Ep. 51: Overview of China tech: Rui Ma on SupChina Access

Episode 51 of TechBuzz China is our second consecutive show that is in a unique format. It features a replay of TechBuzz co-host Rui Ma’s recorded call on SupChina Access, which was originally aired live on July 23. The conversation is moderated by Jeremy Goldkorn, editor-in-chief of SupChina. As longtime listeners know, we are proudly one of the most long-standing podcasts within SupChina’s Sinica Podcast Network. In this episode, Jeremy prompts Rui to speak on some of the hottest topics, trends, and companies covered in past TechBuzz episodes: Luckin Coffee, e-cigarettes, Baidu, Bytedance, EV carmakers, real estate platforms, and 996 work culture. Overall, it serves as a great intro to the past TechBuzz episodes, if you haven’t already listened to them! 

In addition, listen in to hear Rui share her expertise on: What is the current macro environment for venture capital and startups in China — is the “tech winter” really coming? What is the status of the STAR market that just launched, and how will it affect the growth of the innovation economy? Does Rui believe that U.S. startups can realistically enter China? What is the most interesting Chinese tech company that Rui knows of, and that listeners on the call may not yet have heard of? What are her thoughts on the business models or revenue models that are unique to China? Is reporting in China “real” — in other words, could a story like Theranos also happen there? 

SupChina is an independent digital media company dedicated to informing, entertaining, and educating a global audience about business, technology, politics, and culture in China, and SupChina Access is its paid membership that provides even more content, including conference calls such as what you hear on this session with Rui. So, if you enjoy this episode, you should head to SupChina for details on membership. As always, thank you to the entire SupChina team for your constant support. 

You can find these stories and more at pandaily.com. If you enjoy our content, please do let us know by leaving us an iTunes review, liking our Facebook page, and tweeting at us at@techbuzzchina! We do truly appreciate your feedback. Thank you also to our listeners over at our partner, dealstreetasia.com

We are grateful for our supportive and talented producers, Shaw Wan and Kaiser Kuo, and for our intern, Wang Menglu. 

Listeners who are interested in visiting China but don’t know where to begin should check out Pandaily’s one-week immersion into China’s tech scene, taking place October 13–19, 2019: decode.pandaily.com. This trip is not to be confused with TechBuzz China’s inaugural invite-only China Investor Trip for public market investors, which will be held October 7–13. Watch out for TechBuzz meetups held in both Beijing and Shanghai!


(Y: Ying-Ying Lu; R: Rui Ma)

[00:00] Y: Hey everyone. Happy August. It’s not exactly slow news month in China. We have a few interesting stories queued up. But it’s vacation time in San Francisco, so the both of us are doing some travelling. That’s why we thought it would be a great time to introduce a recorded call that we or rather my co-host Rui Ma had earlier with Jeremy Goldkorn at SupChina as part of the SupChina Access call series.

R: Yeah, I took that one on behalf of TechBuzz. Basically for those of you unfamiliar with SupChina. It’s an independent digital media company dedicated to “informing, entertaining and educating a global audience about business, technology, politics and culture in China”. So if those are the things you’re interested in, you should subscribe to their weekly free newsletter by going to SupChina.com.

Y: Well you can get a ton of value as a subscriber to SupChina’s free newsletter. There’s also a paid membership that gives you access to even more content. And that’s called SupChina Access.

[1:08] R: That’s right, SupChina Access gives you daily members-only news letters, 24/7 access to an instant messaging channel. So you can meet other Access members and chat with SupChina’s editors and experts like ourselves. And you get discounts also to SupChina’s products and events.

Y: One of those new benefits is regularly scheduled conference calls with experts where you can dial in and ask your most burning questions. And we’re very lucky to have been one of the first groups featured.

R: The show that follows was recorded live on July 23. And we talked about all the hottest trends in China attack and answered some listener questions. Long time TechBuzz listeners will be familiar with many of the things I mentioned. But if you’re just tuning in, consider it to be a great intro to past TechBuzz episodes that you might wanna listen to first.

Y: If you dig this format, consider signing up for a membership, go to supchina.com for more details. And here’s the show.

[2:36] Y: Hi everyone! We are TechBuzz China by Pandaily, powered by the Sinica Podcast Network!

R: We are a biweekly podcast focused on giving you a peek into what’s buzzing within the tech community in China.   

Y: We uncover and contextualize unique insights, perspectives and takeaways on headline tech news that don’t always make it into English language coverage. So you can be smarter about the world of China tech. TechBuzz China is a part of Pandaily.com, an English language site that tells you “everything about China’s innovation.” I’m one of your two co-hosts, Ying-Ying Lu.

