The Road to a Business Empire


CAI Lei, founding partner of JD Capital, incumbent chairman of JD Capital. This article is adopted from Cai's speech on the 15th JD Capital in November 2014.

“Emperor Qi of Xia commissioned Fei Lian to dig minerals in mountains and rivers and cast tings at Kun Wu …When the nine dings (an ancient vessel, which is also the symbol of a dynasty) have been completed, they shall be given over to three empires.”

All the JD employees are familiar with these words, which are adopted from the Chinese classic Mo Zi about the nine dings-the origin of the names of JD Capital and Kunwu Jiuding.

These words are quoted to assert that not only JD, but all enterprises should conceive a dream, a dream to achieve the peak of their businesses and establish their own business empires.

An Enterprise Worth Hundred Billion Dollars

Ways to prosper is a tricky issue for a company, but some guidelines still can be found. A recent preliminary research by our staff brought us a lot of inspirations. We collected information of worldwide listed companies with market value over a hundred billion dollars, which can be regarded as the most successful companies today. So far, only 69 enterprises have market value of more than a hundred billion dollars, all worthy of the title of business empire.

Apple has the highest market value of 700 billion US dollars, which is close to the annual GDP of Swiss, one of the richest European countries. Now over 60 countries has an annual GDP of more than a hundred billion US dollars, so the scale of a company worth a hundred billion dollars equals to that of a medium-sized country. With such a business scale, the enterprise can surely be called an empire.

Among those 69 companies, the beer company InBev Group established in 1366 has the longest history of more than 600 years. Except InBev, there are 53 companies set up 40 years ago averages at almost 100 years, so most of them are century brands. The secrets of these enterprises' successes despite the two world wars and various revolutions in the last chaotic century deserve our serious study.

We also took a careful look on the 15 young business empires with a history no longer than 40 years, accounting for a quarter of the total. Of these young enterprises, 12 engage in information technologies and Internet. The destiny of these emerging empires must has something to do with the latest trend. From the perspective of industry distribution, it will be a better choice for a company aiming at achieving a hundred-billion-dollar scale to get involved in sectors of information, network, consumption, medicine, etc. 

Geographically, of those hundred billion companies, 39 are located in the US, 18 in the Europe, 3 in the Asian-Pacific region, and 9 in China (6 SOEs + TSMC + Alibaba + Tencent). The global economic center is moving towards the Asian-Pacific region from Europe.

These are the brief conclusions of our research. If we are to fully understand the law of corporate boom and bust, our study should include not only the successful listed companies, but also those non-listed, unsuccessful companies or companies that went from flourish to decline, such as Motorola and Nokia. We will further step up our research pertinent to this aspect and share the results with entrepreneurs.

Now let's go to the main part of today's exchanges. In order to forge a world-class business empire that is worth over a hundred billion dollars, that is, the leading company in the industry, what are the keys? How should we plan and act?

Chapter One: Requirements for an Empire

Requirements for an empire are the qualities of an empire. Three requirements are to be met: its competence should be worthy of its title; its basis should be solid; it should integrate industry and finance.

Firstly, its competence should be worthy of its title.

Graham, teacher of Buffett, once said that in the short run, the market is a voting machine but in the long run, it is a weighing machine. The share price fluctuates along the shifting relationship between purchasers and sellers, but is ultimately determined by the fundamentals of the company. By this taken, the 60 or so enterprises mentioned above do live up to their reputation.

Apple ranks the first in terms of market value and net margin, which are over 700 billion and almost 40 billion US dollars. Walmart takes the first place in sales with 500 billion US dollars. Exxon Mobil has the largest net asset of 170 billion US dollars.

The average market value of the 69 enterprises approaches 200 billion US dollars, sales about 100 billion US dollars, net margin 12 billion US dollars, and net asset close to 70 billion US dollars.

We employed several familiar indexes to evaluate the market value. On average, the 69 enterprises register twice the average PS ratio, 17 times the average PE ratio, and 3 times the average PB ratio. In fact, compared with the valuation of Chinese market and companies, the relative valuation of these world-class enterprises is not that high.

