China’s e-commerce business is booming, with revenue exceeding 120 billion RMB (US$17.5 billion) last year alone, more than double the previous year, and it shows no signs of slowing down. One example of e-commerce success is online retailer Jingdong Mall, which achieved an ambitious target to almost triple its annual revenue to nearly 4 billion RMB (US$585 million) between 2008 and 2009.

360buy Jingdong Mall is now China’s biggest computer, communication and consumer electronics (3C) online retailer. Its CEO and founder, Liu Qiangdong, recently announced new growth targets to help annual revenue hit 10 billion RMB this year.

How did a run-of-the-mill Beijing electronics shop transform itself into an online business-to-consumer (B2C) powerhouse? The company’s ascension began with what some would call a lucky move into e-commerce in 2003. But its 300% revenue growth in the five years since has had much more to do with business acumen than luck. How is it managing such fast-paced growth? What makes its CEO so sure that the company can achieve 10 billion RMB of turnover in 2010? And what is it about the company that helps it stand apart from competitors? China Knowledge@Wharton asked Liu these and other questions.

The following is an edited transcript of interview.

China Knowledge@Wharton: I’d like to thank you for taking the time to speak with me today, Mr. Liu. To start, can you talk about the origins of Jingdong Mall?

Liu Qiangdong: In 1998, I quit my job at a foreign company and started my own business in Zhongguancun, selling magneto-optical products. My first goal was to establish a chain of stores selling IT products and I planned to have 200 stores by 2008.

Soon, I found prices for IT and digital products were increasing much too quickly. The price of home appliances changed every month. Much like the futures market, the prices of IT products, such as for CPUs, fluctuated by the day. Even if the overall pricing trend was decreasing, chain stores couldn’t adjust prices quickly enough so that prices often fell  before the product was even delivered to the end user. Additionally, leading chain stores, such as Gome and Suning, also entered the 3C market, and we didn’t have much of a chance competing directly against them.

Then, in 2003, the SARS epidemic broke out, and Beijing was the worst hit city in China. Our customers were afraid to go outside to shop, and our sales declined sharply. We were forced to find alternate ways to promote our products. We began posting product information online, and the response was overwhelmingly positive. Going into e-business also effectively reduced high inventory and operating costs. However while many people at the time were aware that online shopping was available, few used it. In the first half of 2005, I decided to completely abandon the physical store and changed my business model from a traditional store model to that of a 3C e-business. I headed up a group of IT technicians and we developed our own information system.

China Knowledge@Wharton: But you weren’t alone. At the time, there were many companies jumping into B2C e-business with similar business models. Yet Jingdong Mall came out on top. What is the secret to Jingdong Mall’s success? Can it be replicated?

Liu: The most fundamental reason for Jingdong Mall’s success is focus. Though many traditional retailers and suppliers use e-business, they tend to look at it as a complementary unit and not a main source of income. For us, e-business was everything, which led us to allocate resources differently. For example, in 2005, after we transferred all our business online, our sales were only 30 million RMB, less than half of what they were previously. But we stuck with it. Of course, some people attribute our success to our choice of product. Compared with other products, 3C products are more standardized and have higher unit prices. We don’t deny that this also influenced our sales.

But unlike some of our peers who talk big about flashy concepts, we kept it simple, focusing on three things: improving information systems, building teams and optimizing supply chains. We will focus on this for the next decade. We look at Jingdong Mall as a retailer, not as an IT company. Although there are some small differences, our main purpose differs little from that of a retailer – we buy and sell. Our central development plan is based on products, prices and service. The key to winning in this business is not the so-called business model but the implementation of details.

Take packaging. Jingdong Mall uses six different kinds of cardboard boxes to deliver products. If a large box is used to deliver a small product, it increases costs – not only of the box itself, but also of the foam and tape for the packaging. How do we control this? We keep regular records and analyze the performance data of each employee involved in packing our products. If there are any deviations, we can pull the employee aside and remind him of proper packing procedures. Currently, we deliver thousands of packages a day, and if we don’t pay attention to the small details, the accumulative cost would be staggering. However, balancing cost and customer service is also important, and we devote a lot of financial resources to building local distribution teams in dozens of cities. This home-grown logistics system monitors service delivery easily, and allows for [point-of-sale] payments to enhance the customer experience.

Jingdong Mall's business model is no secret. Many of our competitors do the same thing. The difference is whether we can continue to improve price, product and service performance. I devote 30% of my time every day at work to reading customers' emails, and our old customers also e-mail me directly, which helps us improve service.

China Knowledge@Wharton: Some people are critical of Jingdong Mall’s business model, saying that it uses a low-price strategy to enlarge its consumer base, resulting in weak profits and a business plan that is unsustainable in the long term. What is your response?

