Ep. 84: 2021 China Internet Report with SCMP CEO Gary Liu

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Rui: [00:00:00] Everyone. It’s been such a long time. Since we last updated the podcast, we know, we know. Don’t be upset with us. We got all your emails. We’re still here. If you follow me on Twitter, you definitely know I’m still around because I’m super active there. But if you don’t, here are a few things that we’ve been working on.

[00:00:20] First, did you know that we have a livecast series of interviews with entrepreneurs and investors in China tech? Yeah, it’s called TBC Livecast, that’s Tech Buzz China Livecast. Search for it. We’re actually already a dozen episodes in. It’s a really different format from this show and it’s mostly recorded live in front of our new paid community Tech Buzz China Insider. That’s right. If you are really into China tech, we’ve been hanging out on a discord server and in a forum where myself and the rest of the community discuss everything we know about China tech. We also have regular members only events, like just the other [00:01:00] day, another member and I built up a financial model for ByteDance and we shared it with everyone.

[00:01:04] And a few weeks ago, BigOne Lab, China’s leading alternative data provider that you might have heard before on this show shared with us their latest insights on Alibaba, which was super enlightening to say the least. If that’s up your alley, take our insider quiz at www.techbuzzchina.com/insider. Or just fill out an application or find another insider member to refer you. It’s just $25 a month. But I think you’ll find a lot more value than that. 

Finally, and this is the newest, newest thing, the last thing that we’re working on. Well, I’m opening up select opportunities for investment in great private companies inspired by China tech, and it’s going to be open for accredited investors only. [00:01:51] So if that describes you and you want more details on that, email me at [email protected]. That’s our [email protected].

In short, the podcast will still go on just at a slower, hopefully not this low cadence as before, because we’re working on all these other super exciting projects. We’re getting deeper into China tech, [00:02:15] and I think that only makes our analysis better. So definitely subscribe to our livecast, join our Insider community, or sign up for our investment syndicates. Thanks for all your support. 

Rui: [00:03:38] Gary. It is so great to have you here with us today. Now a lot of our listeners know about the South China Morning Post, but I don’t think most of us know much about your personal background. So why don’t we go with convention here and you start us off with a self introduction.

Gary: Thanks for having me on the podcast, Rui. [00:03:58] It’s great to be here for me. My background is, I guess, a little bit different than what you would find in quote on quote traditional news Executive ranks. I spent my entire career going through a succession of big tech companies and also a couple of small ones. I started my tech career at Google. I worked for AOL, a division called patch, which is infamous.

[00:04:19] I also spent some time at Spotify. I was part of the original team of Spotify U.S. division. When I joined, I think we were less than 30 people. 

And the last thing I did in the U.S. before I moved to Hong Kong for this job was I was CEO of Digg that I hope many of your listeners still remember. [00:04:38] It was once a great and very important content aggregator. 

And somehow this 118 year old newspaper found me in New York and said, Hey, we have new plans for reinvention. Right. And I found myself in Hong Kong doing this for the last five years. 

Rui: Well, those are all super relevant experiences. So thank you for sharing. [00:05:02] Anyway, now you’re at the South China Morning Post, and a couple of years ago you started this ChinaInternet Report. It was actually started with a former colleague of mine named Edith Yeung. 

Gary: Yes. So Edith started it five years ago and the first year Edith did it by herself. She just felt compelled to put together a slide deck that explained the massive growth of the Chinese internet. And because it was so misunderstood and people still at that 0.5 years ago, thought that China tech was all about copying everything else that had been invented in the United States or Europe. And it was of course by then, already very different in that. 

Ever since then, for the last four years, including this one, the South China Morning Post has produced the China Internet Report. [00:05:45] And we’ve been very proud of how it’s advanced over the last several. 

Rui: Yeah. I really watched it grow over the years. Congratulations! It’s quite extensive now. And this year was the first year that I was one of the three experts you guys quoted in this report. Actually, all of us are women. And one of the other ones is my friend, Jennifer Zhu Scott.

