INSIDER | An independent JD Logistics should work with JD’s rivals

In China’s fiercely competitive e-commerce market, JD.com has aimed to differentiate itself through high-speed delivery. The company says that about 90% of its orders were delivered on the same or next day in 2020. That’s because of JD Logistics, the company’s logistics subsidiary. 

Across Greater China, JD Logistics owns a sprawling network of over 800 warehouses that are strategically located near end consumers, and the organization directly employs 190,000 delivery workers. It has also invested in 5G, machine learning, and automated technologies to boost efficiencies across the supply chain.

On Friday, May 28, JD Logistics became its own publicly traded company, raising over $3 billion through an initial public offering (IPO) in Hong Kong.

The company has said it will use the capital injection to invest in further technological innovation and improvement of its delivery networks, especially in lower-tier cities..

The full effects of that will only come to fruition, however, if JD Logistics makes a significant pivot in which platforms it chooses to work with now that it has more operational independence from its parent company.

A more independent JD Logistics should consider working with JD.com competitors like Alibaba’s Tmall, Pinduoduo, and Douyin. It’s a move that would benefit the entire e-commerce market, including consumers, brands, and the company itself. 

Logistics silos

JD Logistics has operated at a loss for 14 years, and will face pressure from new investors to turn a profit at some point in the future. Although the company was spun off as a standalone unit in 2017, and began to serve external retail customers, it still has one primary customer: its parent. Over half of its annual revenue currently comes from JD-affiliated companies.

That’s because in a phenomenon similar to the “walled gardens” of Chinese mobile applications, JD.com and Alibaba have built silos around their delivery arms. Purchases made on JD.com are processed by JD Logistics, while purchases made on Tmall are processed by Alibaba-backed Cainiao. 

JD Logistics cannot support purchases made on Tmall, and Cainiao cannot support purchases made on JD.com—and both JD Logistics and Cainiao are currently limited from selling their services to e-commerce upstarts. 

For the parent company, the business logic of this arrangement seems straightforward: a company’s back-end logistics capabilities can distinguish that company’s ecosystem from that of its competitors. JD.com invested in faster delivery times to make shopping on the JD platform more appealing to consumers. If JD.com permitted JD Logistics to provide services to Tmall or Pinduoduo, then returns on JD’s logistics investments might accrue elsewhere. 

While cutthroat competition between JD.com and Alibaba has benefited consumers, providing faster delivery times and lower shipping prices, the silos have also come with a major downside. Consumers don’t get to select a shipping option independent of the platform on which they purchase goods. In fact, when customers are looking to buy a specific product, they often choose a marketplace based on the shipping options available to them at checkout. Likewise, merchants face restrictions on how they can ship their goods based on the platform. 

And JD Logistics has a restricted set of potential buyers, which hurts its bottom line. 

Time to leave the nest

Now that JD Logistics is its own publicly traded company, it would benefit by removing the silos between Tmall and JD.com, offering its last mile delivery, warehousing, or integrated services to purchases made on the Tmall platform. There is even potential synergy between JD Logistics and Cainiao, because Cainiao is an asset-light logistics data platform that mostly outsources last-mile delivery to third-party companies. 

Were this to happen, the market would determine how a product is most efficiently shipped, providing consumers with more choice and even lower shipping costs. For JD Logistics, diversifying its revenue streams would offer a clearer path to profitability.

For now, the company does not appear to be considering such a move. According to its IPO prospectus, JD.com and Richard Liu remain controlling shareholders. The prospectus warned that “we may be limited in our ability to do business with its competitors.”

However, there are reasons to think this could change. We believe that the emerging push against anticompetitive practices from regulators in China, combined with greater incentive to turn a profit, provide a compelling case for JD Logistics to work with Tmall and other up-start e-commerce platforms. 

Check out TechNode’s Techlash Tracker for an overview of the anti-monopoly push.

The disintegration of these silos could lead to massive changes in China’s e-commerce environment and stimulate innovation. Upstart platforms would be able to better integrate e-commerce capabilities without having to make massive investments in a scaled back-end logistics network that can deliver goods to Chinese consumers at the fast speeds they demand. 

For example, short video apps like Douyin and Kuaishou represent promising sales channels because of their intimate knowledge of users’ preferences and the dynamic nature of these platforms. Although Douyin and Kuaishou are making forays into e-commerce, it will be difficult, and perhaps prohibitively costly, for them to develop large-scale logistics networks that perform at the level of JD Logistics and Cainiao. 

JD Logistics should take advantage of its independence to strike more comprehensive deals with those and other e-commerce platforms, which would allow multiple front-end stores to use the same back-end logistics network.

Ultimately, brands and consumers will benefit when innovative front-end sales channels are able to bid for leading logistics services on the open market. Brands will gain a deeper understanding of their customers and have the opportunity to engage them through new platforms or content forms. Customers will enjoy greater choice and a more convenient shopping experience. And not least of all, JD Logistics will improve its profitability.