Liu Qiangdong: It's Time to Acknowledge That E-commerce Cannot Do Without the B2C Logistics Model

Recently, the National Development and Reform Commission released the "2015 National Logistics Operation Report," showing that total social logistics costs in 2015 were 10.8 trillion yuan, accounting for 16.0% of GDP. In Japan, this figure is only about 5%-6%, and in some European and American countries, it is only 6%-7%.

Looking at the entire express delivery industry, although SF Express, STO, and YTO have all announced plans to go public, thin-profit operations or even losses have become the norm. With rising labor and rental costs, the survival situation for express companies will worsen in the next three to five years.

With annual costs of 10 trillion yuan, why is the express delivery industry generally unable to make money? Is it a problem with the entire industry, or is it due to the drawbacks of the C2C logistics model?

The B2C logistics model, once questioned, is now acknowledged by everyone as JD.com's core competitiveness. Moreover, fast logistics, coupled with the concept of quality e-commerce, has enabled JD.com to grow into the largest internet company by revenue in China, capable of competing with Alibaba.

Among e-commerce leaders, Liu Qiangdong is the one who understands logistics best. On one hand, Liu Qiangdong single-handedly created JD.com's B2C logistics model, and the process from zero to excellence has deepened his understanding. On the other hand, this entrepreneur, who rarely appears in public, is best known for his image as a deliveryman delivering packages, which reflects his deep emphasis on logistics.

Now is the time to listen to Liu Qiangdong's thoughts on the value of logistics to e-commerce and society, as well as his views on JD.com's logistics model.

The following is excerpted from "Liu Qiangdong's Own Account: My Business Model":

When we built our warehousing and logistics in 2007, almost all warehouses nationwide were single-level. By the end of 2015, JD.com had over 200 warehouses across the country. We have a four-level logistics center system, including seven major regional centers, FDCs (Forward Deployment Centers), RDCs (Regional Distribution Centers), and final delivery stations.

Why did JD.com insist on building its own logistics, a "heavy e-commerce" model, despite numerous doubts?

Logistics accounts for 70% of user experience

From an overall perspective, the core of JD.com's inverted triangle strategy is user experience. In my view, logistics impacts user experience by about 70%.

JD.com offers a very popular same-day delivery service. Why did we launch it? Because only by offering same-day delivery can JD.com compete with offline chain stores. When we shop at Walmart, we can take the goods home immediately. That is essentially same-day delivery. If online shopping cannot achieve this, it is a defect in user experience.

Many people have never understood why JD.com doesn't use outsourced express companies like other e-commerce websites, but instead builds its own logistics and insists on not outsourcing. In fact, the most fundamental reason I consider is that outsourced logistics cannot guarantee service quality, and thus cannot guarantee user experience.

Don't be fooled by the good treatment I give our employees; in fact, our delivery costs are very low. In core cities like Beijing and Shanghai, the average cost per order is far lower than third-party outsourcing. Currently, the logistics system is not a burden for JD.com but has become its core competitiveness.

Building our own logistics reduces social costs—this is the meaning of a company's existence

Whether what we do truly has value, and what that value is, is a question I have been pondering. After long-term systematic thinking, I found that JD.com's greatest value lies in reducing social transaction costs and improving social transaction efficiency.

A company's actions, thoughts, and the core behind them reflect its intrinsic pursuit. I have said before that I hope to reduce China's socialized logistics costs by more than half. In 2015, China's total socialized logistics costs accounted for 16% of GDP. In Japan, this figure is only about 5%-6%, and in some European and American countries, it is only 6%-7%. That means a large portion of corporate profits are swallowed by logistics and distribution channels. Are the channels making money? No, they aren't. Why?

Because the efficiency of our entire industry is too low.

JD.com's self-operated model emphasizes large-scale, bulk purchasing from suppliers, then transporting goods to JD.com's warehouses, and finally delivering from JD.com's warehouses to consumers. This reduces the number of times goods are handled, eliminates intermediate links, and effectively lowers logistics costs. Moreover, we hope that within 5 to 7 years, all standardized products can be moved only once, for example, directly from Huawei's phone factory to consumers' homes, without even entering JD.com's warehouses. If we can achieve single-handling of goods, then logistics costs will be the lowest and efficiency the highest.

Currently, the so-called internet thinking mostly focuses on the transaction end, but the logistics end behind it can only be effectively managed by a large company investing hundreds of billions or trillions, enabling organized and planned flow. Small sellers often cannot achieve this. So no matter what internet thinking is at the front end, the back-end logistics will always have lower costs with greater scale. Small retailers can never have higher efficiency or lower costs than organized large-scale logistics. This is an eternal economic law and the direction JD.com has been striving for.

What are the core characteristics of JD.com's logistics model?

Among the three major systems, I have devoted the most effort to the logistics system. Currently, logistics systems worldwide, like e-commerce, can be divided into the following three types.

1. B2B Logistics Model

Examples include Carrefour and Walmart abroad, and Gome and Suning in China. From their warehouses to their stores, consumers pick up goods at the stores and take them home.

2. C2C Logistics Model

Examples include postal systems in various countries, UPS abroad, and SF Express in China. These are typical C2C models. They have many stations nationwide, each capable of receiving and delivering goods. From an overall layout, they are grid-shaped. A grid-shaped logistics system naturally has high management difficulty and high transportation costs.

3. B2C Logistics Model: This is the model JD.com has always wanted to build

The so-called B2C logistics model is a new logistics demand that has emerged with the development of the true B2C e-commerce industry. At JD.com, what we have always wanted to do is the B2C logistics model.

The B2C model is point-to-multipoint, radial in shape. There is no erroneous crossover between each point. This logistics system is one-way, not two-way, and not grid-shaped, which facilitates optimizing our trunk line transportation costs and improving our operational efficiency.

Undoubtedly, e-commerce cannot do without the B2C logistics system. But before us, at least in China, such a logistics system did not exist. This is why we have insisted on building our own logistics over the years, and it is also the fundamental reason for our investment—there is a market gap in China, there is an urgent need in the commercial society, and JD.com has the opportunity. It's that simple.

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