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Thank you to all of our subscribers for supporting DJY Research! We hope you enjoy our JD Logistics Deep Dive! This turned out to be on the shorter side for our reports (which some of you are probably thankful for!). If you haven’t already read our full JD report we published last month, we recommend you start with that as we assume that prior knowledge in the JDL report. While pundits don’t give JDL much attention as a stand-alone company, we believe there are some important readthroughs to other global ecommerce and logistics companies.
Background History.
JD Logistics started as JD’s logistics arm in 2007 to handle the fulfillment and delivery of orders placed on JD.com. In JD’s early days, Founder Richard Liu noticed that their most common customer complaint was with delivery (at one point he noted that over half of all complaints dealt with poor delivery service). Liu recognized that as an ecommerce company, the only direct contact the customer would have with their service was when they received the delivery, and a damaged or delayed box would quickly become synonymous with JD.com. JD tried to work with delivery providers to solve their issues, but working with a motley crew of different 3PL (3rd party logistics) providers was complicated and their quality varied wildly. To eliminate the most common source of customer dissatisfaction, it became apparent to Liu that they would have to bring logistics inhouse. Liu had big ambitions — they wanted to be the fastest delivery service in all of China (including servicing the remote and low-density rural countrysides) that was also capable of shipping large items like appliances and specialty items that needed to be kept cold. However, their first deliveries started much more modestly, with goods being manually sorted, picked, and packed before a small band of delivery people would take the packages to the customer as long as they were in their limited coverage of just Beijing.
In these early days it wasn’t uncommon for a delivery person to only have one package to deliver at a time. However, JD knew that a better experience would bring repeat sales and more word of mouth, which would translate to increases in volume over time. With the goal of being the undisputed fastest delivery service in China, JD rolled out the 211 program in 2010. For goods under this program, any orders received before 11am will be delivered the same day and orders received by 11pm will be delivered by 3pm the next day. Rollout of this program was initially limited to certain regions and limited selection, but they continued to grow coverage over time. To support this service, JD started acquiring assets to build a network of warehouses and delivery stations and hired their own delivery people. Due to the growing importance of logistics and its increasing complexity, JD completed a restructuring in 2012, making JD Logistics its own entity, although they still exclusively supported JD Retail.
When JD Logistics first started, the warehouse picking and packing was completely manual and warehouse workers would often run several miles over the course of each day as they moved packages throughout the facility. This was a highly inefficient system, and resulted in an overworked and frustrated employee base. As they continued to grow volumes and selection, they became even more inefficient as employees often collided as they rushed to grab items in a crowded warehouse with new SKUs being constantly introduced. Automating and digitizing their warehouses became the top focus to stamp out waste, improve throughput, and be able to grow effectively. The culmination of this was their “Asia No 1 Warehouse”, which is a fully automated warehouse that rolled out in 2014. This warehouse utilizes a shuttle system that enables a “goods to person” model that is 6-8x more efficient than manual picking. For other orders, they utilize automated ground vehicles (robots) that bring the racks of goods to the workers for them to pluck the item out of the rack, which enables 250 orders picked per hour. Automating storage, which includes tall and deep racks of goods, is 10x more efficient than how they traditionally stored it. The operational and financial benefits of having a highly automated fulfillment center were clear, and they continued to build out more “Asia No 1 Warehouses”, while simultaneously adopting the technology they developed to upgrade their other warehouses.
As they continued to increase their investment and capacity, they eventually reached the position where they could handle more volume than they were currently facilitating. Being able to serve all of China with quick delivery meant having to build a warehouse and last mile delivery network across the entire country. Having built out a network that was highly efficient and greatly underutilized, JD Logistics realized that taking on incremental volume from external customers could be profitable, as well as spread the cost of their network across a larger base. As a result, JD restructured once again in 2017, turning JD Logistics into a standalone business unit serving external customers. In order to continue growing and densify their network, they raised $2.5bn of external capital in 2018. A few years and many more external customers later, JD felt that they were ready to completely spin out JD Logistics into a separate publicly listed company and IPOed them in 2021. They raised $3.2bn in their Hong Kong offering, which would enable them to continue to build out their logistics network. JD.com still retains a majority stake in JDL with ~65% ownership.
Business.
JD Logistics offers supply chain solutions to help customers move goods throughout China (and to a lesser extent, globally). They operate 6 logistics networks (Warehouse, Linehaul, Last Mile, Cold-chain, Bulk, and Cross-border) that mesh together to offer comprehensive supply chain services across all of China and amongst a variety of different products. They operate over 1,300 warehouses with another 1,700 warehouses plugged into their Open Warehouse management platform for a total of ~24mn square meters (~260mn sqft). Their delivery personal exceeds 220,000 and they enable millions of packages to be delivered in one day or less. JD Logistics generates revenue by charging for various delivery and logistics services on a per unit basis and through longer term contracts, as well as selling their inhouse developed software and robotic solutions.