What does it imply? It indicates that companies became long-lasting and successful not because of an empty title, but their all-round competence, from the large-scale sales, net margin, and net asset, to the reliable capabilities of profit earning and risk resisting.

Secondly, its basis should be solid.

The basis refers to the businesses of a company. In addition to their excellent financial performance, the 69 companies also have well founded businesses.

First, we learnt a lot by looking into the industry distribution of these enterprises. Seventeen of them specialize in information technology and Internet, taking up one third of the total and indicating the social trend. Fourteen are financial institutions, which are indispensable for social resource allocation. Among the rest, there are ten consumer goods and retail enterprises, nine pharmaceutical enterprises, two media and cultural enterprises, all of which can develop for being closely related to people's daily life. There are also nine energy and mining companies and eight high-end manufacturers.

Second, we understood their status in their own industries from their market shares. These enterprises are undoubtedly industry leaders. For instance, Apple takes up 4% global mobile phone market shares with over 50% profit shares; Google accounts for 69% of the search engine market; Coca Cola holds nearly 50% market shares.

Third, we found that most of these companies attach great importance to global layout to go globalized, however, seldom of the nine Chinese companies have realized globalization. We still have a long way to go.

Finally, we also study their business variety, informatization, times of core business shift, etc. The business variety of top companies is usually based on relevant areas and rarely touch non-relevant ones, which is not as highly diversified as we imagined. We also found that all these companies, regardless of financial institutions, consumer goods and service enterprises, or manufacturers, have become highly information-based. In terms of the shifts of core business, our study shows that all these enterprises have for long kept to their core businesses, upgrading as industries upgrade and developing as the world develops, usually shifting from a sunset industry to a sunrise industry. For example, the core business of IBM changed from simple devices, to computer and to today's consultancy services, and that of Philip Morris also shifted from tobacco to food.

In conclusion, successful leading enterprises are usually characterized by competent core businesses, outstanding primary business, variety of relevant businesses, and a global layout. They are also highly information-based and always change with the times.

Thirdly, it should integrate industry and finance.

Long-existing and successful enterprises, especially those with market value of over a hundred billion US dollars, always integrate industry and finance.

As for this aspect, we investigated 15 companies set up no more than 40 years ago, which must have grown up under the modern financial system and capital market system. Averagely, they launched IPO in the seventh year after their establishment, and made the first merger or acquisition in the 14th year.

Another important index is the proportion of the largest shareholder, which averages at only 9% among the 15 companies. Though Alibaba has the largest market value among all the Chinese enterprises on the list, its CEO Ma Yun only hold as few as 10% shares. What does it mean? As corporates expand, the share proportion of the founding shareholders become less important. However, because of the large scale of their business empire, the profits of the shareholders still increase by a significant margin.

So it can be concluded that successful leading companies must be competitive with a solid foundation, and follow a road of industry-finance integration.

Chapter Two: Steps to Set up an Empire 

Every entrepreneur present today surely knows world-class enterprises have far more merits than what mentioned above. And I believe you care more about the concrete measures to build a business empire. Now in the second part, let's have a look at this aspect. To ensure the status of their empires, entrepreneurs should incorporate three tools: capital, M&A, and network.

First, capital.

It's impossible to establish an empire without capital. What is the correct comprehension of capital? Capital was invented in human history and is invested in social reproduction for future returns. It includes material wealth and spiritual wealth that can be materialized. From this perspective, all the inexhaustible wealth created throughout human history is incorporated and embodied by capital. To make good use of capital is to make good use of all the wealth created in human history.

Another kind of wealth in human society is personal competence and intelligence, that is, labor resources. Labor value cannot be inherited for it will vanish along decease. The only way to enhance our personal labor value is to learn and receive training all the time as we live. In contrast, capital is the wealth created by numerous people in human history and can be passed down and accumulated from generation to generation.

Capital and labor should be integrated, usually in a way of labor being employed with capital, demonstrating that capital is powerful in allocating social wealth.

