Xu Xin: There is No Room for Middle-Sized Companies in the Internet Era-钛媒体官方网站

(Chinese Version)

Since Chinese premier Li Keqiang visited Zhongguancun and openly encouraged innovation and entrepreneurship in May, a series of startups were established in China. According to statistics, on average, 1.6 startups are set up in Innovation Avenue in Zhongguancun, 1.0 company attracted venture capital per day, and these startups on average receivedover 5 million RMB financing. Indeed, it seems to be the golden time for innovation and entrepreneurship.

On June 24th, during the JD Innovation Summit, co-hosted by JD Group and China CITIC Press, distinguished guests, including Xu Xin, founder of Capital Today, Yu Yang, chairman and CEO of Analysys International, Zhou Wei, Managing Partner of KPCB China, all shared their insights into the retail industry and innovation in the era of Internet+. The following paragraphs summarize the main points in Xu Xin’s speech.

1. There is no room for middle-sized companies in the Internet era

Capital Today once did some research and found out that among 50 major brands in 50 different sectors in the US, 46 brands remain the dominant players in their respective sector, while 4 brands rank second in their respective sector. Once a brand gets to dominate a market, it will be more difficult to be overturned.

In the past, one might be satisfied to see a brand grab 30% to 40% of the market share, however, in the Internet era, 40% is not enough. The larger market share one grabs, the harder for competitors to compete. In this case, the harsh fact is that there is no room for middle-sized companies in the Internet era. One can say that a brand is the dominator in a sector only if it grabs two times more market share than its largest competitor. Otherwise, it is likely that a black-horse brand will emerge and defeat the existing dominant brand.

2. Some guidelines for online retailers

Similar to offline retailers, online retailers also have to take into full consideration before deciding which sector to focus on.

Online retailers of high-tech and standardized products should sell products by oneself, whereas retailers of low-end products should allow different business owners to sell products on their platforms.

Discount activities do have some advantages, but the problem is that these activities are temporary and can’t effectively build up user base, whereas an online retailing platform that sells a variety of products at a set price can gradually attract a large number of loyal users.

When deciding to conduct businesses in a particular sector or in all sectors, one might need to take into consideration a series of factors, such as unique visit number, the economic model of orders, user retention rate, conversion rate, etc. Chinese youngsters love online shopping, which makes it possible for Chinese e-commerce industry to boom, and for O2O model to develop. That’s also why the sales volume of Chinese online retailers is even larger than that of the US.

Besides, lowering price will always work. Online retailers should give as much discount as possible to attract consumers to buy products for the first time on their platforms.

3. Users, not bosses, should determine the development strategy of an Internet company

At present, Chinese starters seem to be always occupied with all kinds of trivial matters, and can never concentrate on product developing. However, product is always the most crucial part of an Internet company. Only those starters who are insightful enough and well understand their products can succeed.

Moreover, there shouldn’t be a “class” difference in Internet companies. Otherwise, any initiatives will be compromised. In Internet companies, users are always the ultimate determiner.

4. Never wait until you really need money

The best time for financing is right now. One should never wait and look for financing only when he needs money. As long as you have enough cash flows, you have the future. But be aware, only choose those investors who appreciate what you are working on, and can help out when you are in dire need of money. Be not afraid to innovate, and be the first one to start something new, since there will always be a way out.

The following is the transcript of Xu Xin’s speech, edited by TMTpost:

There is No Room for Middle-sized Companies in the Internet Era

Time and tide wait for no man

With the growth of middle-class in China, and along with it the increasing demand for consumer products, it is crucial for retailers to seize the opportunity and penetrate into all sectors of products. Only starters who go ahead and seize the opportunity can stand out. JD succeeded because it is both the first online retailer to provide products in all sectors, and the first one to shorten the logistics time by building storages across China, which best caters to consumers’ need. JD spends a lot of money in doing all these, but in return, also becomes the dominant online retailer in China.

Capital Today once did some research and found out that among 50 major brands in 50 different sectors in the US 60 years ago, 46 brands remain the dominant players in their respective sector, while 4 brands rank second in their respective sector. Once a brand gets to dominate a market, it will be more difficult to be overturned. Time and tide wait for no man, and only those who seize the opportunity can succeed.

Another person who dares to be the first one to do something different is Ding Lei, chairman and CEO of Netease. At the beginning, nobody understood why should Netease invest in game industry, however, only Ding Lei saw the huge potential of game industry and persisted. After a really hard time, Ding Lei was named by Forbes in 2003 as the wealthiest people in the world with his newly-developed games. I once asked him what his ultimate goal is, he spoke very frankly: to be the first one to develop Internet games, and to help shareowners make profits.

The same is true for Steve Jobs, who dared to do things differently, and ultimately outperformed Nokia with his iPhones.

Opportunity means everything in the Internet era. When Liu Qiangdong turned to me for help, he only intended to raise 2 million RMB. However, both Liu and I saw the huge potential of e-commerce in China, so I decided to invest 10 million RMB in JD. He dared to do things differently, and I dared to support him, and help his JD dominate the market.