Above, you can see that they report revenue in two segments: 1) Integrated Supply Chain Customers, and 2) Other Customers.
Integrated Supply Chain Customers (ISC customers): If a customer utilizes warehouse or inventory management solutions, they are categorized as an Integrated Supply Chain Customer. These customers require a higher requirement of industry specific knowledge, so JDL can help deliver end-to-end coverage with more technology to drive efficiencies and fully integrate with their back-end systems.
One of the largest ISC customers is JD themselves, with originally 100% of JDL revenues coming from JD. However, by 2018 only ~70% of JDL’s revenues came from supporting JD and related parties, which kept decreasing to under 50% today. The number of large external customers ( >1mn RMB in revenues) has doubled in the past two years to reach >2,300 at last disclosure. There is a long tail of smaller customers though as they have in total ~60k ISC customers which is growing +59% y/y as of 1H21, with an average contract value of RMB ~197k (+4% y/y).
Other Customers: This segment comprises customers who use more standard products (and not warehouse or inventory management solutions) such as express delivery and freight delivery. These products allow customers to modularize how they utilize JD, but also increase the pool of customers who they can ultimately upsell as an Integrated Supply Chain Customer.
JDL uses their 6 logistics networks (Warehouse, Linehaul, Last Mile, Cold-chain, Bulk, and Cross-border), to enable their 5 main different services shown below.
Warehousing and distribution services accounts for over half of all revenues, followed by Express and Freight Delivery as their second most popular offering. Below, we will touch on each offering with more detail as well as provide some stats on their various logistics networks that support their products.
Warehousing and Distribution Services: This is broken up into four categories: 1) First Mile Services, 2) Multi-Level Warehousing and Distribution Services, 3) Logistics Technology Services, and 4) Value-Added services.
1) First Mile Services: These services are for dealing with transporting goods from the factory to the warehouse. Included here are pick-up/drop-off services by appointment, storage, consolidation & palletization of goods, warehouse delivery through FTL (full truckload) and LTL (less-than-truckload) transportation, and goods inspection. JDL leans on their inventory forecasting tools and inhouse logistics systems to help coordinate and adjust the delivery schedule to minimize excess time inventory sits in their system.
2) Multi-level Warehousing and Distribution Services: This is usually what people think about when they hear “logistics services”—it includes product storage, packing & labeling, order assembly & consolidation, and product delivery to the end consumer. The cloud warehouses they operate also offer these services with their intelligent warehousing management system, which places the goods in the most efficient place across their huge footprint of warehouses.
They have two main types of distribution centers—RDCs (regional distribution centers) and FDCs (Front Distribution Centers). The Regional Distribution Centers are larger and carry a lot more SKUs whereas the FDCs are smaller, but closer to the end customer, to enable faster delivery. Items can be forwarded from RDCs to the FDCs when inventory at the FDC is low. Their software systems digest their large data sets to estimate order cadence to ensure inventory is placed close to where a predicted order will come from. This helps enable faster delivery and a more efficient use of inventory. Instead of having high stock in each warehouse to be ready to ship out to a customer, they can lower their customers’ inventory levels at the FDCs with their algorithms estimating when to send additional units from the RDCs before the FDC runs out. This means that JDL helps customers grow their geographic coverage with quicker shipping while reducing the inventory levels. In short, this means that a JDL customer can service their customers better with faster delivery and fewer stockouts, while simultaneously reducing their working capital requirements. (The package flow is usually from RDC to FDC to delivery station where one of their last mile delivery personnel picks it ups and takes it to the end consumer.)
3) Logistics Technology Services: Everything mentioned above is supported by their Warehouse Management System (WMS) and Transportation Management System (TMS) which help them digitize, automate, and operate all of their owned and cloud warehouses. After developing these solutions originally for JD.com, they started offering them to external customers as SaaS logistics solutions to help customers run their supply chain. After reiterating and refining how they run their own warehouses, JDL turned their WMS and TMS into an external product to help support other warehouses. Many of these 3rd party warehouses that run their WMS are also managed by JDL, in which case they are considered “cloud-warehouses” and are managed under the “Open Warehouse Platform” program. If a warehouse owner joins JDL’s Open Warehouse Platform, they effectively plug into JDL’s backend systems and their warehouse is used the same as any other in JDL’s network, even taking the JDL brand name.
They have over 1,700 cloud warehouses (vs 1,300 owned). The 3rd party warehouse owners benefit from having leading edge technology and software without having to develop that on their own, while also benefiting from the customer base and volumes that JDL’s system brings, which drives efficiency for the owner. JDL benefits by extending their warehouse footprint without having to build out each warehouse, which is costly and time consuming. JDL charges those on their Open Warehouse Platform a fixed technology fee or a fee based on the total parcel volume. To get onto the Open Warehouse Platform, a 3rd party warehouse operator has to have a proven operating history, and if approved, JDL will start storing inventory in their warehouses and pay them a market-rate fee.
