4/10/22 Just Who is JD's New CEO Xu Lei?
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Insider Digest 4/10/22: Just Who is JD’s New CEO Xu Lei?
Housekeeping / Announcements / Fun:
As I mentioned, the TBC Syndicate is syndicating our third deal! Really excited to partner with long-time friend Huashan Capital. Again, open to accredited investors only, so make sure you qualify!
What You Missed on the TBCI Discord
There is SO MUCH in the Discord on the situation in Shanghai and COVID in China in general, I really suggest you join us there!
Super informative document from health experts on Shanghai, including:
Shanghai spiraled out of control because it was politically inconvenient to lock down when so many important meetings happening in Jan & Feb
Expected time to relax quarantine measures: 5/10 or thereabouts
Proposed new rules: lockdown if even 3 positive cases found
ICUs are not difficult to build, but skilled staff will take a long time to train
Even though science & economics support opening up, current political / social / cultural conditions make opening up impossible bc the people are not prepared for loss of life, even if vaccinations are up, treatment more effective, etc. simply not everyone can be saved … (sounds like an impossible situation)
Some alarming stats on how European businesses are handling the COVID disruptions … not well!
51% of German companies’ logistics and warehousing and 46% of German companies’ supply chains are completely disrupted or severely impacted by the current COVID-19 situation in China.
Severe impacts or complete disruption is also reported in production and manufacturing by 31% of respondents, staffing rates by 28% of respondents and demand by 29% of respondents
40% report a complete disruption or severe impact on upstream supply chain operations due to raw materials or upstream products not being available
30% report a complete disruption orsevere impact in the transport ofraw materials and upstream products
For downstream supply chain operations, 35% report severe impacts or complete disruption to the delivery of finished products to local customers, and 33% report the same for goods exported to Europe
If you are thinking of going to China right now … you’re crazy, but if you can’t be dissuaded, still please read this guy’s account of how he was stuck in various different quarantines for 3 months and finally gave up and returned to LA
There are still no deaths from COVID in Shanghai … who knows what is going on …
Guangzhou will be likely going into quarantine soon after uncovering a smattering of cases
Shenzhen continues to PCR test every other day (every day for some folks) and is on high alert
Interesting article trying to explain why Shanghai failed in its COVID response
Too low requirements for neighborhood committees, the capillaries of the bureaucracy and responsible for COVID coordination (food, testing etc) at this time
Shenzhen requires a graduate degree, whereas Shanghai prioritizes people who live there (locals) and so has an older, less tech savvy crowd that can’t keep up in these times of emergency, Beijing’s requirements also much stricter in terms of age, and does not favor locals
Unlike Alibaba, who at least has a partnership DNA (even if Jack Ma is the undisputed head, it is still a “clan” of sorts), JD has always been known as a one-man show. Richard Liu has in fact said (in 2016) that the day he does not have control, he will sell his entire stake. Where one could argue that Jack had been trying to find his successor for years and kissed a few frogs before finally landing on Daniel, Richard seems to have made no such move until 2018. In fact, if we were to take a gossipy point of view, then Richard probably only felt pressure to start thinking about an orderly succession plan after his infamous Minnesota rape allegation incident. Most people think that was the moment when being in the spotlight stopped being fun for him, and in fact a sort of liability. (In fact, if we were to take gossip seriously, which I don’t, but am just letting you know what people whisper about, he hasn’t changed his ways and there is no telling when the next such bombshell arrives.)
Gossip or not, one thing is true, and that is Richard has pretty deliberately kept himself out of the public eye ever since Minnesota. His Weibo, which he posted semi-regularly to (~500 posts over nearly 8 years), has not been updated since December 2018, when he apologized for the incident and the ensuing investigation. Except for a few annual / Chinese New Year letters, he’s basically stayed silent, unlike his previous high profile ways. He's also steadily distanced himself from JD and slowly shedded all his formal obligations. Even internally, he supposedly rarely shows up except for the highest level meetings. In the last 3 years, he’s resigned as legal representative, chairman, or other executive function for 50 or so JD related entities. In fact, he didn’t even show up for JD’s secondary listing in Hong Kong on June 18, 2020. For Q3 2021 results, Xu Lei took over for the first time as the main presenter. No surprise really since Xu Lei was already the “rotating CEO” of JD’s core retail division in July 2018, which had always previously been under the direct supervision of Richard. The following year, people noticed that the word “rotating” was dropped from his title, cementing Lei’s status as JD’s clear No. 2. Then in September 2021, it was announced that Richard would no longer engage in the day-to-day activities at JD, but focus on its long-term objectives. (Sounds just like ByteDance Zhang Yiming last May eh?) Simultaneously, Xu Lei was promoted to President.
So ... by all indications, Richard’s final hanging up of the Group CEO hat was inevitable. Xu Lei has been given all the major responsibilities over time. That being said, I still thought this was a rather terrible time for Richard to formally resign, no matter how expected it was. Has he looked at the markets lately? Could it have hurt to wait at least until things improved a little bit? Like clarification around the PCAOB ticking time bomb? The answer of course is yes, he must know all this, but for some reason unbeknownst to us, it still had to happen now. I suppose it’s possible that with JD prices down, but not down nearly as much as BABA and PDD, for example, that he thought now is as good a time as any, since there doesn’t seem to be any near term positive catalysts on the horizon. A more cynical answer is that there is some other Minnesota level scandal lurking. If that were the case, then shareholders should be glad. Although he is still Chairman for now, with something like 80% of the votes and 14% of the shares, so any hit he takes will still hurt the company a lot, CEO title or not. And even if he rescinded the Chairman title, like Zhang Yiming did last November, it may still not be enough separation to fully insulate the company. But it would be a lot better of course.
