(Chinese Version)

On November 22nd, SOHO China’s president Pan Shiyi discussed about entrepreneurship with JD’s CEO Liu Qiangdong on the SOHO 3Q press conference.

As an entrepreneur himself for 12 years, Liu Qiangdong concluded a pattern of entrepreneurial success: One driving force can lead the three other elements. That being said, if a startup team can achieve a certain degree of success in the four elements, then the team would succeed.

The first element is the team. Liu believes that the most important factor is the people you work with. Once your startup team encounters any issue, the first thing you should do is think about what has probably gone wrong with your team.

The other three elements are user experience, cost, and efficiency. Liu Qiangdong further illustrated his idea using IBM as an example. Liu believes that this once PC giant made its transformation by correctly positioning itself to focus on the enterprise software and services market and providing users with excellent user experience.

However, user experience can’t solve everything. Cost and efficiency also matter. “Being successful at the user experience doesn’t necessarily mean our new business model is a success,” Liu said. “This is something entrepreneurs in the mobile Internet industry today are missing. They always emphasize on the user experience but neglect the cost and efficiency. In their opinion, having a bunch of users means cash.”

“If you can at least achieve success in the aspects of user experience, cost control or efficiency without compromising one another after building a talented and competent team, then your project can be considered as successful,” Liu concluded.

Even though China’s GDP growth has slowed down and people are saying we have entered a capital winter, Liu still thinks this is a great time for Chinese brands to rise.

“When a country’s GDP growth slows down and its export sector is declining, it indicates that brands are rising. Panasonic and Sony emerged during the time when Japan’s GDP growth rate was lower than 8%. Samsung and LG became big when South Korea faced the same situation as well,” Liu pointed out a few examples. “The reason for such emergence is that competition boosted social development, forcing entrepreneurs to switch to survival mode and really think about how to grow big. When entrepreneurs find a new competing power other than BAT, they will try extra harder.”

The following is the conversation between Pan Shiqi and Liu Qiangdong, edited by Tencent Tech and then TMTpost:

One driving force can lead to the three other elements

Pan Shiyi: This year is probably the year with the most changes through out my entrepreneurial journey. The first feeling I always get when I open my phone to read the news in every morning is confusion. How could so many changes happen in one year? But after I wake up, I start to think if these changes are making our world better or worse. And what are the indicators of good changes? Well, if these changes are making our world most just, fair and positive, then they are good changes. If they work the other way around, then they are certainly negative changes.

JD made its own choice, and that is choose to transport products from cities to every corner in China and deliver goods from the countryside to the cities. Like my village’s Pang apples are now being delivered to the cities. And during this process, JD also provide the most services for them.

SOHO is a traditional real estate company. What options do we have? The SOHO 3Q you have just saw today is the result of our decision. This product only has one goal, that is, to make use of the available houses we have in society by using Internet technology and platform.

Liu Qiangdong: Three years ago I also did a show with Pan. Today you see us again but things have changed a lot. What Pan has now are all digitalized on the Internet, or even better, on the mobile Internet. Just like what Pan has said before: tomorrow is going to be even better, and we all have faith.

In this case, today I want to share with you a pattern I concluded from my 12-year-experience as an entrepreneur: one driving force can lead the three other elements. No matter what industry you are in, there are four elements that determine your startup team’s success. And with the four elements we can pretty much evaluate if a brand new business model has value or not.

The first element is the team you have. Talents always come first. Each one of us has different expectation from our entrepreneurial journey and we surely have different aims. Some only do it for fun while some go on this path to support their families.

I didn't really know about the concept of business model until I started to try e-commerce in 2004. And in 2007, I learned about venture capital and was able to get my first investment thanks to that.

Before 2004, we had been doing traditional retailing for six years, during which period we made an inverted triangle system internally. Entrepreneurs that are present today have probably seen this chart already. This is a system that JD has been using for over a decade. The base is “team”, the foundation.

This year we invested tens of enterprises. Some are successful and some turned out to be failures. And just yesterday one of the companies we invested closed down. But of course, things like these are not decided by the capabilities of the entrepreneurs, but rather the industry tendency, risk control on financing and cash flow etc. Startup companies lack experiences, there’s no doubt of that. We believe if we have another chance we will definitely give him the investment since we thinks highly of the team, and him as an individual. This team consists of a bunch of talented, passionate, and hardworking young people born in the 80s.

And no matter what company we are talking about, the team is the most important thing. In 1980s and 1990s, IBM could earn 10,000 dollars from selling each computer. And IBM also sold big and small-sized computers that worth over a couple hundred thousand dollars.