Additionally, JDL can help redesign 3rd party operators’ warehouse layouts, moving or installing high-bay shelves and procuring robotic solutions for them. Making available the hardware they helped develop for automation, as well as the expertise they have cultivated operating hundreds of warehouses for over a decade to 3rd party operators is an important value add that partners consider when they are thinking about joining JDL’s Open Warehouse Platform.
4) Value-Added Services: Lastly, they offer reverse logistics (returns), cash on delivery (COD Payment), advertising, and specialized packaging services.
Express and Freight Delivery Services: This service entails package and freight delivery to corporations and individuals. While the size and weight of a package and freight can vary substantially and they utilize their own networks, the process is very similar: a customer drops off the goods or requests it is picked up, then it is collected and sent to a sorting center, then to a destination sorting center, and lastly to the delivery station where it is either picked up or delivered to the customer via their last mile network. They operate over >200 sorting centers supported by their fleet of >7,500 trucks & vehicles, ~7,800 delivery stations and >200,000 delivery personal. These assets help them achieve a 100x lower than average complaint rate of 0.002 per million orders vs the industry at 0.22.
Bulk Item Logistics Services: This service allows JDL to deliver large appliances and furniture from the warehouse to the end consumer, and also covers assembly & instillation. If you recall from our JD piece, JD.com was vying for share during the “appliance war” and having the ability to deliver directly to the consumer with the ability to install helped make them competitive vs their big box competitors. They also set up JD Service Plus that offered repairs and maintenance with a guarantee.
Cold Chain Logistics Services: Similar to the above, this is a reinforced supply network tailored to specific item needs. Their Cold Chain Network is an end-to-end logistics chain with temperature control and monitoring at every step to keep goods like food and medicine at the preset temperature. This is very tricky to do and requires a lot of sensors to monitor along the full route since any disruption could destroy the product but not be apparent upon delivery (if the fridge in one of the trucks is broken, a bottled medicine may look the same even if it is spoiled). This was a very helpful logistics network to have in place to distribute the Covid vaccine, as it needed to be kept between 2 and 8 Celsius. JD Logistics was one of the first that could guarantee this. More relevant to JD’s core business though, as the push to grocery continues, having a network that can deliver supermarkets’ food in a supply chain they control with quality assurances is a strong synergy vs competitors.
Cross-border Logistics Services: JDL helps merchants who want to sell in China by letting them ship to their bonded warehouses (bonded warehouses do not pay duties) and JDL will then help them clear customs and deliver the goods through the appropriate logistics network. They also provide a service to deliver globally, which is especially pertinent for Chinese consumers who buy on JD.com outside of China. For their global service they aim for what they call 48-48, which stands for any package to be picked up and sent to the destination country in 48 hours and then in another 48 hours to the end consumer.
A few slides detailing JDL’s cross-border logistics product.
Industry Background.
When JDL was just starting up, the shipping industry was very fragmented with little coordination and a lot of wasted “deadhead” miles (deadhead is an industry term for when a truck drives with no cargo). Shipping goods from Shanghai to Beijing was often more expensive than sending them to the US. This was due to little infrastructure, including a lack of cargo hubs to sort and transfer goods, which resulted in shippers moving the goods directly from vehicle to vehicle at each stage in the transportation journey, which is highly inefficient. Whereas today goods are pre-sorted, consolidated, and then stored for the truck’s arrival, before, these workers would have to wait for multiple trucks to arrive at the location so they could be unloaded together and goods swapped amongst them. This led to multiple inefficiencies: 1) leaving the vehicle stationary for long periods of time while waiting for the other truck to arrive and during loading, 2) leaving cargo capacity underutilized, and 3) limiting the available routes. This was all worsened by the fact that everything was manual with zero automation or computerized tracking systems.
To help exemplify some of the issues, we should think about the benefits of FedEx’s original hub and spoke model, which was a creation of FedEx Founder Fred Smith. FedEx has their “hub” in Memphis, Tennessee which is where all packages are sent. So, if you were sending a package from Phoenix to Albuquerque (which are ~400 miles apart), it would go from Phoenix to Memphis and then to Albuquerque. This means instead of just traveling the direct 400 miles, the package would go 1,400 miles to Memphis and then another 1,000 miles to get to Albuquerque. It was a tough sell for Fred Smith to convince clients that this was somehow more efficient, so he stopped trying to explain to early clients how adding an extra 2,000 miles of travel made the network operate better. The reason is simple though: on any given day there is not enough cargo to fully load a plane of packages from Phoenix to Albuquerque, however there is a full cargo load of goods leaving Phoenix to go somewhere in their network. By grouping all the outbound packages leaving a city and having them arrive at the same location (in Memphis) they can then sort and consolidate loads for the second leg of the journey. So that package from Phoenix may be grouped with others from New York City, Milwaukee, Dallas, and many other cities in the network, that together better utilize the plane for the inbound trip to Albuquerque. This eliminates the inefficiency of a mostly empty plane departing from Phoenix to then be stuck with another route out of Albuquerque that has low package volume. Despite having to travel 5 times farther (2,400 miles vs 400 miles in this example) the increase in packages per flight more than makes up for the incremental distance, which means the cost is still lower. The net of all of this is higher plane utilization with more package volume decreases the cost per mile and cost per package, which then in turn can lead to more rationale prices for the shipper. We bring this up to help build an intuition for logistics efficiency and because everything that made the hub and spoke model an efficient model is exactly what China wasn’t doing at the time: there was limited aggregation of volumes for each delivery and there was a lot of deadhead miles and idol capacity.
