Search giant Google recently announced a strategic partnership with JD.com (NASDAQ: JD), the second-largest e-commerce company in China, along with a $550 million investment in JD. While the investment only amounts to roughly a 1% stake, the fact that Alphabet‘s (NASDAQ: GOOG) (NASDAQ: GOOGL) Google is throwing its weight behind JD.com is significant to JD’s epic battle with Alibaba (NYSE: BABA) to rule the Chinese e-commerce market.
In fact, JD now has three international giants supporting its efforts, with Google adding its name to a list that includes Tencent Holdings (NASDAQOTH: TCEHY) and Walmart (NYSE: WMT). Having these three in your corner is a pretty big vote of confidence, and could transform both the Chinese and global races for e-commerce supremacy.
What Google and JD get
Per the company’s press release, JD and Google will “collaborate on a range of strategic initiatives, including joint development of retail solutions in a range of regions around the world, including Southeast Asia, the U.S. and Europe.” Interestingly, the investment was made through Google, not via one of Alphabet’s investment vehicles, signaling that this partnership is relevant to the core Google business and not some small, venture-capital-type bet.
JD will gain access to Google’s AI (artificial intelligence) and technological capabilities, while Google will gain access to JD’s supply chain and logistics expertise. The agreement gives Google a way to benefit from the otherwise closed-off Chinese market, while JD will increase its exposure to Southeast Asia, Europe, and the U.S., selling products through Google’s Shopping Actions platform. Shopping Actions is a recent initiative in which Google allows big-time retailers to sell products through a single online shopping basket.
Tencent and Walmart join the party
JD was founded by owner-operator Richard Liu in 1998 as a brick-and-mortar electronics store. But when an acute respiratory syndrome broke out in Beijing in 2003, Liu reportedly adapted and moved his store online.
Fast-forward to 2014: JD was essentially anointed the No. 2 e-commerce platform when Tencent gave a couple of its e-commerce holdings to JD, along with $215 million in cash for a 15% stake (its stake was later boosted to 18%). Tencent’s backing was so consequential because JD received high-level access on Tencent’s WeChat platform, the dominant super-app at the center of Chinese life that recently surpassed 1 billion users. The boost from WeChat helped catapult JD’s revenue and put it on a collision course with Alibaba.
In 2016, Walmart followed Tencent’s lead, throwing in the proverbial towel on Chinese e-commerce by selling its Yihaodian platform to JD in exchange for shares. Currently, Walmart owns a 10.1% stake of JD.com.
Why the big dogs like JD
The Chinese middle class is set to double to 600 million people by 2022, but the retail scene is fragmented and the population is very tech-savvy — a bullish sign for Chinese e-commerce. With such incredible growth ahead, the stakes to capture market share are incredibly high. Still, e-commerce benefits from scale, and Alibaba was able to carve out a powerful leading position in China, as Amazon has done in the U.S.
To combat these two, Walmart, Google, Tencent, and JD seem to have formed a loose global alliance, pooling their collective strengths to give those two giants a run for their money.
It’s a credit to Liu’s skill and tenacity that he beat other start-ups to challenge Alibaba, and that leading companies chose to bet on him. He remians JD’s chairman and CEO. Today, JD.com has expanded well beyond its humble roots in electronics, selling everything from apparel to high-end fresh food.
Building out a fully owned logistics and fulfillment platform across China requires a huge amount of capital, and Liu’s team has successfully raised massive amounts of money selling minority stakes to strategic partners. JD raised even more money earlier this year by selling a $2.5 billion minority stake in its JD Logistics subsidiary, and it also reportedly plans to sell a stake in its JD Finance subsidiary.
Building a massive service
JD has plowed all of this capital into a formidable e-commerce footprint. Meanwhile Alibaba, which began more as a high-margin marketplace that outsourced fulfillment and logistics, has taken a capital-light approach to delivery. Instead of Alibaba making deliveries itself, its subsidiary Cainiao uses technology to pool thousands of smaller logistics companies and increase their efficiency.
I think JD’s wholly owned end-to-end network, which will incorporate drones, self-driving trucks, robotics, and other leading technologies, will ultimately be more efficient. With the company’s demonstrated ability to raise capital from all-star minority partners, I wouldn’t be surprised if JD eventually gives Alibaba a run for its money in the race for China’s top e-commerce spot.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Billy Duberstein owns shares of Alibaba Group Holding Ltd., Alphabet (C shares), Amazon, JD.com, and Tencent Holdings. His clients may own shares in some of the companies mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, JD.com, and Tencent Holdings. The Motley Fool has a disclosure policy.