In the 90s the PC sector was a gold mine. And when brands like Lenovo, Acer and DEll were still competing in the PC sector, IBM underwent transformation suddenly. Instead of running the line of PC, IBM started to develop software and services. Everybody knows what happened later. IBM became the dominating company in the IT sector. However, IBM has met the bottleneck as well recently. In my opinion another transformation is inevitable.

Any enterprise will encounter transformation once every 7 to 10 years. At least in the 90s IBM was able to foresee the future trend while the PC sector was still a lucrative gold mine. IBM’s transition to software and services provider paved the way for the company to become the dominating power in the IT sector in the last two decades. IBM is the only IT company from the 80s that still maintains a high market value and has been making a lot of revenue for the investors. How did IBM achieve that? It was IBM’s team that pulled the strings. They saw the trend and found a new growth opportunity for the company, which was from hardware to software.

Enterprises with a team that still fail share a similarity, and that’s such enterprises are in industries that are highly reliant on policies. In this case their failures can’t be attributed to the team.

Most enterprises failed because they didn’t have good teams. In China many entrepreneurs would say that they were having problems due to the market and the change of consuming structure and such. At nature it’s actually the teams they have are not competent enough.

Founders must take the absolute responsibility of the development of the company. That’s why I always say that if one day JD’s sales performance and growth suddenly look bad, then my core management team must have done something wrong. Everyone is limited and every company meets its bottleneck at some point. Team really matters.

The second element is the user experience. Whether it’s making products or service, hardware or software, or stuff related to the Internet sector or traditional sectors, the competition at nature is the user experience. Through out the course of hundreds of years, any successful company we can name out in the world achieved what they have right now thanks to the excellent user experience they were able to offer. IBM was just like that. IBM saw the great potential demand on software and services and found a new business trend. But IBM couldn’t have succeeded if it messed up the user experience. The same thing can be said about Microsoft and Apple.

The other elements are cost and efficiency. If a business model can’t lower the cost, then there is something wrong with it.

About five years ago, I said that cash flow was more important than revenue. That said, the core matter is the efficiency. Now let’s look at our cost. If we separate JD Finance, JD Smart, JD To Home, and the cloud-computing segment from our core business, the cost would be less than 10%. Companies from the retailing sector, for example such as Gome, Suning, Walmart, Carrefour, and RT-Mart etc., have at least a cost of 15%.

If JD also gets rid of products with low value like food and books, the overall cost will be reduced to 8%, a 50% to 60% of decrease compared to Gome and Suning.

The core indicator of measuring the efficiency of a company is the days-on-hand. Gome and Suning have about 10,000 to 30,000 categories with a days-on-hand of around 60 to 70 days. JD, however, has over two million categories. But we only had about 30 days of days-on-hand last year.

So you can pretty much say all successful companies out there have achieved the four factors above. If you can at least achieve success in the aspects of user experience, cost control or efficiency without compromising one another after building a talented and competent team, then your project can be considered as successful. Just don't think that the user experience can fix everything.

Let’s come back to JD. People all know that we have provided the users with a rather good user experience. And today many people have consumed in JD more or less. And here I want to show my gratitude for that. Thank you for supporting JD and using our service. We believe if we can make the user experience even better and simpler, the outcome would be wonderful. Imagine we only use SFExpress to deliver our products when JD has 500 warehouses across the country and you can literally go to the warehouse in person without having to walk more than 500 meters. And if there’s something wrong with the product, you can send it back directly and fast.

But if we do this, the cost will be much higher. Your days-on-hand would be lengthen greatly. Only succeeding in the user experience doesn’t mean our business model can work forever. This is something that many entrepreneurs from the Internet sector have neglected. They overly focus on the user experience and forget about cost and efficiency, thinking that with users they can earn mad money.

Last year Pan mentioned in Beijing University that he had led his team to visit many Internet companies. At that time I wanted to tell Pan that if he really wanted to do O2O business, he would have succeeded immediately. Try to imagine this: an apartment in Beijing that’s worth ten million RMB is sold at the price of one million with appliances worth around 800 thousand. Still think it’s not a big deal? Well, another JD card with 200,000 RMB in it. If something like this really happens I bet a hundred thousand apartments can be purchased in one day. Good use experience right? But can such business model really work?

In this case I also want to mention that no matter what your startup project is, you have to consider about the business model. If there’s something wrong with your business model, perhaps in a short time things would be just fine, but one day it would crumble. This is the exact situation that the Internet sector faces today. Many emerging startup companies’ business models just completely go against basic economic pattern.

So one element can lead the other three: the team, user experience, cost and efficiency. I hope that entrepreneurs present today can think about this when designing your own company: do you have a stronger team; is your user experience better than others; have you lowered the cost; have you boosted the efficiency?