JD Logistics had a slightly different problem they needed to solve for. Whereas FedEx built their hub and spoke model to posture for higher value, express delivery that clients were willing to pay for, JDL was first solving for reliability, consistency, and availability. As we noted, JDL was created to solve customers’ most common complaints: damaged and late packages. The immediate initial ambition was not 1 day delivery, but rather to stem the onslaught of customer complaints. Also, in contrast to FedEx, JD was the sole “customer” for their logistics network and packages were all flowing one way (caveat for returns) from the manufacturer to a warehouse to the end consumer. This allowed JD/JDL to set up their warehouse network close to the end customers with inventory being placed according to their demand forecasting tools, which was fed by the millions of consumer transactions they facilitated.
When many think of JD Logistics’ push into delivery, they think of their last mile delivery force that delivers the package directly to the customers footsteps, however, the last mile function isn’t actually the biggest factor of quick delivery. It is much more crucial to build a warehouse network with the product already close the end consumer and this is exactly how JDL built their network. This is what is called a “mesh” or “point-to-point” network and is different than FedEx’s hub and spoke model. Whereas in the hub and spoke model, inventory is all sent to a “hub”, in a mesh network, inventory is spread out to as many nodes as possible, each of which act effectively as mini hubs. As JD’s demand continued to increase, they could densify their network with more nodes, which means more warehouses and better inventory allocation that could speed up delivery. All of this did mean that delivery times rapidly improved, but also that out-of-stocks and damaged packages decreased as they took full control of the supply chain with limited need to coordinate with 3PLs whose quality wildly varied.
Their last mile delivery force is nevertheless still critical, and they employ ~220k personnel to cover all of China. After going through their warehouse network, a package arrives at a delivery station where delivery personnel collect their day’s deliveries and drops them off right at the customers’ doors or a locker. They operate ~10k service stations and lockers for pick-up and partner with other providers for a further >250k pick-up points. As more volumes run through their network, they can further expand and densify the network, while increasing utilization, which when coupled with optimizing their Warehouse, Order, and Transportation Management Systems drives efficiency and decreases costs. All of this means that the bigger they get, the better they can serve their customers. We will next go into how JD serves various verticals and dive deeper into their delivery package flow.
Vertical Specialization.
Specific industry verticals have different needs and order process flows. JDL has a flexible logistics network in order to accommodate different industries and is focused on continuing to develop specialized services and optimizations for various industries. Three of the biggest industries are FMCG, Apparel, and Home Appliances & Furniture. All of these industries JDL originally created to support JD.com, but now are also externally offered and make up JDL’s most competent offerings.
Below is the order flow for FMCG (fast moving consumer goods). The items journey starts from the factory or an imported from an international supplier. The second step is getting it in a warehouse which can either be the dealers or JD’s Warehouse Network (highlighted in red below). This is one of JDL’s bigger value props as their warehouse network allows flexible and wide storage of products across the country, close to the consumer. After being housed in the warehouse, it is sent to a delivery station or store and then finally to the consumer. They call this “short chain” whereby they try to reduce the times the inventory moved from 4-5 times traditionally to 2-3. (When we mentioned the Regional and Front Distribution Centers prior, those both are included in the JD warehouse inter-allocation node highlighted in red below.)
The flow for apparel is below and it’s worth pointing out the “reverse logistics” node, which is an industry specific value-added service whereby JDL can help pick-up returned goods, inspect, repackage, and retag them. Reverse logistics is a very difficult and highly valued service which helps JDL stand apart from competitors. It is especially important in the apparel segment, which has the highest return rates compared to any other category.
The last segment they show is the home appliance and home furniture segment. As you could ascertain, these are large and heavy items that utilize JDL’s bulk item logistics capabilities. It is worth calling out a few unique services below. The first is the “after-sales” warehouses, which help manufacturers serve their customers by providing their customer or dealers spare parts quickly to address any potential issues. Secondly, the last mile delivery force is capable of assembly and installation, which is a further distinction versus others who merely drop the item off and require you to separately schedule installation. Lastly, they also have reverse logistics which is a basic, but hard-to-execute service.
