E-commerce is difficult to build.

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Wen/Dawn Editor/Wei Jia
Source: Fuel Finance (ID: rancaijing)
Netease is a company that can constantly create surprises. From 163 mailboxes to fantasy travel to the west, to Netease cloud music and Netease koala, many people remember the company through Netease products.
Most of the other companies born at the same time as Netease have closed down or declined. But the 22-year-old Internet giant has been active in the middle of the stage.
In the era of portal, Netease is the king of the Internet. After the rise of BAT, Netease has been in the second camp. Its market value follows that of BAT. It can neither challenge the three giants nor easily fall behind.
In the core business, Netease is also difficult to win the first place. In terms of games, Netease has Tencent, an unusually tough opponent; in terms of advertising, Baidu and the headlines have stolen all the limelight; in terms of education, the major giants stand on the hills and are separated from each other.
E-commerce has become the next highland that Netease aims at. Netease Koala and Netease are strictly selected and highly expected by Ding Lei. Ding Lei said that he would “rebuild a Netease” through business.
Five years have passed. How is the development of e-commerce in Netease? Can e-commerce make Netease regain its throne?
On August 8, Netease released its Q2 earnings for 2019 after the U.S. stock market. Overall, Q2’s net revenue was 18.77 billion yuan, up 15% and net profit was 3.07 billion yuan, up 46%. Among them, the net revenue of e-commerce is 5.25 billion yuan, an increase of 20% over the same period of last year. Influenced by good earnings factors, Netease’s share price rose 1.5% after the market.
E-commerce has become the second engine of revenue growth. Q2 in 2019, Netease e-commerce revenue accounted for 28%. In 2017 and 2018, the proportion of e-commerce in revenue was 22% and 29% respectively.
E-commerce has dragged down the overall profitability of Netease. In Q2 of 2019, the gross profit rate of Netease Games was 63.1%, the advertising rate was 55.5%, and the e-commerce rate was only 10.9%. Netease’s overall gross interest rate dropped from 72% in 2014 to 42% in 2018, and its net interest rate dropped from 41% to 9%.
– Clearing up inventories is beginning to pay off. Beginning with Q4 in 2018, NetEase has gradually reduced the amount of inventory. Q2 in 2019, Netease’s inventory value was 4 billion yuan, the lowest in history.
Acquiring external flow, clearing inventory ratio and improving profitability will be three key points that Netease e-commerce needs to cross.
01
Where does Netease E-commerce come from?
From the revenue structure, we can see what kind of company Netease is.
Before 2014, Netease’s revenue mainly came from three aspects: games, advertising and innovation business. Among them, the game business accounts for the majority, accounting for up to 90% of the total revenue. Like Tencent, Netease used to be a real game company.
In contrast, Netease portal, 163 mailbox, Netease cloud music, Dow dictionary, Dow cloud notes and other popular products, in fact, did not contribute much cash flow to Netease. These lines of business contribute less than 10% of advertising revenue and innovation revenue in the long run. Although Netease keeps incubating new projects and advertising business is growing, it has not shaken the core position of the game business.
This situation began to change in 2014.
In early 2014, Netease began to work hard as an e-commerce company, and in one year, the proportion of game revenue was squeezed out by nearly 8 percentage points.
Netease’s early e-commerce business has a strong sense of exploration, more or less a sense of shooting everywhere. Netease, as a platform, has launched Internet lottery, precious metal trading, insurance, financial management and other products in this business basket, which is called “a hodgepodge” in the industry. Starting from Q2 in 2014, the revenue of Netease’s innovative business grew by more than 200% year-on-year for four consecutive quarters, driven by the e-commerce business.
But this informal e-commerce force is obviously not explosive enough.
Cartography/Finance and Economics
In the financial report, the proportion of innovative business including e-commerce in revenue increased from 5% of Q1 in 2014 to 12% of Q3, then stopped growing, and then the proportion has been hovering around 12%. Until Q3 in 2015, Netease Koala began to show the scale effect, this proportion began to rise again. And the popular Internet lottery was called off shortly after.
Until the cross-border e-commerce wind blows.
