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Special: 2021 China Tech Trends (with Tech Buzz China)

Limited Partner Episode

May 5, 2021
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2021 China Tech Trends


We team up with two of the very best English-language analysts covering China tech today, Rui Ma and Ying Lu from the Tech Buzz China podcast, to talk about the big trends happening on the ground in China right now. We've had Rui and Ying's episodes on repeat in our own podcast players for many years as we researched our Meituan, PDD, Tencent and Alibaba episodes, and we're so excited to have them finally join us live. We had a blast and learned much more about what's actually happening in the world's largest market than the relative trickle of news Western audiences normally receive. Tune in!


LP Book Club Announcement!

The Acquired LP Book Club is officially returning! We are super excited to have Brad Stone join us on May 21st to discuss his sequel to the Everything Store, Amazon Unbound. We'll be interviewing Brad on Zoom with Acquired LPs “live in the audience”, and Q+A to follow. You can join and become an LP here: https://acquired.fm/lp/

Topics and trends covered:

  • How Rui and Ying stay on top of trends in China tech remotely from the US
  • The rise of “tech company like” CPG and other consumer brands in China and extremely fast product development and iteration: e.g., Genki Forest, Perfect Diary and Shein
  • Community group buying and the reinvention of commerce in rural China (along with an eye-opening discussion of what qualifies as “rural” in China... which is very different from the West!)
  • Autonomous and electric vehicle design and production in China (which is the world's largest car market), and the government's push for China to become a global leader in both
  • The current state of anti-trust in China and why investors and operators on the ground in China are optimistic about recent developments


Links:


Sponsors:

  • Thanks to Kevel for being our presenting sponsor for this special episode. Kevel provides API infrastructure to quickly build custom ad platforms for sponsored listings, internal promotions, native ads, and more — customers include Yelp, Rappi, OfferUp, Mozilla, Strava, and many other large apps and platforms. In true Acquired fashion, Kevel and CEO James Avery have put together a fun page showcasing the company's "history & facts", which you can find here!
  • Thank you as well to Perkins Coie and to Masterworks (use code “Acquired” to skip the waitlist)

We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Marvel
Season 1, Episode 26
LP Show
1/5/2016

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
8/28/2019

8. ESPN

Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

ESPN
Season 4, Episode 1
LP Show
1/28/2019

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

PayPal
Season 1, Episode 11
LP Show
5/8/2016

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
6/25/2017

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

NeXT
Season 1, Episode 23
LP Show
10/23/2016

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Android
Season 1, Episode 20
LP Show
9/16/2016

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

YouTube
Season 1, Episode 7
LP Show
2/3/2016

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Instagram
Season 1, Episode 2
LP Show
10/31/2015

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!

Sponsor:

  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: Welcome to this special episode of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert and I am the co-founder and Managing Director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures.

David: I'm David Rosenthal. I am an angel investor based in San Francisco.

Ben: We are your hosts. On today's show, we have a crossover episode with Rui Ma and Ying Lu from the Tech Buzz China podcast.

David: So excited about this one.

Ben: I've been thinking about doing this for a while.

David: I know. I've been listening to Rui and Ying for many years. I've been listening many times over on repeat while doing research for Meituan, PDD, Tencent, Alibaba, Xiaomi, and all of our China tech episodes. They are the best English-languaged China tech podcast out there. So excited to finally do this crossover.

Ben: Yeah, no kidding. We wanted to cover a few things and thought that the best way to do a broad general China episode that's not specifically about a company would be to collaborate on one and do it together.

Today, we're going to talk about trends in 2021 for China tech, how Rui and Ying do their research given that they both live in the U.S., their views on the China tech landscape, how those have evolved over the last decade as that ecosystem has rapidly developed as we've covered on the show, and a little fun comparing and contrasting our two shows.

Before we jump into the conversation, we have a great sponsor from the Acquired community. Someone we know because he's a frequent participant in the Acquired Slack, James Avery. James, as many of you know, is the founder and CEO of Kevel, the company that offers the infrastructure APIs needed to quickly build custom ad platforms for sponsored listings, internal promotions, native ads, and more. Customers include Yelp, Rappy, OfferUp, Mozilla, Strava, and many other innovative brands.

On these special episodes, James has been sharing with us his journey that he's been on in the digital advertising ecosystem since 2007. James, last time, you teed us up on running The Lounge and the business that you accidentally became the indie hacker proprietor of and growing that business. Catch us up. How did you get from The Lounge to where you are today with Kevel?

James: Yeah, absolutely. I've just taken over The Lounge back in 2007. It was a legit side hustle at the time. I was working as a developer. I was doing consulting gigs. The network was really only bringing in a couple of thousand dollars a month. This was a real crash course. I was doing sales, signing up publishers. I even drafted my wife to manage paying out all the publishers and building these big spreadsheets.

The valuable lesson that I learned from running this ad network is that it was a pretty tough business. You're constantly selling and you're dealing with publishers and advertisers. It's kind of a marketplace without all the efficiencies that we like about current marketplace businesses.

The real lesson that I learned is that I was passionate about the space. It was rewarding people who were putting out good content. Today, that's really aligned with our mission at Kevel, which is to make the Internet a better place. How do we provide revenue and advertising for the people who are doing good, who are putting out good content, and who are creating good services?

I also learned that I really didn't want to keep running that ad network. I decided to take the work and the tech that I built to run this ad platform for The Lounge and pivot that into a SaaS product so that I could enable other publishers and other networks to go out and make the Internet a better place with this technology.

Ben: That's awesome. Since we know only a small percentage of you are currently in the market for an industry-leading set of APIs to power the ad platform and your product, we figured it'd be more fun to point you to a page showcasing Kevel's company story and history. You can check that out at kevel.co/history. Our thanks to James and the team.

Now, onto our conversation with Tech Buzz China. Rui and Ying, great to be doing an episode with you.

Rui: Yeah, totally. We're big fans of Acquired. Our goal is to be like Acquired but for China tech.

Ying: Oh, my God. That's true though.

David: You guys are great.

Ben: Why don't we turn it over to you real quick. Give us your personal backstories, a little bit about the show. Both of you live in California, right? Not actually in China?

Rui: Yeah. We both live in the Bay Area right now. I was born in China, immigrated to the States as a kid when I was eight. I grew up primarily in Silicon Valley actually and went to school at Berkeley. When I graduated, I went into investment banking doing technology because I wasn't good enough to be an engineer. I studied engineering in college and then I went into finance.

In 2007, for personal reasons, I moved to China and ended up staying there for the next eight years working in a variety of jobs, but starting first in real estate investing. I even did some cross-border M&A, media private equity, and then finally, really early-stage startup investing at 500 startups, which is a very, very early-stage accelerator and seed fund.

Then, I moved back to the Bay Area at the very end of 2015. I didn't think I was going to do much with China anymore but was still keeping tabs on things. Then, I was like, hey, podcast is all the rage. This is in 2017. We should do a podcast on China tech. It seems like it could be fun.