This also blends into JD’s network partners with their Jing Dong Bang brand that has 1,800 bulk item delivery stations, which also support service and installation. Every delivery has different needs, whether it is a small ecommerce package with a tube of toothpaste or a huge stove and being able to handle all volumes is hard as it requires different supply chain needs. JDL covers all this while also helping with the upstream inventory management and production decisions.
Advertising.
As they built out their infrastructure, JDL looked to optimize everything, from the automated warehouses and delivery robots to branded trucks. However, given the capital-intensive nature of the business, efficiency didn’t always mean more profitability. Incremental margin improvements were fairly limited as continued growth required a lot of capex and an ever-growing employee base. As they looked for other ways to improve their margins, they realized that advertising would be an “easy win”. As they moved goods across the physical world, they essentially had moving billboards in their trucks that could reach millions of people as they went through their lives. Rather than just having JD-branded trucks, they began to open up that real estate to advertisers and partners.
Although these moving billboards reached more people, most people would only see them for a brief moment while they were outside (besides at pick-up points, which customers would frequent regularly). As JDL looked to improve their advertisers’ engagement, they realized they had another advertising opportunity – one that was harder for the consumer to miss and could allow direct measurement of an ad campaign’s reach: selling space on their packages. It also allowed advertisers to reach consumers in their homes without them feeling their privacy was invaded.
JDL began experimenting with this by rolling out a series of different package advertising options, including fully custom-wrapped boxes, “transforming” boxes that could be repurposed into pet houses, placing stickers on boxes, and inserting flyers and trinkets into the boxes themselves. The custom-wrapped and “transforming” boxes were a hit, with many customers even saving and collecting them.
While advertising still only makes up a small portion of JDL’s revenues, the “low-effort, higher-margin” nature of this business has become a priority for them. And as they did with their physical infrastructure, JDL is trying to vertically integrate their advertising services. They are aiming to bolster their logistics offerings by bundling advertising and integrating with JD.com’s advertising platform to offer merchants a unique value prop with proprietary inventory both on their vehicles and boxes as well as websites and apps. Today, they have 25+ advertising agencies that they work with and they mostly seem to facilitate un-targeted brand advertising on their logistics properties. We don’t know the specifics of these advertising agreements, but we are fairly confident they have much higher gross margins than their core logistics business (likely >70%), but today are still a relatively small portion of revenue.
Autonomous.
In 2021, JD Logistics became one of the first three enterprises in China to receive a road test license for autonomous delivery vehicles (alongside Meituan and Neolix). Previously, the vehicles were only tested in closed environments like residential compounds, university campuses, hotels, and business parks.
These vehicles are already in use today and used for last-mile delivery within a small, geo-fenced area. Due to their contactless nature, they have been rapidly rolled out throughout China and are now operational in over 25 cities. Rakuten, the Japanese retail giant, also adopted JDL’s vehicles for convenience store deliveries in Tokyo.
Each vehicle can be loaded with 24 parcels at a time, and plans and travels its own route. Once it arrives at the destination, it automatically calls the customer and sends a message with a verification code that is required to retrieve the order.
JD’s autonomous vehicles have a significant advantage over peers thanks to its nationwide footprint and self-operated logistics network. Going forward, they will be even more important as JD looks to further increase reach and efficiency while decreasing driver payouts. Currently, JD’s autonomous delivery vehicle management platform allows a single staff members to supervise as many as 50 operating vehicles at once, and the company believe it will soon be 100. However, it is still early days, as JDL has only rolled out ~400 autonomous vehicles across the 25 cities in China.
Beyond autonomous vehicles, JDL has been working with the government to develop drone safety regulation and is already utilizing drones for rural deliveries. In contrast to some of the drone promotional material you may have seen though, the drones primarily deliver from warehouse to delivery station and still require a delivery personnel for the last mile. It remains to be seen whether they can roll out this technology for more broad-based use in the future.
While important to JD’s future ambitions of reshaping the retail industry and transforming the urban supply chain, these initiatives and the regulations surrounding them are still very early, so we do not assume broad-based utilization. However, at the extreme, success here could mean meaningfully reducing their employee base, which is one of their largest costs and could allow for profitability higher than what is traditionally seen in the logistics industry.
Competition.