R: And I’m your other co-host, Rui Ma.We’d like to acknowledge our partners DealStreetAsia and SupChina, creator of the Sinica Podcast Network! In addition to TechBuzz, you can also find Sinica which covers current affairs, NuVoices and Ta for Ta on women, the business-oriented ChinaEconTalk, and the Caixin-Sinica Business Brief from China’s leading business magazine. 

[3:32] Y: If you were ever interested in visiting China and simply didn’t know where to begin, Pandaily is organizing a one-week immersion into China’s tech scene from October 13-19th.More information and applications are now available at decode.pandaily.com.

R: Here TechBuzz, we’re also going to be in beijing and shanghai this October. Our inaugural invite-only TechBuzz China investor trip for public market investors is happening the week of the seventh right after golden week. So if you’re around then please tune in as we finalize where we’ll be holding meet ups. Come and have a beer on us.

Y: Finally, as always, if you enjoy listening to our podcast, please leave us a review on iTunes or whichever other platform you use. We’re so close to hitting our hundred ratings target. Please help us get to three digits. We truly appreciate it.

[4:33] J: Thank you for joining the latest in our series of SupChina direct conference calls in which we talk to a subject area expert about an aspect of the Chinese economy, about politics, about current affairs or anything else in the SupChina remit. Today’s guest is Rui Ma who is also one of our TechBuzz China podcasters. She is someone has a foot in silicon valley and a foot in Zhongguancun. Rui is deeply immersed in the tech cultures on both sides of the pacific.

And if you listen to her show TechBuzz China, you’ll know that she has an almost encyclopedia knowledge of the Chinese tech scenes.We are delighted that she could join us today. Welcome Rui, and thank you very much for making the time to join us.

R: Thank you so much. It’s a pleasure to be here.

J: So just a few words about your background. I know that you are an engineer by education or by training. But what led you to start to immerse yourself in the Chinese tech scenes and start your podcast?

[5:38] R: Yes. I studied engineering college group in silicon valley and around 2007 I just moved to China on a whim actually, well because of personal reasons. So yup, super well thought professionally. I was doing technology investment banking here in silicon valley before I went over. So just sort of continued doing that when I landed in China and then I got my certain to venture capital after doing a couple years in private equity in China. So I ended up staying in China for eight full years from 2007 to 2015. Sorry for the sirens in the background if you guys can hear. But yeah basically actually I met Bob there as well.

And one of the main reasons why I started TechBuzz along with my co- host Ying-Ying who is also someone I met while living in Beijing is that you know I have personal experience and interests in China tech and also we were just starting to see really good content in Chinese on Chinese tech because you know the tech sector was really starting to blossom really mature. And there were a lot of just great content being put out a lot of innovative business models as well as companies being formed and a lot of analysis and that wasn’t always the case by the way.

I think that’s really started in the last five years and we weren’t seeing that captured in English. Whereas vice versa, actually in China you see a lot of the really great English content be translated almost next day into Chinese, but we felt that an English speaking audience could really benefit for some of the insights and just things that were happening over there. So decided to do TechBuzz.

[7:17] J: So let’s get straight into the meat of the thing. I’d like to talk about the macro environment for venture capital and for startups in China. Recently there have been a course of headlines about tech winter is coming.

They have in fact been highly visible layoffs at some of the best known startups including hyper growth early stage bike-share companies for example but also some more established players like JD.com. Recent reports also indicate that venture funding in China has plummeted.But how bad is it in the trenches? Has the sense of optimism really gone from China’s tech entrepreneurs? And what do you think the causes are? You know, is it the techno trade war? Is it a general slowdown in the economy? Or is it just that some of these startups have been spending sick amounts of money on customer acquisition? You know I’m thinking of Luckin and DiDi, and the money is just kind of coming to an end. 

[8:19] R: Yeah. Well exactly some of the reasons is definitely because of the unprofitable business models. Right? So and to this day, for example, the bike-sharing companies still haven’t figured out a way to make money. And also I think similarly in China as is still in the US there’s sort of a private market public market arbitrage opportunity in a sense that private valuations were actually very high.

And then when companies actually debut on the public markets, their valuations often times actually be you know where was lower or even halved and you see that in China even more egregiously than in the US because about let’s say five years ago there was a huge influx of money into venture capital at the behest of the Chinese government which was really pushing investment in you know, internet innovation etc and entrepreneurship in general and a lot of those LPs, limited partners, in venture capital were not very experienced and you see large amounts of funds that were raised.

Let’s say, you know, starting five years ago that have not been able to raise a success of a round of money because they did not make very good investments. So that was sort of the bubble. And now because of the slowdown in China macro-economically as well as you know there’s definitely some part of the trade war tensions in there as well as concerns. That’s really just depleted the enthusiasm and also just the funding sources for a lot of these funds. However on the ground I was just there less than a month ago.

