Shopping Festival in 2016 turned out to be below the management’s expectations. A month later, JD saw major changes in personnel.

Richard Liu regained control over JD’s main businesses. Ten executives of JD Mall and 18 executives from JD.com would report directly to Liu, who possesses 80.2 percent of JD’s voting rights. Since then, Liu has made a series of strident changes, in order to make the industry giant competitive again. The core adjustments were to focus, attack, and boost efficiency.

JD soon had the biggest shakeup in organizational structure since its listing. Liu spun off JD Daojia and JD Finance through joint ventures and independent operation so that they no longer needed large-scale capital infusions from JD Mall. Also, Liu combined relevant businesses together and formed middle-office departments to improve internal efficiency.

Externally, Liu stressed the need to go on the offensive and launched a full-blown war with Alibaba. He opened up JD’s logistics business. Meanwhile, JD went after the clothing and home furnishing businesses, where Alibaba’s core advantage lies. JD also moved into fresh food and fast moving consumer goods.

War With Alibaba

Alibaba and JD used to “fight over business models.” But nowadays, Alibaba, JD, as well as Amazon, ultimately face the same two core questions in retailing: a) how to offer more value to customers; and b) how to offer better services to and gain bigger control over businesses on their platforms.

Alibaba acts as a platform, and its advantage lies in its size and traffic. Therefore, Alibaba focused on online-offline integration, optimizing supply chain, and perfecting user experience over the past two years. JD, on the other hand, did well in user experience and control over supply chain (merchandise). Therefore, it focused on expanding categories and promoting differentiation, as well as learning to better serve businesses on its platform.

After Liu’s return, JD scaled back strategically, concentrating on “e-commerce, finance, and technology." Meanwhile, the company tightened investment and sorted through its old and new businesses. Liu integrated the overseas business and the smart business into JD Mall, and did not hesitate to spin off loss-making new businesses (JD Finance, JD Daojia, etc.).

Thanks to the recent moves, the JD’s operating profit ratio changed from negative to positive (non-GAAP operating profit ratio changed from -0.9 percent in 2015 to 0.4 percent in 2016). At the same time, focusing on major businesses boosted the gross margin, which is the main reason behind JD’s turning a profit in the first quarter of 2017. JD's gross margin rose from 5.45 percent in 2011 to 11.63 percent in 2014, and up again to 15.16 percent by 2016. JD’s gross margin stood at 16.05 percent in the first quarter of 2017.

If JD remains just an e-commerce company, then it could not reach the level of Alibaba and Amazon.

JD’s business strategy was very clear in the past: optimizing the entire production and sales system through reconstructing the supply chain.

JD.com’s Chief Strategy Officer, former Vice President of Cheung Kong Graduate School of Business, Liao Jianwen told Caijing that JD will open up every link of the supply chain and shift into an open platform, achieving growth through connectivity.

For instance, JD Logistics became independent in April 2017, opening up to outside companies. The move, which aims to take advantage of redundant capacity and cut overall costs, is a attempt to turn a cost center into a profit center.

Wang Zhenhui said that they want to be more than just a courier company. In other words, their profit will not come from the gap between the price they charge and their cost for order distribution, but from offering integrated services including supply chain management and financial services to clients.

JD Finance is currently the bright spot among the group’s new businesses. After the spin-off, its valuation exceeded 50 billion yuan. Its two main sources of income are the Supply Chain Financing Division and the Consumer Financing Division. But these two businesses depend a lot on JD Mall, which means they could hardly achieve such growth without similar levels from JD Mall.

JD Finance once wanted to become an Internet-based financial institution, but now it is transforming into a technology service provider for financial institutions, offering products to traditional financial businesses. Caijing learned that this business, which is the best model given the current regulatory environment, has become a new area for JD Finance’s profit growth.

JD Cloud is still in its early stage, but Richard Liu predicts a substantial breakthrough in its business income in 2018.

However, JD Finance, JD Cloud, and JD Logistics, which are future growth areas for JD, all need long-term investment. Their contribution to JD Mall will be steady, rather than exponential.

This requires JD to maintain low profit margins for many years and long-term, large-scale investment in new businesses.

 “Our strategy is to plan for 10 or even 20 years. We want to become the world’s largest retailing platform in the next 12 years,” says Richard Liu, “We will win in the end.”

(Richard Liu Qiangdong   Photo: VCG) 

Rebuilding a Culture of Excellence

In the eyes of management scientists, the ideal of a great company is one that never moves past the start-up period, one that manages to maintain high-speed development, stays aggressive, and keeps the ideals of its early stage. The return of the company founder reinvigorated both Dell and Apple. In essence, the return of a founder means the return of previous ideas and work style. However, the goal is not to repeat the past, but to upgrade the present.

Currently China’s fourth largest Internet company, JD is still far away from the first and the second. However, the past few years have shown that JD could not be run by professional managers, nor could its growth stabilize. The strength of professional managers is that they are risk averse and are able to use the system to balance each other. They may lose in competition, but they will not ruin the company. A wise “dictator” is better than a stable but mediocre management system. But there is a risk: if the “dictator” chooses a direction that turns out to be wrong, it could destroy the company.

One year after Liu returned to the helm of JD, the company has moved back on offense, started acting like a start-up, and is implementing a single-core strategy. JD’s market value also rose from its nadir and hit a new high. 

However, Liu needs to further prove himself moving forward. After all, unlike Amazon which commands public respect and support, JD still faces strong competitors and short-sellers.

Translator: Xiong Jing

Copy Editor: Michele Scrimenti

Chinese Editor: Ma Ke

English Editor: Kang Juan 

 (This article was originally published in the June 26, 2017 issue of Caijing magazine. Click "阅读原文” at the bottom to read the original Chinese article.)

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