Competition for JDL comes from various providers: 1) contract logistics companies (think freight forwarding, 2) small 3PL providers, 3), enterprise-incubated supply chain providers, and 4) integrated supply chain providers (JDL is in this category). The first group includes Kerry Logistics, IT Logistics, SAIC Anji Logistics, and PG Logistics, among others. This group of companies do not own their own delivery assets or networks, but rather outsource everything on the client’s behalf. Essentially, they are a one-stop shop for logistics needs, but they also tend to be more manual without a unified platform, connecting a motley crew of assets to get a delivery done, which introduces inefficiencies and redundant costs. The second group includes all of the smaller 3PL players (Flysman, Rokin Logistics, Dachu Logistics to name a few) and they tend to find their own niches within the logistics chain and a regional geography. The contract logistics companies will often hire the 3PLs when it makes sense for a specific route. The third group is supply chain companies that grew out of an enterprise’s logistics arm. For example, Sunning’s Sunning Logistics, Haier’s Ririshun and Midea’s Annto. All of these companies offer select external services to merchants. The development of these logistics firms is similar to JDL, but JDL is placed in the fourth group which includes those with their own express network and full-service supply chain solutions. Also here is SF Express (one of their largest direct competitors), Best Express, and ZTO Express, among others. Cainiao, is a hybrid of an integrated supplier and a contract logistic company since they do not own their own assets (more on them shortly).
If we think about the factors that a client considers when picking a service provider, there are 6 main criteria: 1) Service Offerings, 2) Convenience & Simplicity, 3) Reliability, 4) Visibility, 5) Efficiency, and 6) Price. The first (1) is Service Offerings: different providers have different routes, different specialties (like bulk delivery, cold-chain, 1 day delivery, or warehouse storage) and different competencies. Certain clients may need multiple services (cold chain + warehouse storage) in order to fill their order, which means that they will either need to patch together providers or find someone who provides both services. This dovetails into (2) which is Convenience & Simplicity. A client will always prefer to use fewer providers than more. The third (3) variable is Reliability, which is usually tracked with complaint rates, cargo timeliness and damaged goods. Recall, JDL’s complaints per million is 0.002 vs the industry average at 0.22. Not all clients are necessarily primarily concerned with reliability though, and some are more price sensitive than “quality” sensitive—it depends on what the business is. If you are shipping tires that, in the worst-case scenario, you have to tell a customer that they have to wait a few days for it to come in stock, it isn’t a travesty—you might lose that sale, but it could be well worth the cost savings of the cheaper shipper. However, if you are shipping an input like steel parts to a manufacturer whereby a delayed arrival can mean shutting down the plant’s production line and losing production days, that could be a debacle and the minimal cost savings would not be worth it. The fourth (4) factor is Visibility, which includes the ability to monitor the full supply chain and adjust it in real time, which in turn enables businesses and manufacturers to be much more dynamic in response to demand. We also include demand forecasting capabilities here, which is when JDL can help tell a business how many units they need to produce and where to put them geographically. The fifth (5) factor we call Efficiency, which is how well they utilize automation, software, and data to support their supply chain. Some small providers have almost zero of this, whereas others like JDL have fully automated warehouses with sensors everywhere and tracking devices on each vehicle. The last (6) is Price which is self-evident: people like paying less. However, it should be noted that sometimes the more expensive offering can be cheaper in the long-run if it eliminates business disruptions or customer churn due to poor experience.
JDL vs SF Express. SF Express is one of JDL’s main competitors with similar offerings. When comparing the two on the marks above, they score very similarly to each other with a few important caveats. JDL scores well on all of these marks as a fully integrated supply chain provider, including price surprisingly. Our channel checks noted that even on price they are pretty competitive as evidenced by their gross margins (4.4% LTM and 8.6% in 2020) versus SF Express that has reached 20% (however, that has come down to 12-13% as mix-shift to lower margin commerce packages with RMB ~5 ASP vs an average of 2x that and incremental investments weighed on them). JDL is still trying to gain market share and are positioning their products competitively to below SF Expresses similar offerings. SF Express has a “time-definite” product utilizing their large air fleet, which is a weak spot for JDL. Given JDL developed off of JD’s business with the ability to house products in warehouses near the consumer, they never built out much of an air network, but that is starting to change, and they now plan to have at least 100 cargo planes by 2030. SF Express reports industry-standard ASPs of RMB ~11, and as of 2021, has 66 all-cargo self-operated aircrafts with an additional 13 externally-chartered ones transporting 2,660 tons/day.
On “efficiency”, JDL stands out ahead of the competition (particularly in fulfillment) with their >30 fully automated “Asia No 1” warehouses that allow very minimal human intervention. However, while they have the most advanced technology, it hasn’t yet been rolled out to most of their warehouses, with a lot of their other smart warehouses still requiring manual inventory picking and packing. Their Order, Warehouse, and Transportation Management Systems are another strength of theirs that support “efficiency” and “visibility”. These systems have the benefit of being created on the back of JD.com, being fed order and package data from the hundreds of millions of consumers that use the platform. These systems and the ability for a merchant or warehouse operator to fully integrate on JDL’s systems creates simplicity, which buttressed by JDL’s broad service offering creates a compelling value prop. However, SF Express has similar systems and their recent merger with Kerry Logistics will allow them to control more assets and better direct package volume. Nevertheless, while JDL and SF Express both have very competitive offerings, the opportunity is large enough for them to each take share from the sub-scale players with fewer integrated offerings and the inability to adequately invest in technology.
