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Wed, 05 May 2021 19:53
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!
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Topics and trends covered:
Your format on tech bus China is well probably a similar amount of piles of research to acquire your format is way different you actually write the whole thing out beforehand right. Yeah we actually do we don't even record synchronously at this point. That's a crazy thing. So wait can you explain what that means? We just record separately I record my part and then you record her part. It's more like an audiobook each episode but sort of like two people reacting to each other who are not in real time in the same room it's it's wild. 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 in our venture fund PSL Ventures. I'm David Rosenthal and I am an angel investor based in San Francisco and we are your hosts. On today's show we have a crossover episode with Rayma and Yinglu from the tech bus China podcast. Woo so excited about this one. Been thinking about doing this for a while. I know I've been listening to Ray and Ying for many years at listening many many times over on repeat while doing research for Maytwan and PDD and Tencent and L.A.Baba and Xiaomi and all of our China Tech episodes. They are the best English language China Tech podcast out there and so excited to finally do this crossover. Yeah no kidding we wanted to cover a few things and thought that the best way to do sort of a broad general China episode that's not specifically about a company would be to collaborate on one and do it together so today we're going to talk about trends in 2021 for China Tech. How Ray and Ying do their research given that they both live in the US their views on the China Tech landscape and 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. Our presenting sponsor for this episode is not a sponsor but another podcast that we love and want to recommend called the founders podcast we have seen dozens of tweets that say something like my favorite podcast is acquired and founder so we knew there's a natural fit we know the host of founders well David Senra hi David. Hey Ben hey David thank you for joining us thank you for having me I like how they group us together and then they say it's like the best curriculum for founders and executives really as we use your show for research a lot I listen to your episode of the story of a key or Maria before we did our Sony episodes is incredible primer. You know he's actually good example of why people listen to founders into acquired because all of history's greatest entrepreneurs investors they had deep historical knowledge about the work that came before them so like the founder of Sony who did he influence Steve jobs talked about him over and over again if you do the research and I think this is one of the reasons why people love both of our shows and there's such good. Complements is on acquired we focus on company histories you tell the histories of the individual people you're the people version of acquired and where the company version of founders listeners the other fun thing to note is David will hit a topic from a bunch of different angles so I just listen to an episode on Edwin land from a biography that David did David it was the third fourth time you've done Polaroid. I've read five biographies of Edwin land and I think I've made eight episodes of them because in my opinion the greatest such a pretty to do it my favorite entrepreneur personally is Steve jobs and if you go back and listen to like a 20 year old Steve jobs he's talking about Edwin lands my hero so the reason I did that is because I want to find out like I have my heroes who were their heroes and the beauty of this is the people may die but the ideas never do and so Edwin land had passed away way before the apex of apple but Steve was still able to use those ideas and now. He's gone and we can use this ideas and so I think what acquires doing what founder trying to do as well is find the best ideas in history and push them down the generations make sure they're not lost history love that well listeners go check out the founders podcast after this episode you can search for it in any podcast player lots of companies that David covers that we have yet to dive into here on acquired so for more indulgence on companies and founders go check it out now onto our conversation with tech buzz China. All right Ray and you great to be doing an episode with you yeah yeah totally or big fans have acquired or a goal is to be like the acquired but for you know China. Oh my god. That's true though. You guys are great. Well why don't we turn it over to you real quick for get give us your personal back stories a little bit about the show. Both of you live in California right not actually in China. Yeah we live at both in the Bay area right now was boarding China immigrated to the states as a kid when I was eight and grew up primarily in Silicon Valley actually you know what to go up Berkeley and then when I graduated what into investment banking doing technology because I wasn't good enough to be an engineer so steady engineering college and then what into finance and in 2007 for personal reasons move to China and then I was staying there for the next eight years working in a variety of jobs but starting first in real estate investing and then going into even did some cross border M&A and then media private equity and then finally really really early stage start up investing at 500 startups which is very very high in the market and then I was going to do a lot of research accelerator and seed fund and then moved back to the Bay area at the very end of 2015 didn't think I was going to do much with China anymore but was you know so keeping tabs on on things and I was like hey podcast or all the rage this is in 2017 should do a podcast on China tech seems like it could be fun and then well very quickly when I realized is that you know by the end of 2019 I will call it I was like well some of these companies that I'm just sort of covering for fun and personal passion for tech buzz are actually really doing really really well and I should really think harder about whether or not I want to drop the China connection and then so in 2020 decided to really 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 and then we were going to do that last year more you know as part of tech buzz but then the pandemic cut short all that so we've pivoted into more of a community now online for investors and then I personally do a bunch of consulting for funds interested in investing in trying to tech that's great well it comes through on the show I can't talk about everything I get you know a lot of information is proprietary but I tried to share what I can there's so much that is happening that is reported if you are Chinese but if you're American you're like I I just occasionally get this random story about Jack Ma disappearing like I would love to I would not have to understand thematically what's going on under those headlines in China yeah and you know I think one thing I should point out when it comes to my personal experience and also this happens to drive with you because we that's what we met we met when we're both living in Beijing which is that we were there in retrospect at a very auspicious time in trying to tech because prior to let's call it 2013 14 trying to tech was really really small so I was really there when the first couple years really you could count on your hand the number of people doing angel investments in China right so there there literally was a book called angel investors of China I think it had like 12 men in it so yeah it's like the the warm buffet used to go through you know the Moody's manual of companies to like look at all the companies that there's like a manual of the here you go here are all the people and then so I happen to then join 500 which at the time by the way a lot of people are 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 and then it's not like I knew what policies are coming but then two years later boom you have a couple thousand accelerators you have hundreds of early stage funds and you have a total sea change shift and 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 all the best and brightest would of course go and create their own startups and that happened really around 2014 or so and I think you can see it in the types of companies that are public today right some