Nevertheless, capital can also be employed by high-quality labor resources, that is, entrepreneurs and investors who have acquired capital operation capability through efficient learning. Compared with others, outstanding entrepreneurs and investors can make better use of capital and all the historical wealth human have created and hire more competent employees. Thus, they obviously stand a greater chance to succeed. Therefore, the primary skill of entrepreneurs is to use capital wisely.

What kinds of capital to be exact? One is low-cost capital. Another is intelligence capital. There is a saying in Wall Street: money never sleeps. Capital always seeks for profits, but different kinds of capital expect different levels of profits. For example, JD always pursues high returns and therefore does not employ low-cost capital for operation. Where does low-cost capital come from? Capital acquired from IPO, for instance, is of low cost. Shares issued in China can incur 50 times earnings, which means investors will be satisfied with an annual expected return ratio of only 2%. Capital with such a return level can be called low-cost capital.

If a company is able to constantly obtain low-cost capital, the company is equipped with advantages over others relying on no, limited or expensive capital. This is the largest benefit of going public.

Intelligence capital is also indispensable. It's infeasible for an entrepreneur to solely depend on low-cost capital because capital is a rare resource, not to mention low-cost capital. Moreover, entrepreneurs with too much low-cost capital can easily lose rationality and self-discipline. So enterprises should endeavor to gain intelligence capital.

Intelligence capital can bring something beyond money. Such capital that can offer extra help to enterprises, to play the role of a strategic investor, is normally expensive. Many enterprises cooperate with JD because its intelligence capital, which, though expensive, is valuable and instrumental at critical moments. In the long run, intelligence capital is also low-cost capital if it generates more profits than the cost.

What's the role of capital in the endless competition among enterprises? As I see it, proper utilization of capital is as useful as gunpowder in the cold weapon age and nuclear bomb in the hot weapon age by offering asymmetrical competitive advantages. Many owners of listed company here must have such a feeling: their companies seemed equally competitive as others before listing, but after listing, their reputation has increased dramatically despite their hardly changed business portfolio.

This is what we call the power of capital. Enterprises must secure sustainable low-cost capital to become publicly listed companies, and introduce prominent partners for strategic cooperation, which are the first steps to establish an empire.

Second, M&A.

The second step to establish a business empire is to make wise mergers and acquisitions, that is, M&A. The history of company expansion is a history of M&A. An enterprise either extend its life span by acquiring others or comes to an end by being acquired by others.

What is the correct way of M&A? I personally suggest to begin with local M&A, horizontal M&A of companies in the same industry, as well as vertical M&A of those on the same industry chain. The top priority of a Chinese enterprise's M&A should be becoming the leading player in the related industry in China and acquire enough price bargaining power in the industrial chain.

Mergers and acquisitions have become commoner in Chinese capitalist market but most are very chaotic and unsystematic for two reasons. One is that our entrepreneurs haven’t get the know-how of M&A. Another is that they are hampered by the low-cost capital as I mentioned above. Some traditional enterprises try to get into the Internet or the big data industry by acquiring companies of mobile games, investing in media and catering industry. However, such M&A strategy will absolutely fail. A company attempting to carry out M&A in a new industry or in foreign countries before making local, horizontal and vertical M&A is like a kid attempting to wolf down a big dinner before being weaned. An enterprise, before becoming the leader of the industry, or gaining 30% to 50% market shares, went to purchase an enterprise from a complete irrelevant industry is like a boatman attempting to sail across oceans before learning how to control the boat. The consequences are obvious: failure and death.

Wise M&A can help to establish an enterprise with market value of tens of billions of US dollars. A lot of traditional or emerging industries in China have a market capacity of over 100 billion dollars. If a leading company in a certain industry manages to secure over 30% market shares through M&A and self-growth, its sales can be more than 30 billion dollars and its market value can reach around 30 billion dollars. I will briefly show you how this conclusion is drawn. Let's say the average net profit ratio of an industry is 5%, which means 30 billion dollar sales can generate 1.5 billion dollar net profits. This figure multiplied by a PE ratio of 20 equals 30 billion dollar market value.