[00:06:05] Anyway, I got to see firsthand how much work you guys put into it. So everyone, I know we’re going to go through a lot of the reports. But you should definitely download it. Anyway. It’s https://sc.mp/cir-2021. I’m going to say that again, but it’s S C dot M P slash C I R (that stands for China internet report) dash 2021. It’s free and it’s really worth a read. 

Okay. So the first thing I want to talk about is the fact that 2020 was a great year for Chinese, just like in the U.S.. Actually it was exceptional, especially compared to 2019. So what do you think happened here, Gary? 

Gary: Yeah. It’s really interesting. I think 2020 was a great year for China BC. 2019 was a big surprise for the world when viewing Chinese Internet investment, because it was a huge down year. It was really when the U.S. China trade war reached its apex where the world was between Beijing and Washington, was actually roiling global markets. So effected the domestic investment marketplace as well.

[00:07:22] And the second reason it was because 2019 was when everyone realized goodness, the Chinese domestic market is really well penetrated, and they’re just too many competitors is actually really difficult now to cut in, cuz growth had slowed down and adding new users to the Internet in a new mobile phone penetration.

[00:07:42] So people started looking outside, but then COVID happened. And COVID showed that actually the Chinese domestic market still had a huge amount of head room. And over the course of the last year, the volume of media consumption of just domestic goods consumption, right. People started realizing, okay, actually in the right condition there is still going to be a lot of opportunity within China and the money started flowing into startups again.

Another reason is because towards the end of the year in 2020, people started realizing that Chinese companies were going to be facing very real headwinds for listing for public offerings, does not just listing in Western exchanges anymore, but even in Shanghai, Shenzhen, and Hong Kong, they were going to be additional restrictions and regulations surrounding the public listings in general. 

Rui: And that sounds about right, actually, and I especially agree with you on the second point regarding domestic growth. PDD just really unlocked everyone’s imagination regarding rural China. The slogan, the Chinese ecosystem these days is that you have two strategies, right?

[00:08:51] You either Chuhai (出海) as in you go sell abroad, or you tack the Xiachen (下沉) marketas in you go sell to rural China or what you guys translate in the report as the sinking markets. Now China might be slowing down, but rural China is not, it’s actually growing quite quickly. And I think, especially with the country now going full on into common prosperity mode as a new goal, there will definitely be regulatory tailwinds encouraging that even more.

[00:09:19] Okay, enough of a detour back to the VC data in 2020. Your report actually shows that the funding was up 24% from 2019 to 2020, but the number of deals went down 11%. So that means more mega deals got done in China, deals like Xingsheng (兴盛), the community group buying startup, which raised over $3.6 billion across four rounds last year, or Yuanfudao (猿辅导), the EdTech startup that raised $3.5 billion over four rounds.

[00:09:48] What I also found really interesting in that report is that you guys laid out investments by the largest Chinese tech companies versus U.S. ones. And I certainly didn’t realize that, I mean, we all know Tencent invested in a lot of companies last year, they invested in 168, but I did not know that Google also invested in 155 companies.

[00:10:11] It’s not just Google either. The next few are pretty comparable as well. Xiaomi (小米)invested in 70 startups, but Microsoft did 50. And Alibaba invested in 44, but Amazone did 28. So they’re not that far apart. Although I’m guessing that if we dig into the Chinese deals, the Chinese Internet companies are probably leading more rounds and getting greater ownership than their Western counterparts. And they’re probably investing in later stages, but I don’t have the data for that. So maybe someone else can look into it. 

Anyway, let’s go back to the report. Gary, you guys picked five trends. Tightening regulations, bumpy roads for IPOs, overseas expansion plans, shifting demographics, and finally you have this very specific section focused on growing private domain traffic, which is most relevant to e-commerce, but actually pretty important to understand for all of consumer Internet.

[00:11:02] So let’s go through them in order, and talk about the tightening regulations. It reallydominated the conversation. I’m sure it’s driven SCMP a lot of traffic, certainly for myself in the last year. It’s given me a lot of work, a lot of it just me explaining to organizations, funds investors what exactly is going on in China as a pertinent regulator.