Very quickly, what I realized is that by the end of 2019 (I will call it) I was like, wow, some of these companies that I am just covering for fun and personal passion for Tech Buzz are actually doing really well. I should think harder about whether or not I want to drop the China connection.

In 2020, I decided to pick it up full-time. We took some investors to China with us in 2019 to visit a bunch of the companies that we talk about on the podcast. We were going to do that last year more as part of Tech Buzz but then the pandemic cut short all that. We've pivoted into more of a community now online for investors. I personally do a bunch of consulting for funds interested in investing in China tech.

Ben: That's great.

David: It comes through on the show.

Rui: I can't talk about everything. I get a lot of proprietary information, but I try to share what I can.

Ben: There's so much that is happening that is reported if you are Chinese, but if you're American, I just occasionally get this random story about Jack Ma disappearing. I would love to understand thematically what's going on under those headlines in China.

Rui: I think one thing I should point out when it comes to my personal experience and also this happens to jive with Ying because that's where we met. We met when we're both living in Beijing, which is we were there.

In retrospect, I had a very auspicious time in China tech because prior to 2013, 2014, China tech was really, really small. I was really there for the first couple of years, you could count on your hand the number of people doing angel investments in China. There literally was a book called Angel Investors of China. I think it had 12 men in it.

David: Warren Buffett used to go through the Moody's Manual of companies to look at all the companies out there. There's a manual of angel investors.

Rui: Here you go. Here are all the people. I happened to then join 500, which at that time, by the way, a lot of people were like, why are you doing this? This is way too early. This is really bizarre. This is not a business model that works in China.

It's not like I knew what policies were coming, but then two years later, we have a couple of thousand accelerators. You have hundreds of early-stage funds. You have a total sea change shift in attitudes around entrepreneurship and startups where people went from thinking that was something honestly only losers did if they couldn't get a real job to now, oh, all the best and brightest would of course go and create their own startups.

That happened really around 2014 or so. I think you can see it in the types of companies that are public today. Some of the most popular companies that are always talked about in the media—Pinduoduo, ByteDance, Meituan, et cetera, all these companies really started in the last decade. Pinduoduo is a great example of a company that started in the last 5, 6 years. This is when it all happened basically, all the capital started flooding in, and the social attitudes changed.

Before the pandemic, both of us used to go back quite often. I would say probably quarterly. Now, because of the travel restrictions, it is primarily online. But the good thing is that because of the pandemic, actually, everyone in China is also more used to being online. In fact, some of the VC GPs that I talked to themselves are not even based in China right now. They're in Singapore, Taiwan, or something.

Ben: Very cool. All right, Ying, what's your story?

Ying: Rui brought me into the story when she mentioned that we met in China 10 years ago when I went to China right after college. Even when we started this podcast, China wasn't a super hot topic. China tech, even three years ago, was not as appreciated.

I feel like things have just totally changed. It's interesting to be able to say, oh, I've seen the rise of different sectors of tech especially online to offline, companies going overseas, the rise of all the digital live streaming, and ecommerce happening in China while also watching concurrent trends in the U.S.

To go back, I came to the U.S. when I was two from Guangxi, actually a fourth-tier city. A lot of my extended family that I'm very close with are still in fourth-tier and some third-tier cities. They're all in Guangxi except my parents and brother.

Throughout my career, I've been more on the operator side. I've worked with over 50% China-based, fully Chinese teams embedded as part of the team. I've been an employee. I've been a startup cofounder in China. This is 2012–2014.

I fell into this niche initially when I moved to the Bay Area from China in 2014. That was the year that a lot of Chinese apps were trying to go overseas. You guys might know about this. I'd be brought on to help them with their U.S. business deals, set up an office, do PR, and tell their story.

Today, I have two partners in China. Most of my deep-rooted opinions and cultural schemas of China have been shaped by a combination of family backgrounds in early personal and professional experiences. But I do want to emphasize that we really have to put in time to gather current knowledge.

When people use the term China expert to refer to Tech Buzz, I do think it's not something we just can spit off. It's like you guys making an Acquired episode. You have to put in a lot of time to do the research.

Ben: You could not have teed us up better to discuss what is happening now in China in terms of trends for entrepreneurship. I'd like to turn it back to you. Feel free to start wherever you want, but for both of our audiences, what are some trends that they should be paying attention to that will be covering 3–5 years from now, the next Meituan, and the next Pinduoduo in future episodes?

Rui: Actually, that's a great question. At least, in the near future, what we're focused on at our insider community for this year, what I think would be really interesting are a couple of things. One is consumer brands. That's specifically on consumer brands being run like Internet companies, which we can talk about.

There is also community group-buying which is disruptive. It's a new form of ecommerce that's happening now in rural China that really kicked into high gear last year because of the pandemic.

The third thing, I will briefly mention it, but I don't actually have too much to share on the topic at the moment, which is if we think about China tech more broadly than just the Internet or than even just software, then this whole new thing of electric vehicles and autonomous driving is really interesting in China as well.

Actually, a lot of experts I talked to think that the U.S. and China are really on par. Some people even think China is ahead in that sector. That's definitely something I'm watching. I'm more familiar with the AV frontend, less with the actual vehicle-making, but those are all interesting things.

Ben: Maybe let's first start with that direct-to-consumer and that brand piece and kick it over to Ying. What do you think about that? What's going on in China there?

Ying: At a high level, we've always thought that in my observation, the level of quality of Chinese consumer brands like Rui mentioned is going to go up. This is totally in parallel with innovation and China-continuing, China no longer being a copycat, manufacturing, and designing a lot of its own products.

Rui, you mentioned consumer companies being run more like tech companies, but I'll delve more into specifically the DTC side, direct-to-consumer brands.

Rui: I think there is a huge market opportunity for domestic Chinese brands to gain market share in China. That's not just because the media narrative is all about the youth being very nationalist, but it's because if you look at developed countries, for example, the United States, we have something like a quarter of FMCG products are foreign brands, are non-U.S. But if you going to China—

Ben: What's FMCG?

Rui: Fast-moving consumer goods. Your basic consumer staples, et cetera. But if you look at China, the foreign brand penetration is actually north of 40%. Much higher than that for certain other categories.

If we assume that China's going to look more like the rest of the world in terms of how strong its domestic economy and brands are relative to foreign ones, then there's a huge market share that domestic brands can capture. This is accelerated by the fact that in recent years, manufacturing, design, all these things that go into brands have significantly improved.

Like I was saying to you, Ben, the OEM of the past—the original equipment manufacturers—where the model is that when you go to China, you already have your product spec. You already have your brand. You have your design. You go there just looking for someone to make it for you. Those days are a long past. OEMs are now ODMs. They also do a lot of design where you can just go there with some much fuzzier product spec, and then they'll actually design something for you as well as manufacture it, too.

