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Perspectives

In-Depth Report: How JD Tackles Counterfeits

Part One: JD.com’s Beginnings and its Business Model

Photo by Dan Freeman on Unsplash

Author, Brad Burgess

It’s only been a month or so since the COVID-19 outbreak, but it feels like it’s been much longer. As I write this, I sit inside the comfort of my home in Shanghai, where I often pick up my phone and place an order at the touch of a finger. If I want to, I don’t even need to step outside my community at this time. Smart businesses are finding ways of surviving through these trying times. Before today’s delivered lunch, I note McDonald’s “put your heart at ease” tags highlight the temperature of the kitchen staff, cook and delivery person. If that doesn’t curb anxiety while easing hunger, I’m not sure what does.

McDonald’s delivery service during COVID-19

My residential compound has stringent measures that do not allow anyone to enter it. And, when I go to take a walk (which is becoming less frequent), I need to pick up a tag and have a temperature check by the security guard upon reentry. While these measures are tough, they are effective in preventing people from meeting and increasing the risk of communicable respiratory transmission.

Temperature checks for residents before returning to enter compound in Shanghai

Yet, this raises certain questions in my mind. If China didn’t have such a highly developed e-commerce and delivery infrastructure, would people be able to stay inside en masse?  At least for cities like Shanghai – and, in particular the district where I live which hasn’t had a new confirmed case in nearly two weeks – I think the answer is no. Though people are likely battling anxiety as much as they are cabin fever, we live in fortunate times. We have the choice to stay inside. I still remember SARS in 2002 and the public fear that ensued at that time with the lack of information that left many of us ill-equipped to handle it. The situation is far different today.

The only retail company in China that has its own end-to-end logistics fulfillment business, JD.com has been heavily involved in supporting the fight against the epidemic from the front lines to across its entire operations. JD is a company founded on making the most out of a crisis like we see today and developed at a specific point of time in the history of China’s development. Originally, JD was only a few offline retail stores selling electronics in the heart of China’s “Silicon Valley” at the time – Beijing’s Zhongguancun district. When SARS began to wipe out footfall at the offline stores, founder Richard Liu made a highly pragmatic and strategic decision to close the stores and handle customer needs online using the new tools available, such as bulletin board communication programs and Tencent’s QQ chat tool. Once the crisis was over, he saw the opportunity that going online afforded JD. And, the rest is history.

Well, not just yet. And, what does this all this have to do with counterfeits and business models?

If we take a step back in time to how China was back even before SARS to the roots of JD.com back in 1998, we’ll get a bit more clarity.

In Beijing back in the day, everything was negotiable and with few exceptions, nothing was sold at a fixed price. Strolling through market stalls in any given neighborhood was exciting. Shopkeepers haggled with customers. I remember being fought for often – literally pulled this way and that by small shop owners who wanted to persuade me to buy their products at a good `friend price”. After making a few rounds, I often learned that the friend price was sometimes double the “walk away and come back price”.

While a trip at the market was entertaining for visiting tourists who had time and money to burn, imagine the difficulty and headaches this created for the normal Chinese customer. Part of the reason everything was negotiable was because real quality products were uncertain.

With negotiation the norm, fake products were so prevalent it was often hard to tell what was real and what was not. And, haggling seemed highly justified in this environment. Indeed, Chinese-origin fakes became the source of jokes from visiting tourists from around the world for years.

“GUGGI” brand cell phone case. Seen in Shanghai

Now, cut to JD.com in 1998. Founder Richard Liu was a scrappy and hard-working entrepreneur who had a radical idea. He stubbornly believed that people didn’t want to haggle. What they wanted instead was to trust that their products were real. And, he also believed that there would be enough people who wanted real products that they would pay a set price for them, even if it was higher than some of the competition. He staked his business on it.

And, this is how the largest retail company in China – online or offline – was born. If you look at JD’s business today, you’ll notice it’s a highly complex organization made up of several moving pieces. JD Logistics, its in-house logistics business, has been getting the most attention this past month with the COVID-19. JD also has a property business, insurance, technology, and many others.

But, in the very beginning, JD was mostly a retail company. And, retail fundamentals still apply. Retail companies buy product wholesale, handle inventory, and deliver to the customer. This is what JD did 20 years ago, and it’s what they still do today.