[00:11:24] Now I’ve actually done a lot of speaking on the subject, so I could theoretically do the next section, but I’ve actually heard you talk about this on the London tech week panel we just did together. I think you did a fantastic job there. Could I just get you to repeat that whole thing again and tell our audience here? What is going on with all the tech regulations in China? 

Gary: Sure. The regulation or the regulatory environment in China is changing and is changing extremely fast. We have broken it down into really four different key areas of tightened regulation that is really impacting the market: antitrust, FinTech, data, and then finally crypto. Let me walk through each of these one by one. 

For antitrust, [00:12:08] what we’re seeing is that the Chinese government is starting to come down on these huge tech giants that have been created over the last several decades. Now in China, in some sectors, the market concentration of these tech giants is even higher than that in the United States, which is already very high.

For instance, the top three players in China’s e-commerce sector command 84% of the marketplace. In the U.S., it’s only 51%. And food delivery, 98% of the marketplace belongs to just two players. In ride hailing, it’s also only two players that combined for 92% of the marketplace where DiDi is actually the vast majority. 

So big tech’s market power is huge in China and that market power has led over the last years to monopolistic behaviors. And most of that monopolistic behavior has happened in what we describe as heavily walled gardens. As an example, in Wechat, you can’t send Taobao links, right? So it’s very separate ecosystem. Nor can it adversely for Taobao. Taobao also limits vendors and people who are trying to sell the goods are oftentimes not allowed to sell on PDD or any of the other e-commerce competitors out there e.g. JD, and this is a scheme known as picking one from two. So the tightening of antitrust regulations is China’s attempt to try and stamp out these monopolistic behaviors. 

Now FinTech companies have just really taken over the entire environment over the course of the last several years. They use big data and algorithms to facilitate barring by consumers and small businesses. But the way that they do it is that these FinTech companies actually contribute only a tiny fraction of the borrowed. Most of the funding actually comes from banks, traditional banks. This kind of blending has facilitated FinTech companies to grow, and it has actually ballooned as a borrowing marketplace to 500 billion US dollars in just five years.

[00:14:08] And so the issue is that the government believes that these FinTech companies are fueling excessive borrowing, and overspending, while they are actually bearing very little, all liabilities. And so the FinTech regulation is trying to bring FinTech companies closer toward the same regulations as banks.

[00:14:26] Number three, on data. China previously lacked both the EU and the U.S. on data protection laws, and they are going through massive, extremely fast catch up, because there is a significant public concern on rising privacy violations, and the authorities are growing extremely uneasy about the amount of data that these tech firms actually have.

[00:14:45] So the legislation has been accelerated. In 2017, the other cybersecurity launch for the first time. And this year China passed the data security law and June, and then recently passed the personal information protection law. Now all of these are really strict. 

The personal information protection at all is closely modeled after Europe’s GDPR, which we all know very well and have all had to react to over the last several years. [00:15:08] But the Chinese version of that actually provides stronger protection for individuals and less protection for corporates, or state organs. Now, ultimately the increased regulation by the Chinese government around data is aimed at protecting Internet users. 

And then lastly for crypto. Now, Bitcoin mining. Even though China for many years now has been restricting kind of ownership and trading of crypto, Bitcoin mining has not really been touched. And mining is still absolutely huge at its peak in 2019, China’s accountable for three quarters of all mining activities in the world. And even as recently, as earlier this year, China was still responsible for 65% of all of the world’s Bitcoins mined. 

The issue for China is really twofold. [00:15:55] One is the fact that Beijing wants to get the environmental impact of all Chinese industries under control, and get carbon neutrality by 2060. The other reason is because China is very concerned about financial security and especially about what they refer to as quote on quote graphs. That’s this umbrella catchall for corruption. [00:16:17] China is scared of not being able to control capital outflows. Those are the four key areas of regulation that we’re paying attention to, and they have really impacted global ones. 

Rui: Thanks for giving that breakdown. I personally have a slightly different way of bucketing it, which I’ll just share with everyone, cuz maybe you find it more helpful, maybe less helpful, and you don’t know.

But the three buckets I use are: one, they’re regulations that are, you know, Chinese idiosyncratic. So things like decimating the after-school tutoring sector, or limiting miners, video game cleaning.Those are all things that are kind of specific to solving issues within China. So you really need to understand how China works in order to predict them. 