Yet, to what degree can we say a company has “dominated” the market? In the past, one might be satisfied to see a brand grab 30% to 40% of the market share, however, in the Internet era, 40% is not enough. The larger market share one grabs, the harder for competitors to compete. In this case, the harsh fact is that there is no room for middle-sized companies in the Internet era.

In China, business owners tend to rush into a business once there is a potential market. In this case, there might be over 20 companies conducting the same business at the same time. All companies get to grab part of the market share, yet no company can dominate, as can be seen among Chinese groupon service providers and online retailers. In the Internet era, one can say a brand is the dominator in a sector only if a brand grabs two times more market share than its largest competitor. Otherwise, it is likely that a black-horse brand will emerge and defeat the existing dominant brand. We decided to invest, among all video websites, in Tudou because we appreciated Tudou’s CEO Wanghui very much. It turns out that with our support, Tudou developed rapidly, and ranked second after some period. Finally, Tudou merged with Youku. However, here comes another black-horse, Iqiyi.

Some guidelines for online retailers

When a typical Chinese consumer wants to buy food, he or she might go to RT-Mart, Walmart; when one wants to buy domestic appliances, in the past one might refer to the CCC, but at present, he might just turn to JD; when one wants to buy furniture, IKEA is definitely the place one might be looking for. To wrap up, when consumers want to buy something, they will most likely first know which sector they might be looking for, and then turn to the dominant company in that particular sector. Similar to offline retailers, online retailers also have to take into full consideration before deciding which sector to focus on. Next, one might focus on the user experience by improving the logistics service and supply chain, as well as building credit.

When deciding to conduct businesses in a particular sector or in all sectors, one might need to take into consideration a series of factors, such as unique visit number, the economic model of orders, user retention rate, conversion rate, etc. To be specific, one need to consider if Chinese are often in need of a product, or if they need the product, can they wait.

Fresh food may become a new sector of business for online retailers

In the past, it could be really hard for online retailer to sell fresh food, since large supermarkets don’t bother to conduct such business, while small-sized shops have no willingness and incentive to deliver fresh food to online buyers. However, Chinese youngsters love online shopping, from clothes to domestic appliances, from fresh food to takeout, which makes it possible for Chinese e-commerce industry to boom, and for O2O model to develop. That’s also why the sales volume of Chinese online retailers is even larger than that of the US.

Moreover, since Chinese people are more densely populated, the average delivery cost is lower compared to that of the US. In this case, there is both a large demand for fresh food, and a comparatively lower cost, and it is likely that fresh food may become a new sector of business for online retailers

Our wish is that after all the competition in different sectors, only two most dominant players will survive in each sector, such as groupon, local service, travelling, takeout, etc. Capital Today will do everything we can do achieve this goal.

Low price will always work

I once advised Liu Qiangdong that JD should have the courage to sell products at much lower price, only then can it beat competitors at the very beginning. After all, low price will always work.

Also, online retailers should give as much discount as possible to attract consumers to buy products for the first time on their platforms. Along the way, they should put on a series of products building up the brand, so that consumers get to trust the online retailer and feel assured to buy products at lower price. During the price battle between Didi and Kuaidi, both side tried to defeat the other by offering lower price and bigger discount. Again, low price will always work.

At present, Chinese starters seem to be occupied with all kinds of trivial matters, and can never concentrate on product developing. However, product is always the most crucial part of an Internet company. Only those starters who is insightful enough and well understand their products can succeed. For example, Pony Ma is not only the CEO of Tencent, but also the Chief Experience Officer of Tencent. He encourages everyone to voice their opinions and there is no “class” difference in Tencent. Imagine the huge efficiency brought about by this. User experience is the very center of Tencent’s business.

Some thoughts on company structure

I shall ponder for a moment on company structure. JD is another case in point, since there is also no division by titles there, and consumers’ needs are attached with great importance. Personally, I advise the boss of a company to evaluate his or her employees by different standards, such as performance, manners, etc. Those who scale high by both standards should be paid as much as possible. Yet, those who achieve a good performance by cheating should be fired with no exception. Huawei and Lenovo are two of the most organized companies in China, since they are both strict on employees, and will fire any employee who cheats.

However, most employees are just ordinary. They scale neither high nor low by both standards, and will only do as others do. So it’s very tricky when dealing with these employees. One thing for sure is that companies who suffer development stagnation must have too many these kinds of employees.

Finally, a successful company needs to have a good reputation. To achieve that, one need to have a good brand name, and be creative when making a new advertisement.

Never wait until you really need money

In 2007, JD was desperately in need of money, yet nobody was willing to invest at that time. Capital Today helped out and invested 8 million RMB. After that crisis, I and Liu Qiangdong came to the consensus that the best time for financing was right now. One should never wait and look for financing only when one need money. As long as you received financing, you have future.

A business owner should also balance the board of directors by equity dilution. But be aware, only choose those investors who appreciate what you are working on, and can help out when you are in dire need of money.

Be not afraid to innovate, and be the first one to start something new, since there will always be a way out.

Finally, I want to pay tribute to all the innovators.

[The article is published and edited with authorization from the author @Yang Xuedan, please note source and hyperlink when reproduce.]

Translated by Levin Feng (Senior Translator at ECHO), working for TMTpost.