If you have achieved success in these four elements, then I would say you would achieve success eventually! But if you can’t achieve at least two, or even worse, do worse than others, then I suggest you sell your company as soon as possible.

The rise of brands happens when the GDP slows down

Pan Shiyi: Why are we making this SOHO 3Q today? It used to be a shopping mall. And due to the competition, we had no choice but came out with such plan. No shopping mall in China is making money now. And what we have come up with is an alternative. If we can succeed, then we can provide 110,000 job opportunities to people and 500,000 part-time job opportunities. If more startup companies can make it, then the impact on the world will be profound. We simply just don’t have other choices, and the only option is, kickstart something.

Liu Qiangdong: I think as long as the competition in society doesn’t violate the law, then it’s good for social development. If we don’t have JD competing with shopping malls, I believe SOHO 3Q wound not be able to have today’s success. Shopping malls are not high-tech stuff. But if we make 3Q happen, we can generate more value for society.

If I could start over as an entrepreneur, I would start my business today. There will be serious competition going on in China in the next 20 years due to the rise of Chinese brands.

When a country’s GDP growth slows down and its export sector is declining, it indicates that brands are rising. Panasonic and Sony emerged during the time when Japan’s GDP growth rate was lower than 8%. Samsung and LG became big when South Korea faced the same situation as well.

What is the reason for that? I have mentioned before, competition pushes society forward. Traditional industries grew wildly in a chaotic environment and are not reliant on the development of technologies. It’s just like securing some land and then exploiting the farmers. But what would happen when the value is lost?

Survival instinct forces entrepreneurs to really think. In the future 20 years Chinese brands will rise in a global scale. And when that day comes, we can really say China is a globalized country. Without the globalization of enterprises, the country will be limited in different industries.

Liu told Pan: pure Internet companies provide their products for free

Pan Shiyi: It’s true. Everybody should learn by heart that when you are choosing your part in the startup team, you need to remember you have to do something with technologies. Many companies that only do low-tech works lost great money to the high-tech ones. So we have to combine our aims with technologies.

Liu Qiangdong: We will have a forecast on the future tendency. In the future, everything will be smart, including our clothes, socks etc. All things will be intelligent. Your sock might be able to measure your heart rate for example. In this case we wish to help entrepreneurs who want to make innovations in these fields in exchange of first-hand information about these industries.

Since everything will be intelligent, today every brand can get a few opportunities from traditional enterprises. Now everyone thinks IKEA is great, right? But what will happen to IKEA in the future where everything is smart hardware? Perhaps IKEA will not survive the future competition. That’s our point.

I think this startup project is quite similar to the cloud computing technology we have today. In the past every company had servers, bandwidth, and their own IT personnel, which were a great source of cost. Some companies had one server that was barely been used to 5% of its capacity. It’s just a completely waste of resource.

Under co-working model, every company might have rented a house for one year, two years or three years. And every company has extra office space. Thus, they move around according to that so no space will be wasted. JD changes the office once every six months in the last ten years, which is actually a waste of resource.

So maybe SOHO 3Q is not meant for companies like JD. SOHO 3Q is more for startup companies since startup companies are usually short of money and do not have the extra funding to decorate the office and buy office equipment. At last you find that the 800 thousand RMB has become your office asset. Then why not collect them into one place?

One year later, you find that many people went broke because you put too much money in fixed assets instead of current assets. At 3Q people don't have to spend money on that aspect, so they can focus on coming up with creative ideas and innovations, improve the business model, customer service. It’s a great innovation. And maybe you can even provide them the office space for free, Pan?

Entrepreneurs that come to 3Q can get a certain area of office space according to how many staff you have and the rent duration. Also factors like share and revenue bonus will also be taken into consideration. Basically 3Q will become their shareholder. Just imagine 3Q has 1%-5% of share of each startup companies and in the future the revenue the share will bring is definitely more attractive than just rent. Pan always talks to me about making something out of the Internet. But you have to remember: pure Internet companies provide their products for free.

Entrepreneurs at 3Q must stick to their course. Still, it’s easier to just say it but when obstacles do come, it would be difficult. From 2008 to 2012, JD had been questioned by the crowd. Some people even just directly post something like “I told you this is not going to work but you wouldn’t listen,” and stuff like that directly. But still most of the doubts were not offensive.

Because of JD I was not good at socializing with people. I lacked the time for communication as well. Many media outlets at that time would therefore just make assumptions based on the material and information they had. So there had been rumors saying that my fund had been cut off. On one occasion in which I was partying with the old staff in the company who had worked for JD for 5 years, I learned that some of their parents feared that they might lose their job in the future working in JD.