of the most popular companies that are always talked about in media you know Pinto to a bite dance may to an etc all these companies really start in the last decade and Pinto to is a great example of a company that started in the last you know five six 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 restrictions then 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 they themselves are not even based in China right now they're like in Singapore or Taiwan or something very cool all right Ying what's your story so I think Ray brought me into the story when she mentioned that we met in China it's been like 10 years ago when I went to China right after college and even when we started this podcast China wasn't a super hot topic in China tech even three years ago was not is appreciated and I feel like things have just totally changed and it's interesting to be able to say oh I've seen the rise of different sectors of tech especially like online to offline companies going overseas like the rise of all the digital live streaming any commerce happen in China while like also watching concurrent trends in the US but to go back and I came to the US when I was two from Guangxi I'm actually a fourth tier city and a lot of my extended family that I'm very close with are still in like fourth tier and some third tier cities and they're all in Guangxi except my parents and brother so throughout my career I've been more on the operator side I've worked with over I would say over half so over 50% China based fully Chinese teams like embedded as part of the team I've been an employee I've been a startup co founder in China this was like 2012 to 2014 I fell into this niche initially when I moved to the barrier from China in 2014 and that was the year that a lot of Chinese apps were trying to go overseas you guys might know about this and I'd be brought on to help them with their US business deals are set up in office or like do PR until their story and today I have two partners in China most of my deep rooted opinions and like cultural schemas of China have been shaped by a combination of family background in early personal and professional experiences but I do want to emphasize that we really have to put in time to gather current knowledge so you know when people use the term like China expert or refer to tech buzz I do think it's not something we just can spit off it's just like you guys making an acquired episode and you have to put in a lot of the time to do the research. Well you could not have teed us up better to discussing what is happening now in China in terms of trends for entrepreneurship so I'd sort of 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 and that will be covering three to five years from now in the next may to on and the next pinduo duo in future episodes. So actually that's a great question and at least in the near future what we're focused on are insider community what I said for this year what I think you're going to be really interesting are a couple of things one is consumer brands and that's specifically on consumer brands being run like internet companies which we can talk about there's also community group buying which is very disruptive and it's a new form of e-commerce that's happening now in rural China that really kicked into high gear last year because of the pandemic and then actually 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 internet or than even just software then this whole new thing of electric vehicles and autonomous driving is really really interesting in China as well and actually a lot of experts I talk to think that the US in China are really kind of on par or some people you can see here is a lot of people are not going to get into the world but in the world are not going to be in the world and it's going to be a lot of things and then you can see that it's not going to be in the world and it's going to be a lot more fun for the world and it's going to be a lot more fun for the world. Or some people even think China is ahead in that sector and that's definitely something I'm watching I'm more familiar with the AV front and less with the actual vehicle making but those are all interesting things. Well, maybe let's first start with that direct to consumer and that brand piece and kick it over to Ying sort of how do you think about that and what's going on in China there. So at a high level I think we've always thought that you know in my observation the level of quality of Chinese consumer brands like Ray mentioned is going to go up and this is totally in parallel with innovation in China continuing China no longer being a copycat manufacturing and designing a lot of its own products. Ray mentioned consumer companies being run more like tech companies but all delve more into the specifically the DTC side so direct to consumer brands. So I think there's a huge market opportunity for domestic Chinese brands to gain market share in China and that's not just because you know again the media narratives all about like the youth being very nationalist but actually it's because if you look at developed countries right. So for example, the United States we actually have something like a quarter of FMCG products or foreign brands are non-US but if you go to China what's FMCG FMCG fast moving consumer goods. Yeah, so so so you're basically consumer staples etc. Right. But if you look at China again the foreign brand penetration is actually north of 40% very very much higher than that for certain other categories. And so if we assume that China is 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 right there's a there's a huge market share that domestic brands can capture. And this is accelerated by the fact that in recent years manufacturing design all these things that go into brand has significantly improved. So like I was saying to you Ben the OEM of the past the original equipment manufacturers were you know the model is that you go to China you already have your products 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 long past OEMs are now ODMs right they also do a lot of design where you can just go then with some sort of much fuzzier let's call it products spec and then they'll actually design something for you. As well as manufacturer it to today I hear people call it you know call these factories OBMs right original brand manufacturers were literally they're doing pretty much everything for you except the final branding you know they they even will do a lot of the marketing copy etc 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 not all the so the the clone core original brand manufacturing is is basically still you know ODMs but the point is that there are significantly better than before right so you will see again you see this already on like in the US and Amazon right you already have a bunch of brands from China. So I'm trying to like trying to brand themselves right on Amazon selling commodity products what we're talking about however is not you know you're like no name unpronounceable brand from China selling like an apple fire wire or something right iPhone charges or stuff yeah we're talking more now about like people building real brand IP right so I think one of the examples that is very very popular in China right now is probably less well known outside of China. This brand called Ganky Forest and it is right now is $6 billion dollar valuation company that wants to be the Coca-Cola of China right so we already saw last year this company called yatsun aka perfect diary wants to be the lorry out of China and then last year we actually already also saw the listing of the PNG of China so there's all these brands trying to take over the consumer staples categories and the newest interest and I think it's really interesting is ganky forest which is Coca-Cola of China and they are just starting off with basically your carbonated beverages and the different thing that they're doing is that the company is actually run by people who come from a social gaming background so they think about everything in terms of you know marketing ROI right and doing very very quick a B testing and very very quick iterations. And are they using OBMs of DMs to actually make the soda they're just a brand they're just a brand they're just slapping on their brand and marketing right so they did start with their own factory but it was only in mid last year and that's after you know that that's that's like that's a few years after they started right so same thing