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One master’s two apprentices: How Indonesia’s J&T Express rose in China on the back of Pinduoduo

Written by Qianyu Han Published on     8 mins read

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As the dark horse in China’s hyper competitive courier market, J&T is galloping ahead while bleeding along the way.

Pinduoduo, China’s second-largest e-commerce platform, put out a statement in early May rebutting a rumor claiming that it has invested in J&T Express, with which it has formed a special partnership. While its e-commerce platform operates under a set of codified and published rules, the choice of courier services is left to the vendors’ discretion with no interference from the company, according to a statement from the company.

To some, the announcement begs the question—what is J&T Express, and what did it do to warrant Pinduoduo’s refutation?

Hailed from Indonesia by a Chinese entrepreneur, J&T Express has made a runaway success across the region of Southeast Asia since its inception in 2015 before it decided to expand to China four years later. Since then, J&T has thrust itself into one of the world’s most competitive courier markets, with a mixed performance. Meanwhile, both companies come from China’s famed BBK syndicate that consists of a group of companies either spun off from BBK Electronics, a Chinese electronics maker, or founded by entrepreneurs associated with Duan Yongping, the founder of BBK.

Yet, this is not the first time Pinduoduo has had to refute claims about its tie-up with J&T Express.

A bumpy, costly, and meteoric rise

There is no denying that it was the massive amount of orders from Pinduoduo that not just helped J&T Express survive a bumpy start in China but also—in just one year—propelled it to a feat that took its more established rivals from STO, YTO, ZTO, and Best to Yunda Express (the top five Chinese couriers) more than a decade to achieve.

Recently, a source told 36Kr that the daily order volume of J&T Express has reached 30 million, almost three-fifths of that of ZTO Express.

J&T is certainly moving at a rapid speed that has not slowed even amidst the COVID-19 pandemic. In early April, J&T Express completed a new USD 1.8 billion financing round at a valuation of USD 7.8 billion, surpassing that of STO Express, Yunda Express, and YTO Express, according to National Business Daily. Heavyweight investors such as Hillhouse Capital, Boyu Capital, and Sequoia Capital backed this round. The company also closed a USD 300 million round of financing, with another round in the works, according to Bloomberg News. The ultimate goal, of course, is a U.S. IPO to raise more than USD 1 billion.

While J&T’s success was to be expected, the ferocity of its offensive was not.

The company is part of the BBK syndicate that includes the likes of Vivo, Oppo, and OnePlus, some of the most popular Chinese smartphone brands, with a combined far-flung retail network set up over decades and deep pockets. The connection is obvious given J&T is founded by the former CEO of Oppo Indonesia. That, coupled with a substantial proportion of delivery orders from Pinduoduo, J&T has become one of the very few newcomers who can take a sizable chunk of the market away from the major players.

Very much like the rise of Pinduoduo, the model behind J&T Express’s meteoric growth is straightforward and barbaric: offering subsidies and lower prices.

In Yiwu, a city known as China’s small commodity center in the country’s eastern Zhejiang Province, the local post bureau earlier this year warned J&T Express against “dumping at a price that’s far below the cost” as it charged as little as RMB 0.80 yuan (USD 0.12) for a single delivery. The company also offers 20% cheaper cross-provincial express delivery services than other major players in Yiwu.

The company’s rapid-fire growth is accompanied by concerns, as 90% of the company’s orders still come from Pinduoduo, and the rest coming from China’s main online retailer JD.com, video-sharing apps Douyin and Kuaishou, and a small amount from Taobao, China’s e-commerce goliath.

Although China’s express delivery industry is highly concentrated—a concentration index pegs it at as high as 80%, J&T Express, sharing the BBK syndicate’s vigorousness, still fought its way in. But it is not out of the woods yet. An insider told 36Kr, “The new player won’t make it to the table unless one or two old hands leave the table.”

To duplicate the success of Pinduoduo, the latecomer must race against time.

“Be prepared to lose”

“(Our) franchisees must prepare themselves to lose money for the first two years.” This is one of the most famous remarks by Jet Lee, the founder of J&T Express and former executive of Oppo.

Indeed, J&T Express can afford to lose money and is not afraid of doing so because it has the backing from some of the most loyal distributors revolving around the BBK syndicate.

Unlike the major players in the logistics industry, before J&T Express franchised its business, the core backers of the company are distributors for the BBK crew, many of whom got off the ground and earned their first profits by selling Oppo and Vivo (OV) phones. Loyalty and trust from these agents towards the BBK system became J&T’s core competitiveness. In an internal letter from Jet Lee, he recalled that in the early days, “the leaders of Oppo, Vivo, the Little Genius smartwatch, and BBK’s agents across the country chipped in for our fight.”

The BBK DNA runs in Jet Lee’s blood. Within the BBK system, he has pulled off remarkable feats such as spearheading Oppo’s market in Indonesia, setting up J&T Express based on the phone maker’s sales network, and leading it to become the leading e-commerce delivery firm in Southeast Asia. Outside the system, he’s a mysterious man who has given few public interviews.

