IPO to spur on JD.com in the race to build an effective distribution network in China

JD.com recently became the first Chinese company to file a US listing for an IPO since the accounting scandals at the big four US firms broke. Although the real details of the IPO, in terms of the price and quantity of shares, have not yet been disclosed JD.com is looking to raise up to $1.5bn from the move, posing the question of how exactly the company intends to use the funds?

JD.com has made no secret of its long standing desire to build its own China-wide distribution network. It therefore seems likely that the money raised from the IPO could be used to fund the capital intensive process of building up the necessary warehousing and distribution centres.

The fragmented retail market in China is seen as a great opportunity for e-commerce companies to quickly become the preeminent instrument of retail consumption within the country. However, the efforts of e-commerce companies such as JD.com and the giant Alibaba have been somewhat stifled by China’s equally fragmented infrastructure.

Designed to serve China’s historically export driven economy, the country’s infrastructure is not very well suited for the Chinese shift to domestic consumer demand. Consequently the race to be the first to develop an efficient distribution network is likely to be decisive in the battle for market share between Chinese e-commerce companies.

Having started this race in 2009, in its IPO submission JD.com revealed the extent of its existing network which features six fulfilment centres, seven front distribution centres, 82 warehouses, 209 pickup stations and 1453 delivery stations. It has capacity for 25.7m SKUs and is manned by 26,288 workers in 460 cities across China; it is a network that has already brought the company some 35.8m customers. JD.com conducts delivery services from these facilities through its subsidiaries Jiangsu Jingdong Information Technology Company and Jingbangda. By doing so the company hopes that its uniform service offering and its range of products available for reliable express delivery will secure its future growth prospects.

Alibaba, which is estimated to hold up to an 80% share of the Chinese e-commerce market, stands as one of JD.com’s major competitors in this race. It began pursuit in 2011, developing a logistics strategy dubbed the ‘China Smart Logistics Network’. It consists of three domestic aspects; a supply chain management platform to deal with inventory, an integrated logistics services platform from warehousing to delivery and a nationwide network of warehousing. Alibaba expects the implementation of this plan to cost $15bn spread over 10 years, a considerable investment which goes some way towards explaining why JD.com may be seeking extra funding, even if its IPO is only likely to deliver a fraction of the funds set aside by Alibaba.

Of still greater concern to the comparably diminutive JD.com is the difference between its high inventory business model and the minimal inventory ‘marketplace’ model employed by Alibaba, specifically with regard to warehousing requirement. As a ‘direct-sales’ e-commerce company, JD.com must necessarily maintain much higher inventory levels than its competitor Alibaba. The reality enforced by this business model is that, in order to compete with Alibaba in the future, JD.com will require vastly more warehousing and distribution facilities than its rival. While Chinese e-commerce companies scramble for market share the capital cost of this prerequisite could well prove to be JD.com’s downfall.