Today, I hear people call these factories OBMs—the original brand manufacturing—where literally, they're doing pretty much everything for you except the final branding. They even will do a lot of the marketing copy, et cetera, for you as well because they've just gotten so much better at all these parts of the entire process.

I should caveat with saying that is still, in my opinion, a lot of PR, so the "original brand manufacturing" is basically still ODMs, but the point is that they are significantly better than before. Again, you see this already in the U.S. and Amazon. You already have a bunch of brands from China trying to brand themselves on Amazon selling commodity products. What we're talking about however is not no name, unpronounceable brand from China selling an Apple, FireWire, or something.

David: Right, iPhone chargers or stuff.

Rui: Yeah. We're talking more now about people building real brand IP. One of the examples that is very popular in China right now—it's probably less well-known outside of China—is this brand called Genki Forest. It is right now a $6 billion valuation company that wants to be the Coca-Cola of China.

We already saw last year, this company called Yatsen aka Perfect Diary wants to be the L'Oréal of China. Last year, we actually already saw the listing of the P&G of China. There are all these brands trying to take over the consumer staples categories.

The newest trend that I think is really interesting is Genki Forest which is Coca-Cola of China. They're just starting off with basically your carbonated beverages. The different thing that they're doing is that the company is actually run by people who come from a social gaming background. They think about everything in terms of marketing, ROI, doing very quick A/B testing, and very quick iterations.

David: Are they using OBMs or ODMS to actually make the soda? They're just a brand.

Rui: They're just a brand. They're just slapping on their brand and marketing. They did start with their own factory, but it was only in mid last year. That's a few years after they started. Same thing with Perfect Diary, by the way, the cosmetics brand. When they went public, they had also just started their own factory.

Ben: I will say in the beverage industry, even in the U.S., that's super common. This is going to sound a little trite but I know the founders of Four Loko. At one point in 2011, they had 100 people working at the company, 96 of them were salespeople, and then they had the founders and a CFO. They work with a contract manufacturer. I think it's technically a contract brewer.

This is the most common way for any beverage, especially alcoholic beverages in the U.S, to start is to contract out everything but the distribution and the branding.

Rui: That makes a lot of sense. I don't think Genki Forest is quite that. They are doing more R&D, but I think what differentiates them is how many skews that they're constantly trying. They do small batch testing and then they will do it on both the marketing front as well as the physical products of course. According to the founder, only 5% of their products make it into mass channels because the mass offline channels are actually very hard to penetrate and also to manage.

David: This isn't like Coca-Cola where it's the recipe that has been one soda that's been sold for 150 years. It's lots of different products.

Rui: Maybe even a better example is to look at Perfect Diary. They're doing a lot of collaborations. All the new brands these days are doing a lot of collaborations. They're making very seasonal products, so they'll put out something. Their average is one new product a week. Then whatever makes it becomes a "best-seller," then they'll put more resources around it.

It's the same thing for Genki Forest. They are supposedly coming out with a new product every few days and then they'll do small batch testing with it. Then, 5% or so of these products will become a further best-seller that they'll put into more distribution.

If you think about it, it's very similar to how you iterate on an Internet software product. This is what I mean by companies and brands in China are now trying this, applying it to physical products. They're doing this because they have such good access to a very advanced and flexible supply chain.

A lot of people, when I talk to them, are thinking of factories as still very manual and people on these long lines, but I visited some of these factories and they're actually quite advanced. There's a lot of automation. Like I said, they're all running software to manage themselves and they have a lot of design in-house talents.

The advancements in manufacturing have really primarily focused on speed in China. When you think about manufacturing, the minimum order quantity is always a barrier for most people, especially in consumer products, clothing being the main one. China has really been able to push forward on having more flexible manufacturing.

What I mean is when we visited Ruhnn—I don't even know how you say their English name—they're just about to go private. We did an episode on how they were started by the "Kylie Jenner'' of China. It's basically influencers making their own clothing and branded products.

Ben: When you say about to go private, are they public now?

Rui: They are public now, yeah, about to go private. Haven't done that well. When we visited them, we saw all their clothing and all the stuff.

We also visited Mogujie, which is a live streaming shopping app. Both of them have told us that number one, they had such good access to manufacturing, and turnaround times were so fast. It's about seven days from a design, to being made, and then shipped out the door. Seven days, that's actually really fast.

For a company like SHEIN, which Ying can talk about, that is apparently down to five days. A company like SHEIN is pushing out 1000 new skews every day on their website.

David: Amazing. I want to hear about SHEIN.

Ben: I've heard about this. This is crazy. Ying, bring us up to speed here.

Ying: What Rui talked about with marketing and really flexible supply chains is enabling the tech-based teams to focus on marketing and online marketing which is a highly-valued skill just like it is in the U.S. SHEIN takes five days of designing to ship—this is on average. They’re producing 1000 new designs a day. They have $10 billion in revenue.

David: Amazing. It's all women's clothes, right?

Ying: Yeah. All women's clothes. It's like H&M fast fashion.

Rui: I feel like they might have some men's clothes. We can check.

Ying: We should check.

Rui: Do you want some, David?

David: I do.

Ying: It's super cheap, too.

Rui: It's super cheap. I don't know if you want to wear that.

David: They have men's, kid's, and beauty.

Ben: I can order something that was designed five days ago?

Ying: Yes. It might take longer to ship and get to you.

Rui: It will take a long time to ship. It's like Wish's shipping times, slightly better.

Ying: Have you guys ever ordered from Wish?

Ben: I haven't.

David: I've been tempted to, but I never have.

Ben: I know only of Wish because I've seen it on Laker jerseys.

Ying: That sounds like Wish. I do think that's a good comparison. You order and the quality of clothes, in my opinion, isn't very high. I didn't order just to test it, but this was because I was benchmarking to another company.

SHEIN has, as of the time of recording, 19 million fans on Instagram. Note that I'm saying Instagram. This is not a Chinese social media platform. We'll get a little bit into that too with some of the cross-border DTC happenings.

David: This is amazing. I'm in the men's section. You can get swimsuits for $3.90.

Ying: It's true. For reference, Uniqlo is at $26 billion. We're benchmarking SHEIN as the success story of overseas DTC brands coming out of China.

Rui had mentioned, we visited Mogujie in October 2018. They're also doing small batch designs and producing a lot of new designs. These are all innovations within the supply chain and shortening the time it takes to get new designs to market.

Ben: When people used to refer to fast fashion, you'd look at Zara or something. The knack was, oh, they're busting their ass to get this to customers' hands five weeks after they come up with the concept. Now, we've shortened it to five days. Is that right?

Rui: Yeah. There's the shipping aspect of it, but if this was happening in China, then you can probably get it shipped the next day.

Ben: There have always been a bunch of people that are concerned about the environmental impact. At least I know there's a lot of negative sentiment around fast fashion. How does that play into how all this is developing?