In July 2014, for cross-border e-commerce industry, “No. 56” and “No. 57” documents were issued successively, which exempted a large amount of tax in the import sector and clarified the regulatory framework of the industry. This has ignited the business of cross-border e-commerce. Ding Lei sensitively smelled business opportunities, and immediately established NetEase Koala. In early 2015, Netease Koala officially launched, and was subsequently upgraded to a strategic product within Netease.
According to the data released by Ai Media Consulting, from 2016, NetEase Koala has occupied the first place in cross-border e-commerce market share for three consecutive years. In the first quarter of 2019, NetEase Koala ranked first in cross-border e-commerce with 27.5% market share.
After the success of cross-border e-commerce water test, Netease officially launched in April 2016, the self-service life of the selected e-commerce network easy strict selection. Born with a golden spoon, Netease became popular with one shot. Ding Lei announced that it would take three to five years to rebuild Netease through such e-commerce businesses as Netease Koala and Netease Yanxuan.
As reflected in the financial report, the proportion of innovative business including e-commerce in the total revenue of Netease increased from 9% in 2014 to 37% in 2018. The proportion of game revenue was further reduced to 60%.
Cartography/Finance and Economics
Netease separated its e-commerce business from its earnings in 2017 and made independent disclosure. Data show that in 2017 and 2018, the proportion of e-commerce in revenue is 22% and 29% respectively. Q2 in 2019, Netease e-commerce revenue accounted for 28%. E-commerce has become the second largest growth engine after games.
02
Can e-commerce reshape Netease?
The situation seems to be very good. Can Netease e-commerce really have a good time?

One must face the fact that in order to rebuild Netease by utilities, we should not only depend on the scale of revenue, but also on profits and growth. However, on these two core indicators, Netease’s earnings have conveyed some unfavorable signals.
First, in terms of profit, Netease e-commerce drags down the overall profit level of Netease.
From 2010 to 2013, Netease’s gross interest rate averaged 69%, reaching its peak of 73% in 2013, and its net interest rate averaged 44%, reaching its peak of 48% in 2013. Moreover, both indicators are increasing year by year. But after Netease invested heavily in e-commerce in 2014, the overall profit rate of Netease declined year by year, with gross interest rate falling from 72% in 2014 to 42% in 2018 and net interest rate from 41% to 9%.
Cartography/Finance and Economics
Q4 Netease in 2017 will be independent disclosure of e-commerce business in the financial report, we can know its true profitability.
According to the financial report, in the seven quarters from Q4 in 2017 to Q2 in 2019, the average gross profit rate of Netease Games was 63%, advertising was 62%, and e-commerce was only 9%. Among them, e-commerce reached its lowest quarterly value in Q4 in 2018, with a gross interest rate of only 4.5%. And this is only the gross interest rate, if deducting the operating costs and distribution costs, Netease e-commerce basically has no money to earn.
Compared with Jingdong, its gross profit rate has remained around 14% all year round. Under the self-management mode, Jingdong has lost money all year round. But Jingdong is constantly expanding the profit model of third-party sellers, from purely self-owned to platform transformation. The gross profit rate will be raised through the combination of merchandise sales and services. In Q1 of 2019, the platform services with higher gross margin in Jingdong achieved net revenue of 12.4 billion yuan, an increase of 44% over the previous year. Jingdong achieved full profitability in Q1 in 2019.
Cartography/Finance and Economics
For the current stage of Netease e-commerce, under the self-management mode, it seems to develop rapidly, but the profit space is limited.
Loss is not the fundamental problem. It is not uncommon for electronics companies to seize the market through strategic losses and increase valuation through high growth rate. Whether it is Jingdong or Jiduo, it has been a model of huge losses. Jingdong has developed for more than ten years, and has not completely torn off the label of loss. The logic of investors’willingness to pay for losses is that short-term losses are not a problem as long as they continue to grow.
However, for Netease, on the issue of growth, it now encounters bottlenecks. Netease e-commerce has bid farewell to the high-speed growth stage.
In the first three years of its inception, Netease’s innovative business including e-commerce grew by 205%, 252% and 117% respectively. Revenue growth fell to 92% in 2017, below 100% for the first time. In 2018, it further dropped to 59%, the lowest growth rate in nearly five years.
From Q4 in 2018 to Q2 in 2019, the growth rates of e-commerce revenue of Netease were 44%, 28% and 20% respectively, and continued to decrease quarterly. From 2014 till now, the development of Netease e-commerce is obviously insufficient in terms of growth.