with perfect diary by the way the cosmetics brand when they went public they had also just started you know their own factory. I will say in the beverage industry even in the US that's super common so like I'm going to sound a little tight but I know the the founders of for a local and at one point in 2011 they had a hundred people working at the company 96 of them or sales people and the founders and a CFO and they work with a contract manufacturer so I think it's technically a contract brewer and this is the most common. The most common way for any beverage or especially alcoholic beverages in the US to start is to contract out everything but the distribution and the branding huh that makes a lot that makes a lot of sense I don't think I don't think thank you for his quite that I mean they are doing more R&D but I think what different chase them is how many skews that they're constantly trying so they do small batch testing and then they will they will do it on both the marketing front as well. As well as sort of the physical products of course and then you know according to the founder only 5% of their products make it into sort of mass channels right because the mass of the mass offline channels are actually very hard to penetrate and also to manage. But so like 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. Yeah it's a lot of like so maybe maybe even a better example is to look at perfect diary which is they're doing a lot of collaborations right so like all the new brands these days right they're doing a lot of collaborations they're making like very sort of seasonal. Ish products so they'll put out something I think their average is one new product a week and then whatever makes it you know quote unquote becomes a best seller then they'll put more resources around it and it's the same thing for Genki Forest right so they are supposedly coming out with a new product every few days. And then they'll do sort of small batch testing with it and then of 5% or so of these products will then become you know a sort of further best seller that they'll they'll put into more distribution and that is basically how. If you think about it's very similar to how you iterate on a internet software product right so this is what I mean by companies and brands in China are now trying to do this applying it to physical products and they're doing this because they have such good access to a very very advanced and flexible supply chain. I think a lot of people when I talk to them they're thinking of factories as likes you know still very manual and you know people on these like long lines but I visited some of these factories and they're actually quite advanced right so there's a lot of automation. Like I said they're they're they're all running software to manage themselves and they have a lot of design in house talent and you know the advancements and then manufacturing has gotten have really primarily focused on speed in China so when you think about manufacturing with the minimum order quantity is always a barrier for most people right so. Especially in consumer products like clothing and while clothing being I think the main one China has really been able to push forward on having more flexible manufacturing by what I mean is when we visited. Ruhan who is a I don't even know how you say their English name is Ruhan but anyways they're just about to go private but they were previously you know we we did an episode on them how they were started by the quote unquote Kylie Jenner of China so it's basically influencers making their own clothing and branded products when you say about to go private are they public now they are public now yeah about to go private haven't done that well. But we when we visited them when we we saw all their you know like all their clothing and all the stuff and then we also visit a Mwokudya who is a you know live streaming shopping app and you know both of them told us that like number one you know they had such good access to manufacturing and turn around times were so fast it's about seven days right from a design to being made and then shipped out the door right seven days that's actually really really fast and for a company like she in. Which you can talk about that is apparently down to five days and yeah like a company like she is pushing out a thousand new skews every day on the website amazing yeah yeah I want to hear about she in yeah I've heard about this this is crazy yeah bring us up to speed here okay so I think that what Ray talked about with marketing and like really flexible supply chains enabling the tech based teams to focus on marketing and online marketing which is actually like highly valued skill just like it is in the US so she in takes five days of designing to ship this is on average I'm there producing a thousand new designs a day they have $10 billion in revenue and so it's all it's all women's clothes right yeah all women's clothes it's kind of like a to them that fashion they might have some men's clothes I feel like they might have some men's clothes I don't know we can check we should check check do you want some David I do I do it's super cheap to it's super cheap I don't know if you want to know they do have they have men's and kids and beauty so I can order something that was designed five days ago yes it might take longer to ship and get to you but five days yeah it will take a long time to ship yeah wow like wish shipping times yeah slightly better have you guys ever ordered from wish I haven't I've been tempted to but I never have I know only of wish because I've seen it on Laker jerseys yeah this has like wish I do think that's a good comparison so you order in the quality of clothes in my opinion isn't very high I think I did order just to test it but this was because I was benchmarking to another company but she and has as of time of recording 19 million fans on Instagram so note that I'm saying Instagram this is not a Chinese social media platform and we'll get a little bit into that too with some of the cross border DTC happenings this is amazing there I'm on the men's section and oh yeah I'm going to get swimsuits for $3.90 it's true wow oh my god yeah and for reference unique clothes at 26 billion dollars so we're kind of benchmarking she in as the success story of overseas DTC brands coming out of China and then Ray had mentioned we visited more goods yet in October 2018 and they're also doing small batch designs and producing a lot of new designs so this is all innovations within the supply chain and shortening the time it takes to get new designs to market and when people used to refer to fast fashion you look at like a Zara or something the knock was oh they're you know busting their ass to get this to customers hands you know five weeks after they come up with a concept and now we've shortened it to like five days is that yeah well there's the shipping aspect of it but yeah if this was happening in China then you you can get that you probably get it shipped the next day yeah that's right wow and there's always been a bunch of people that are concerned about the environmental impact and at least I know there's a lot of negative sentiment around fast fashion how does that play into how all this is developing I would say at least right now like for a company like she and right first of all she is called ultra fast fashion now I guess I don't think the environmental impact is probably fully baked into it and I'm firstly not a fan of the model but I think the point we're trying to make is just that the supply chain is really flexible now and the end goal really is to have it to be so flexible that you can make it as demand comes in right 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 yeah it's like not even inventory it's not even like just in time manufacturing it's just in time creation and design of products so they're like there's no there's not even any product risk yeah exactly well that's where people are trying to get to we're definitely not quite there yet yeah but that is the future and yeah we pick these categories she and is actually old company it's over 10 years old because again these supply chain innovations take a long time right but the supply chain innovations then can also be extended to other industries like you were saying you know or like we were saying the drinks as well as cosmetics etc and all these other categories there's a growing proportion of Chinese companies that want to sell into overseas markets including the