[00:17:00] But the other two buckets, I think are much more clear, even if you didn’t truly understand China. So the second bucket I would put in regulations where China’s effectively catching up to the world, like when they’re forcing Internet giants, like Tencent and Alibaba to open up the walled gardens, or the monopolistic practices of forcing merchants to choose one. So that goes into the second bucket. 

The third bucket is this new thing where there are regulations and emerging technologies. China istrying to actually try to get ahead of everyone else. It’s not quite setting standards because that’s very specific, but it’s kind of similar in the sense that it’s about being proactive and setting the terms of the conversation about these new technologies.

[00:17:47] But you do bring up one thing that I often forget to mention entirely, and that is the banning of cryptocurrency, which I guess is Chinese idiosyncratic, but basically started off as this partial ban, you know, you could still get around it, but more and more, it’s really starting to look like it’s for all intents and purposes, a real ban. China just seems uncomfortable with the idea of a non sovereign cryptocurrency right now, to jump on the bandwagon a little bit here, because that’s literally what everyone around me is talking about all the time. 

Let’s talk a little bit about NFTs, non fungible tokens. You guys don’t have this in your report. I’m personally very curious. What do you think about their future in China? 

Gary: Yeah, that’s a great question. [00:18:41] This is where things get complicated, right? Because extensively, crypto is blocked, banned completely, now that mining has gone. But blockchain technologies, applications of blockchain technologies are not only alive in China, but actually investment in blockchain technologies has been encouraged. 

And NFTs straddle these two worlds, right? Because NFTs are token. They are seen in China today as just an application of blockchain technology that makes the distribution, the monetization, the valuation, whatever it is, the preservation, all digital assets, more efficient.

I guess China still sees so much potential in NFT that big companies like Alibaba and Tencent are both investing in NFT trading platforms, Alibaba in June, and Tencent in just August. Tencent has also been actually experimenting with NFT music, right, so turning kind of their music assets through Tencent music into NFTs. 

Remember China is actually investing a lot, not just institutional and private investors, but the state is investing a lot in other blockchain technologies to track the supply chain, to improve transparency in regulation, and also in their own digital currency. And again, I think that people conflate multiple things. The digital yuan is not meant to replace bitcoin or any other cryptocurrency. It’s for a very specific domestic use case, but not only is the state, but provinces are increasingly investing inblockchain applications. [00:20:12] So let’s see where the lines are drawn there. They’re constantly changing. 

Rui: Yeah. I was actually researching this for Tech Buzz Insider community a few weeks back. And what I can say is that most experiments that are taking place are on corporate blockchains. Like you said, so not on the public blockchains that everyone’s heard about, like Bitcoin or Ethereum. [00:20:32] So it’s not linked to cryptocurrencies. 

In fact, the transactions are taking place in R&D, which greatly limits, uh, what should I call it, the speculation. As of a few weeks ago, at least the highest transaction was actually just 100,000 USD that I could find anyway. It’s not nothing of course, but it’s not hundreds of millions that we’ve seen for a JPEG outside of ???.

Gary: [00:20:58] Yeah. It’s not nothing. And [00:21:00] these private blockchains increasingly are going to be actually built by government. Of course, there’s already a private blockchain that People’s Bank has released for the digital yuan. One of the major private blockchains that people are experimenting on is built by the civil government in Chengdu.

Rui: I do want to insert here that even though blockchain sounds sexy and well, I mean, it is sexy and the government is putting money into it. It’s actually a super small part of the venture ecosystem in China. So of the record breaking VC and PE that went into Chinese tech this year in 2021, blockchain didn’t even account so far for half of a percent. And if you compare it to the largest category this year, which is healthcare, well, it’s about 1/50 of healthcare. 

Now let’s go into the second topic you guys covered in the report, which I think is also reallyimportant, the bumpy road ahead of Chinese tech IPOs. I get this question a lot as well as I’m sure you do. [00:22:00] What do you think is going to happen with the foreign listings? 

