10 Years of China

I just came back from a 3-week trip to China. Besides gaining 10 pounds from all the various business meals, I believe there are interesting phenomena that our US peers might want to pay attention to.

As the world’s second largest economy, China is going through some subtle changes that are going to impact the world in the next 10 years.

Fundamental Societal Changes

Over the past 10 years, leveraging export-driven manufacturing and abundant labor, China managed to maintain its high growth — which fostered a new generation of affluent class & middle class.

However, those two advantages are disappearing gradually. Based on numerous conversations that I had with executives and investors over there, the concerns over RMB depreciation & economy slow-down are real. The affluent class is getting anxious about its asset value, while the working class is fighting to keep jobs from robots and cheaper labor overseas…

China is eager to find its next growth engine for the next 10 years. The pressure and hype to do so has never been stronger. And that reflects in three folds —

1. Chinese capital seeks ways to invest in overseas asset. We are just at the beginning of this mega-trend.
2. Both public and private sectors are eager to import technology, hoping it would help upgrade their products in the value creation chain.
3. With the capital outflow and new technology inflow, China is hoping to create a new economy that’s mainly driven by the new middle class.

Historically, every 5 to 10 years, legendary entrepreneurs and investors are drawn to various missions by drastic tech advancements and radical societal changes. As a semi-outsider, I sense the present anxiety and upcoming opportunities — while China’s last 10 years was about getting foreign capital to invest in China, the switch is now turned the other way and might remain so for the next 10 years.

With that, let’s talk more.

New Generation, New Needs

China has the “millennial generation” too, except they are called BaLingHou and JiuLingHou — meaning the “post 80's” and the “post 90's”. Like their US peers, they grew up during digital age with internet, mobile and social media. However, they live in a much different universe than their US peers.

Beijing, Shanghai and Shenzhen are China’s top tier metropolitan cities, with dense populations of 20 million, 23 million and 10 million respectively. (To put things in perspective, NYC has 8 million people.) China’s population density creates a new, and one of the largest, consumer demographics.

So who are they and what do they do?

They…

1. are 9/9/6 people.

That means work from 9am to 9pm, 6 days a week — no (open) complaints… It might not be the most efficient way to work but that’s just how it is. While I was there, having meetings on Saturdays or at 11pm was not uncommon. Meanwhile, people spend a lot of time commuting, in cars, but mostly by public transportation.

The pace is faster and there seems to be a very blurred line between work and personal life. Part of this reflects on the tool people use for business communication — it’s not email, nor slack…. It’s WeChat — intros are made and meetings are scheduled, all through this incredible mobile messaging app.

Such fast pace and the ubiquitous smartphones & 4G network empower this consumer demographic to …

2. Fully live on Mobile.

It’s probably no secret how ubiquitous WeChat is in China — covering mobile messaging, news, payment, and beyond. The wonder of WeChat cannot be fully appreciated unless you are in China — a now leapfrogged, mobile first, cashless society. Mobile payment in China is everywhere: from hailing a taxi to paying for food at street carts. More importantly, it’s not just a tool only the tech elite know how to master. Even my grandma and mom know how to use Wepay / Alipay, thanks to many coupons, incentives and of course many many Chinese Red Pockets.

The implications of which provide the foundation for other so called Online-to-Offline (O2O) or on-demand companies to thrive. From food delivery, to messaging, to home improvement — thanks to the density of Chinese cities and the relatively lower cost of labor — most of the services are only a mobile tap away. Fast and low-cost. (1)*

Compared to US’s 250 million smartphone users, China has about 1 billion people who live on smartphones. These mini-computers are heavily used for entertainment as well, especially during long commutes. People download episodes of videos and consume them during the subway rides. The same goes with mobile games. A vast mobile user base, combined with tons of commute time, helped China bypass US to be the number 1 gaming market in the world.

As the new generation craves for more contents and entertainment, you might be able to expect the same graphic curve for movies, and even VR/AR to come…

China’s Way — Past and Future

With such a robust internet and mobile market, Chinese consumers proliferated a wide nest of foundation for consumer tech companies — many of which generated tremendous amount of value for the society.

The first stage of China’s tech revolution was dubbed “Copy to China” by the western media. Jack Ma of Alibaba (Market Cap $190B), Robin Li of Baidu ($56B) and Pony Ma of Tencent ($200B), were all pioneers during the wonderful late 90s /early 2000— a time when the internet just started to boom yet it took courage to start something that nobody had tried before, especially in China at the time. Riding the waves of China joining “World Trade Organizations,” many entrepreneurs like Jack, like Robin, like Pony, took something that had worked in the West and created the China version, through rigorous iteration. People in China humbly call it the “micro-innovation” — but behind the scene, the sophistication of building a product that hundreds of millions of people love, is anything but micro.

For the past 10 years, China’s BAT (Baidu, Alibaba, Tencent) have remained the dominant golden triangle. They inspired many 2nd generation consumer-driven companies to follow, such as JD.com ($31B), Qihu 360 ($10B), VIPSHOP ($6.5B) and MoMo ($2B). Interestingly and yet non-surprisingly, these first stage of Chinese tech companies all share similar traits and behaviors —

• Serving consumers rather than enterprise users
• Sensitive to users’ needs and willing to create “new business models”
• Used to 10x harsher and more competitive environment due to population density
• Founders are very good at raising capital
• Biased towards speed — aim to deploy capital fast and kill competitors by scale (2)*

These companies have all done very well, as China’s economy skyrocketed in the past 20 years. However, as the economy slows down, it calls for more than “business model innovations” for these tech companies to continue to thrive. China needs real tech — a real advantage to create long-term growth and demand.

China’s Seek and its Next Export

Going beyond the past / current platforms of PC, internet and mobile, US venture capitalists and tech entrepreneurs are all looking at VR/AR, AI, Intelligent Devices/IoT and Drones/Robotics for our next frontier.

So are our Chinese peers. And rightfully so. Should any of those frontier tech become a major platform after mobile, it will spur the next generation of BAT, which will create the next growth engine for the next 10–15 years to come.

However, China’s challenge to move forward is not about capital or wealth, it’s about technical talent. The reasons for lacking such talents can be attributed to China’s education system, societal environment and political climate, which go deeper than a blog post can address. But simply put, the drought for talent in China is much more severe than in the US — and will remain so for many years to come.

Unless, of course, talent can be acquired and technology can be imported.

With a shortage of talent and Chinese investors’ anxiety over RMB depression, China’s main export over the next 10 years will be capital seeking overseas technology-based assets. (3)*

While the search for hard-core tech is taking place, the 2nd stage of Chinese companies are all eyeing western markets for exploration. Companies like DJI, Xiaomi and Ehang represent China’s accumulated advantages in hardware; Chinese mobile companies like Musical.ly and Cheetah Mobile are pioneers in applying China’s domain in consumer mobile to the western world. I expect we will see more of these over the next 10 years too.

Parting Thoughts

Globalization has shaped the world as we know it. The blurred lines between countries have provided unprecedented opportunities for entrepreneurs who have a global mind and truly dare to “change the world” for the better.

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(1)* although like their US counterparts, Chinese O2O companies are now focusing on the profitability part of the equation

(2)* by these standards, Uber might be the most Chinese western company that I have seen!

(3)* there are real challenges associated with this — particularly China’s global image and deal makers’ reputation.

 ** The post was originally published at my Medium.