US 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 themselves benchmark themselves to she and so they'll have a graph on their pitch jack of like here's the supply chain process here's like what she and does here's what we're doing pretty much looks the same or there will be some minor tweaks and 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 very little bit what they share with she and is a common quality of low price a heavy reliance on social media so remember when we said she and had 19 million Instagram followers this is something that I personally see as kind of similar to a heavy handed version of the whole utility apps overseas craze of like 2015 16 or 14 in that you can have a domestic based team really master social media as long as they speak English and get some help with your customer management and then get the right operational scale so kind of like use labor to make up for what you don't have any their local savvy or necessarily like B2B software technology in order to just like get the performance marketing right and sell purely online straight to consumers and like there's some tweaks with this but in general like investors seem to think it's worth betting on and she and it's also at Amazon right yes yeah I don't think all their stuff is though not everything we're not the target customer here it's funny I asked on Twitter I was like hey have anyone heard of this app called she and then all the people who replied were basically dads who had teenage daughters yes my daughter orders for this all the time so there's another factor in this overseas expansion which is that within China DTC brands insist on having a gross profit margin of 30 to 40% so that's kind of 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 like a roughly 10% margin on their costs but when someone like Selmy enters the same market then they'll kind of push all of the prices down to something like 5% and all of the other players will die so this is kind of another case of like the market in China is so saturated in many categories that some people think it's less vicious to try to sell overseas even though they don't have the native competitive advantage that's fascinating it's very similar to what we were talking about David on the main one episode where you have to move so quickly and gross so quickly because there's like 10 times the number of people any given time trying to do the same company that you're doing and there's enough consumers to sort of like support several different companies at once and if there is any winner take all dynamic then it's just going to accrue very quickly to whoever gets out ahead the fastest and otherwise there's just like a massive race to the bottom on who will be willing to compress their margins the most yeah totally you're that it's just so competitive yeah it's so competitive unless you can create the superior brand or customer experience right so for she and in all these other brands in China how is offline playing into this is are they also doing physical retail in China or or overseas or these purely online brands yeah so so for she and 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 emerging of online offline right so it depends it's happening at two levels the earlier we were talking about primarily at the brand level there's also innovation happening at the channel level and by channel I basically mean like retail stores right so I think one thing that China definitely leads in that gets lost a little bit in in all the coverage is that yes China leads in e-commerce but China actually also leads in digital retail by digital retail what I mean is actually an offline experience that is highly digitized right so that's very very different from the US and I actually I this is something you can sort of intuitively understand when you go shopping in China but I think the we did an episode with Jordan Burke who is the former head of Walmart e-commerce and digital experience in China and I think the way he breaks it down is really smart and during the pandemic we saw US stores right use their shops as pickup points for e-commerce right but in China actually that's something that's been happening for the world that's been happening for the last 10 years where shops are designed that way from the get go because e-commerce has such a high penetration so it's totally normal for people to you know shop online go pick up at their local store so the way the stores laid out is even different right like where the warehouses are how much you know what the flow of the store or etc and this is because you know if you ask Gen Z here in the US like they see less and less difference between online offline well I think in China because the society so highly digitized that's that's actually the typical experience for many many consumers they just think of it as shopping they don't think of it as necessarily like online shopping versus yeah going to the store huh yeah the stores have like I said number one their outfit for picking being able to be picked up they're also much more integrated with their apps right so how many times you go to Costco and or at least I go to Costco and I I'm asking for some help and they're like we can't help you because that's Costco dot com right and you're in the store right but but in China like a lot a lot of these experiences are fully integrated and then the app is also something people use when they're inside the store and then there's also a lot more personalization right because again personalization is very important to the average Chinese consumer but it's been shown that Asian consumers in general actually require a lot a lot higher personalization or want a lot higher personalization the Western consumers and what's an example of that when you say personalization like who what's a company that's done it well what's a example of personalization well what I mean is like the actually all the e-commerce I would say all the e-commerce companies in China do it fairly well like in the sense that the user behavior on some platforms especially like Pinduoduo is much more of a feed based and recommendation pushed experience isn't like the merchandising that you're seeing in your shopping experience is like versus you walk into a target and literally everybody who walks into that target gets the same merchandising experience yeah that's a big part of it it's been basically getting recommended what the store thinks you want based on your past purchases right based on your you know experiences but also getting very personalized promotions right so I think something that I don't know if this is too much of a tangent but in China like there is a huge team called operations that's really hard to find a analog and then you know in Silicon Valley companies but all the e-commerce platforms actually have huge operations teams that are constantly working through promotions and working with merchants so that every time you that you log on as a user you're seeing you know different content then when you logged on you know the day before or this morning or whatever yeah because people expect like you know people expect you know new content and new things to be offered to them constantly it's funny that well this is not really a big thing in e-commerce in the US 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 US to have a live operations team you'll see I spent a year working in the gaming industry and you'll frequently see people who's background includes live ops and that basically means they were running the in-game stores promotions for you know a live period of time with a lot of personalization built oh my gosh that's I she's a gamer up that makes a lot of yeah I didn't realize that but that makes a lot of sense now that I think about it first of all gaming was basically how I was like 10 years ago most people were working on some sort of gaming company or if they weren't working on a gaming company their ultimate monetization was gaming right so they could be working on XYZ but they were basically trying to funnel people into games because that was the only like that was basically the only business model that worked in yeah yeah so a lot of people have this we got a tangent here for a sec what kind of gaming we talk like like legal like legal legends like mobile gaming gaming I think things that we gave were just because like I played more games than she did but yeah my college because she was like I played games all through school yeah I did yeah there