Lee joined BBK Electronics in 1998 and was Oppo’s regional manager in Jiangsu and Anhui provinces in the early years of his career. He created OV’s three-level distribution system, and the areas he’s responsible for have always come out top in sales. There is even a “Jet Lee Award” named after him to reward top salespeople. In 2013, Lee volunteered to explore the Indonesian market and soon made Oppo one of the top two best-selling brands in the region. In 2015, Lee stepped down as CEO of Oppo Indonesia to fully devote himself to J&T Express.

The name itself also suggests J&T’s pedigree. Current CEO Robin Lo explained at a Tsinghua Wudaokou EMBA2019 Freshman Sharing session that the “T” was taken from Oppo’s current CEO, Tony Chen. Oppo helped J&T make its first fortune by commissioning it for the delivery of its handsets in Indonesia. J&T then went on expanding into the rest of the southeast Asia market, where it began to diversify into integrated logistics.

Lee is well aware that the company won’t get far if it’s complacent with its gain in the region. “If J&T stays in Southeast Asia, sooner or later, other companies will come and snatch the market,” he said. When J&T Express became Indonesia’s second top delivery company, the daily pick-up volume was around 300,000, which accounts for only a tiny slice of the logistics market in China.

At the time, the territory of the domestic logistics industry was clearly divided, with a few major players taking over the market and the rest struggling to survive.

Without a doubt, J&T’s strong entrance into the Chinese market benefited from the deep-pocketed BBK agents. Although they are new to the logistics industry, they have years of experience in the mobile phone industry, which gives them the ability to mobilize massive resources in a short frame of time to help J&T with money and subsidies to quickly cut a large piece from the market. And J&T did not skimp on its agents by giving back handsome returns.

A source told 36Kr how its model works. For key markets, such as Yiwu and Guangzhou, provincial agents will manage with assistance from someone designated by the headquarters, meaning that the headquarters will directly involve itself in the key markets. For non-key markets, provincial agents take the call and will recruit new agents to manage lower-level markets. This way, the most valuable resources are still almost entirely in the hands of BBK’s core team. When the early price war was so fierce that franchised outlets were all in a state of loss, the headquarters still gave subsidies to help agents tide over difficulties. And after the business gradually gets on the right track, if the agents want to sublet the outlets, they can earn a huge sum from franchise fees.

Thanks to the BBK crew’s backing and resources from OV, J&T was able to hit the ground running in short order.

Where does J&T’s future lie?

Underneath J&T’s crazy expansion lies its anxiety. It is still playing catch-up with major players in China’s logistics market, such as STO Express and others.

J&T is entering a much more competitive market that’s different from the smartphone industry. While meteoric rise is possible for smartphone players through hefty investment and talent poaching, in the logistics sector, one has to spend years to gain a solid foothold. According to ZTO’s Q4 2020 financial report, it has 94 sorting centers and 30,000 delivery outlets, covering 99% of the country. On the other hand, J&T still lacks services in some rural and remote areas in the country.

Even with the capital, manpower, and channel support from BBK agents, J&T still went through a rough patch.

When J&T embarked on its journey in China, it acquired Longbang Express, a Shanghai-based logistics company. But its business scale was too small to support J&T’s fast expansion. While its network-building is still in progress, J&T exploited delivery outlets from other logistics firms. Major competitors soon banned their delivery network outlets from processing orders for J&T.

While these franchised networks have little loyalty and are happy to make some extra money by taking orders from J&T, the order volume increase is too aggressive for them to deal with.

The only solution for J&T seems to be scoring more of the market share as quickly as it can through low prices and by attracting more franchised partners to join, eventually hoping to build its own network.

J&T has thrived after hopping on the bandwagon with Pinduoduo, yet each has its own agenda.

In April, Pinduoduo issued a statement drawing the line with J&T, claiming that it has no investment relationship with J&T and that their special cooperation guarantee has ended on February 22, 2021.

Although Pinduoduo is the main source of J&T’s business, J&T accounts for only a small part of Pinduoduo’s logistics supply. At least currently, Pinduoduo cannot risk making enemies with the STO, YTO, ZTO, Best, and Yunda expresses by teaming up with J&T exclusively, not when J&T still has much to grow.

On the flip side, even if Pinduoduo offers a massive amount of orders, orders from Taobao are more desirable for J&T. At the end of the day, it’s hard to find a perfect solution to a paradoxical situation where neither side wants to put all its eggs in one basket.

While the side is yet to be picked, J&T faces another dire issue: how to actually make money after the burning-money phase ends. Citing the source mentioned above, 36Kr learned that J&T is positioning itself to serve small and medium-sized merchants who sell tens of thousands of orders a day, which inevitably reminds people of the rise of Pinduoduo.

Although first-tier cities are mostly covered, J&T still can’t compete with the established incumbents in accessing the rural and remote areas. Building its own logistics network will be J&T’s primary focus in the near future, which might determine whether the company is a flash in the pan or a dark horse with the potential to reshuffle the domestic logistics market.

 

This article was originally written by Yuan Silai of 36Kr, KrASIA’s parent company.

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