JDL vs Cainiao. Cainaio is the logistics platform Alibaba built in order to enable their merchants to have quicker and more reliable shipping. It patches together the largest shipping companies in China and benefits from Alibaba directing all of their Taobao and Tmall package volumes through it. It is not a direct competitor to JDL (today, anyway) as they are focused on serving merchants that operate on Taobao/Tmall and haven’t (yet) made any significant moves to take external customers or expand their services. However, that could change overtime. Cainiao is particularly well positioned to handle small ecommerce packages and they could offer their services to other platforms like Bytedance or Xiaohongshu, but they still have friction getting their variety of different providers to consistently operate at a high level of service, which will make JDL and SF Express a better option for a client who wants higher assurances of who is handling their delivery.
Conclusion. In addition to JDL having the benefit of all of the JD’s volumes, the most advanced automation technology, a large warehouse network, and the benefits of honing their demand forecasting and logistics operating systems over a decade, they also have a property advantage. Strategic locations for infrastructure are scarce with special approval from the Chinese government needed to buy land and get the necessary permits to operate a logistics facility. It not only is hard for new players to mimic the same footprint that incumbent players have, but it also requires a lot of scale and support for the government to want to support a new logistics player anyway (local government subsidies or tax subsidies to build facilities are common). JDL even has warehouses near certain factories so customers can minimize their warehousing and shipping costs, which means winning over that customer requires building a new warehouse when it’s not even clear the newcomer would win that business. Additionally, locations near city centers are much more limited and hard to replicate, especially since many of the prime locations JD acquired a decade ago at cheaper prices.
However, not to miss the forest for the trees, logistics is an incredibly competitive business with market share typically won and lost on pricing. There are limited barriers to entry and given the small margins in the industry, a tiny swing in capacity utilization could have a drastic detrimental impact to returns. The huge capital outlays required and lack of pricing power means returns on invested capital are usually underwhelming. Additionally, labor costs can make the cost structure very inflexible and economic downturns can lead to large losses with an inability to size down. They also may only have a limited ability to pass on fuel price increases before it hurts their volumes. As JDL still isn’t profitable (-3.7% LTM EBIT margin) we cannot even calculate ROIC. However, if we assume SF Express’s ~6% EBIT margins on their LTM revenues of RMB 90bn or $14bn then that is a ~9% ROIC after tax. Perhaps you can argue that their asset base could support more revenues, but then it also is likely that the depreciation charge doesn’t capture asset replenishment adequately with capex running at ~2x of PPE depreciation (~$500mn vs ~$250mn). In order to continue to grow and increase their scale, they will invest most of their cash flows back into the business. Offsetting this is JD Property, which we mentioned in our JD piece and facilitates property funding by external investors to reduce the capex needs of the business, however there is no way around the fact that they will continue to have to plow cash back into the business to replenish their fleet and warehouses.
Perhaps an argument could be made that the logistics industry is undergoing a fundamental shift with the barrier to enter drastically increasing with new technology and software creating stickier customers, more cost savings, and ultimately more pricing power. More software solutions and 3rd parties that plug into their platform could also help improve margins and retention. However this remains to be seen and the examples we do have of cost savings seem more anecdotal; JDL mentioned in their Global Offering Prospectus that they helped Skechers decrease fulfillment cost by 11% and delivery times by 5 hours, which seems somewhat underwhelming in the context of us not knowing how inefficient they were operating prior (maybe SF Express could provide a similar cost savings so JDL’s ability to take a piece of that savings in the form of a price hike is limited). In our build below we will show what success for JDL could look like, but don’t forget that historically no national, asset-heavy logistics provider has made outsized returns in the logistics industry. SF Express has achieved a moderate 10-13% ROIC over the past couple years, but that is heading back down on a new investment cycle and mix-shift headwinds from less profitable ecommerce packages, so it is possible they were overearning and the increase in competition will mean lower returns for everyone. This means that even if JDL is able to execute very well, they may only achieve an adequate ROIC with downside from greater competitive intensity driving everyone’s returns lower. The most optimistic scenario is that JD’s integration and new software tools give them pricing power and better margins, in which case ROIC may be much higher than it has been for other competitors historically. However, again, this assumes the future will be very different than the past. Today JDL still offers price concessions to win and keep business.
Revenue Build and Valuation.
In their Global Offering, JDL does a nice job of laying out the TAM (however, we note that these figures are highly subjective and management teams are notorious for inflating them). They estimate that the logistics industry total spend is $2.5tn, which clearly is a large TAM! While we usually would spend more time dissecting the TAM, we don’t really doubt that the TAM for logistics service is huge and a longer term mid-single digit growth rate seems fair to us (essentially GDP+ growth). Although, they also note that a lot of inefficiency and redundant costs that need to be eliminated through better process improvements are an opportunity to JDL, which would actually imply that logistics spend is too high today. Either way, with $14bn LTM in total revenues and <1% market share position, we do not see their growth being at risk from the TAM turning out to be smaller than estimated. We expect JDL to take meaningful share from less efficient in-house operations and smaller sub-scale competitors as we believe their scaled efficiencies and larger service offerings would allow them to provide a better value prop to their clients. However, the profitability of this growth very much remains in question.