we go exactly and college I played a lot of starcrafted yeah so much and this is very this is very much dating myself ever quest is like setting the bar yeah that is well we I mean the way that what we had a Rahul for a from superhuman on the show I mean he really like yeah superhuman is great no but he really like one cred with me when he was like oh yeah like a I used to say I was a game designer and we're like wait I did the research you work like an original game designer on runescape yeah yeah well that's crazy though that was one of the deals I worked on at right actually I love invested in jagax which was right company of runescape yeah yeah that's right that's hilarious but I think I think you know that what you said is it's just a really good point that I think actually that's a lot of where Chinese companies probably get their inspiration but to to this day right operations remain really really important and you know everything is quote and quote operated on by the way even the bullet comments on Billy Billy have operators right like getting special promotions or planting comments. Yeah we haven't colored Billy Billy yet in the show so introduce us to that company what is Billy Billy Billy likes to call itself the YouTube of Trida but it's basically the stickiest platform for Gen Z to create and watch videos I mean 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 I think five and 20 minutes so longer not short videos. Oh so not not like do you like to talk to exactly more much much more like YouTube that's what they do compare themselves to YouTube except their business models different right they don't make much money off of advertising they have also a gaming platform they have live streaming e commerce it's actually pretty diverse at this point yeah. Yeah. Huh I mean that's just so that's so much more common in China than the US where like it's just not an advertising driven economy it's yeah yeah you're right yeah what the exception of bite dance who has made huge strides in advertising yes that I would say you know well actually Ali Baba as well as is really an advertising based company in many senses but yes you're correct yeah and I guess I should clarify when I say that too because I don't know like 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 walled steered torn commerce like there will be a more direct way to create and capture value that's absolutely right I mean it has a lot to do with the fact that it was just kind of early right like China just cross like $10,000 in GDP per capita I don't know if you guys know the US number but it's over 65,000 right there's a pretty big gap and you know for I would say the first couple 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 well why because at the time you really you should just invest your profits into growing distribution that you got way more bang for your bug out of just organically growing you know distribution points then trying to advertise because advertising if you think about it's really for a kind of saturated economy where all the distributions are already built out right and you're just trying to compete with each other but at the you know with China until recently at least it really was just like just get your products in front of the customer yeah you know versus like trying to say I'm better than the other guy it's like no no you win just by being there so this is this is a great transition point to the next big trend I think we want to discuss which is community group buying which we discussed a good bit with Lulian on the may talk follow up on the LPC show but for everybody else I mean to me like this is the like a perfect example of this the focus on distribution in China like this is what it's all about right distribution yeah this this is exactly a distribution play yeah so yeah what what is community group buying community group I is very simple people are applying a group buying a 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 choice and isn't great logistics for such products and then so what they're doing is they're collating demand right and they're aggregating it and then the platforms basically send it to you the next day for your own self pickup there by saving money on the last mile logistics and these are like to the you know previous discussion about advertising and not needing to differentiate your products like these are the ultimate unbranded like these are products from rural farmers right like vegetables and stuff right like that people are buying through community group buying platforms and the platforms are made to on PDD you know Ali Baba like enormous tech companies right yeah although although actually if you look at community group by we just did a call with an alternative data firm on this and you can see that people are so so while fresh food is sort of like the way to get people hooked on to your platform so like in China for example like everyone sells eggs because I don't know why like eggs are just people just love cheap eggs and then I heard that nowadays actually they're trying to get people to get vaccinated by gifting you free eggs along with your vaccination so yeah eggs are just like we don't know I think it is like eggs are like eggs are like one of the best sellers on all these platforms actually but you can also see from some of these platforms are shifting into more branded and non perishable products as well so like boxed milk right at juices you know and then there was one platform I think they're just trying to brush their GMV I won't say their name but they're actually their best seller was actually the iPhone 12 so wow yeah that doesn't quite seem like the same thing so there's a platform that selling iPhones yeah via this community group buying model in role in rural China it's one of the yeah it's one of the top ones that are well funded yeah so what I'm saying is that this is a model but you can see like while it's starting off with groceries you can see pretty clearly that this is really just rural e-commerce and the group buying aspect is you know if you consider a group buying as something like the order only happens what enough people order it that's not really happening right now anymore either right so like even the group buying aspect I always say everything about these words is kind of for debate I would just call it hyper local rural e-commerce which by the way Alibaba their new initiative that's what they're calling it their colleague hyper local e-commerce and the way this all works is fascinating right like the platforms are pushing so much of the logistics work on to users and leaders of these group buying platforms themselves right so it's not like PDD or Maytwan or whomever is actually doing very little to get these products in hands of customers well that's not strictly correct you are correct in that they're not doing the last mile but they have to do with the entire procurement which in the process of the products in China would be you know you go to the farms there were two or three layers of distribution before you as the final and customer you know got it from a grocery store or the wet market or whatever but now then Maytwan or a Pindo do has to do this entire thing which requires actually a lot of the products for perishable foods that most of them don't have right so we did an episode on egress re in China and I don't remember the exact stat but you can compare the you know per capita I guess cold storage sort of capacity and it's trying as like a fraction of what's here in the US so so that is actually a really much more effective for you to invest in interesting so they're doing all of the they are doing all the other watching it's the last mile that they're pushing down on to users yeah and you know it's arguable whether or not it's really really all that much cheaper because the Pindo do a CEO Chenle has actually said in agricultural ecommerce it's not the last of it's the first mile huh and why is that because getting it from the farmer I guess to the warehouse and then doing all that is actually you know that part of the supply chain isn't as well developed as if you think about it sort of the same day same city career system like a lot of the ecommerce actually already accommodates that they've already built that out yeah well and just the refrigeration and cold storage yeah I assume none of that is happening during the last mile no no so it yeah the way it works right now for all the platforms was we actually like took