Gary: I think the key risk is uncertainty. There’s uncertainty on both sides. Let’s take the New York stock exchange, and the NASDAQ American exchanges. There is uncertainty on whether or not American capital still cares about Chinese companies, or will be turned off, or have been turned off because of the ongoing diplomatic war, right, [00:22:25] between the two countries. 

Now we want to believe that capitalist countries like the United States are going to be more practical than ideological about investment, but there are definitely signs of divestment, not just because the Chinese markets and Chinese tech company evaluation are fluctuating like crazy every single daycuz there all these regulations domestically, but because there is a fear that Chinese companies will not be allowed to grow outside of their own walls.

But more importantly, there is uncertainty because right now Beijing is rolling out all of these changes to what Chinese tech companies can and cannot do, ostensibly again, for the protection of Chinese internet users and for the protection of national security.

[00:23:05] So a lot of people are just holding tight. The DiDi situation was a big wake up call. Like it was a situation where DiDi did something that the central government determined to have a threatto data security and there for national security. And they got severely punished for it, by the way, they’re not done right with the punishment.

[00:23:24] So all of that uncertainty means that Chinese companies, they’re just holding tight, they’re waiting to see who can list, how they can list, where they can list, and what parts of their business can be listed. What that’s going to benefit, I think, is that exchanges in this part of the world, especially Hong Kong. Shenzhen and Shanghai are doing extremely well as exchanges. [00:23:48]They’re going to continue to grow massively, but they are the domestic market. 

It’ll be very interesting to see where the international comes from into Hong Kong to invest in Chinese companies. There’s going to be still [00:24:00] plenty coming from the United States and Europe, but I think increasingly we’re also going to see middle Eastern dollars blowing into the Hong Kong stock exchanges to get access to the Chinese domestic market.

Rui: [00:24:10] Yeah, it’s also important to mention that Chinese domestic markets are changing as well. As you mentioned, they are very different. They are not Hong Kong. And some international investors still find it challenging to invest, but the government has actually announced a new Beijing based exchange that will be up and running shortly.

[00:24:29] It’s more of an incremental improvement than a full step function improvement in my opinion. They’re basically making it so that the best companies that were part of an existing over the counter exchange can have access to better capital. So I’m with you, Gary, on Hong Kong being an increasingly important alternative, but it’s interesting I thought that when we were on that LondonTech Week panel together and the former head of the Hong Kong Stock Exchange was there, he didn’t think so. 

He thought things would revert back [00:25:00] to how they were like before. I think it’s possiblethat you know, we’re all talking about different timelines, but certainly right now in 2021, and probably for most of the next year, it’s looking like Hong Kong is getting a bunch of the folks who have to pull their US IPOs.

[00:25:16] We see Ximalaya, Keep for example, filing for Hong Kong. Of course. We’ll see if that continues. It may frankly depend on what this DiDi situation yields. So far leaks keep on saying that the investigation is about to end, but I don’t know. It’s been a couple months and all of us have yet to hear any final findings. 

Gary: Effectively had no engineers, no people working on any product improvements. [00:25:44]Every single employee seems to be focused on this internal investigation and figuring out how to reorient the company and the operations to fit within these new rules. 

Rui: Yeah, to comply, because it’s an existential crisis. They’re losing market share every day. They don’t get fixed and their competitors are raising money. [00:26:07] T3, which is backed by state-owned automakers, just raised $1.3 billion dollars two weeks ago, while DiDi was still stuck in this quagmire. What a nightmare! But let’s set back for a moment. 

So earlier, when we were talking about IPOs, you mentioned briefly that there might be some risk for Chinese companies as they expand abroad, that actually I think is one of the most central trends of this year. Pretty much every Chinese company I talked to, no matter what they’re doing, whether it’s gaming or SaaS or e-commerce, all of them are expanding abroad. And that’s what I’m busy working on these days, actually helping these companies strategize and putting together investment syndicates. You mentioned though in the report that some are downplaying their Chinese origins to expand specifically in Southeast Asia. 

Gary: I think part of it is to get under the radar of geopolitical tensions. But part of it is also just in the countries that these Chinese companies are investing in acquiring companies and trying to grow their footprint around the world.