Rui: I would say, at least right now, for a company like SHEIN, first of all, SHEIN is called ultra-fast fashion now I guess. I don't think the environmental impact is probably fully baked into it. I'm personally not a fan of the model.

The point we're trying to make is just that the supply chain is really flexible now. The end goal really is to have it to be so flexible that you can make it as demand comes in so that it is completely just-in-time, and then you have zero inventory risk or zero inventory. You basically lower your cost so much.

David: Yeah. It's not even inventory risk. It's not even just-in-time manufacturing. It's just-in-time creation and design of products. There's not even any product risk.

Rui: Yeah. That's where people are trying to get to. We're definitely not quite there yet, but that is the future. We picked this category. SHEIN is actually an old company. It's over 10 years old because supply chain innovations take a long time. The supply chain innovations can also be extended to other industries—like we were saying, the drinks, as well as cosmetics, and all these other categories.

Ying: There's a growing proportion of Chinese companies that want to sell into overseas markets including the U.S. that are DTC fashion brands. I've personally seen a number of business plans including one women's fashion brand that I'm currently working with and all of them benchmark themselves to SHEIN. They'll have a graph on their pitch deck of, here is the supply chain process. Here's what SHEIN does. Here's what we're doing.

Pretty much looks the same or there will be some minor tweaks. Then, the end product is a little different but it's usually in fashion, women's clothing. I haven't seen cosmetics yet, but while their innovation in how they handle the supply chain and how they position themselves to consumers might vary a little bit, what they share with SHEIN is a commonality of low price, a heavy reliance on social media.

Remember when we said SHEIN had 19 million Instagram followers? This is something that I personally see as similar to a heavy-handed version of the whole utility apps overseas craze of 2015, 2016, or 2014 in that you can have a domestic-based team really master social media as long as they speak English, get some help with your customer management, and then get the right operational scale.

Use labor to make up for what you don't have in either local savvy or necessarily B2B software technology in order to get the performance marketing right and sell purely online straight to consumers. There are some tweaks with these, but in general, investors seem to think it's worth betting on.

David: SHEIN is also on Amazon, right?

Ying: Yes. I don't think all their stuff is though. Not everything.

Rui: We're not the target customer here. It's funny because I asked on Twitter. I was like, hey, have anyone heard of this app called SHEIN? All the people who replied were basically dads who had teenage daughters. They're like, yes. My daughter orders from them.

Ying: There's another factor in this overseas expansion, which is that within China, DTC brands insist on having a gross profit margin of 30%–40%. That's just the benchmark. Otherwise, consumers will think, oh, your prices are too high and it won't work. But depending on the industry, brands can charge roughly 10% margin on their cost.

When someone like Xiaomi enters the same market, then they'll push all of the prices down to something like 5% and all of the other players will die. This is another case of, the market in China is so saturated with many categories that some people think it's less vicious to try to sell overseas even though they don't have a native competitive advantage.

Ben: That's fascinating. It's very similar to what we were talking about, David, on the Meituan episode where you have to move so quickly and grow so quickly because there is 10 times the number of people at any given time trying to do the same company that you're doing and there are enough consumers to support several different companies at once.

If there is any winner-takes-all dynamic, then it's just going to accrue very quickly to whoever gets out ahead the fastest. Otherwise, there's just a massive raise to the bottom on who will be willing to compress their margins the most.

Rui: Yeah. I totally agree with that.

Ben: It's just so competitive.

Rui: Yeah. It's so competitive unless you can create a superior brand or customer experience.

David: For SHEIN and all these other brands in China, how is offline playing into this? Are they also doing physical retail in China or overseas, or are these purely online brands?

Rui: For SHEIN, that's actually a purely online brand selling exclusively outside of China. But for a lot of the new innovations that we're seeing inside of China, it's actually a merging of offline and online. It's happening at two levels. Earlier, we were talking primarily at the brand level. There's also innovation happening at the channel level. By channel, I basically mean retail stores.

One thing that China definitely leads in that gets lost a little bit in all the coverage is that China leads in ecommerce, but China actually also leads in digital retail. By digital retail, what I mean is actually an offline experience that is highly digitized. That's very different from the U.S. This is something you could intuitively understand when you go shopping in China.

We did an episode with Jordan Burke who is the former head of Walmart’s ecommerce and digital experience in China. The way he breaks it down is really smart. During the pandemic, we saw U.S. stores use their shops as pickup points for ecommerce, but in China, actually, that's something that's been happening for the last 10 years where shops are designed that way from the get-go because ecommerce has such a high penetration. It's totally normal for people to shop online and go pick up at their local store.

The way the store is laid out is even different—where the warehouses are, the flow of the store, et cetera. This is because if you ask Gen Z here in the U.S., they see less and less difference between online and offline. While in China, because the society is so highly digitized, that's actually the typical experience for many consumers. They just think of it as shopping. They don’t think of it as necessarily—

David: Online shopping versus going to the store.

Rui: The stores have, like I said, number one, their outfit for being able to be picked up. They’re also much more integrated with their apps. How many times do you go to Costco? At least I go to Costco and I’m asking for some help. They’re like, we can’t help you because that’s costco.com and you’re in the store.

But in China, a lot of these experiences are fully integrated. The app is also something people use when they’re inside the store. Then, there’s also a lot more personalization because, again, personalization is very important to the average Chinese consumer. It’s been shown that Asian consumers in general actually require a lot higher personalization or want a lot higher personalization than western consumers.

Ben: What’s an example of that when you say personalization? What’s a company that’s done it well?

Rui: What’s an example of personalization? Actually, I would say all the ecommerce companies in China do it fairly well in the sense that the user behavior on some platforms especially like Pinduoduo is much more of a feed-based and recommendation-pushed experience.

David: Is it in the merchandising that you’re seeing and your shopping experiences versus you walk into a Target and literally everybody who walks into that Target gets the same merchandising experience?

Rui: That’s a big part of it, basically getting recommended what that store thinks you want based on your past purchases and based on your experiences, but also getting very personalized promotions.

I don’t know if this is too much of a tangent, but in China, there is a huge team called operations. That’s a really hard to find analog in Silicon Valley companies, but all the ecommerce platforms actually have huge operations teams that are constantly working through promotions and working with merchants so that every time that you log on as a user, you’re seeing different content than when you logged on the day before, this morning, or whatever because people expect new content and new things to be offered to them constantly.

Ben: It’s funny that while this is not really a big thing in ecommerce in the U.S—I’m sure some companies do it well, but to your point, much more common in China—it’s actually very common in gaming companies in the U.S. to have a live operations team.

I spent a year working in the gaming industry and you'll frequently see people whose background includes live ops. That basically means they were running the in-game store's promotions for a live period of time with a lot of personalization built-in.

Rui: Oh my gosh.

Ying: She's a gamer.