some deep dives into the warehousing because that that is really where you're going to understand if if this platform is doing it correctly or sustainably and can make it right so they actually franchise out the warehouses so you can go for example and become like a meh toa and CGP warehouse pick up point I guess and then you just you need to have like a you have a certain number of capital you have this building that fits the requirements and then you need to have like cars or like some type of vehicle that fits the requirements etc and this laborers and then you can go and become off an triz of the system yeah wow so 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 and it's not people that Ray and I talked to on a daily basis because they're usually in first or second maybe second tier cities but this is really about like we said digital penetration into rural China it is also about micro entrepreneurship so the community leaders who are taking a cut of the total sales within their community are essentially you know being contracted and get like a nice partial salary every month for playing that role and it's a way for the large platform so you mentioned Pindledua PDD but also Ali Baba and JD of putting almost I would say almost billions of dollars US yet no no not almost yeah they are billions of dollars over like billions of dollars into their own platforms or into their investments and sort of like at a high level to what we talk about a lot on tech buzz is the whole what was it trickle up consumption and what was that phrase right it's hard to translate but consumption upgrade is when people in China talk about the first and second tier cities you know increasing in their consumption and basically being like developed economy consumers and then there's also the consumer quote unquote downgrade which is when all the brands are now discovering that rural China is where is that exactly yeah and is this race pouring billions of dollars into the tier three and tier four cities is that just because they're at a growth in tier one and tier two cities and this is where they need to go to grow or why is there a capital battle going on there yeah huge because if you look at try to 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 right so and this is about depending on how you slice it but I generally like to take just the first and second tier cities out the rest of China quote unquote rule China third tier and below is still a billion people yeah this is you know for western audiences just to give a sense of scale like tier one and tier two cities in China are like bigger than any cities in the West right right yeah like tier three and tier four are two there sometimes bigger especially some in Cisco SF is really small it's like a town yeah so we're still talking about yeah as you say a billion people in tier three and tier three and tier four cities in China yeah yeah and below and even you know again tier five it's it's really interesting because China has really good infrastructure in some sense but then and and a lot of people but when you think about like retail distribution think about like in the US right we have access to really good you know grocery stores supermarkets because it's been over a hundred years that people have been investing in these logistics real estate cold train etc and in China it's just going to take some time right like they're already growing really really fast but but to give you an example of what a fifth tier city looks like a fifth tier city because I was trying to explain to an African entrepreneur exploring CGB I was like I was like oh well the you know in China works well in these types of cities and fifth tier cities just like what does that look like so anyways I found some stats and pictures for her it's about a million people usually so which is the size of safer to scale exactly it's about a million people typically I looked up like ten cities are all about a million and you know if you look at the skyline they don't have like necessarily a ton of skyscrapers but they have some tall buildings the main thing is that you'll find I thought this was like hilarious is that all of them have either a Starbucks about to open or just open so that that is like the level of GDP that you can think about so and by the way Starbucks is about three to four dollars per cop in China right so it's not cheap it's premium in China so when Starbucks is opening I think it's a great indicator of this this city being on the up and up and being able to consume more well this explains to I think you know one of the things Lillian really talked about on on the L.P. episode about CGB in the question of why why is this so important and why are all these big platforms investing billions of dollars into it it's not about selling groceries to people it's about capturing user behavior for all of these new people coming on to tech platforms right and so if they start transacting for their staple everyday goods on PDD or on Mayton or on JD or on L.A.Baba and 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 right yeah these are high frequency purchases and then you know even the disposable income I think you can't just look at the short income level right because it's the same thing as in the U.S. where if you live in a quote-unquote tier one urban center you might have a high salary but your real estate costs are super high as well so you're a final like lifestyle purchases could actually be less in China if you live in Shanghai or something versus if you live in a quote-unquote tier two city like Chengdu or a you know we're yinying's families from like a tier four city people there might actually have more money to spend yeah it's like it's unintuitive but it's true right because the income disparity might be a factor of like two three times but the real estate prices might be a factor of 10 times yeah right it's very like like Shanghai when I left I bought an apartment there and I sold it and it was like already more expensive than most districts in San Francisco wow this is five years ago yeah so Ray mentioned my family and I just looked up the population of the fourth tier city that I was born in and it's fourth tier but there's 5.77 million people and and what you were saying with disposable income and folks having more to spend discretionary in general that's true I feel like my aunt compared to my mom she will spend hundreds of U.S. dollars on clothing and her salaries probably like not to out her but probably like one or two thousand U.S. dollars a month so we just don't know sometimes my mom's like where is she getting the money for this but it's because everything else is so cheap or if you're working kind of a government job you get a ton of benefits including housing and also I want to just ingrain and listeners minds when we do say rural China like we've already described we're not talking rural areas we're talking cities like the one I just we're talking like yeah it's not like some field in the middle of nowhere the reason this works in community group buying like it's not just people traveling 10 miles to deliver one-bagger groceries to the final outlier it's like they're in neighborhoods that are stacked like more densely than San Francisco and so you have like the gatekeeper of the neighborhood taking the bulk orders and it's right downstairs before you go out so what do we call like people farming in China if rural China means 5 million person cities in dense farmers in the park department. Okay. I think they're still called farmers. Wow. 