Will NetEase Yeation Retain Its Advantage Under the Mundellian Trilemma?

Mundellian Trilemma (蒙代尔三角), or the Impossible Trinity, is raised by an American economist on the issue of political decision in an open economic environment. The implication is that under an open economic environment, the independence of monetary policy, reasonable exchange rate, and capital mobility cannot be satisfied at the same time. They can only meet two goals and abandon the other in order to regulate the macroeconomic environment.

The retail industry, interestingly, also has two Mundellian Trilemmas. One triangle consists of cost, efficiency and customer experience, and the other is consist of Gross Merchandise Volume (GMV), quality control and inventory turnover. The first triangle is mostly discussed in fresh grocery industry such as Fresh Hema and 7Fresh. For example, Fresh Hema chooses to provide a high consumer experience in-store and to increase its logistic efficiency while having a higher operation cost. The other triangle (GMV, Quality and Inventory turnover) is often mentioned in the E-commerce platform such as NetEase Yeation (网易严选), Tmall (天猫), Xiaomi Youpin (小米有品) and Pinduoduo (拼多多). Pinduoduo, in this case, is sacrificing quality for higher quality and high inventory turnover.

This article talks about how NetEase Yeation, an E-commerce branch under NetEase Inc. (网易), deals with this retail trilemma.

NetEase Yeation has been continuously confronted by news about the massive layoff, high inventory risk and a slowdown of its GMV since the beginning of this year.

However, the economic cycle encountered by China's Internet and retail industry is too short and too little. After a long period of high growth, it is easy to ignore the common sense. In fact, international retail giants such as Wal-Mart, or other retail company like Coca-cola and 7-11, have all experienced several cycles of the economy slowdown in the past few decades. Below shows several cycles of consumption upgrading in Japan:

Every time they encounter a down cycle, international retail giants would manage their capital liquidity (sometimes by department reconstruction and layoff), optimizing their retail processes and supply chain management.

According to Ifeng.com (凤凰网), who points out massive layoff, destocking and high inventory of risk NetEase Yeation, said that the root of all these problems is that NetEase Yeation has selected the GMV as a priority during the peak period of its development. However the senior executive LIU Xiaogang (柳晓刚) said in2019, NetEase Yeation, is giving up GMV for the moment to upgrade the quality of its good and improve the efficiency of its supply chain. So which side would be closer to the real situation?

If we apply the Mundellian Trilemma to this issue, higher turnover surely will lead to a higher GMV, but it does not necessarily mean its goal is a higher GMV. Since NetEase Yeation remains a high standard in product line management and keeps a good reputation in its brand, among the three indicators GMV, quality control and inventory turnover, it’s safe to conclude that NetEase Yeation is launching the strategy of high-quality control and high inventory turnover, which is in consistent with LIU Xiaogang’s claim.

One thing for sure is that NetEase Yeation has redefined China's manufacturing industry by applying a new supply chain management. What we used to and still do is to have products produced by a manufacturer, then given to different distributors, then to retailers and finally reach to the customer. While NetEase Yeation skips the distributor part by directly connecting with the manufacturer, assist the manufacturer in design and quality control, and then sell the products to customers directly via its E-commerce platform.

As a retailer, NetEase Yeation has changed from the traditional purchasing process to a reverse process that can better participating in the product design and manufacture, establishing a customer-led supply chain. NetEase Yeation also take the advantages of big data on their own platforms to protect and nurture its manufacturers, help suppliers to quickly acquire and respond to market demand, achieve the goal of matching information between supply and demand, and benefit more to the consumers.

NetEase Yeation integrates upstream superior production resources, screens high-quality manufacturers for consumers, and connects manufacturers and consumers with quality production resources and production capabilities. One end is connected to the manufacturer to sell the goods, and sell more “good value for money” goods; one end connects the consumers so that they can buy cost-effective goods. At present, there are 3,000 cooperative manufacturers selected by NetEase Yeation, 500 manufacturers of which maintain close cooperation. The factory directly reaches the consumer, while the product excludes the brand premium.

In order to allow consumers to buy high-quality, high-satisfaction products, NetEase Yeation strictly launched its quality control system, controlling the quality of raw materials from the source. In order to achieve high-efficiency feedback on quality control, it strictly implement zone control in quality control. When the one defect occurs, the control team will communicate with the manufacturer's technical personnel, production personnel, and quality control personnel in a timely manner to avoid the problem from expanding and recurring from the front end.

In conclusion, the whole process works like this: product categories selection- manufacturer screening - design - sample production - quality inspection - mass production - random quality inspection - packaging into the warehouse – online display- logistics - after-sales.

Compared with big retailers like Toyota and 7-11 the like, the NetEase Yeation is still a teenager but with great talents and patience. We should not rush into any conclusions but wait for its healthy growth.