Liu: As our company is not listed, I’m under no obligation to release profit numbers. At this stage, profits are not our main concern. Our first concern is to use the business model to increase sales volume by creating value for our customers and suppliers. As sales increase, profits come from a range of sources and are not limited to pricing. In fact, 30% of Jingdong Mall’s current profits come from other sources, such as advertising and brand and event promotions.

Keeping prices low requires cost-control capabilities, not just changing price tags. First, 90% of our supplies come directly from manufacturers or top sales agents. Second, we pay attention to small details to reduce unnecessary costs, keeping in mind that our customers pay for any waste. Finally, we don’t seek to attain very high profit margins. We will always have low prices. This is not a temporary tactic, and we will always strive to have lower prices than our competitors. As for keeping a cost advantage, there is no real secret, although it involves thousands of employees and hundreds of processes.

China Knowledge@Wharton: You mentioned that profits are not your first concern. What is your first concern? Is it scale? Do low prices serve to increase the scale of the company rapidly?

Liu: I do not deny that low prices increase the scale of the company, but that is not our only intention. I would like to emphasize that you can’t have low prices without low costs. With annual sales in the billions, we can’t afford even a 1% loss. Presently, Jingdong Mall is looking forward to reaching its goal of sales of several billion RMB as quickly as possible. To me, until a retailer has achieved 10 billion RMB of sales, he can’t exert any influence on the industry.

China Knowledge@Wharton: You have publicly declared your goal of reaching 10 billion RMB of revenue in 2010. What's the reason for your optimism when you have less than 15 months to achieve it?

Liu: According to our sales performance over the past eight months, we should hit a target of nearly 4 billion RMB this year. Over the past five years, Jingdong Mall has recorded an average annual compound growth rate of 300%. At this rate, a 10 billion RMB revenue target is feasible. Of course, as our customer base expands, we don’t expect growth to always be this fast.

In fact, one of the main bottlenecks for us is not the number of orders, but logistical capacity, such as delivery and storage. What our customers complain about most is slow delivery times.

Earlier this year, we received a second round of [private equity] financing to invest US$21 million in expanding our three major warehouses in Beijing, Shanghai and Guangzhou, which will give us capacity to handle the processing and distribution of 10 million RMB of orders. The expansion will be finished by the end of October. In addition, we have speeded up the construction of our local distribution centers, and an increasing number of cities can access our logistics services. In terms of sales promotions, we plan to advertise, but don’t plan to spend much money on it. Advertising fees account for less than 1% of sales. In short, we will continue to focus on product, price and service. Regardless if the revenue target is 4 billion RMB or 10 billion RMB, our business model will essentially remain the same.

China Knowledge@Wharton: Jingdong Mall built its reputation on selling 3C products online, but last year you added other items, such as clothing, shoes and watches. Some observers, including your investors, might worry that this change will dilute the company’s brand influence. How do you react to this? Will Jingdong Mall become an online Wal-Mart, selling a wide variety of goods?

Liu: People always call us the online Wal-Mart, or the online Gome, but we just say we are ourselves. We don’t intentionally imitate others. I decided to add the products because of customer demand. Every year, we receive thousands of e-mails from customers asking us to increase our product line. Their needs are the most important to us. In 2004, we experimented with selling cosmetics [online], which brought in a revenue profit of between 200,000 RMB and 300,000 RMB every month. But because of limited resources, we abandoned cosmetics and focused on 3C products. We now have the logistics, information system, team and funding necessary to add products if we want to. I respect the opinions of our investors, but our customers take priority.

There are hundreds of thousands of products other than 3C products that can be sold online, and currently we only have 5,000. This is a relatively small percentage of sales but it is growing rapidly. We conducted preliminary research and negotiated with suppliers to add categories. We are prepared to spend the next three to five years completing the process. There is no need to worry about brand dilution. Our home page still emphasizes 3C products. According to surveys, our customers don’t feel we’ve changed.

China Knowledge@Wharton: Do you worry that expanding the product range will lower your profit margins?

Liu: Ten years ago, I set a rule that our retail business would not be based on products with high profit margins, that only products with low profit margins can build the core competence of a company. Although Carrefour and Wal-Mart’s profit margins are not high, they have offset the low profit margins of their products by improving the efficiency of operations and cutting costs, and the low profit margin does not affect the value of these companies.

China Knowledge@Wharton: Recently, Gome and Suning accelerated their plans to enter the e-business market. What are your comments on future competition between you and these traditional retailers?

Liu: In the future, most companies will be involved in e-business, whether they are suppliers or retailers. But for traditional retailers, e-business is just one sector. Unlike us, they cannot allocate all their resources to support the pursuit of just one sector. However, all companies related to e-business will see a period of high growth.