Specifically, within Integrated Supply Chain Logistics Spend, the TAM is estimated at ~$350bn, which is still ample compared to their ~$10bn in Integrated Supply Chain LTM revenue or ~2.8% market share. JDL believes this market will grow faster at ~10% as more clients move to full service, integrated logistics, which seems reasonable.
In our build below, we assume revenues compound out at 22% for the next 5 years on mix-shift to integrated supply chain services, end market growth, and JDL taking share. We assume limited operating leverage from employees and higher depreciation expense are offset by less outsourcing costs (in line with their 2018 level) as they build out more capacity in-house and should lead to a low double digit gross margin. The swing factor is how much of their revenues move to more logistics software services which can be higher margin and create more customer retention, granting them more pricing power. On the other hand, the market can remain very competitive with fighting over market share ruining the profitability for all players involved (as is the case currently). Frankly, we could see pretty similar odds for both cases and do not really lean towards one over the other.
Below, we take our gross profit build and roll it into a NOPAT figure. With limited operating leverage as we assume S&M needs to stay elevated to keep growing as well as R&D in order to improve automation technology, we see a ~6% operating margin 5 years out in this scenario. 10 years from now, their margin profile could look more attractive, closer to where UPS operates today and ahead of where SF Express is, but it could just as easily remain depressed with limited pricing power and high need for reinvestment.
In the valuation below, we sensitize revenues and operating margins for 5 years out and apply a 15x multiple. 15x may seem low to some, and you are welcome to input whatever figure you think is a fairer multiple (either mentally or by downloading our excel available to Members Plus subscribers), but as JDL is in a very capex intensive industry with adequate to subpar ROIC, we would be more inclined to say 15x actually is too high rather than too low. In order to really get a premium multiple, they need to not only prove profitability, but a strong free cash flow conversion rate which is harder to do as capital expenditures often run in excess of depreciation, meaning the earnings you see take an increasing amount of capex to support. However, if they are able to grow less capex intensive logistics services with their Warehouse, Order, and Transportation Management Systems then the higher ROIC earnings streams would warrant a higher a multiple. They don’t break any of this out now, so unfortunately, we can’t do anything explicitly. That said, an investor should factor it in their valuation.
Below we show different scenarios with a slight bias towards the lower growth and lower margin scenarios. However, if an investor has confidence in JD Logistics’ superior value prop and ability to monetize that over time, they may be willing to underwrite much more ambitious assumptions.
Risks.
1) Competitive environment remains tough or gets worse as players vie for market share with pricing their primary tool to win over customers. If the competitive environment never ameliorates or if clients never change their preferences to valuing service or reliability more, then it is possible that gross margins never meaningfully increase.
2) Capital outlays consume all free cash and do not provide an adequate return on capital.
3) The nature of the JD and JDL relationship changes in a disadvantageous way. It is interesting to think what would happen if JD thought that showing profits in their retail business was valued by investors more (higher multiple) than showing margin improvement in their Logistics business, so they push more costs to JDL. This probably wouldn’t explicitly be allowed, but it’s not clear how a JDL minority investor would ever know if this was happening.
4) Regulation. As logistics is a labor-intensive business, there is the risk that labor legislation (restricting hours or increasing benefits or pay) hurt their productivity and margins. Other regulation that limits the amount of trucks that are allowed on the roads (which has happened before) hurt utilization and efficiency. Lastly, any changes to their licenses that allow them to operate legally and procure land for their facilities could be damaging.
5) Reputation. JDL uses the JD brand to help them win customers and any damage to the JD brand could impair their ability to earn new customers.
6) Prolonged Economic Slowdown. Given their lack of profitability and reliance on increasing volume levels to improve operating leverage to the point of profitability, a prolonged economic slow down could put them in the position of needing to raise additional equity, which will likely be dilutive to the existing equity holders. Relatively small swings in utilization could have outsized impacts on profitability as they have very high fixed costs with a limited ability to rationalize their cost structure in the short term.
7) Autonomous Vehicles. This could be a risk as much as an opportunity for JDL. The risk is that another player is able to utilize this technology and reap efficiency gains that allow them to operate at a much lower cost than JDL. However, JDL is investing heavily here so it seems unlikely the gap is ever that notable for long.
Model Summary.
Conclusion.
Thanks for reading our JDL piece! It was a tough one to write with very limited information available versus the other companies we have written about in the past, but we hope you still learned something! Feel free to drop in questions/ comments in the JD channel of the Discord.
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