But what do we know about Xu Lei?
Firstly, perhaps because I don’t pay nearly as much attention to JD as I do some of the other China Big Tech, I hadn’t heard of Xu Lei until last year. But unless you’re a JD-phile, you probably only got to know him the last few years, too. He has a sales and marketing background, and started his career at Lenovo back in 2000. In 2002, he went to internet advertising services provider Allyes (a giant in those days), working his way up to Beijing GM. He then started consulting for JD in 2007, and officially joined in 2009 as a VP in charge of sales and marketing, eventually making it to CMO. What is often missing in descriptions of his career is that he did leave JD for 2 years in the middle for Yougou, a fashion-focused e-commerce website, from 2011 to 2013, but has declined to talk about why he left.
In addition to sales & marketing, Xu Lei helped build JD’s PR team, as well as its mobile product development system and membership system as well as advertising business. He was supposedly instrumental in pushing JD towards mobile, and took the lead in opening up JD’s supply chain capabilities to outside vendors, both no small feats and arguably providing the main fuel for JD’s second stage of growth. Finally, just like Daniel, he masterminded JD’s answer to Single’s Day, the 618 Shopping Festival. (618, as we all know, is China’s second largest consumer shopping holiday, and “possibly the second largest in the world.”) A lot of parallels here between Daniel and Lei, in the sense that both moved up the corporate ladder in non-technical roles (versus say Chen Lei, who was CTO before CEO at Pinduoduo), and demonstrated a keen sense for commercial opportunities. Coincidence that both Richard and Jack are humanities majors instead of tech geeks and ended up building businesses that were more operations-driven than tech driven? (Richard does know basic programming, to be fair, unlike Jack who prides himself on knowing very little about technology.) Seems a logical next step that their successors would have a similar profile to them at least in this broad sense.
But everything else about Daniel and Lei are different. Whereas Daniel is in every way the careful, deliberate, conservative accountant that his resume presents, Lei is ... honestly the exact opposite. He has (at least) 3 tattoos that are sometimes visible, rarely wears suits and is typically decked out in the latest fashionable streetwear brands, and loves his jewelry — a large stud earring is almost always visible, thick necklaces and bracelets are common, and at least 3 or 4 rings. He loves music, especially rock & roll, and makes no secret that he will fly thousands of miles for a favorite performer. Personality wise, he’s considered a straight shooter, with the swagger of someone who grew up in a “Beijing courtyard,” which is shorthand for someone whose family is part of the important parts of the bureaucracy in some way, as those were coveted assigned housing units. Xu Lei’s family, it turns out, was part of the military, which means he was virtually guaranteed very good benefits and opportunities if he were to pursue the same path, but he was apparently born with a rebellious streak, and hated his regimented upbringing. He didn’t go to the military, as his family probably wanted, but went to a second-rate university in Beijing (currently #191 in China), and studied international business management, which would not have been highly regarded at the time.
I guess we are supposed to walk away with the idea that he isn’t afraid to break the rules, and within the confines of his generation, that could be true. But it doesn’t mean that we should expect wild experimentation from him either. First of all, Richard still retains control, and I think we should believe him when he says that he won’t be giving that up, so CEO or not, Chairman or not, his approval will probably be needed for major decisions. Second of all, Lei has his share of messes to clean up. JD’s CGB, which I’ve written about recently, is a slap on the face, especially since Richard had so loudly proclaimed that he was going to lead the battle back in 2020, one of his few public statements after Minnesota. JD’s executive ranks also seems to be very unstable, with large numbers of reshufflings and firings every year. Not that it’s a recent problem ... when I was trying to establish a partnership with JD back in 2015-16 they were reorganizing so often and people changed or left positions so quickly that it was impossible to get anything done. But Xu Lei has his work cut out for him, because maybe JD’s core business is quite defensible but where’s the next stage of growth? It’s made very little progress into rural China or content-driven shopping AKA livestreaming, the two biggest paradigm shifts in the last few years.
I have not spent nearly as much time on JD as some of these other internet platforms, so I don’t have a great idea where the company is going. To conclude though, I do think the facts make it clear that Xu Lei’s appointment is quite expected, and I suppose as well-signaled as it could have been, at least by Chinese standards. As for why Richard wants to step out of the limelight, one word, Minnesota. However, suppose there was no Minnesota, might have he made the same decision post the events of 2020 and 2021? Yes, I think there is an argument to be made for that, that there is less and less allure to being an “internet mogul” in China, and that the public is very much eager to “cancel you” at every turn and the regulators can’t wait to get their hands on you to show their efficacy. And there is simply no advantage anymore to being “the face of the company.” It doesn’t help the company — it may instead help focus fire — and it’s just generally a massive pain in the behind. Of course, concerns about lack of a succession plan were always there too, but it’s unclear that without Minnesota as catalyst Richard would have done much to really address it. But I rather think the company is made more stable by the official installation of this clear successor. What do you think?
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