I would say there’s still a lot of enthusiasm for tech in general, It’s just that people are a little bit more cautious, and not everyone is able to raise money as easily as you know, a couple of years ago. So there is definitely a flight to quality. But you see that the top venture funds in China continue to be able to raise massive amounts and also the top startups continue to raise massive amounts. You know, we have like a couple of companies I think we’re gonna talk about later in this conference call there really prove that, Luckin as you mentioned. Regardless what you think of their business model—  went IPO in about two years after they were founded. So there are still all these success stories that are keeping you know the dream machine going.

[10:44] J: Speak of IPOs. Can we talk about the star market which launched just yesterday. It’s China’s attempt to establish something like NASDAQ, a market that will encourage high tech firms to list and give them relatively easy access to capital. Tell us about the background of the star market and do you think it will affect VC funding in China and the innovation economy?

R: Maybe, so I think that the star market by the way we covered it back in Ep. 40 of TechBuzz in quite great detail that’s actually are most popular episode. The market was created because China has been trying to come up with a competitor or let’s call it equivalent to the NASDAQ for quite a long time and it’s tried several different versions of stock markets, including in over the counter market as well as one that was designed for startups in Shenzhen. And none of these really worked.

So this is its newest attempt. The main innovations are “innovations”. The changes that’s made is like the NASDAQ, it’s allowing companies to list before they’re profitable. It’s allowing for dual class shares, meaning founders can maintain control of their company and have outside voting rights. And that’s something that was not allowed on any of the Chinese exchanges before. And also, it’s made it so that it’s a registration-based system instead of an application-based system. So in the past and the Chinese stock markets you have to apply, then CSRC would decide whether or not you’re fit to be listed and that process can be 1-3 years if you even you know get approved. Whereas now it’s supposed to be much more efficient, much faster, and then companies have a lot greater control when they go public. So It’s much more similar to what we have here in the US. That being said, there’s still a lot of restrictions on who can buy the securities and the government does still have a lot of say over who gets to be on the board. So 25 companies went IPO yesterday. A lot of them are like bio-tech semiconductor. You really see the government trying to push these frontier tech or deep tech companies. They’re not like very many internet companies that are being encouraged to list the board.

So from that sense, I think you might see some change in the venture capital system where VCs might be more willing to take risks in these sectors. Knowing that there is a viable exit alternative for those companies.

[13:27] J: Let’s talk about some specific companies. Firstly, Luckin Coffee. It had an enormous American IPO. Is it a real challenge to Starbucks? Is there something truly innovative about its business model? Are they worth the hype? One tech writer called them a scam, I think Ponzi Scheme was the word he used, but in your podcast you make a case for it as a pioneer of a new type of shopless retail.

R: Yeah.I would say to her early to say whether It’s going to succeed by being a shopless retail player. But I definitely have heard of the many analysts who do consider it quite scammy and the reason why they consider it scammy is because of the fact that it has negative unit economics. Right? So last year where its first full year of operations, it lost two dollars for every dollar of revenue it made. So that’s not a very attractive business model. However, kudos to the, you know, executive team in the first half of this year, it’s narrow those losses so that it’s only losing about a dollar for every dollar it’s making.

So, not great, but It’s getting better. I would say the case for Luckin being  not a direct competitor to Starbucks is that if you go to China and you look at the Luckin stores.They have like 3000 stores. But most of these storefronts are not anything like the Starbucks experience where you can sit down, you order, you know, you sit there and have a coffee and have a chat. Most of these are kiosks. Most of these are pick-up only.And Luckin is very much built around the fact that they don’t want you to stay at their stores. They want you to consume whatever it is that they’re offering at your workplace or at your home. And for Luckin the coffee market is what they started off with because I don’t know if everyone’s aware. But coffee is actually a very high gross margin business. So Starbucks, for example, makes 90% profit on its Macchiato or whatever fancy drinks it has. A little less on the, you know, average Americano. But basically the Luckin model could potentially work and is not necessarily I would argue a Ponzi Scheme because coffee has such a high margin that it could work off of.

That being said, it’s already expanded into light food, meals and most recently milk teas because It’s finding that you know not that many people drink coffee in China still without being heavily subsidized. So even though the profit margin can be really good, the way Luckin really getting customers is heavily subsidizing those drinks.

[16:15] J: Let’s talk about another addictive product — e-cigarettes. You recently did a show on the e-cigarette industry in China, which is very different from in the United States. Could you perhaps give us a big picture look at vaping in China and perhaps point out some of the more interesting players. That’s sort of one of those strange case of China not innovative or not applying its own innovation because e- cigarettes were actually invented in China by a Chinese pharmacist, if I’m not mistaken.