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 the back that are happening because of new battery technology companies because of Tesla competitors because of Tesla you know building a very large factory in China like what the heck is going on with electric vehicles in China. So first of all it's just like 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 like expensive economic development but in recent years you've really seen China take a lead on climate change and part of it is because you know they realize that. I was realized on oil and just you know all the devastation from climate change is actually bad for national security right it's destabilizing so now electric vehicles has become a huge priority in China and every brand is jumping into it so. Last month alone we've seen Huawei announced that they're going to put in the software into eb's we've seen we've seen Xiaomi announced that they're going to invest $10 billion over the next 10 years into eb's we've seen DJI the company's like so by do is now effectively basically a on a striving company actually if you just look at their really look yeah basically like they're that's really the that's really the main story now for that company. My and R on acquired sort of perspective on the BAT and by do specifically is like that they've just fallen off the map and it's just Ali Baba intense and of the big players in China now but I at least haven't known anything about what's actually happened with by you. Yeah basically like investors like I talk to our basically like oh you're basically investing a by do as a autonomous driving company and you're getting the search business for free. Wow so it's like investing in waymo and getting Google. Exactly right so it's like if you and you know again like when I do introduces itself now I know a lot of the PR people there is basically where an AI company that's accurate yeah yeah and they've made they've made by the way a lot of progress and autonomous driving so no knock on them but. If you look at Ali Baba they also have a bunch of JVs in the we don't know what they're exactly what they're doing because they've only announced JVs but no specifics. Tencent of course has invested in I think they invested in neo Ali Baba also invested in X-Pong and then made one invested in Lee Auto which are the three publicly listed Chinese EV companies and then they all may significant money I guess at least on paper on these events because they're all of significantly in the last year. Which is hilarious because when we visited neo in October 2019 I remember meeting got canceled that last minute because this was the period when people weren't sure if they were going to be in business so their stock price was like hovering around. And are they making cars like are these companies cars on the road yeah yeah all of them have all of them have delivered vehicles of course there are fraction of Tesla but they've all delivered vehicles. In fact I think neo now is a. I want to say yeah fifty nine billion dollar company. Wow yeah let's really a year and a half ago we weren't sure if they would be survived which is what Tesla was two years ago. No it must have. Well it's funny it is the Tesla sales multiple being applied to all of these companies to is that what's happening yeah I think so. The the exuberance is has lifted the entire sector yeah and what you consider of course that China's you know far just car market and there's government push towards EV's. That yeah there's a lot of excitement. And is it fair to say that the car market in China is probably four to five times as large as the car market in the US just by population. I actually don't know I did an episode on this but I don't remember the exact numbers but I do reverse the largest yeah. Because I have heard this from other sources sort of talking about the growth of electric vehicles people saying oh well the real growth is in China. Just from a consumption perspective yeah yeah. And I think that's people betting on the continued development of the economy and the incredible demand and probably government incentives to be driving an electric car in the next few years. Yeah yeah I mean it's complicated it's a complicated story the government is tamping down incentives. But I think the overall demand is still going to be there yeah and the but there's a lot of there's a lot of competition as you can see basically every internet company. And we've listed a bunch I'm just waiting for a Pindo the one now to announce that they're going to do something just count car yeah. EV's are the new games for Chinese companies. No for sure for sure yeah and then the pretty much everyone's announced one and then separately. And then separately in autonomous driving which I think is also really interesting but all of these companies are private so so we don't know as much about them but I've talked to a bunch of people who have 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 so by do for example working with the government on autonomous driving solutions that aren't just the software but also include. And then making the infrastructure on the road right so so we'll see if that works and then there are just yeah a bunch of players are really like teams actually that came out of by do also Google. Just really really top notch AI talent and the word on the ground is that it's anyone's game like who's going to get to level five first it's not clear that it would be the US winning I think China has a really strong chance. It's like the first this is what I would say is like the first sort of deep tech right not like consumer internet lightweight app but really deep tech that we see this competition play out that will be that will have really really interesting lasting effects right the first country to get to level five is going to experience tremendous efficiencies. Yeah yeah well and you know the infrastructure point is it an interesting one too because you know I remember not that I spent a ton of time in the autonomous space but you know a few years ago people were thinking oh well if you know there's going to be new roads built or roads upgraded in the US that are going to be integrated with a V's and this is going to be great the reality is like that's not going to happen in the US anytime soon. But China could actually do this right the US is at a huge disadvantage for this both because of the sort of like. Reliance on the existing system whereas China will just make a government mandate and say nope we're building an all new system and people will snap to 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 you know please please population do something very different strategies that both have their trade offs. Yeah yeah I mean it is not that centralized in China either but I think there are yeah the local governments who I work with some of them I definitely have a lot more power a lot more budget. Then you know then here in the States I can't imagine some of the cities I've lived in in the Bay Area for example really being able to remake the entire you know traffic light system or. Like markers or whatever it is that's needed yeah probably it's just impossible to even imagine I know right it's like the pot holes aren't even filled yet and you're going to make this a smart road I don't know. Yeah. All right one one more lightning topic here before we close because I know it's not a lot of people's minds who follow China tech what is going on with antitrust in China right now and is it a good thing is a bad thing I will say it's definitely affecting asset prices and stock prices so what's. Happening there so I think the antitrust caught some people off guard but actually if you look at the history this was pretty much inevitable and it's actually been in play for quite a few years right so I talk to people who were been working on antitrust in China and 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 right because in the US it was like in the 1890s yeah yeah the first version. Sherman act I think was yeah yeah exactly exactly and so and then nothing was done for the next 12 years so specific to tech we had one case that was she who 360 and 10 cent they got into a fight where it was actually very similar to what's happening right now where they. 