Cartography/Finance and Economics
An ex-Netease mid-level Fang Dongfei said to Fujian Finance and Economics that Netease e-commerce is relying on Netease’s own traffic in the initial stage, so the start development is very fast. However, when the self-owned traffic is exhausted, the cost of obtaining traffic from outside is very high, which will reduce the development speed of e-commerce.
At Netease’s Q4 earnings conference in 2016, Ding Lei made a bold statement that Netease would achieve 7 billion yuan of GMV in 2017 and 20 billion yuan in 2018. Now, it seems that although it is impossible to confirm whether Netease will meet its target in 2017, it is clear that it will not achieve its target in 2018. According to the financial report, the combined revenue of Netease Koala and Netease Yanxuan in 2017 was 11.7 billion yuan and 19.2 billion yuan in 2018.
“The rapid development of Netease e-commerce in the past two years conceals some problems. When traffic problems are exposed, many problems arise. Fang Dongfei said.
The tightening of policy also has a certain impact on Netease e-commerce.
In March 2016, the Customs announced that it would cancel the tax preferences in the bonded areas from April 8, 2016 and levy an additional 11.9% tax, which would directly increase the cost of cross-border purchases of goods. In 2016, Q4, Netease included the innovative business income of e-commerce, the growth rate directly decreased from 107% to 38%, and then maintained around 60%.
Cartography/Finance and Economics
Ding Lei tried to rebuild Netease through an electronics business. But is this the new Netease that Ding Lei wants?
03
Netease e-commerce still needs to pass three barriers
“Netease has chosen the most difficult way in the business of electricity.” An insider close to Netease told Fujian Finance and Economics.
Netease e-commerce has adopted the heavy asset model. Whether Netease Koala or Netease’s strict selection, they all adopt the self-management mode. The biggest benefit of this model is that product quality and user experience are guaranteed. Take Netease Koala as an example. When Ding Lei decided to do cross-border purchasing business in 2014, the first thing was to let Zhang Lei, CEO of Netease Koala, with his team, run through mature bonded warehouses in China in a week and take the largest warehouse area. Netease set up a large number of bonded warehouses at that time, and controlled overseas supply chain, platform sales, warehousing and distribution in its own hands.
Netease’s idea of doing cross-border e-commerce is similar to that of self-built warehousing and logistics in Jingdong. Liu Qiangdong’s main slogan in the early period of Jingdong was that there were no fakes. Ding Lei’s label for Netease Koala was also quality and no fakes.
But when NetEase Koala expands the commodity category of the platform from 100 to 1000, and the sales channels cover Jingdong, Tianmao and even more, the problem arises. In addition to the occasional exposure of fake goods, inventory becomes a more difficult problem.
According to the financial report, since Q4 in 2017, Netease has released the inventory data of e-commerce to the outside world. In the past seven consecutive quarters, the average inventory of Netease e-commerce is 5.1 billion yuan, of which five quarters are higher than cash and cash equivalents. Q3 in 2018, Netease e-commerce’s inventory reached a peak of 6.3 billion yuan.
Cartography/Finance and Economics

So at the end of 2018, Netease began a continuous inventory clearance campaign. For the same down jacket, Netease strictly chooses APP to maintain the original price, while other platforms do promotions. After preferential reduction and exemption, the price difference between the two can reach 40 yuan.
The promotions soon paid off. Q4 in 2018, Netease e-commerce inventory reduced to 5 billion yuan, Q1 in 2019 to 4.3 billion yuan. But it also affects the gross profit rate of Netease e-commerce. Q4 in 2018, e-commerce gross margin is only 4.5%.
Netease’s determination to keep its inventory down remains. In Q2 in 2019, Netease’s inventory amounted to 4 billion yuan, the lowest in history. However, with the continuous expansion of the scale of Netease e-commerce, the inventory problem can not be ignored.
Another tricky problem is traffic.
In the industry view, Netease e-commerce is “back to the tree to enjoy the cool”. Either Netease Koala or Netease’s strict selection, Netease gained the support of the whole Netease Group in the early stage of development. Netease portals, games, news clients, cloud music, mailboxes, which have a huge base of users, have become the source of traffic for Netease e-commerce. In terms of department ownership, Netease’s strict selection is a project incubated within the mailbox department, and the whole mailbox system can guide the strict selection.