I felt like I was being treated like those construction managers who just took all the money and ran off. As a result, we also had troubles hiring new senior executives during that time.

But then they would just say: oh, JD, no I am not going. Who wouldn't be stressed under such circumstances? To be honest all entrepreneurs get stressed out because of that. Even Pan, as success as he is, you will still feel stressed. The main problem here is how to overcome the pressure. I believe everyone has their own ways of venting out the frustration.

I hope entrepreneurs can bear in mind that you have to know who you clients are from the very beginning of your entrepreneurial journey. If your product is designed for everyone, then I would tell you it’s impossible for you to succeed. Startup companies should understand this. They have to profile their clients despite what they are saying. Your product can’t be changed because of that.

Why I only focused on cities of the first, second and third-tier in the last decade? In the last ten years, the mid and high-end consuming power has been the clients JD wanted. Some people suggested that I could just get cheap clothes from Wenzhou and Guangdong and sell them. But I wouldn’t do it, because it’s not what our clients wanted.

But why we are expanding to other small cities? Since 2012, the middle class has taken off in China, including in those cities. Simply put people in general didn’t have that much money, but now they have.

Q&A Session: Is there any development space in the O2O sector next year for startup projects?

Question: You introduced some businesses of yours to president Xi on the World Internet Conference. What did you tell him?

Liu Qiangdong: President Xi went to our exhibition and I introduced our smart logistics center to him briefly. Everybody knows that we have finished give Asia One projects. What we are thinking right now is make the logistics centers entirely automatic. Everything will be done by robots.

We will achieve that by 2020. First we are going to build a trial base in Beijing and we will start to test using drones to deliver packages. The core issue about the logistics sytem is that the cost of delivering packages to the countryside is really high. So we want to replace automobiles with drones. Drones can fly directly from the county to villages without having to worry that they might wear. We will start to send a couple hundred of drones to every county this year. We are still designing the final delivery model, which is using self-driving cars to deliver packages. In that case we don’t need delivery guys anymore.

Question: Will age be an obstacle for entrepreneurship? At what age people should not consider entrepreneurship?

Pan Shiyi: It’s an obstacle. People born in 70s think differently than people from the 60s. And it works just the same for people born in 80s and people born in the 70s, let alone people that are born in the 50s. It’s a great obstacle to be honest. However today what every enterprise and entrepreneurs do is run business, or else they wouldn't survive.

Just take me as an example. People that are older than me shouldn't consider entrepreneurship, but people like Liu Qiangdong can.

Liu Qiangdong: There is no age limit for entrepreneurship. Pan is also using Internet thinking to transform business models. He’s starting his second entrepreneurial journey in real estate, rental, and SOHO 3Q. So I wish that everyone can just go for it.

Question: Is there any development space in the O2O sector next year for startup projects?

Liu Qiangdong: The O2O sector definitely has opportunities. But unfortunately last year too much capital had been poured into this particular sector, making many startup companies overly confident about their companies and business models. Some entrepreneurs are not even using the money to improve the user experience, reducing cost or boosting efficiency, but rather use the money to get more users. It’s an abnormal trend.

Question: Mr Liu and Mr Pan, should startup companies try to avoid to enter fields in which BAT have already set their foothold? Or should they stick to their ideas? How can entrepreneurs get a share of the market fast?

Liu Qiangdong: I think even in fields that BAT and JD have penetrated you can still set yourself apart from the crowd if you have something unique to offer.

In 2004 when I was doing e-commerce, there were only 36 people with me. We had nothing. No investment, no technologies. So what it was like back in 2004 in the e-commerce sector in China?

Alibaba received an investment of one billion dollars from Yahoo in 2001. When Dangdang.com had already received its series C round of financing, which was 27.5 million dollars, Zhuoyue was sold to Amazon at 75 million dollars. In the U.S, there was a B2C company called the NEWEGG, a company that started as an IT company first. The company’s sales volume back then was two billion dollars, with an annual net profit of 50 million dollars.

But we were like nobody. But we succeeded anyway because we didn't try to copy any business model from anybody. We have always been original.

We spent 10 years to finally have a comprehensive product stock. And those new B2C startups put up millions of items on their platforms in just one or two years even though they didn’t really have a reliable supply chain. You just have to be innovative. You have to be different from others. It’s not really about whether or not BAT and JD have already entered certain areas, it’s a matter of if your innovation can generate value for the clients or not.

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

Translated by Garrett Lee (Senior Translator at PAGE TO PAGE), working for TMTpost.