Recently, the M&A business of JD devised a strategy package. We call it M&A nuclear weapon, for it can lift a company's market share proportion to over 30% in a relatively short period without diminishing the controlling status of stakeholders of the listed company. As a result, the "weapon" can enhance companies' market value to 30 to 50 billion dollars and thus realize entrepreneurs' empire dreams.

Third, network.

If an enterprise is to set up a business empire in the industry, it wouldn't be enough by becoming No.1 in Chinese market through local M&A and M&A in the same industry and in the industry chain. Further breakthroughs are needed in the network aspect, which is what I call network. 

Firstly, take advantage of the information network. In this information age, Internet has an influence on every enterprise in a degree greater than computers dozens of years ago, electricity a century ago, and even the earlier steam engines. The structure of every enterprise is linked to Internet, which is now the basic corporate component and operational model. For companies targeted at large-scale end-users, Internet, including mobile network, is essential. For traditional manufacturers, Internet of Things, Industry 4.0, and smart factory are indispensable. Companies should utilize investment and M&A to properly incorporate information network. It would take too much time to elaborate on this aspect, so I won't go into detail here.

Secondly, globalize the operational network. In the trend of globalization nowadays, an enterprise aiming to grow into an empire must not be complacent with local success, and must enter the global market, participate in global competition and then become an international enterprise. You can become an international enterprise by naturally expand with the operational network, or you can realize it through M&A and integration. How to go international in an efficient way is a required course for every entrepreneur with foresight. A vital resource for overseas expansion and M&A is finding long-term overseas strategic partners. JD Capital has already embarked on its systematic overseas layout by launching large-scale overseas investment. As for this aspect, we may have in-depth exchanges with entrepreneurs later.

Third, diversify the businesses to a certain extent. A company must neither blindly diversify its businesses, nor only focus on limited businesses, because all industries have their life cycle and will eventually decline. A company, large or small, should must make a resolute decision to transform once it figures out the ceiling of the industry is near and that the industry is close to the end of its life. Therefore, moderate diversification is essential, which, with the power of capital, may help the company get into a new area, top the sector, and finally set up a long-lasting empire.

All in all, enterprises that wisely use capital and then go public can achieve several billion dollars market value; enterprises that wisely carry out M&A and become the top in their own industries in China can secure market value of dozens of billions of dollars; enterprises that are fully informatized, internationalized, and moderately diversified may enhance their market value to several hundred billion dollars. This is the road to a business empire.

Chapter Three: Principles for a Business Empire

An enterprise can make a business empire by following the above mentioned operations pertinent to technologies and materials. However, to sustain the sound status quo, a company should practice the principles proposed by Chinese traditional culture, including principle for leadership, principle for inheritance, and principle for the coexistence between human and nature.

First, principle for leadership.

The leader for a business empire is its entrepreneur, without whom, a company will be in a mess like a country without monarch, a combat troop without commander, and a boat in borderless sea without captain. I find it too chaotic to imagine.

JD have so far invested in over 200 companies, investigated due diligence of thousands of companies, and contacted with tens of thousands of companies, in which we found out the success of a company depends on two factors: the industry the company chooses to enter, and the entrepreneurs. The former determines the theoretical maximum scale of an enterprise, which means the background of the industry and of the times predetermines the highest goal of an enterprise. And the latter determines the actual maximum scale of an enterprise, that is, the actual performance. An entrepreneur can optimize his or her company's actual performance as far as the theoretical value of the industry. The corporate performance of an ordinary entrepreneur is far lower than the theoretical maximum value the industry defines and that of an outstanding one is much closer to the maximum. However, the extraordinary ones are able to fully combine their companies with the industries they are in and when they are expanding their own businesses, they are also expanding the overall industry, in the way of Steve Jobs in the development of Apple and the mobile phone industry, for example.

Then, what's the role of entrepreneurs in corporate operation? The core function for entrepreneurs as decision makers is to allocate resources, which is to create in essence. They should constantly adjust resource allocation to stand out in competition. At critical moments of dynamic games with competitors, especially those filled with uncertainty, entrepreneurs must come up with innovative measures.

