JD.com: Using E-commerce to Alleviate Rural Poverty in China

Introduction

JD.com is one of China’s two dominant e-commerce giants, competing with Alibaba in a B2C market worth $600 billion in 2017.

Alibaba had taken an early lead in online commerce in China with a customer-to-customer platform similar to eBay. The decision to receive buyers’ payments into escrow, and then release the funds to vendors only after confirmation that purchased goods were received, triggered a boom in transactions between hundreds of thousands of micro-, small- and medium-sized (MSME) Chinese merchants and hundreds of millions of buyers.

JD.com, launched by Richard Liu in 2004, developed the model further, to secure the confidence of buyers seeking high-priced items such as cell phones, computers, and consumer electronics. It became a first-party business-to-consumer retail platform, selling directly to consumers the branded goods that were bought and held in storage and taking control of ‘last mile’ delivery to assure a high level of service excellence. By 2008 JD.com’s product mix included general merchandise, and the company was working to achieve its vision of becoming ‘the most trusted company in the world’.1

Ecosystem Pain Point

China’s online retail sales as a percentage of total retail was 13.5 per cent in 2016, compared with the global average of 8.6 per cent.2 Analysts predict China’s online penetration will reach as high as 25 per cent of a $1.7 trillion total retail market by 2020.3 Unlike the early years of explosive growth in prosperous coastal cities, however, the locus of China’s future e-tail growth will be the rural interior where incomes are low and infrastructure is poor.

China’s central government sees e-commerce as a solution to rural poverty, which it pledged to eradicate under the 13th Five Year Plan launched in 2016. Central and provincial government funding has increased each year to support the pledge, reaching a combined total of nearly ¥100 billion in 2016.4 In addition, the government designated 158 poverty-stricken counties as rural e-commerce pilot regions where domestic e-commerce companies are encouraged to offer assistance and expertise in targeted economic development programmes. Unlike the general poverty relief programmes of the past thirty years, current programmes are meant to be customized according to local conditions. If these pilots are successful, all poor counties will be included in rural e-commerce programmes by 2019.

China’s poverty alleviation projects generally include three key components: government funding, farmer training, and local third-party administration. The third party—which might be a local government office or even a local business owner—is often responsible for distributing funds and helping farmers to improve their productivity and income. In the past, many government projects have failed because none of these stakeholders really understand markets. Despite the abundant financial resources tied to these aid programmes and the modern farming knowledge and skills available, they typically do not address other gaps in the ecosystem, such as:

1. IT/Entrepreneurship/Marketing knowledge and skills

2. The size of local markets

3. Logistics infrastructure, which is needed to bring farm goods to urban markets at a reasonable cost.

Business and Programme Strategy

In 2016, JD signed a Memorandum of Understanding with China’s State Council Office of Poverty Alleviation with the intention of closing these remaining gaps. A four-pronged programme was established to provide industry upgrades, employment opportunities, entrepreneurship upgrades, and marketing and branding support.5 JD provides logistics services to more than 400,000 of China’s 600,000 rural villages, and also extends agricultural loans on favourable terms to farmer cooperatives making capital purchases and investing in the means of production (e.g. seeds, fertilizers, and livestock). The World Bank, Dupont Pioneer, and a number of local businesses cooperate on these financing programmes. Employment options are offered directly by JD and also by cooperating merchants in the JD e-commerce network. Entrepreneurial training is offered in cooperation with UNDP, China Social Entrepreneur Foundation, and other organizations, with an emphasis on boosting e-commerce skills and knowledge. Finally, marketing support is offered on JD’s e-commerce platform, where dedicated sites are set up to sell specially designated poverty-alleviation products. Consumer awareness and interest in buying these goods are boosted through digital communications on the JD e-commerce site, and also by organizing discounted group-buying events.

Running Chicken: Taking the Programme a Million Steps Further

After the first year of operations, JD’s four-part programme had created 16,000 direct and 5,000 indirect jobs in rural villages. ¥200 million had been extended in loans; 50,000 people trained in e-commerce; and more than 10,000 products and services sourced from poverty-stricken counties. 6 Despite the impressive aggregate metrics, however, the most tangible gains in poverty reduction came from a single village where a highly tailored pilot programme had run. The pilot was designed to tackle two anticipated barriers to meaningfully raising farmer incomes:

1. Market prices for rurally sourced Chinese agricultural goods are generally low and unstable due to uneven and poor product quality.

2. Smallholder farm yields are too small to amass wealth even if prices are high.

JD’s Running Chicken programme had been initiated to test the hypothesis that free-range chickens could be sourced at scale from low-income farming zones and sold on JD Mall at a premium price. The pilot was situated in Wuyi County—one of northern Hebei Province’s poorest regions that is nevertheless endowed with sandy soil and a climate that is conducive to raising chickens and growing fresh fruits, vegetables, and grains for chicken feed. JD worked with the local government to establish a 200-Mu7 fenced-off farming zone that scales and concentrates chicken farming without detracting from the landscape’s beauty. The region thereby remains a viable location for tourism as an additional source of future revenue. The land-use decision removed the problem of fragmentation—a persistent problem that arose when China’s communal farms were chopped up and doled out to eligible citizens at the launch of economic reforms in the 1970s, and which remains in place due to the slow pace of legal reforms concerning land ownership and transfers. JD’s Running Chicken farm is large enough to graze 15,000–16,000 chickens at a time, for an average density of less than 80 chickens per Mu.