R: Yeah, sure. I mean one of the reasons why we did this episode was because we thought it was really interesting as being you know hugely covered in Chinese media and less so in western media about China tech. But It’s considered one of the biggest emerging trends in China tech right now.

So the interesting about e-cigarettes is that you know China has about a third of the world’s smokers. That’s 350 million people. But the Chinese population is highly addicted to cigarettes and haven’t moved on to e-cigarettes because cigarettes have a lower tax right there than in almost every other country. So it’s actually more affordable in China even though China actually as you can imagine makes over 90% of the world’s e-cigarettes because you know it’s a factory of the world however it only has less than 3% of the market share. What happened was that I think maybe viewer are listeners on the call know about the company JUUL which is the leading e-cigarette company in the US now valued at over 30 billion dollars.

Chinese investors came to the US saw how well JUUL was doing a couple years ago. And we’re like hey all these things are actually being made in China and China already has such a huge captive nicotine addicted audience. Why aren’t we doing it there? So that became they got inspiration from JUUL and they went back and they started making these better e-cigarettes. As of this quarter, all the major sort of tier one VCs you can think of have invested in an e-cigarette company. And some of the leaders come from the management team of the leading e-cigarette startups right now, come from Uber China, come from other smartphone manufacturers like Smartisan because that has a hardware component.

And we’re starting to see that some of these companies. The one that’s made by the former GM of Uber China called RELX, actually I don’t know how to say it in English, I’m not sure you’re supposed to be able to pronounce it. It’s supposedly valued at 800 million dollars already and that’s after barely a year in existence. So we’re seeing the rise of e-cigarettes in China achieving sort of the same really accelerated trajectory as we saw JUUL here in the US.

[19:08]J: Let’s talk about a very different kind of company, Baidu. Aside from a brief moment of sympathy for CEO Robin Lee, when somebody dumped bottle of water on his head at a conference the other day. There hasn’t been much good news for Baidu recently.

R: Yeah, that’s right.

J: They continue to be plagued by dodgy medical advertisement scandals, and they reported their first quarterly loss in many years of just a few weeks ago. Many people view this search industry in China as being woefully under underdeveloped compared to pretty much any other market.

Baidu really seems to have lost its shine. It’s lost its mojo. People used to talk about BAT, Baidu, Alibaba, Tencent. They were the three kings, the unstoppable threesome of Chinese tech. But nobody really talks about BAT anymore and I think it’s because Baidu has lost its way. Can you comment on that?

[20:08] R: Yes, I don’t know how Kaiser feels about this story but since he used to work at Baidu. But yeah, so I will just represent you know what I see happening among just Chinese media in general. And I think it’s reflective of what the average Chinese citizen thinks, which is that yeah when this incident happened there was just not very much sympathy for Robin. Even though everyone agree that it was a very rude and you know frankly kind of dangerous thing to do to have someone pour water over your face when you are giving a you know very big speech. But at the same time, the reason why there was not much sympathy is because Baidu has really kind of destroyed its trust with its users by doing so much paid advertising.

So as we know, search engines get you know a large portion of their revenues from advertisers, especially from paid or sponsored, advertised results. But in the case of Baidu, they’ve just really gone overboard where I think if you try to like search for something that you’re not going to be able to find a relevant result within the first page, maybe not within the first couple of pages. We actually did an example of this in our episode on China and Google because you know to cover China and Google we really had to cover Baidu in all of it.

So if you go back and listen to our episode on that, which is Ep. 18, you get a good idea of how bad some of the results are now on the search engine. Therefore one of the most viral articles actually earlier this year in China Tech in January was an article that proclaimed Baidu’s death. It was like an obituary for Baidu. It was just basically the influencer was saying that Baidu has leaned so far into the paid results that now a lot of people just don’t trust its results and in fact think its motto is do evil.

Because a lot of the issue people have with the results is not just that these results are irrelevant, but some of them are actually harmful because they’re done by scammy pharmaceutical companies selling really you know unsafe medicines or medical procedures and that’s the bulk actually or a large percentage of their advertising revenue.

[22:36] J: OK, so gloom and doom for Baidu. Let’s talk about another B company which has perhaps displaced Baidu’s crown. I’m talking, of course, about ByteDance.

It’s valued at 75 billion dollars more than Uber was when it IPOed. What is ByteDance’s revenue model? What is its business model? Is it profitable? I believe it’s hiring massively overseas and this is in fact perhaps the only Chinese tech company to have successfully penetrated the American teen market, and you know, with its streaming short video app TikTok. Tell us all about ByteDance, Rui.

