As JD.com founder cuts pay to US$1 a year, Chinese e-commerce firm targets poorer rural customers

PUBLISHED : Tuesday, 11 August, 2015, 7:00am
UPDATED : Tuesday, 11 August, 2015, 7:00am

One of China's largest e-commerce firms is looking to grow its userbase with a massive expansion into the country's largely untapped rural market.

JD.com said it will expand its reach to 100,000 villages across mainland China by the end of this year, the Beijing-based firm's most aggressive market expansion since 2013, when it started its foray into lower-tier cities across the country.

The company's founder and chief executive, Richard Liu Qiangdong, also announced that he would be cutting his annual salary to less than US$1 per year, though he will be able to greatly expand his stock holdings in the profitable US-listed company.

American tech leaders like Facebook's Mark Zuckerberg and Tesla's Elon Musk, as well as several Google executives, also claim incredibly small salaries from their companies while making huge returns on stock holdings.

JD's rural expansion will heat up competition with Tmall.com, e-commerce giant Alibaba Group's business-to-consumer operation, in the fast-growing market segment.

"We've made a lot of progress in the past year-and-a-half," Shen Haoyu, the chief executive at JD Mall, told analysts in a conference call late on Friday. JD Mall is the business-to-consumer unit of Nasdaq-listed JD, in which Tencent Holdings has a 15 per cent stake.

"We are covering 46,000 villages right now, and our target by the end of the year is to cover 100,000 villages in China," Shen said.

The number of online shoppers in rural mainland China increased 40.6 per cent year-on-year to 77.14 million at the end of December, according to data from the China Internet Network Information Centre.

Sidney Huang Xuande, the chief financial officer at JD, said the company was encouraged by growth in the lower-tier cities.

"In the second quarter, for the first time, our active customers from tier-three to tier-six cities have surpassed 50 per cent," Huang said.

Bernstein Research estimated there are about 50 cities categorised as tiers one to three in mainland China, about 60 in tiers four and five, and more than 500 smaller cities in tier six.

However, mainland China's classification of cities is not consistent, despite efforts by by many market analysts to use economic scale and population size as yardsticks.

According to a 2010 report by InterChina Consulting, the term "city" in mainland China refers to an administrative division. This typically comprises an urban core and the surrounding rural area, which includes lower-tier cities, towns and villages.

In the eastern coastal province of Jiangsu, for example, the tier-two city of Suzhou has jurisdiction over the tier-four cities of Kunshan, Zhangjiagang and Taicang, among others.

A Tianjin University survey in 2010 found that there were 2.6 million villages across the country. That number, however, has likely decreased over the past few years amid the central government's push for rapid urbanisation.

An estimated 600 million Chinese currently live in rural areas.

While size and average frequency of online purchases in lower-tier cities and rural areas are low when compared to those in tier-one and tier-two cities, Huang said JD data from the past five quarters show an encouraging upward trend.

"Over time we do expect their shopping behaviour will catch up and get much closer to the tier-one and tier-2 customers," Huang said.

JD last Friday said it plans to invest in more high-growth programmes after posting a modest decrease in losses in the quarter ending June 30.

A sharper focus on improved efficiency in e-commerce and logistics operations is targeted “as China's consumers increasingly look to JD for authentic products and the best online shopping experience”, Liu said on Friday.

The company reported a net loss of 510.42 million yuan (US$82.06 million) in the second quarter, an improvement from 582.53 million yuan in the same period last year.

“During the quarter, we enhanced our mobile offering, partnered with premium international brands and expanded our JD Worldwide cross-border e-commerce initiative,” Liu said.

Total net revenue for the second quarter rose 61 per cent to 45.93 billion yuan, up from 28.61 billion yuan a year ago.

That was beyond JD’s previous estimate of between 52 to 56 per cent revenue growth for the quarter and total turnover from 43.5 billion yuan to 44.5 billion yuan.

Its gross merchandise volume — the total amount of goods sold online by a company for a certain period — jumped 82 per cent year on year to 114.5 billion yuan.

That beat Barclays forecast of a 71 per cent year on year increase to 108 billion yuan.

"We continue to see upfront investment on mobile, financial services, and local services weighing on its near-term profitability," John Choi, an analyst at Daiwa Capital Markets, said in a report.

JD said it expected third-quarter sales to slow. It estimated net revenue for in the quarter to September to be between 43.2 billion yuan and 44.7 billion yuan, representing a growth rate between 49 per cent and 54 per cent compared with the third quarter last year.

Annual active customers for JD reached 118 million in the 12 months ended June 30, compared with 68.5 million in the same period last year.

The company had 76,000 merchants on its online marketplace as of June 30.

Fulfilled orders in the second quarter climbed 87 per cent year on year to 305.6 million, with the number of fulfilled orders placed through mobile devices accounting for 47 per cent of total orders.

Huang said JD's logistics capability has proved to be a key differentiator in supporting its domestic expansion.

As of June 30, JD operated 166 warehouses in 44 cities and a total of 4,142 delivery stations and pickup stations. Its network also covered 2,043 counties and districts. Its “211” same-day and next-day delivery programme covered 135 and 951 counties and districts, respectively, as of July 31.