In Depth: JD.com’s Rocky Road to Take the Finance Out of Its Fintech Unit
The abrupt suspension of the Ant Group IPO in November last year has reverberated across China’s fintech sector and caused dozens of casualties, one of which has been the fintech arm of JD.com, a leading Chinese e-commerce company. Known back then as Jingdong Digits Technology Holding Co. Ltd. (JD Digits), the company was later forced to abandon its IPO plan in the middle of the process.
While Nasdaq-listed JD.com Inc. has long been widely seen as one of China’s top online retailers, the growth path of its fintech arm has been anything but consistent. Even its name has changed several times. It started as JD Finance as early as 2013, before changing monikers to JD Digits in November 2018.
A little more than two years after that, JD Digits changed name again. Since this January, it has been rebranded as JD Technology, encompassing cloud computing and artificial intelligence (AI) businesses previously run by JD.com. “Technologies like cloud computing, AI and blockchain will be our key businesses in the future,” said an insider at JD Technology, adding that “cloud for financial services will be core.”
An autonomous delivery van produced by JD.com sits on display at the China International Fair for Trade in Services in Beijing on Sept. 4. Photo: VCG
Li Bo, a vice president at JD Technology, announced at a public event in September that the company aimed to become a player in industrial digitization, and would count governments, financial institutions and corporations as clients.
Along with the restructuring came reshuffles of senior executives, as well as layoffs. People close to JD Technology told Caixin that key senior executives who joined the original JD Finance in 2013 or 2014 and helped build up the business have almost all left the company in the past few months. The plan now is to “de-financialize” JD Technology and make it a pure technology company so that it eventually can be listed.
Much remains to be seen, however, as to how the restructured JD Technology will evolve under a very different regulatory regime, and whether it can generate healthy revenue growth to sustain its long-term development.
There’s a lot in a name
As one of the largest e-commerce companies in China, JD.com plunged into the fintech business at almost the same time as its bigger rival, Taobao, the online marketplace run by Alibaba Group Holding Ltd. In late 2013, Chen Shengqiang, then a high-level executive at JD.com’s e-commerce business, was appointed CEO of JD Finance and given the task of building a team and running the business. A number of others also joined JD Finance as senior executives. Two of its early successful online consumer loan products, namely JD Baitiao and JD Jintiao, were launched by teams led by Xu Ling, who was credited as being one who brought the business model of “buy now, pay later” to online shopping in China.
In January 2016, JD Finance raised more than 6.6 billion yuan ($1 billion) in its series A financing round, giving it a valuation of 46.7 billion yuan.
Later that year, however, regulators started to clamp down on misconduct in the online financial sector, targeting products like online microlending and peer-to-peer (P2P) lending platforms. Chen subsequently announced at the end of 2017 that JD Finance would move away from proprietary finance to focus on providing services to financial institutions. “Let finance be finance and tech be tech,” he declared.
The shift from serving retail customers to serving business clients thus started. In 2018, JD Finance finished its series B financing round that valued it at more than 130 billion yuan.
The name change to JD Digits in November 2018 was the idea of Chen himself. He expanded the lines of business, and played down the company’s financial links by talking up concepts like “digital technology” and “smart cities.” Getting prepared for listing then became the primary task. The prospectus, published in September 2020, revealed that revenues from JD Baitiao and JD Jintiao, once combined, accounted for more than 40% of the company’s total revenue in the first half of that year.
As Ant Group Co. Ltd. was forced to call off its much anticipated IPO, industry insiders sensed that JD Digits’ opportunity to go public had also passed. A management reshuffle at the most senior levels ensued. At the end of 2020, Chen was appointed vice chairman of JD Digits and chief of staff at JD.com, a position that reports directly to Liu Qiangdong, the company’s founder, who goes by the name Richard Liu in English. Li Yayun, then JD.com’s chief compliance officer, took over as CEO of JD Digits. Just a month after the reshuffle, JD Digits was rebranded as JD Technology, though the name on JD Digits’ corporate registration record wasn’t officially changed to JD Technology until May. Amid the rebranding, the company added AI and cloud computing to the scope of its business, while dropping most activities related to finance.
Shortly after JD Technology withdrew its IPO application from Shanghai’s STAR Market in April, Chen quit both the board of directors and the board of supervisors. He was no longer a senior manager either. Business registration records showed that Chen had also pledged all of his equity in the company for loans. Former employees of JD Digits who spoke to Caixin believed that Chen was marginalized in the reshuffle and decided to cash out.
People close to JD.com said that Chen and Liu had disagreed for quite a while about JD Digits’ business strategy and operations. The suspension of Ant Group’s IPO provided an opportunity for Liu to replace JD Digits’ management team, and some believed that an inappropriate video ad in December 2020, in which a person who looked like a migrant worker was showed how to upgrade his mother’s seat on a flight with the help of a JD Digits loan product, triggered the reshuffle. The ad caused an uproar and was criticized for promoting excessive consumer spending. JD.com and JD Digits both had to make public apologies. Liu was very angry about this incident, according to a former JD Digits manager, and decided that someone needed to be held responsible.
Big layoffs at JD Technology started in May this year, said several former employees. “Almost all of the businesses related to finance were firing people,” one recalled.
Overall, approximately 30% of JD Technology’s staff were let go. The percentage was higher in teams like asset management and wealth management, which weren’t making money anyway.
There were people who voluntarily quit too, as the company wasn’t going to list anytime soon. Xu Yerun, a vice president in charge of asset management at JD Technology, left in May and joined OneConnect Financial Technology Co. Ltd., a U.S.-listed fintech company affiliated with Ping An Insurance (Group) Co. of China Ltd., sources with knowledge of the matter said.