[00:27:04] There is anti-Chinese sentiment and this is long rooted. Right. So I think downplaying, in some ways it’s probably a smart move by most of these big companies, Chinese companies over the last several years led by Alibaba and Tencent have been moving aggressively into Southeast Asia, both through investment and just direct acquisition.

[00:27:25] Alibaba did that with Lazada. JD has invested in Gojek, right. That has now merged, was in the process of merging with Toko. And then Tencent invested in C groups. So the Chinese tech grasp across Southeast Asia unicorns and giants is already pretty well established, but there’s still a huge amount of opportunity because we are talking about a part of the world Southeast Asia that hasway above GDP growth compared to the rest of the world average. And we’re talking to another 600 million people rapidly growing Internet users, surprisingly young population versus China’s actually aging population. And so China definitely sees opportunity there. They see Southeast Asia as kind of like China was 10, 15 years ago.

Rui: [00:28:08] Especially when you look at some of the stats that you have provided here in the report, like e-commerce Kager of 24% from 2020 to 2025, that’s just the overall market. If you’re the market leader, you’re definitely growing much, much higher than that. Just for comparison. China is only at about 11% for the same period, so less than half, because it’s obviously much more mature being the largest in the world. 

Gary: And traditionally Southeast Asia, well, at least some of the major operating powers in Southeast Asia have been American allies, but now it’s really about potentially having to choose between America political ideology versus the opportunities all joining the Chinese economic sphere of influence.

[00:28:54] And I think if these countries are practical, if it really comes down to it, I think the U.S. is going to lose out in most of the Southeast Asian countries over the next generation. 

Rui: Ooh, that’s a really interesting topic, but I’m not knowledgeable enough to respond. So let’s just say I have no opinion. I do have an opinion on the next section though, which is what you guys actually asked me to comment on.

[00:29:15] And that’s the section on shifting demographics and underserved user segments. So basically to really simplify the story of the last decade or near decade is a rise of the rural Chinese consumer. Not the folks living in Beijing, Shanghai or Hangzhou, but in the 600 or so lower tier cities, most people have never heard of, even many people in China.

[00:29:38] But now that China is at 1 billion mobile Internet users, and even most of rural China is online now, 70% in fact. Where to look for growth? Well, one group has users aged 60 and above, making up the so-called silver economy. The Internet penetration within that group is just 42%. And so you’re hearing all these stories about internet companies, making special additions of their apps, simplified with larger fonts for senior citizens and getting millions of new users onboarded. This segment, by the way, also spends more than average. So 2.3 times the average Internet user, according to a 2017 survey. It’s a real market. 

It’s not just seniors though. There’s also the Sheconomy, catering to females. Females in China are becoming both more educated and also staying single for longer periods of time, and they’re having less kids. So that means they have different needs from prior generations, and could use different products and services.

[00:30:39] You’ve probably heard about the aging demographic crisis in China. I actually tweeted the other day a joke I saw on the Internet about China speed. China has nearly halved its number of annual new births in the last five years, a feat that other countries like Japan took 40 years to do. China did it in five. So it’s not good news. 

[00:31:00] Now China does still have over 1.4 billion people. So it’s still going to be a very large market, maybe the biggest market for a very long time, but it’s really clear that there’s going to be a huge demographic shift and people are just leading very different lives compared to 20 years ago.

People care a lot more about gender equality. They care a lot about health. They aren’t blindly chasing brands, but choosing fashion and cosmetics that highlight their personal taste. They care about impact on the environment. So green consumption is a thing, but okay. Not to throw you for a loop here. While I did say just a few minutes ago that it’s not all about the rural consumer it’s still kind of is. 

That’s because even though a majority of the users are in rural China are now online, it doesn’t mean they’re using all the same services as their wealthier country men, just yet. Maybe everyone is watching videos on their phone, and no matter where they’re in China. Fewer in rural areas are using ride hailing and far fewer are using the Internet for financial services. 

And even within highly penetrated opportunities, like e-commerce, there’s still new business models that are emerging, like community group buying that we did an episode on before. [00:32:17] That’s just more appropriate for less developed places in China where the infrastructure and spending habits are still different. That’s why, by the way, I stole the saying from my friend, Ron Tao, and I wrote an op ed earlier this year that the next China is China, because it kinda is. 