A local farmers’ cooperative is invited to raise chickens at this central facility (typically equivalent to 100 chickens per family), with a promise that JD will buy them at three times the average market price as long as strict growing standards are followed. Chief among these is a requirement that chickens run a minimum of one million steps before slaughter, and another that they be fed a healthy diet including grains twice a day and fresh fruits and vegetables at least three times per week. The cooperative has hired a third-party organization to run the farm, and that organization employs local farmers as labour. The growing conditions are digitally monitored via electronic pedometers attached to chickens’ feet along with video images from cameras installed at the farm. When JD purchases the chickens from the cooperative, the funds are allocated to individual farming families.

In total, the programme engages four principal stakeholders: JD, the local farmers’ cooperative, the Chinese government, and the local third-party organization, which in this case is an Internet business owner. JD provides interest-free loans to the cooperative for purchasing chicks and feed, without demanding collateral. The government insures the cooperative loans against catastrophic risks. Chicks and feed are currently sourced from suppliers in JD’s network. The aim is to source from local suppliers eventually, although no direct programmes have yet been established to cultivate those sources. Once chickens meet the minimum growing standards they are purchased and sold under the proprietary JD brand name Running Chicken at three times the price of ordinary chickens. JD is monitoring sales and also farming conditions closely to determine the connection between farming methods, supply quality, and market demand.

Performance

Running Chicken is a winning programme for all external stakeholders. Thirty thousand chickens were sold in the first year, and consumers generally were pleased with the meat’s health credentials and good taste. More than 600 families joined Running Chicken in 2017, most of them elderly or sickly farmers with little education and few other viable means of earning a living. After deducting loan repayments and growing expenses, a typical farmer included in the programme via the cooperative realized an income increase of ¥2000–3000.8

In addition to direct farming income, Wuyi County created part-time jobs for cleaning the chicken farm and slaughtering the chickens at the end of the growing period. Running Chicken farm will in principle also become a buyer for locally grown fruits and vegetables once a reliable local supply chain is established. Finally, the Chinese government gained a new and more efficient poverty-alleviation business model and a tangible reduction in national poverty cases. On the basis of this success, Running Chicken is adding additional Wuyi families in 2018 with the aim of doubling the 2017 overall programme size. Pilots are also underway to replicate the programme in other poverty-stricken counties. If successful, Hebei Province Flying Pigeons and Jiangsu Province Swimming Ducks will join JD’s traceable premium poultry product line in 2018.

Prognosis

The benefits to JD are difficult to assess in the short term. For a sustainable long run, JD is working closely with government officials and universities to establish agricultural standards for free-range chicken farming and processing. The standards will be based on deep analysis of what works best for raising the chickens as well as building the market demand. Using these standards, local organizations should in future be able to pull independent farmers into the free-range chicken supply chain without the need of JD’s financial, human, and social capital inputs.

For now, JD does not assess the programme’s success through the lens of short-term profitability. Like many young Internet businesses, the company is spending investors’ cash to build market strength and a network that will later be monetized. A successful New York IPO in 2014, and an ongoing stream of investments from institutional ecosystem partners (chief among them TenCent and Walmart) fuels the expansion of JD’s market presence and ecosystem services. The powerful logistics network will help JD reach deep into China’s growing rural e-commerce space, boosting the platform’s active user base and adding critical sales volume to offset the platform’s low average product margins. At the same time, a high quality, traceable source of poultry will help JD capture the growing Chinese market for fresh meat. Already a $159.1 billion market in 2015, it has been growing at an annual rate of 6.5 per cent since 2010.9 JD’s own-company online sales of fresh meat grew by 780 per cent year-on-year in 2017, consistent with the overall trend. The Running Chicken programme ties into an overall push toward achieving the company vision of being the most trusted company in the world.

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Notes

1. http://corporate.jd.com/missionValues/.

2. ‘China Retail Market Report 2016’, Deloitte.

3. http://www.alizila.com/online-shopping-in-china-to-double-by-2020-goldman-report/.

4. Approximately $15.9 billion using 2018 exchange rate of $1=¥6.3.

5. Xiong, Nie, Bi, and Waqar (2017).

6. Xiong, Nie, Bi, and Waqar (2017).

7. Approximately equal to 13 hectares or 32 acres.

8. $317–$476 at 2018 exchange rate of $1=¥6.3

9. http://www.agr.gc.ca/eng/industry-markets-and-trade/international-agri-food-market-intelligence/asia/market-intelligence/sector-trend-analysis-pork-trends-in-china/?id=1481126666257.

Case Study Contributors

• Lydia J. Price, CEIBS

• Liu Xiaowen, JD.com

• Ni Jing Hua, JD.com

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