Rui: I didn't realize that but that makes a lot of sense now that I think about it. First of all, I would say 10 years ago, most people were working on some sort of gaming company. If they weren't working on a gaming company, their ultimate monetization was gaming. They could be working on XYZ, but they were basically trying to funnel people into games because that was the only business model that worked in China. A lot of people have this thing.

David: We've got to tangent here for a sec. What kind of gaming, like League of Legends or mobile gaming?

Rui: Ying thinks I'm a gamer just because I played more games than she did.

Ying: In college, she was like, I played games all through school.

Rui: I did. Exactly. In college, I played a lot of StarCraft and EverQuest. This is very much dating myself.

Ben: EverQuest is setting the bar.

David: The way that we had Rahul Vohra from Superhuman on the show—Superhuman is great and all, but he really one cred with me when he was like, oh, yeah, I was a game designer. I did the research, you were an original game designer on RuneScape.

Rui: Oh, wow, RuneScape. That was one of the deals I worked on at Raine actually. Raine invested in Jagex, which is their company at RuneScape. That's hilarious.

Ben, what you said is just a really good point. Actually, that's a lot of where Chinese companies probably get their inspiration, but to this day, operations remain really important. Everything is "operated on," by the way. Even the bullet comments on Bilibili have operators like getting special promotions or planting comments.

Ben: We have covered Bilibili yet on this show. Introduce us to that company. What is Bilibili?

Rui: Bilibili likes to call itself the YouTube of China, but it's basically the stickiest platform for Gen Z to create and watch videos. That's not really how they make money. They have a more diverse set of revenue sources, but what they're really known for is this platform much like YouTube where people are uploading creative videos generally between 5 and 20 minutes. Longer, not short videos.

Ben: Oh, so not like Douyin, like TikTok-type.

Rui: Not like Douyin, much more like YouTube. That's why they do compare themselves to YouTube, except their business model is different. They don't make much money off of advertising. They also have a gaming platform. They have live streaming, ecommerce. It's actually pretty diverse at this point.

Ben: That is so much more common in China than in the U.S. It's just not an advertising-driven economy.

Rui: Yeah, you're right. With the exception of ByteDance who has made huge strides in advertising. Actually, Alibaba as well is really an advertising-based company in many senses, but yes, you're correct.

Ben: I guess I should clarify when I say that too because I don't know GDP-figure spend on advertising, but in China, it seems like it never really was the default answer that so many people are like, oh, we'll put games in or we’ll steer you toward commerce. There will be a more direct way to create and capture value.

Rui: That's absolutely right. It has a lot to do with the fact that it was just early. China just crossed $10,000 in GDP per capita. I don't know if you guys know the U.S. number but it's over $65,000. There's a pretty big gap.

For I would say the first couple of years, I was in China. I had a lot of friends in advertising and they could tell you that it was really difficult to sell advertising. Why? Because at the time, you should just invest your profits into growing distribution, that you got way more bang for your buck out of just organically growing distribution points than trying to advertise because advertising, if you think about it, is really for a saturated economy where all the distribution's already built out. You're just trying to compete with each other.

But with China, until recently at least, it really was just like, just get your products in front of the customer versus trying to say I'm better than the other guy. No, you win just by being there.

David: This is a great transition point to the next big trend we wanted to discuss which is community group buying, which we discussed with Lilian on the Meituan follow up on the LP show. To me, this is a perfect example of the focus on distribution in China. That's what it's all about.

Rui: Yeah. This is exactly a distribution play.

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What is community group buying?

Rui: Community group buying is very simple. People are applying a group-buying mechanism to buying fresh groceries to start with, but now also moving into other goods to parts of rural China where there isn't a lot of choices and there aren't great logistics for such products. What they're doing is they're collating demand and they're aggregating it. Then, the platforms basically send it to you the next day for your own self-pickup, thereby saving money on the last mile logistics.

David: These are like the previous discussion about advertising and not needing to differentiate your products. These are products from rural farmers like vegetables and stuff that people are buying through community group-buying platforms. The platforms are Meituan, PDD, Alibaba—enormous tech companies, right?

Rui: Yeah. Although actually, if you look at community group-buying, we just did a call with an alternative data firm on this. While fresh food is the way to get people hooked onto your platform—in China, for example, everyone sells eggs because I don't know why people just love cheap eggs. I heard that nowadays, they're trying to get people to get vaccinated by gifting you free eggs along with your vaccination.

Ying: We're getting donuts. They get eggs.

Rui: Eggs are one of the best-sellers on all these platforms. But you can also see for some of these platforms, they're shifting into more branded and non-perishable products as well like boxed milk, juices.

There was one platform. I think they're just trying to brush their GMV. I won't say their name, but their best-seller was actually the iPhone 12.

Ben: That doesn't quite seem like the same thing.

David: There's a platform that's selling iPhones via this community group-buying model in rural China.

Rui: Yeah. It's one of the top ones that are well-funded. What I'm saying is that this is a model, but while it's starting off at groceries, you can see pretty clearly that this is really just rural ecommerce.

The group-buying aspect is if you consider group-buying as something like the order only happens when enough people order it, that's not really happening right now anymore either.

Even the group-buying aspect, I would say everything about these words is up for debate. I would just call it hyperlocal rural ecommerce, which by the way, Alibaba, their new initiative, that's what they're calling it. They're calling it hyperlocal ecommerce.

David: The way this all works is fascinating. The platforms are pushing so much of the logistics work onto users and leaders of these group-buying platforms themselves. PDD, Meituan, or whoever is actually doing very little to get these products in the hands of customers.

Rui: That's not strictly correct. You are correct in that they're not doing the last mile, but they have to do the entire procurement which in the past in China would be you go to the farms. There were two or three layers of distribution before you as the final end customer got it from a grocery store, the wet market, or whatever.

Now, Meituan or Pinduoduo has to do this entire thing which requires a lot of cool chain logistics for perishable foods that most of them don't have.

We did an episode on egrocery in China. I don't remember the exact stat, but you can compare the per capita cold storage capacity and China's a fraction of what's here in the U.S. That is actually a really, really good sector for you to invest in.

David: Interesting. They're doing all of the higher level supply chain. It's the last mile that they're pushing down onto users.

Rui: Yeah. It's arguable whether or not it's really all that much cheaper because the Pinduoduo CEO, Chen Lei, has actually said, in agricultural ecommerce, it's not the last mile that's expensive. It's the first mile.

Ben: Why is that?

Rui: Because getting it from the farmer to the warehouse and then doing all that, that part of the supply chain isn't as well-developed as if you think about it the same day, same city courier system. A lot of ecommerce already accommodates that. They've already built that out.

David: We'll end this with refrigeration and cold storage. I assume none of that is happening during the last mile.

Rui: No. The way it works right now for all of the platforms is we actually took some deep dive into the warehousing because that is really where you're going to understand if this platform is doing it correctly or sustainably and can make it.