JD is unique from other retail companies in a few important aspects. It’s important to understand this because its core retail business model itself guards strongly against counterfeits.

JD made a highly strategic and unprecedented decision to begin developing its own logistics network to service its business. While this was a customer-centric decision, it was also prescient for its authenticity guarantee. Most customer complaints at the time were related to damaged goods. Sometimes in China, the only way to manage an outside vendor is to not to manage them at all but to do it yourself. And, that’s precisely what JD did. Providing end-to-end logistics was the only way that JD could guarantee a higher quality customer experience. With over 700 warehouses in China and over 220,000 staff, there is no question that this is an asset-heavy model. But, it’s the bone and marrow that has led to healthy growth over time. Since JD controls the entire supply chain, they decide how people sell on it and cut out a lot of the unnecessary fat.

This is the business Chinese customers know JD for. It’s called 自营 in Chinese, or ‘self-operated’. This is JD’s first party business, where the company buys, stocks and delivers. And, customers love it because it’s a guarantee of quality and service.

Quality, because JD provides real brands and manages the supply chain for them. Service, because customers get what they are shopping for. They get it quickly and they can return it easily if they are dissatisfied. It’s really retail fundamentals, where JD is able to grow its business at economy of scale. Because it buys wholesale, it offers good prices for the product. JD – in turn – is able to sell to consumers at a good price. This first party – or what JD calls, 1P business, is unique. JD is the only e-commerce company in China that does it. Other companies who once criticized JD’s asset-heavy model are now trying to do the same. It’s both how JD is able to offer quality products and good service as well as how to grow in a fiercely competitive environment. And, eat into the market share of offline retailers.

“I only buy from JD. I don’t trust the others,” says Ms. Wu, a white collar professional and long-time customer of JD.com. She elaborates: “It doesn’t really matter what they (competitors) say. I really don’t buy it. I’ve been buying from JD for years, and I trust the products that I buy, and it’s great service. But, what really makes it special is the delivery. Being able to build a unique relationship with a delivery person is really wonderful and unique.”

The service she alludes to refers to JD’s door-to-door delivery. JD Logistics, its in-house logistics business which is now a separate business group since 2017, allocates JD couriers to ‘own’ residential compound areas. Customers see the same courier on a day to day basis and build a relationship with them. The couriers get to know the customers they deliver to, and can even take orders in addition to simply dropping them off. There’s a lot more JD could talk about in this business, but the key point is that owning the entire system allows a significant amount of control that is of benefit to brands and customers both.

Doctor Zhong Nanshan, the national hero who led China through SARS and today, offers his gratitude to JD Logistics

This leads into another related point. The brand positioning of JD is somewhat on the higher end. Demanding Chinese consumers come to trust quality and are willing to pay the price for it. But, the people who can afford to pay this price are those who have higher income. Because China’s middle class is rising overall, this means the consumer base is growing. But, JD’s business is satisfying two unique groups of consumers. One is the existing JD consumer cohort who for years has chosen quality and has been willing to pay for it. This group is growing.

At the same time, there is another consumer cohort who is increasingly choosing JD, and this is the consumer from the lower tier city. These people have rising incomes, are increasingly savvy and are choosing to “trade up” in their brand and product choice. This is all great news for the company in terms of overall business development. But, equally important, as a wider group of consumers across China have more income to spend for purchase of goods, they will inherently choose quality – and, authenticity, by extension.

JD Logistics courier in Beijing recently, braving the snow

To summarize, when people talk about tackling counterfeits, there’s a lot they can say. But, more importantly, it’s key to understand the business fundamentals as well as JD’s corporate values to get a broader perspective on demonstrating how JD tackles counterfeits. From the first days of JD over 20 years, they were counter-culture at the time. They chose to sell quality at a set price. Then, as the business progressed, they decided to manage the entire supply chain of its business – the only retail company in China to do so – even to present day. Lastly, they continue to be well-positioned as Chinese consumers become both savvier and more demanding. This is part of why some may say JD is the “best kept secret” in the business. And, it’s part of why people who understand its business will continue to invest in JD.

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