Alibaba rival plays the long-game on technology investment

Chinas has made it clear recently that its venturing into artificial intelligence and automation. Every few months over the past year, the online retailer Chinas second-largest by transactions after Alibaba has unveiled new products based on cutting-edge technology: for example drone delivery, self-driving trucks, fully automated warehouses, to name a few.
Most of these technologies are still in their testing phase and JDs ever expanding technology investment is already eating into its profitability.
In the second quarter, the retail titans technology expenses were up over 70 percent year-over-year for the third consecutive quarter, costing the company 2.8 billion yuan, or $400 million. Net income slipped more than 50 percent to 478 million yuan, versus 977 million yuan last year.
By comparison, marketing and fulfilment, which traditionally make up the bulk of JDs overall operating expenses, grew at less than 30 percent over the same period.
When will JD start to seriously capitalize on its technologies? When it can do things at scale, according to the companys head of technology.
If there is no scale, there is saving, JDs chief technology officer Zhang Chen told a group of reporters in Beijing on Tuesday.
If you build something, you want other people to use that. It takes a lot of time to make a product perfect before you say its done. AI is all about iteration and how much data you get, Zhang continued.
As of August, JD had over 314 million annual active user accounts. Thats a sizable chunk of Chinas 800 million internet users (even given the fact that people may hold more than one accounts). Its archival Alibaba, however, reached twice the size of JD at 601 million annual active customers in September.
Alibaba also enjoys much wider profit margins than JD, thanks to a light-asset platform approach that connects vendors to consumers and derives the bulk of its revenue from advertising. JD, on the other hand, runs a more costly model that sees it operates most of the supply chain and deliver goods from warehouses to customers like Amazon .
Alibabas operating margin in Q3 stood at 16 percent, while JD posted a 0.8 percent non-GAAP operating margin in Q2. That said, Alibaba has also suffered a margin squeeze in recent quarters as it continues to invest heavily in offline operations such as food delivery.
To secure more user traffic, JD has been leaning on its ties with Tencent, a major shareholder in its business and the builder behind the massively popular WeChat messenger. While Alibabas e-store links are blocked on WeChat, JD runs smoothly through a mini program, a light-weight application that runs inside WeChats interface that allows buyers to bypass app stores.
Its unclear how much traffic WeChat brings over to JD. But WeChat has proven to be an effective channel for acquiring ecommerce users. This is evident in the case of group-buying appPinduoduo, which started out as a WeChat mini program. In June, the three-year-old company leapfrogged JD in mobile penetration to reach 26.2 percent, according to data services provider Jiguang.
Pinduoduos rise was so impressive that its shares popped 40 percent in their first day of trading on NASDAQ in July though laternosedived following accusations over fake goods sold on the ecommerce platform.
Counterfeiting is a decade-old problem in the Chinese internet, tarnishing the name of both Alibabas online bazaar Taobao and even JD, which boasts of its authenticity of direct sales.
JD has also been looking overseas for growth. In August, Google poured $550 million in JD as part of a strategic partnership to help the Chinese company grab more users around the world. While JDs vice president of strategy Ling Chenkai did not reveal details on the firms European plans when asked by TechCrunch on Tuesday, he assured going global has always been an aspiration for JD and partnership will play a key role amid the process.
But JD understands that it cant always fall back on its partnerships, even with its close allies.
Every company protects its data like [there will be] none tomorrow, even with strategic partners. Data sharing is a very serious business, says Zhang the CTO.
Most Chinese companies have a really big security team, he observed, adding that while partners do not directly share data, they collaborate by exchanging user insights.
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