They actually franchise out the warehouses, so you can go, for example, and become a Meituan CGP warehouse pick-up point. You need to have a certain number of capital. You need to have this building that fits requirements. You need to have cars or some type of vehicle that fits the requirements and this number of laborers. Then, you can go and become a franchisee of the system.

Ying: I think to frame this, this is one of the areas that I'm personally really excited about seeing up close and in person when we can travel again because again, a lot of the content that we're seeing around this is reported on. It's not people that Rui and I talk to on a daily basis because they're usually in first or maybe second-tier cities, but this is really about digital penetration into rural China.

It is also about micro-entrepreneurship. The community leaders who are taking a cut of the total sales within their community are essentially being contracted and get a nice partial salary every month for playing that role. It's a way for the large platform—you mentioned Pinduoduo, PDD, but also Alibaba and JD—of putting almost billions of U.S. dollars.

Rui: Not almost. They are billions of dollars.

Ying: Over billions of dollars into their own platforms or into their investments at a high level, too. What we talk about a lot on Tech Buzz is the whole trickle of consumption—what was that phrase, Rui?

Rui: It's hard to translate, but consumption upgrade is when people in China talk about the first and second-tier cities increasing in their consumption and basically being developed economy consumers. Then, there's also the consumer "downgrade" which is when all the brands are now discovering that rural China is where it's at.

Ying: Exactly.

Ben: Is this race pouring billions of dollars into the tier three and tier four cities? Is that just because they're out of growth in tier one and tier two cities and this is where they need to go to grow? Why is there a capital battle going on there?

Rui: Huge because if you look at China, the growth has slowed down for all of China, but if you look at rural China, it's actually still something like 10% GDP growth per capita year on year. Depending on how you slice it, but I generally like to take just the first and the second-tier cities out, the rest of rural China third-tier and below is still a billion people.

David: This is for the western audiences, just to give us a sense of scale, tier one and tier two cities in China are bigger than any cities in the west, right?

Ying: Tier three and tier four are too. They are sometimes bigger, especially in San Francisco. That stuff is really small. It's like a town.

David: We're still talking about as you said, a billion people in tier three and tier four cities in China.

Rui: Yeah, and below. Again, tier five is really interesting because China has really good infrastructure in some sense and a lot of people. But when you think about retail distribution, think about in the U.S. We have access to really good grocery stores, supermarkets because it's been over 100 years that people have been investing in these logistics, real estate, cold chain, et cetera.

In China, it's just going to take some time. They're already growing really fast. To give you an example of what a fifth-tier city looks like, because I was going to explain it to an African entrepreneur exploring CGB and I was like, oh, in China, it really works well in these types of cities, in fifth-tier cities. She's like, what does that look like? Anyway, I found some stats and pictures for her. It's about a million people usually.

David: Which is the size of San Francisco.

Rui: Yeah, exactly. It's about a billion people typically. I looked up 10 cities. They're all about a million. If you look at the skyline, they don't necessarily have a ton of skyscrapers but they have some tall buildings. The main thing is that you'll find—I thought this is hilarious—all of them have either a Starbucks about to open or just opened. That is the level of GDP that you can think about.

By the way, Starbucks is about $3–$4 per cup in China. It's not cheap. It's premium in China. When Starbucks is opening, I think it's a great indicator of the city being on the up and up and being able to consume more.

David: One of the things Lilian really talked about on the LP episode about CGB in the question of why is this so important and why are all these big platforms investing billions of dollars into it is not about selling groceries to people. It's about capturing user behavior for all of these new people coming on to tech platforms.

If they start transacting for their staple everyday goods on PDD, Meituan, JD, or Alibaba, there's a really good chance that they're going to keep doing more stuff on those platforms especially as their disposable income goes up.

Rui: These are high-frequency purchases. Even with disposable income, I think you can't just look at the pure income level because it's the same thing as in the U.S. where if you live in a "tier one" urban center, you might have a high salary but your real estate costs are super high as well.

Your final lifestyle purchases could actually be less in China if you live in Shanghai or something versus if you live in a "tier two city" like Chengdu, or where Ying's family are from like a tier four city. People there might actually have more money to spend. It's unintuitive but it is true because the income disparity might be a factor of 2 and 3 times, but the real estate prices might be a factor of 10 times. Like Shanghai when I left, I bought an apartment there and I sold it. It was already more expensive than most districts in San Francisco. This was five years ago.

Ying: Rui mentioned my family. I just looked up the population of the fourth-tier city that I was born in. It's fourth-tier but there are 5.77 million people. What you were saying with disposable income and folks having more to spend discretionary, in general, that's true. I feel like my aunts compared to my mom will spend hundreds of U.S. dollars on clothing. Her salary is—not to out her—probably $1000 or $2000 a month. We just don't know.

Sometimes, my mom is like, where is she getting the money for this? But it's because everything else is so cheap. Or if you're working a government's job, you get a ton of benefits including housing. Also, I want it just ingrained in the listener's minds, when we do say rural China like we've already described, we're not talking rural areas. We're talking about cities like the one I just shared with you.

David: We're talking five-million-person cities.

Rui: It's not like some field in the middle of nowhere.

Ying: The reason this works in community group-buying, it's not just, oh, people traveling 10 miles to deliver one bag of groceries to the final outlier. They're in neighborhoods that are stacked more densely than San Francisco. You have the gatekeeper of the neighborhood taking the bulk orders and it's right downstairs before you go out.

Ben: What do we call people farming in China if rural China means five-million-person cities in densely intact apartments?

Rui: I think they're still called farmers.

Ben: I want to transition us to one other big topic that I think we want to hit in talking through China trends today and that is electric vehicles. I think this is something that a lot of people have seen in the news both because of specs that are happening, because of new battery technology companies, because of Tesla competitors, because of Tesla building a very large factory in China. What is going on with electric vehicles in China?

Rui: First of all, it's just a big priority right now. I think if you look back 10 years ago, China probably didn't care that much about environmental damage or climate change, at least not the expensive economic development. But in recent years, you've really seen China take a lead on climate change. Part of it is because they realized that reliance on oil and all the devastation from climate change is actually bad for national security. It's destabilizing.

Now, electric vehicles have become a huge priority in China and every brand is jumping into it. In the past month alone, we've seen Huawei announce that they're going to put in the software into EVs. We've seen Xiaomi announce that they're going to invest $10 billion over the next 10 years into EVs. We've seen DJI, the drone maker, say they're going to participate in EVs. The BAT and companies like Baidu are now effectively basically an autonomous driving company actually if you just look at them. That's really the main story now for that company.

David: My and our own Acquired perspective on the BAT and Baidu specifically is they've just fallen off the map and just Alibaba and Tencent are big players in China now. But I at least haven't known anything about what actually happened to Baidu.

Rui: Basically, investors like I talked to are like, oh, you're investing at Baidu as an autonomous driving company. You're getting the search business for free. That's what it is.

David: Wow. It's like investing in Wemo and getting Google for free.