“Koala Haishou is Netease’s group strategy for the next 3-5 years, with a very high project priority in the company.” Zhang Lei, CEO of Koala Haishou, once said so.
With the support of the whole group, Netease e-commerce has passed the difficult cold start stage directly. But when most of these traffic has been transformed, NetEase e-commerce needs to find new traffic sources.
“Netease has a very good initial intention to do e-commerce, and the topic is also very good at the beginning, but it has also fallen a few heels. If it hadn’t been Netease’s backstage, these businesses would have died 10,000 times. Only a company as rich as Netease can do this. Fang Dongfei said.
Profit is the third major difficulty.
With less than 10% gross profit margin, Netease e-commerce profitability is imminent. The story of Jingdong has proved that the way to earn reputation and profit from third-party platforms is feasible. If Netease wants to open up third parties, it means that it has to reduce the quality and user experience. This is a double-edged sword.
Picture/Visual China
In June 2018, NetEase Koala Haishou announced its renaming as NetEase Koala and its entry into the integrated e-commerce market. Its self-propaganda has quietly become a “cross-border business-oriented integrated e-commerce platform”. Conversion to a comprehensive e-commerce, Netease stands in front of Tianmao, Jingdong and other big players.
In the strictly selected track, Netease not only has to face the challenge from millet, made in Beijing and Tokyo, but also a very tough opponent – famous and excellent products.
In Q2 of 2019, the gross profit rate of Netease e-commerce was 10.9%, the highest in history. After Q4 fell to its lowest level in 2018, Netease’s follow-up improvement measures have obviously begun to play a role.
But the gross profit rate is still not high. Relying on e-commerce, let Netease return to position C, long and difficult.
04
Ding Lei’s patience
“How long Netease e-commerce can run depends, to a certain extent, on the support and patience of Boss Ding.” A Netease departure employee disclosed to Fujian Finance and Economics.
Ding Lei has more than once expressed in public the importance of e-commerce. He became a diligent and hard-working salesman, and spared no effort to promote. The annual Wuzhen World Internet Conference has become an excellent opportunity for Ding Lei to endorse and publicize Netease e-commerce for his products.
Ding Lei’s dedication even infected Zhou Hongzhen. During last year’s Wuzhen World Internet Conference, Zhou Hongzhi gave Ding Lei a 360 children’s watch and also advertised his products.
Within Netease Group, Netease Koala’s office is located in the nearest area to Ding Lei’s office, which used to be the site of Netease games and Netease cloud music. This reflects the importance attached by the group leaders.
On the other hand, it also puts pressure on employees in the business sector.
“E-commerce is one of the main channels of Netease, and the boss is also full of support, so the performance pressure of the e-commerce department is also great, they should shoulder this heavy responsibility.” Netease employees said above.
In February 2019, Netease employees exploded in the pulse, Netease is severely choosing to lay off staff, the proportion is as high as 30%. At that time, it was a critical period for Netease to reduce inventory. A month later, Netease Koala was also exposed to the need to lay off 20% of its employees, and the wind was blowing.
In Fang Dongfei’s opinion, layoffs are not a big problem for Netease. “The layoffs are the manifestations of enterprises’desire to do well, strengthen management and improve efficiency. The money lost by e-commerce will not hurt Netease.
How long will Ding Lei tolerate e e-commerce losses?
Ding Lei’s business philosophy is to make money. In other words, Ding Lei does not do business at a loss. In this capital winter, it is necessary for Ding Lei to take the initiative to reduce costs and make enterprises more wolfish.
Ding Leitu/Visual China
Fang Dongfei disclosed that Netease Yanxuan is the product of the Mailbox Business Department. Now it has become an independent Business Department. Netease Koala has been an independent project from the beginning. “Netease’s strictly selected corporate atmosphere is more like the old style of Netease, less wolfish, and the product’s tonality is good. Koalas are more like Ali’s style.”
The value of Netease is that it always seems to find a delicate balance between product tonality and commercial liquidity. Specifically to the operational level, Netease can be less aggressive, less wolf sex, but let the product more temperature.
“Netease is very stable.” An employee of NetEase E-commerce said so about his opponent.