The role of Zhengdong Jinkong
Beijing Zhengdong Jinkong Information Service Co. Ltd., a wholly owned JD Technology subsidiary, surfaced during this round of personnel reshuffling and layoffs, as some of the finance businesses previously operated under JD Technology had been transferred to Zhengdong Jinkong, namely, consumer finance, supply chain finance and asset management.
The JD Digits IPO prospectus showed that at the end of June 2020 the company controlled seven subsidiaries that provided financial services, four of which were microlending companies, whose actual controller are now Zhengdong Jinkong.
Industry observers expect JD.com to further integrate the four microlenders in order to boost their competitiveness, at a time when other tech giants, such as Tencent Holdings Ltd., Meituan and Sina Corp. are said to be considering setting up online microlending platforms that can conduct business nationwide.
Only one of the four, which mainly provides supply chain financing to small companies, is running at a loss. The other three are helping JD Technology maintain a meaningful presence in the realm of consumer finance. Several industry experts, as well as a number of company insiders, believe that it’s impossible for JD Technology to completely give up on the consumer finance business. “The demand is there,” said an employee who wished to remain anonymous. “But the business won’t be part of the company that seeks an IPO.”
A cash cow in the cloud?
On March 31, JD.com sold its AI and cloud computing businesses to JD Digits in a deal that put the combined value of the businesses at 15.7 billion yuan. Several fintech experts told Caixin that the purpose of the deal was to make JD Digits seem more like a tech company. The prospect of profitability, however, remains uncertain because both the AI and cloud businesses have weak cash flows and revenues.
JD Cloud officially started doing business in April 2016. It was in that year that Chinese regulators set a firm timetable for the banking industry to migrate all important internet-based information systems to architecture platforms based on cloud computing by the end of 2020. The market for cloud businesses for financial institutions subsequently exploded.
In November 2017, JD Finance launched Financial Cloud, specifically targeting financial institutions. But the company didn’t come up with good answers to questions like: What exactly is JD Financial Cloud’s business model, how will it create value for clients, and even how would it make profit, recalled a mid-level manager who recently left the company. Caixin later found out that most of services JD Financial Cloud offered weren’t bought based on their own merits, but because they were tied to other benefits the company could offer its clients. “Banks purchased JD’s Financial Cloud service, and in return gained access to clients diverted from JD Baitiao or Jintiao,” said an employee with an information technology service provider in the banking sector.
Competition is intense in the cloud business, as nearly all of China’s major tech giants are in the race. Alibaba’s and Tencent’s cloud services are generally more popular because each is able to provide other services aligned with cloud, which can provide their clients with a better value. Alibaba’s DingTalk, for example, has effectively become an office communication and collaboration platform for numerous small and midsize enterprises.
Data-related services, such as know-your-client and anti-fraud, are traditionally the most profitable parts of a financial cloud service. However, the recent regulatory crackdowns on misconduct in the fintech sector, especially of those companies that rely heavily on data, have made the business model increasingly precarious. JD Financial Cloud, together with its Industrial Cloud and City Cloud, have become the pillars of JD Technology’s fintech business. But it’s far from clear whether they can turn into a new cash cow for the company.
Ways to profit
At the time when JD Digits was renamed JD Technology, supplying technology to business clients was how it was positioned within the larger JD.com.
The quickest way to make a profit, as industry experts point out, is to provide services directly to clients. The slower way is the so-called software-as-a-service, in which a software suite — like Alibaba’s DingTalk — is provided to enterprise clients. The slowest and most lucrative strategy, is to enhance clients’ digitalization by helping reengineer their business procedures. “(These projects) take at least two or three years to complete, but should be the focus of JD Technology in the future,” said one JD Technology employee who declined to be named.
But JD Technology is under short-term pressure to quickly increase revenue. Several sources close to the company told Caixin that it offered shareholders a “valuation adjustment mechanism” (对赌协议), meaning that the company provided them with a sweetener to help ensure they could cash out their investments in a timely manner. In that case, it promised to either list domestically by 2017, or overseas if it was unable to do so. If it fails to list in five years’ time, then JD.com would buy back investors’ stakes at an annualized return rate of 8%, meaning the interest payments alone could be worth tens of billions of yuan.
Few experts doubt the technological capabilities of JD Technology, yet it still won’t be easy for the company to turn a quick buck. As someone with knowledge of the situation pointed out, JD Technology probably should collaborate with Pudao Credit and explore the business of using its tech to help the credit reporting company improve its business.
As China’s second company to provide personal credit reporting services, Pudao Credit started business in February and counted JD Technology as its second-largest shareholder, with a 25% stake.
Liu, JD.com’s founder, took JD Technology’s role in the business of Pudao Credit very seriously, sources with knowledge of the issue told Caixin. He sent Cheng Jianbo, previously head of risk management at JD Technology, to Pudao Credit to become its CEO. The sources also said that shortly before Beijing-based Pudao Credit was incorporated, Liu promised senior officials at the Beijing city government and the People’s Bank of China that JD.com would never turn into a bank, and that its primary business would always be selling products.
The sources told Caixin that Liu has always shown great interest in the insurance business. Just recently JD Technology established an insurance unit, which may serve as a platform to integrate JD.com’s insurance businesses that are currently dispersed within the group. Moreover, JD Technology has already ventured into the insurance agency and broker businesses via wholly owned subsidiaries. Sales channels have been established too, both online and offline.
Sun Yang, a senior researcher at the Suning Institute of Finance, believes that the main reason why JD Technology set up a separate business unit for insurance is to better monetize the online traffic brought in by its platforms. Meanwhile, it can provide technological services for traditional insurance companies, as they are speeding up their own shift online because the Covid-19 pandemic has hurt their offline business, Sun told Caixin.
Contact editor Michael Bellart (email@example.com)
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