Rui: Exactly. Again, when Baidu introduces itself now—I know a lot of the PR people there—it's basically, we're an AI company.

Ying: That's accurate.

Rui: They've made, by the way, a lot of progress in autonomous driving so no knock on them, but if you look at Alibaba, they also have a bunch of JVs and EV. We don't know exactly what they're doing because they've only announced the JVs but no specifics. Tencent of course has invested in Nio. Alibaba also invested in XPeng. Then, Meituan invested in Li Auto which are the three publicly-listed Chinese EV companies.

They've all made significant money—I guess at least on paper—on these investments because they're all up significantly in the last year, which is hilarious because when we visited Nio in October 2019, I remember when our meeting got canceled that last minute because this was the period when people weren't sure if they were going to be in business. Their stock price was hovering.

Ben: Are they making cars? Are these companies' cars on the road?

Rui: Yeah. All of them have delivered vehicles. Of course, they’re a fraction of Tesla, but they've all delivered vehicles. In fact, Nio now is a $59 billion company. Literally, a year and a half ago, we weren't sure if they would be surviving.

David: Which is what Tesla was two years ago.

Rui: I know.

Ben: What's funny is the Tesla sales multiple being applied to all of these companies, too. Is that what's happening?

Rui: I think so. The exuberance has lifted the entire sector. When you consider that China is the largest car market and there is a government push towards EVs, there's a lot of excitement.

Ben: Is it fair to say that the car market in China is probably 4–5 times as large as the car market in the U.S. just by population?

Rui: I actually don't know. I did an episode on this. I don't remember the exact numbers, but I do remember it's the largest.

Ben: I have heard this from other sources talking about the growth of electric vehicles. People are saying, oh, the real growth is in China just from a consumption perspective. I think that's people betting on the continued development of the economy, the incredible demand, and probably government incentives to be driving an electric car in the next few years.

Ying: Definitely government incentives.

Rui: It's a complicated story. The government is tamping down incentives, but I think the overall demand is still going to be there. There's a lot of competition as you can see, basically every Internet company. We've listed a bunch. I'm just waiting for Pinduoduo to announce that they're going to do some discount cars.

Ben: EVs are the new games for Chinese companies.

Rui: For sure. Pretty much everyone announced one and then separately in autonomous driving, which I think is also really interesting. But all of these companies are private, so we don't know as much about them.

I've talked to a bunch of people who've invested in the space and I've talked to a few of the companies. I think that this is a space we should definitely be watching because China is going about it in a different way.

Baidu for example is working with the government on autonomous driving solutions that are just the software but also include remaking the infrastructure on the road. We'll see if that works. Then, there are a bunch of players that are really teams that came out of Baidu. Also Google, just really top-notch AI talent.

The word on the ground is that it's anyone's game. Who's going to get to level five first? It's not clear that it would be the U.S. winning. I think China really has a really strong chance. This is what I would say is the first deep tech, not consumer Internet light-weight app, but really deep tech that we see this competition play out that will have really interesting, lasting effects. The first country to get to level five is going to experience tremendous efficiencies.

David: The infrastructure point is an interesting one too because I remember—not that I spent a ton of time in the autonomous space—a few years ago, people were thinking, oh, well, if there are going to be new roads built or roads upgraded in the U.S. that are going to be integrated with EVs, then this is going to be great. The reality is that's not going to happen in the U.S. anytime soon, but China could actually do this.

Ben: Right. The U.S. is at a huge disadvantage for this, both because of the reliance on the existing system whereas China will just make a government mandate and say, no, we're building an all-new system. People will snap too, but also because of the federal system, the idea that we're a whole bunch of states that are all going to pass laws independently.

I think the ability to require that people stay at home during the CoronaVirus is a very similar example where if something is declared by fiat, it is much more likely to be followed than the please population, do something. Very different strategies that both have their trade-offs.

Rui: It is not that centralized in China either. The local government—I worked with some of them—definitely have a lot more power, a lot more budget than here in the States. I can't imagine some of the cities. I've lived in the Bay Area. For example, really being able to remake the entire traffic light system, lane markers, or whatever it is that's needed.

David: It's even impossible to even imagine.

Rui: I know. The potholes aren't even filled yet and you're going to make this a smart road? I don't know.

Ben: All right, before we bring it home here on this episode, we would like to thank Perkins Coie, the official legal sponsor of all of these special episodes of Acquired. As long-time listeners know, Perkins Coie is a premiere technology-focused international law firm known for providing high value, strategic solutions, and extraordinary client service to businesses ranging in size from Fortune 50 companies to of course startups.

I've personally worked with Perkins and in fact, I did again even since. I additionally wrote this at the beginning of the season. It has been a great experience and continues to be. I know several other Acquired listeners who feel the same way.

David: Ben, you just keep doing deals.

Ben: Well, you know we are in a fast-paced environment as they say.

David: We have a $100 billion fund to deploy.

Ben: Indeed, and Perkins is a great partner for working with us on legal needs as they come up.

Clients rely on Perkins Coie for counsel, company formations, IP protection and enforcement, financings, IPOs, mergers, acquisitions, and everything you can think of. They also advise VCs in fund formations and investments, and represent their portfolio companies throughout the ark of their growth. To learn more, you can click the link in the show notes or visit them at perkinscoie.com.

One more lightning topic here before we close because I know it's on a lot of people's minds who follow China tech. What is going on with antitrust in China right now? Is it a good thing? Is it a bad thing? I will say it's definitely affecting asset prices and stock prices, so what's happening there?

Rui: I think the antitrust caught some people off guard but actually, if you look at the history, this was pretty much inevitable. It's actually been in play for quite a few years. I talked to people who've been working on antitrust in China for at least three or four years in the making. If you look at the history, Chinese Antitrust Law, the first version was passed in 2008 which is really late because in the U.S., it was in the 1890s. There was the first version.

David: The Sherman Act was the original.

Rui: Exactly. Then, nothing was done for the next 12 years. Specific to tech, we had one case that was Qihoo 360 and Tencent. They got into a fight. It was actually very similar to what's happening right now where they basically told their users that the other software program was malware and that if you wanted to use my program, you had to uninstall the other program forcibly.

Tencent won that case, but it actually had some ramifications in that it really changed how they thought about their strategy going forward. This is actually the time after which they stopped making a lot of products internally and started investing. This is when they built their empire so to speak. After that case, no cases were heard for the next 10 years.

David: Wow. Literally zero antitrust cases in China for 10 years?

Rui: In tech. There were plenty of antitrust cases but I mean for the Internet. Let's make that clear.

In January 2020, in an effort honestly to catch up with the rest of the world—if you look at the state media and the government proclamations, this is all about trying to catch up with the rest of the world—they issued the first draft. A lot of the things were very reasonable. Then, they issued more towards the end of last year specifically around platform companies.