There is a well-known law in physics, the second law of thermodynamics, or the law of entropy, in which, entropy refers to the chaos or irregularity of a system. Based on this law, the entropy of a system will keep increasing unless there is additional energy from outside the system. In other words, without external force, all systems will end up irregular and chaotic.

The role of entrepreneurs is to cut the entropy, constantly inject energy, and cement the order of the companies. To this end, entrepreneurs should keep improving themselves all the time. This is what I understand as the principle for leadership.

Second, principle for inheritance.

This is an issue that every entrepreneur cannot avoid. The principle for leadership enables an enterprise to last for three to five decades, while the principle for inheritance enable it to live for centuries. Without inheritance, a century-old company may vanish in a day. The once prosperous Qin and Sui dynasties in China, for example, went on the mournful wane in the second generation. Therefore, inheritance is of significant importance. All enterprises are faced with difficulty of inheritance, especially the private companies in China. Most of these companies are still in the charge of their founders, who are about to retire after several decades' corporate expansion, posing an even more severe problem of inheritance.

What is the best way to pass down the business? The answer lies in the predecessors and successors. For the predecessors, I believe they should give their businesses to those are reliable and qualified. It's every entrepreneur's responsibility to rationally select such successors–surely it's the best to pass down the business to the offspring, but it's not a must, for the key is to find someone most suitable for it. That's the most responsible attitude towards the enterprises the entrepreneurs founded. Moreover, entrepreneurs should pass down everything valuable without holding back, including not only the company, wealth, businesses, and staff, but more importantly their lifelong experience about the law of boom and bust and the operational principles they conclude from all the ups and downs.

As for the successors, they should, as I see it, have senses of responsibility and calling to carry forward the cause of the company and forge ahead into the future, and never escape their duties. Additionally, the successors should be aware that once the enterprise is passed down, it is a new organization, and thus they should start over in developing their own qualifications as leaders and abilities to set up an empire.

Third, principle of coexistence between human and nature.

Technically, even the most successful entrepreneur or enterprise will be carried away by history. Everything comes to an end–this is a historical law. Then what should we pursue in the limited lifespan of entrepreneurs and enterprises?

As far as I am concerned, the top mission is still to settle the ultimate issues of human society–efficiency and equality, that is, how to enhance social efficiency and equality. As I mentioned above, the role of entrepreneurs as leaders is to cut the entropy of their companies, enhance corporate strength, and enlarge the business scale. To put it in a larger context of human society, the mission of entrepreneurs and corporate citizens is to contribute to the entropy reduction in human society, provide better services and products, optimize the allocation of social resources, and eventually develop a more equal and advanced human society. 

From a macro perspective, according to the second law of thermodynamics, even the universe, the largest system identified so far, has its end, which is disorder and destruction. And in this broader system edging towards disorder, human as a group of intelligent lives bear an ultimate mission to create and maintain an orderly system of constant entropy reduction. This is the reason why there have been heroes throughout human history, including outstanding scientists, entrepreneurs, investors, politicians, and artists, who have led human society to become more and more advanced. Despite all the sufferings and retrogression sometimes, we manage to maintain a beautiful and harmonious world.

One of our ancestors told us the truth as early as thousands of years ago. Poet Su Shi said in his poem Boating at the Red Cliff, "If it is viewed from the angle of change, the universe can hardly be the same for a moment. However, when seen from the angle of constancy, then everything and we ourselves are blessed with immortality. What should so much deserve our envy?"

From the perspective of eternal changes, what we are doing is nothing compared with the profound history of human and the universe, and thus our efforts seem meaningless. However, from the perspective of constancy, we are immortal once we are integrated with nature. For enterprises and entrepreneurs, the integration refers to resource optimization, fairness and equality, as well as social progress.


I would like to wrap up today's exchanges with several sentences in classical Chinese language. Empire establishment can be quickly realized with various strategies. But if it is to be a long-lasting one, it still takes good leadership, inheritance in a correct manner, and integration with nature. In other words, the rapid rise depends on material resources while lasting prosperity calls for cohesion.

These words are also suitable for JD Capital, for we are a company aiming to be the best.

Let's encourage each other in our endeavors!