R: Sure, yeah. ByteDance is currently the most valuable startup in the world. It was founded in 2012 by a guy named Zhang Yiming who owns, I think like, 90% of the shares of the company. And basically it recently crossed a billion monthly active users across all its apps. But it has really two main apps. One of which you just mentioned TikTok, which is a short video app where you basically can watch people doing 15-second videos of something funny or entertaining or whatever it is. And then it’s other app which came earlier and made the bulk of its revenues at least prior to this year is called Toutiao which is the Chinese word for headline and it’s actually a news app. The commonality across both these apps is that they are both algorithm-driven.

So based on how you interact with the feed that it gives you whether it be news in the case of Toutiao or short videos in the case of TikTok you know the software supposed to learn your preferences and show you more and more things that that you’ll find to be relevant or entertaining or whatever. And the idea obviously is to keep you on the app as long as possible because its core revenue model at least of right now is still advertising. In 2017, they had about 2 billion dollars of advertising revenues.

[24:44] That was at the time all from Toutiao. Last year, they had about 7 billion. And I think that was still mostly Toutiao but some from TikTok and also Douyin which is the Chinese name for TikTok inside of China. And they are shooting for double that this year to 15 billion as of right now in the US TikTok only has about you know 30 or 40 million users and it currently doesn’t make money off of advertising. It makes money off of a sort of micro transactions based on virtual coins.

It made 5 million or so off of these coins in February. So we can sort of ,you know, expect that sort of range, it’s not a very large amount. But in terms of overseas, aside from the US they’ve really expanded a lot into India where they now have 200 million users. So obviously India is also a very large population. In China they now have 500 million monthly active users, India 200 million. And you can see very quickly how that adds up to the billion user amount that I was talking about earlier.

I would argue though that it’s too early to say that ByteDance is going to be successful overseas because you know in India we see it coming up against regulators all the time. It’s constantly being shut off and then restarted because of ,you know, inappropriate content, not protecting minors etc. And the US I would say it’s still too early to tell for the number of users it has. You still can’t consider it like a very dominant app because It’s still you know like under 50 million users right now.

So we’ll see. But it is true that it is one of the Chinese companies that has been more successful certainly at expanding overseas than the others have in the past.

[26:42] J: Can you think of any other examples of Chinese tech companies that have achieved anything like ByteDance’s success overseas?

R: Yeah, no, not really. I mean there’s definitely you know companies that have expanded well through acquisition or investment, but to take a sort of native app and then expanded overseas is rare. Right? Although  actually TikTok was an acquisition, it was an acquisition of a company called Musically, and ByteDance bought it for 800 million dollars in 2017. But I would argue that’s different because Musically was actually a Chinese company. So for some of the other companies that you’ve seen expand successfully overseas. Let’s say Tencent like buying you know Riot Games which makes League of Legends that’s really like a cross border transaction. So if you were asking like domestic acquisitions that have resulted in huge overseas numbers of users. No. I would say probably ByteDance is the main one that comes to mind.

J: Let’s switch industries and talk about electric vehicles. There are dozens of EV car makers in China. They sold three times the number of electric vehicles as were sold in the United States last year. There were many reports of quality issues and customer dissatisfaction there. Yet the EV market in China is apparently growing much faster than in the US or Europe. Is that really the case? And are people genuinely happy with the vehicles and buying them on merit or because they feel strongly about the environment? Or is the system of subsidies and other incentives driving all of this?

[28:30] R: Yeah. So you are saying that China’s market is growing faster than the US and Europe, right? And like you said it’s about three times as big as the US right now. But I would say the the market is sort of bifurcated. So you on one end you have the really low end about 10,000 dollars per car are fully you know electric automobiles and then at the other end you have like the automobile that look and feel more like what you know a Tesla is. And on the low end, those have some huge quality issues. A lot of them are from no name brands and you know like if you go online and search for posts about some of these cars, the specs are just atrocious like one of them that’s about 10,000 dollars has 24 horse power.

I’m not a motor head but that sounds awfully low to me. There are others that don’t come with any airbags etc. So you know you might wonder like why would any Chinese person like buy this kind of crappy car that is clearly like unsafe. Well in the past and this is quickly changing. But in the past when China is trying to push electric vehicles, they made it so that you can skip the queue and get a license plate in some of the most impacted cities. Because in China, actually even if you have a car, you might have to wait in line to get a license plate because the roads are so crowded.

So therefore, if you bought an electric car, you can get the license plate immediately. So if you know needed to commute and to drive, then you might be hugely incentive to buy electric vehicle. And another thing was like as you said the subsidies. But those subsidies have for the most part been halved earlier this year in the spring. So there are now 50% less than what they were. And they were quite substantial. There were thousands of dollars just like here in the US so we’ll see if that continues to, you know, spur people to buy electric vehicles, or they start to be a little bit more, hesitant to do so.