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 right for some like and then 10 cent actually won that case but but it actually had ramifications and that it really changed how they. But about their strategy going forward this is this is actually the time after which they stop making a lot of products internally started investing so this is when they built their empire so to speak but after that case that no cases were heard for like the next 10 years wow so literally zero antitrust cases in China for 10 years yeah yeah well in tech in tech there were plenty of antitrust cases but I mean for internet for internet so so let's make that clear then in January 2020. And then effort honestly to catch up with the rest of the world right so if you look at all 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 and then a lot of the things were very reasonable and then they issued more of course towards the end of last year specifically around platform companies but really you've seen movements towards this direction for a while now and all the things are meant to. Really protect consumers as well as vendors who deal with these platform companies because let's face it some of them like Ali Baba who recently received the massive 2.8 billion dollar fine we're really abusing their positions yeah they were telling people that you could only do promotions or sell products on my platform and not JD right so this is like this is very egregious if you think about it yeah and then the laws are not going to be a lot of things. The laws also protect consumers against various other things which is like discriminatory pricing so a lot of the platforms were discovered by the public to be discriminating against users and in fact they were doing it against their most loyal customers right because right they're going to be happy to pay more yeah exactly they're like we know you're really sticky and you're very loyal so we're going to actually charge you more for the same thing and for a new user so this is this is obviously really not cool. So so really I think the proper takeaway is that China is really trying to catch it for 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 is very adamant about this it's not going to go back to the days of the while all west which I agree with and 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 did this happen earlier right and why is that because again some of the practices that were that the big tech companies were doing that were really really unfair to both consumers and vendors and there was just no recourse because the antitrust authorities weren't really even hearing any cases right so all of the judgements also were I shouldn't say the antitrust they were here in cases but I would say the judgements were very small so prior to the draft laws changing this I think the upper cap for violations was like a million R&B right or 500,000 R&B might have been even lower which is like $70,000 it's like it's like a small tax you're going to pay yeah imagine imagine your you know $200 billion company this means nothing so if you're a startup investor startup founder and play this is great news for you because you know this is going to force you know trying to big tech to play fair exactly so and that's exactly what's happened if you talk to VCs on the ground if you talk to entrepreneurs on the ground one VC actually says something this is more specific to Fintech he was like oh yeah I was previously not interested in consumer Fintech at all but now that all these rules came out I think I'll start looking at it right so fascinating all right well as we close here let's look with an eye toward the future what should people sort of think about as what's next for China tech through 2021 2022. So 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 and you have like people who used to start internet companies going and making electric cars and raising a bunch of money for that so that's happening domestically but I think in my purview there's a lot of increased internationalization that we kind of thought stopped last year because of COVID but I actually see signs of it starting up again and accelerating and this whole trend of Chinese companies not just coming to the US in Europe but also going to Southeast Asia to Brazil to other emerging markets India that's again been ongoing and I feel like having honed their shops at home that's only going to accelerate and there's certain sectors like e-commerce that are very well positioned for that and there's companies that have already started to take advantage of those trends and I think capital kind of an a cycle recognizes that as well. So definitely internationalization I think from a talent point of view to founders who have found either success at home or success in a different sector or have had global education and I know you guys have seen this too with probably all the founders that you're meeting with they take that knowledge and return home and you know it's like more comfortable to have a great lifestyle and to be well funded and well supported in the China market and from there kind of take on the rest of the world because you know how to hire teams in other places. So I think that that's going to continue. There's definitely continued innovation. I think where you wrote McKenzie's head of China said no China, no country were the main thing. Yeah so and I think the this is more of a meta point because I think we covered the sectors that we think are really interesting to look at for this year. The meta point is that I think for Chinese companies don't expect them to impose any boundaries on themselves right so for example we see that by dance is now going into local services and trying to move made ones cheese right we see of course like Xiaomi going to EVs but all these companies are going wherever the opportunities next because the amount of change that's really happened in the last 30 years in China GDP went up 30 times in China in the last 30 years. Right that's the highest like far far higher than any other country which makes both the customers in China hyper adaptive but also makes the entrepreneurs their hyper adaptive as well no one really takes anything for granted they're looking for the next thing all the time right well like the story of mate one is that you started as a group on clone. And today it's you know the largest travel player and a huge community group buying platform and you know also it's a stuff yeah exactly mate one is made one is a perfect example like you know basically what woncing like I think you really embodies this but so does you mean a bite dance etc right there they've just made a $4 billion acquisition of a gaming studio and then three weeks later they made another acquisition which I think it's also billions of dollars it was undisclosed but it's just looking at the company it's definitely it's definitely up there yeah I mean if I had to describe this trend I think it would be US companies think that their core competency is something like e-commerce or ride sharing or social networking and Chinese entrepreneurs think we have lots of competencies we have a lot of capital we have a lot of users yes let's do whatever let's do lots of things with that exactly we'll do whatever makes money our core competency is making money yeah either making money or for losing money then raising money so something like that yeah so I I definitely there's this basically I think existential anxiety that people have because they've seen so much change over the last you know during their lifetimes but they can't take anything for granted right so people don't hold on to their laurels for too long and they're always investing yeah like did you guys know for example by dance has invested big into fintech and even into hospital right so no whoa yeah and then of course there are rumors they're making their own EV as well like who knows right everyone everyone you get an EV you get an EV everyone and it's still a private company yeah yeah well that's a great place to leave it Ray and Ying this was super fun thank you for doing this with us yeah thank you for having us all right well that wraps up our crossover episode with tech buzz China if you liked what you heard and you want to listen to more there are loads of great episodes from Ray and Ying just search tech buzz China in any podcast player and you'll 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 and tech and business you should join the acquired slack at acquired dot FM slash slack if you love acquired and you want to be a deeper part of what David and I do here you should become anلمter mainland established alternate expert games. We and within resource persons friendliness within the community we'll get on in history the 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. I've been and I both have a pre-ordered the Brad's first book on Amazon was just like a classic. That's the everything store was the first one. Everything store. Yep. I learned so much from that book and Brad is just such a sensational reporter and so much has happened since since he laughed last left Jeff. This is going to be awesome. So Brad is going to join us for live discussion with our LPs and we can't wait to see everybody there. Yeah and 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's what we'll be doing the discussion and 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 from the history of Uber and Airbnb. So join us become an LP tune in live and join us on the zoom and ask Brad some questions to on May 21st. Well with that David I think that's all we've got so folks we will see you next time. We'll see you next time.