We’ve seen movements towards this direction for a while now. All of the things were really meant to protect consumers as well as vendors who deal with these platform companies because let's face it, some of them like Alibaba who recently received the massive $2.8 billion fine were really abusing their positions. They were telling people that you could only do promotions or sell products on my platform and not JD. This is very egregious if you think about it.

The laws also protect consumers against various other things like discriminatory pricing, so a lot of the platforms were discovered by the public to be discriminating against users. In fact, they were doing it against their most loyal customers.

David: They're going to be happy to pay more.

Rui: Yeah, exactly. They're like, we know you're really sticky and you're very loyal, so we're actually going to charge you more for the same thing than for a new user. This is obviously really not cool. The proper takeaway is that China is really trying to catch up to the rest of the world and this is something that is going to be in play. This is not something that's going away. China's very adamant about this. It's not going to go back to the days of the wild, wild west which I agree with. If you talk to investors on the ground and consumers on the ground, they're all cheering these resolutions. In fact, they're like, why didn't this happen earlier?

Ben: Why is that?

Rui: Because again, some of the practices that these big tech companies were doing were really unfair to both consumers and vendors. There was no recourse because the antitrust authorities weren't really even hearing any cases. I shouldn't say antitrust. They were hearing cases, but I would say the judgments were very small. Prior to the draft laws changing this, I think the upper cap for violations is ¥1 million or ¥500,000. It might have been even lower, which is $70,000.

David: It's like a small tax you're going to pay.

Rui: Exactly. Imagine you're a $200 billion company. This means nothing.

Ben: If you're a startup investor or a startup founder in play, this is great news for you because this is going to force China big tech to play fair.

Rui: That's actually what happens if you talk to VCs on the ground, if you'd talk to entrepreneurs on the ground. One VC actually said something, this is more specific to fintech. He was like, oh, yeah, I was previously not interested in consumer fintech at all, but now with all these rules, I think I will start looking at it.

Ben: Fascinating. As we close here, let's look with an eye toward the future. What should people think about as to what's next for China tech through 2021, 2022?

Ying: I think it's really hard to sum up what we should be looking at because as you've heard throughout our entire discussion, there's so much going on in China tech and so many sectors that are experiencing innovation.

You have people who used to start internet companies going and making electric cars and raising a bunch of money for that. That's happening domestically. In my purview, there's a lot of increased internalization that we thought stopped last year because of COVID, but I actually see signs of it starting up again and accelerating, This whole trend of Chinese companies not just coming to the U.S. and Europe but also going to Southeast Asia, to Brazil, to other emerging markets, India.

That's been ongoing. I feel like having honed their jobs at home, that's only going to accelerate. There are certain sectors like ecommerce that are very well-positioned for that and there are companies that have already started to take advantage of those trends. I think capital in a cycle recognizes that as well. Definitely internalization.

From a talent point of view too, founders who have found either success at home, success in a different sector, or have had global education—I know you guys have seen this too at probably all the founders that you're meeting with—take that knowledge and return home.

It's more comfortable to have a great lifestyle and to be well-funded and well-supported in the China market. From there, you take on the rest of the world because you know how to hire teams in other places. I think that's going to continue. There is definitely continued innovation. I think, Rui, you wrote McKenzie’s head of China said no China, no country. We're the main thing.

Rui: This is more of a meta point because I think we've covered the sectors that we think are really interesting to look out for this year. The meta point is that for Chinese companies, don't expect them to impose any boundaries on themselves.

For example, we see that ByteDance is now going into local services and trying to move Meituan's cheese. We see Xiaomi going to EVs. But all these companies are going wherever the opportunity is next because of the amount of change that's really happened in the last 30 years in China, GDP went up to 30 times in China in the last 30 years. That's the highest, far higher than any other country, which makes both the customers in China hyper adaptive, but also makes the entrepreneurs hyper adaptive as well. No one really takes anything for granted. They're looking for the next thing all the time.

David: The story of Meituan is that it started as a Groupon clone. Today, it's the largest travel player, a huge community group-buying platform, and all sorts of stuff.

Rui: Exactly. Meituan is a perfect example. Basically, Wang Xing really embodies, but so does Zhang Yiming at ByteDance, et cetera. They've just made a $4 billion acquisition of a gaming studio and then three weeks later, they made another acquisition which I think is also billions of dollars. It was undisclosed, but just looking at the company, it's definitely up there.

Ben: If I had to describe this trend, I think it would be that U.S. companies think that their core competency is something like ecommerce, ridesharing, or social networking. Chinese entrepreneurs think we have lots of competencies. We have a lot of capital. We have a lot of users. Let's do lots of things with that.

Rui: Exactly. We'll do whatever makes money. Our core competency is making money. Either making money or losing money then raising money. Something like that. There is basically existential anxiety that people have because they've seen so much change during their lifetimes that they can't take anything for granted. People don't hold onto their laurels for too long and they're always investing.

Did you guys know for example ByteDance has invested big into fintech and even into a hospital? Then of course, there are rumors that they're making their own EV as well. Who knows? Everyone, you get an EV, you get an EV, everyone gets one. Guess what?

David: It is still a private company.

Rui: Yeah

Ben: That's a great place to leave it. Rui and Ying, this was super fun. Thank you for doing this with us.

Rui: Thank you for having us.

Ben: All right, that wraps up our crossover episode with Tech Buzz China. If you like what you heard and you want to listen to more, there are loads of great episodes from Rui and Ying. Just search Tech Buzz China in any podcast player and you will be able to find it.

If you want to talk about this episode, the goings-on of the tech world, or just talk to genuinely smart people about what's going on in tech and business, you should join the Acquired Slack at acquired.fm/slack. If you love Acquired and you want to be a deeper part of what David and I do here, you should become an Acquired Limited Partner. We have obviously loads of things that we normally talk about, the library of content, the VC fundamentals episodes, the interviews, the monthly Zoom calls, but this month, we have a special announcement about our next book club.

David, what are we doing?

David: The triumphant return of the book club. We are so excited to bring it back. We are having Brad Stone back on Acquired to hang out with all of our LPs and talk about his new book dropping this month, Amazon Unbound. I can't wait to read this book. Ben and I both have preordered. Brad's first book on Amazon was just like a classic.

Ben: The Everything Store was the first one.

David: The Everything Store. I learned so much from that book. Brad is such a sensational reporter. So much has happened since he last left. This is going to be awesome. Brad is going to join us for a live discussion with our LPs. We can't wait to see everybody there.

Ben: For you, LPs, you'll get this in your email and an announcement with all the details of how to join, but read the book by May 21st because that is when we will be doing the discussion.

Many of you may actually remember listening to Brad when he was on our Uber and DD episode as a guest back when he wrote his other book The Upstarts from the history of Uber and their Airbnb.

Join us, become an LP, tune in live, join us on the Zoom, and ask Brad some questions too on May 21st. With that, David, I think that's all we've got. Folks, we will see you next time.

David: We will see you next time.

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