Just so you know, like Tesla, which is a very high end car, right? Much more expensive than most of the brands that we see in China. Tesla was still a top 10 seller of fully electric cars in China. So as you can see the market is highly fragmented even though there’s like so many cars being sold, Tesla with just 17,000 cars was able to be in the top 10.

[31:09] J: I’m gonna ask one more question and then take questions from our listeners. Please just unmute yourself if you want to ask a question and I’ll call on you. My last question for you, Rui, is about VipKid, a very interesting company. Could you explain its business model?

R: Sure. So VipKid is a cross-border education business and they primarily focus on kids younger than, I think like, nine because in China what VipKid does is it creates the supplemental learning experience for your kid to learn English. And the cross-border aspect of is that instead of you know learning it from like a DVD or something, you are connected to a live native English teacher here in the US or Canada and you get a lesson one-on-one with that teacher.

The way VipKid makes money is they sell these packages of lessons and then they put you in touch with the teachers and they take a rate off of the per hour lesson. For the regulatory aspect, I would say that right now the way its position itself, it doesn’t seem too likely because It’s not part of the actual core curriculum. So it’s not positioning itself as something that’s part of the regular school experience. It’s positioning itself as purely supplemental, much like the tutoring centers that you have in China and also popular elsewhere in Asia where lots of parents send their kids to learn extra skills.

So I don’t currently think It’s that big of a issue. That being said there is so much scrutiny and so much pressure on like you said foreigners interacting with you know Chinese kids that this could be an issue. The way that you know Ministry of Education works in China is that it has total and absolute control over the compulsory education of Chinese kids. Therefore in order for example to to run a school in China It’s much much more difficult than to do so here to get government approval etc.

So the government has a lot more control. That being said, I don’t know, I don’t see the risk. The business still continues to grow, although it’s not profitable for the foreseeable future until China abolishes a compulsory English education because in China every kid has to start learning English in grade three. I see VipKid as an attractive alternative to urban and affluent parents who want their kids to have the proper accent and, you know, sort of proper feel for, you know, American culture.

[34:00] J: I have another question here from Jessica regarding cross-border startups. Can American startups realistically hope to operate in China, given the current environment, or are they going to be blocked in some way, fairly or unfairly, legally or illegally?

R: I think that’s a big question. I have some, I guess I have some anecdotal data from earlier this year, but not quite this month. So as we know these things seem to be changing like week by week.

You know like based on my interactions with founders in the earlier part of this year, is that American companies, you know, aren’t necessarily prohibited from entering China. That being said, you probably don’t have much of a competitive advantage of you are a consumer company unless you have some very superior brand for example or just superior experience like you have to be you know really really ahead of the curve in at least one aspect. Most of the successful cases that I’m hearing, again this is very anecdotal and not necessarily representative of everyone else in silicon valley.

A few friends I know are doing fine with their products in China, but they service like a very specific technical problem. So most of these are enterprise software companies with a significant technology that is just not available in China. And they are just so far ahead of their Chinese competitors that the the Chinese internet companies who they’re mostly servicing  other tech companies may be some financial institutions that have no choice but to buy their product. And their businesses are growing quite quickly as far as I can tell. So if your deep tech or if you’re an enterprise so far, I can tell there is nothing preventing you from going and selling to China. And Chinese companies are still making those orders and signing those contracts.

[36:00] J: What about the reverse? What’s your sense of how much more difficult it’s become for Chinese companies to enter the American market or smaller companies from anywhere to set up shop in the US?

R: My sense for that is that very few people are doing so at all stages. So unless they have a very specific reason like they have a product that they’re selling to US consumers and that was always their business plan. But if they’re business plan was more agnostic and you know they were starting off with China and they’re trying to expand elsewhere where I see most people going out to South Asia, India or Southeast Asia. And you see that in the strategies actually of even ByteDance apparently they’re spending way more money in India than they are for example in the US or that’s what I’ve heard it’s the plan.

So basically the internet companies in China that are going abroad are not coming here unless there’s a very specific reason to. I guess I’m more familiar on the investment side. You definitely see that Chinese investment funds have either shut down or put on indefinite pause or  spinning off their US operations. So very much It’s probably more Chinese staying away from America than the other way around.

[37:20] J: I have a question here from Jessie. What is the most interesting Chinese tech company that you know of that perhaps we will not have heard of.