The media love hype and are predicting that the rise of Jingdong will weaken Gome, Suning and other traditional channels of business. In fact, these two retail giants take only a 20% share of the home appliance and IT product markets. It’s far from zero-sum competition between traditional and e-business retailers. Even if we continue to grow a lot, it doesn’t mean they will suffer losses, although that might happen in 10 years from now.

Besides, e-business and traditional retailers cater to different consumer groups. Our customers are mainly young people familiar with the Internet and open to online commerce, while older people still want to go to stores. Even my parents, who live in Jiangsu province, bought their air-conditioner in a nearby Gome store, rather than use their own son’s website.

China Knowledge@Wharton: I heard that some suppliers are concerned that your pricing policy will upset their traditional pricing systems and refuse to cooperate with you. Is this true? How do you deal with these issues?

Liu: We regard our 1000 suppliers as important stakeholders. One honors all. One damns all. Many traditional retailers charge fees under a variety of names, like “promotional income,” “management service fees” or “display space leasing fees.” We never charge these. Due to our efficient inventory management, the turnover period of goods from supplier to consumer is 10 days on average and most suppliers receive payment within 20 days. This suits them better than the traditional retailer’s offer, which always takes several months.

Suppliers also need to make some changes. One is the product. If the product available online is exactly the same as the one available offline but is much cheaper, this naturally creates problems. One solution is for the manufacturer to provide models that are exclusively for e-business, avoiding direct price competition between the two channels. Secondly, the e-business market has no geographical constraints, which means traditional agreements that limited the geography of where a retailer can sell, need to be reworked. The vendor distribution systems, including logistics and after-sales service, which are always based on region, have to adjust to e-business. Some vendors have already tried to do this. Nokia’s after-sales service network, which covers the entire country, is able to support our products.

Last year, a few suppliers refused to deal with us, but they were the exception rather than the rule. Most rational vendors have a positive attitude toward the rise of online shopping and are willing to provide promotional resources to cooperate with us. Our most important suppliers are either brand manufacturers or advanced distributors.

China Knowledge@Wharton: You have gone on record saying you are not interested in corporate finance or investor relations. As the company grows, have your opinions changed? How do you lead your team?

Liu: I have just enrolled in an executive MBA course, because in my opinion, if a CEO doesn’t have any theoretical grounding, he cannot go very far, even though I wasn’t enthusiastic about tackling corporate finance and accounting. Communicating with investors is a routine part of my work.

As the company goes through different stages of development, the leader’s role should adjust accordingly. Previously, I had no vice president or assistant and had to handle operational details, such as the number of orders and logistics myself. But over the past year, we have expanded our team to include five vice presidents in charge of separate parts of the business. After a year of cooperation, I’m pleased to see we hired the right people, and I can now stop worrying about small details. For example, if I take a business trip that lasts a week, I don’t have to make more than 15 business-related phone calls. My assessments rely on our information system, and I have access to all the information, such as sales numbers and gross profit, at any time.

Nowadays, my main involvement in the company's day-to-day operations is during the 8.30am meeting, which usually revolves around ways to improve operations and coordinate cross-functional work. I think about strategy most of the time. Also, I have a lot of "ceremonial" duties, which take up a lot of time, such as maintaining communication with media and investors, visiting peers, etc. Of course, I still make time to read a large number of customer comments.

China Knowledge@Wharton: Judging from available data, China’s online shopping market is in a golden age of rapid development. In your opinion, what are the obstacles for development?

Liu: There is a huge vacuum in the industry in terms of regulation and enforcement of such. Many consumer-to-consumer (C2C) websites eschew invoices, which in China is a method of tax evasion and gives them an unfair edge over competition. China’s logistics industry, in general, is also underdeveloped. Most logistics companies’ services are subpar, the quality is uneven and the fees are too high, so we have to build our own logistics systems in important cities. However, complaining about these things will not solve them. You can’t wait to start a business until all the conditions are perfect. In recent years, the overall environment has vastly improved.

China Knowledge@Wharton: With more new entrants to e-business, where does Jingdong Mall stand? What’s your take on C2C trade platforms like Taobao?

Liu: Regardless of whether [a C2C platform] is a vertically or horizontally integrated online retailer, neither will have many survivors. In a homogeneous market, there will be at most one to three survivors. Jingdong Mall now mainly focuses on 3C products and will develop a horizontally integrated B2C website in the future. As for C2C trade platforms, the value they provide is relatively limited. Taobao’s business model relies on the business between seller and buyers and a variety of logistics companies, making it difficult for it to optimize the distribution process and produce [economies of scale], which neither significantly cuts distribution costs nor effectively improves channel efficiency. In the long term, the B2C business model will result in greater value for its end users and suppliers, by building a large-scale business.

Source: knowledgeatwharton.com.cn