R: Yeah, there’s like a lot I would just, I guess I would just talk about a few big companies that we’ve covered already on the podcast that could be, you know, if you want to know more based on what I’m saying in this one liner now that you can go and look at. So for example, I think Xiaohongshu is really interesting. It’s an e-commerce platform that’s driven by content, but they also sell their own products. And that’s proved to be very very popular with influence or celebrities as well as just all sorts of like lifestyle brands.

They’re doing something that’s very different from what we see here in the US where people are either an advertising model or e-commerce. And they’re really like rolling up into both. They are like, they call themselves like Instagram and Pinterest with a bit of Taobao. Actually I don’t think they call themselves that. I call them that. So that’s interesting. They might go IPO in the near future as well. They’re quite big already with a billion in revenue last year.

There is another company called Pinduoduo which I think maybe many people on this call have heard of. But in case you haven’t, it’s a 20+ billion dollar company that went public last year. That’s doing social commerce and that’s definitely a business model you don’t really see here in the US. It’s really gamified shopping experience and in the beginning at least. No less so it’s key gimmick was to get you to invite your friends to take advantage of a deal that you know you can only get if you have multiple people like buying it. Sort of like what GROUPON was like in the beginning. That company went public in less than three years and has just tremendous growth.

By the way, some people think that company is also Ponzi Scheme because they also lose a lot of money. But I think that it’s definitely something interesting you can look at if you’re not familiar with its business model and we did a really deep deep dive on that in one of our episodes, Ep. 17 actually.

[39:40]J: I have a penultimate question from Francis. After that there will be time for one more question. The question from Francis is there have been a number of scandals of American tech companies where a lot of the friends about the company’s has been driven by bad tech reporting, perhaps the most famous is the blood analysis company Theranos, which turned out to be a complete scam. There was the Juicero incident a few years ago where this company raised a lot of money to make a five-hundred-dollar juicing machine that didn’t really make juice. Have you seen similar things going on in China where there are monster fund raising rounds based on essentially vapor in the media?

R: Yes, of course I’m sure there aren’t I can’t think of exactly one that’s exactly like Theranos, but I can give you some ideas of some of the other issues that happened in China tech.

So for one of the things that’s quite prevalent in China tech that is less so in the US is sort of the reporting of like the actual funds raised and this was way more prevalence a couple of years ago and is less so now. But for example people were grossly exaggerate how much money they raised and the reason they did that was basically to scare off the competition to make themselves look better in the press so they can attract more talent to secure better you know deals with their suppliers or variety of reasons. Just to make themselves look like a bigger enterprise and stronger financially than they were. You know sometimes people apply a multiple of ten you know to the funds they raise which is if you think about it really crazy or they would just you know say they raised so and so such such and such money in RMB, but then quoted as if it was a USD number which is like that’s like multiplying by a factor of seven and that happened quite a bit. So that’s definitely I consider that an instance of fraud.

[41:42] In other ways, there is definitely corruption and fraud going on. We covered one of the more egregious incidents in Ep. 27 which was on a company called Mafengwo, a travel company, online travel company. You can think of it as China’s trip advisor. An independent analysis showed that 85% of the reviews on this website was fake. If you think about it, that’s pretty crazy, right? Imagine if you went to trip advisor and you know the vast majority of the reviews you’re reading are not real.

So in this case, some of them were real but they were plagiarized from other websites and some of them were paid. But in either case, these were not legitimate, you know, reviews by real users put on this website and this website is now a unicorn and has been consistently able to raise money. So in some ways when this news came out there was a lot of discussion about whether or not this was ethical and whether or not should continue getting funded. And I think the unfortunate conclusion is that a lot of people felt like, hey, what’s the big deal?

You should know that a lot of their reviews are fake as a user and you should also know that as an investor. So sort of discount that number and then apply the right valuation. I don’t agree with that way of thinking about things, but that’s an example of fraud and just lack of integrity also in China internet.

And then of course there’s also corruption which we’ve covered in another episode. I think if you look at DJI, they’re one of the sort of more smart companies about how to protect themselves against corruption. And yet still they found earlier this year that they were being overcharged by suppliers because their internal employees were basically miss quoting or engaging in you know corrupt practices and that they basically ended up finding out that they were losing over a hundred million dollars.So you definitely see things like that. Nothing like you know not on the case of third knows where the technology didn’t work at all. Right? Like obviously all these companies they have something that did work. But various a degrees of a fraud or issues within the company and maybe it’s not the user that’s getting hurt, it’s a company that’s getting hurt. But definitely lots of issues.

[44:14] J: We have one last question. It’s about scooters. Are there on demand scooter services in China like a Lime and Circ?

R:Yeah, right now, I don’t think so. That’s just because, you know, maybe they’re coming in the near future, but I think right now, that’s not happening because or at least not at scale that I can see. Because in China the transportation system is just quite different, right?

So first of all, you still have the bike-sharing around.Those are like 1 RMB a ride, so 15 cents per ride and there is gonna be a tier of people for whom that is economically feasible and attractive. And then you have a lot of other options, a lot of really good public transportation. And then you have the fact that people who probably need some kind of micro mobility in China may already own it. Right? So there is a large group of people who already own sort of the sit-down scooters not the standing ones that you’re talking about like the Lime’s and the Bird’s, but the sort of sit-down scooter. They already owned that or they have like a small motorcycle or whatever.

So there’s already a lot of transportation alternatives more so than in the US where you kind of either have the bike or the car and most people only have the car and not a great public transportation infrastructure. So in China I would say the problem set is different. So unless the cost is very very low or it’s just you know very easily accessible like the bikes used to be. But I don’t see it being having huge legs in China just because there are so many other alternatives.

[46:00] J:Uh these are, I guess the electric scooters we are talking about, not the on-demand bicycles.

R: Yeah. So we did a whole like really deep dive into the entire bike- sharing industry. So first of all if you do go to China right now you’ll find that there are still some bikes around. It’s far less than it was a year ago. And the number of bikes on the street as well as the number of riders of these shared bikes on the street. And you’ll find that most people I would say and I’m saying analysts and investors have now agreed that bike-sharing it’s not a good standard alone business.

The only way it’s probably going to survive is being part of another business. So as you know, like Hello Bike is only, I think, bike company that’s still doing okay right now. But it’s like it has a huge tie with the Alibaba group Ant Financial Mobile which was bought by Meituan is still operating but it’s kinda slowly dying but you can see that like mobile could still survive. Whereas Ofo which was the stand alone bike business just really had no chance because of the really really expensive upkeep costs of these bikes.

So unless you’re able to monetize of these bikes and the data they are getting from the riders in some other way, you’re not gonna be able to make the stand alone bike business, just doesn’t make sense. And I think most of the giants have decided that the data is still really interesting. I still wanna know who is riding these bikes when and where are they going? The key now though is how to utilize and how to best put that into an ecosystem. Is it to direct you to offline stores? Is it to get you some other promotion and get you to other places? You know, lead you to restaurants? What is it? I don’t think people know yet.

[48:04] J: I’m gonna have to detain you for another few moments for two last audience questions that just came in. I’ll tell you both of the questions right away. This next question is about a subject dear to my heart comes from Santana in Nairobi who asks, is there any excitement amongst China VCs about investing in Africa based startups?

And the second question is a follow up to our earlier conversation about Baidu, which is are there any such alternatives to Baidu in China? Any other ways to do internet search in China? Those are the last two questions and that will round up this SupChina direct conference call. Thank you so much, Rui.

[48:49] R: Sure. So in Africa I have heard more and more noise around investing in Africa, but on the tech side I think that’s still a little bit far away. So most of the investments you hear about from China being directed to Africa is in infrastructure and it’s not yet on internet although I think again with Chinese people there they’re very good at discovering opportunities. So they’re very quick into Southeast Asia and India and I think obviously Africa’s like a really great next choice. I just don’t see it at scale yet. Not like what we see in the other two regions I mentioned.

[49:28] R: And then the second question was about Baidu,right. So there are other alternatives. Alibaba has been trying to develop a competing search engine for a very long time. There are independent ones like Sogou, you know, etc. However none of them have been able to wrestle significant market share from Baidu. And that’s just because Baidu has such a long-standing brand name. But like I said, if the trust is deteriorating very quickly, it is possible that other players can come in and offer a good alternative. Just right now, frankly speaking, I’ve tried some of the other alternatives. I think they might be a little bit better. Like, if you try the 360 search, it’s slightly better, but also all of them have as many of the same issues, mainly the paid results, same as Baidu.

So in that sense, I don’t think Baidu is in danger of losing the competition any time soon, because they’re all sort of equally crappy. I think the main issue is that a lot of the search engines are very expensive to build. So either someone has to come up with a significantly better technology and be able to get it to scale much more cheaply than in the past, or if they’re gonna use the same technology and infrastructure is just gonna be a long time and a lot of investments, before something can be, you know, truly competitive.

[51:09] R: All right, that’s all for this week, folks. Thanks for listening. We really enjoyed putting this together, and we are always open to any comments or suggestions. You can find us on twitter at thepandaily, at techbuzzChina, and my Twitter is spelled RUIMA.

Y: And my Twitter account is spelled GINYGINY. TechBuzz China by Pandaily is powered by the Sinica Podcast Network. Pandaily.com is an English language site that tells you “everything about China’s innovation.” Our producers are Shaw Wan and Kaiser Kuo. Our intern is Wang Menglu. Thank you for listening!