Okay. So I rambled on quite a bit about the underserved markets. Now let’s switch gears and talk about the final section of the report, which is this thing that is related to the whole direct to consumer or DTC brand boom in China. It’s called private domain traffic. So loyal tech bus listeners, you have definitely heard of this term before. We defined it for you in our episode on Perfect Diary, which is a cosmetics brand that went public last year. But since you are here, Gary, why don’t you go ahead and define it for us. 

Gary: Instead of defining it, but it’s actually shockingly difficult to define. I want to illustrate it. I think for a lot of your Western listeners, it’d be people who haven’t been to China and used Wechat in China. I’m not talking about the version of Wechat that we can all download on our phones outside of China, but just Wechat in China.

[00:33:25] If you haven’t done that. I don’t think you really understand how all encompassing Wechat actually is. And this might sound like an exaggeration, but it’s not really. You can have a phone with only Wechat on. You don’t have to have anything else on your phone or on your personto be able to survive in China.

[00:33:45] You could live within one app and be completely satisfied and have access to pretty much everything in life. That is private domain traffic, right? For a company, an individual corporation within a single channel, [00:34:00] they will be able to have one-on-one relationship, direct relationship with a user, and be able to serve all of that user’s needs through single channels.

[00:34:09] That is very unique. It’s not something that really exists in the United States or in any other Western country that I’ve seen. So this type of private domain traffic and corporate growth because of private domain i’s actually hard to understand outside of China.

If we take an e-commerce business in the United States, a direct to consumer e-commerce business, so many technologies have to be part of that business stack. You need to acquire users. And so you might start off with a website, so you need to have a URL you need to be on, I don’t know, Google clouds to serve you or whatever. You could build something on Squarespace. You needed them by advertising to acquire users. 

Once users come onboard, and they start shopping and they decide that they have to purchase, then you are using some kind of a commerce stack, right? And then there’s a payment system that could be different. And then once somebody has already bought something, then you collect their email and your communication with them is generally through email. And that is pretty much as simple as the commerce stack can get.

[00:35:10] But with e-commerce businesses in China, all they have to be on is Wechat. User acquisition, the shopping experience, payments, even logistics and delivery, and then the circular cyclical communication to draw users back, the publishing of content so they can get to from content to commerce, everything that’s through a single channel, through a single app, a single platform.

[00:35:37] And that is why the private domain traffic businesses in China can grow at the immense speeds that they do. It’s not just the size of the population. It’s the fact that there is centralized,standardized technology stacks that can be fully deployed within days for a brand new business to get up to scale.

Rui: [00:35:56] Got it. I really like how you explain that. I mean, I generally say it’s just a private communications channel, but really you bring up a good point that it’s a fully integrated stack. So the entire virtual sloop can happen within one platform. Wow. When you think about it that way, it really is quite different. 

It’s not that cheap, of course, and it does take a lot of operations, but nowadays a lot more brands want more control over their customers and they don’t want to build on top of these centralized platforms like Alibaba. So they’re doing a lot more on Wechat. 

In our episode on Perfect Diary from last year actually, I think that they were already running something like 15% of their orders off on Wechat. [00:36:39] Now that company has an actually done particularly well this year, but I don’t think that means private domain traffic itself is broken. 

I do agree with you in that Wechat is really this core digital infrastructure that just accelerates business building. Now Gary, can you think of a company outside of China that is close to building something like this? Or do you think that because of regulatory reasons or maybe ecosystem characteristics that it’s probably just going to be Wechat in all the world?

Gary: I haven’t seen it. And by the way, Wechat as it is today might be different than two years ago because of these anti-monopoly regulations in China. Wechat would not be able to exist in the United States and it would not be able to exist in Europe. [00:37:25] It would have been broken up way before it reached the stage. 

Rui: Yeah. It’s really hard to imagine someone building Wechat from scratch today, even in China. It’s I think like a right time, right place sort of thing. Anyway, Gary, I think we’re running out of time. So if there is one last thought, you’d want to leave everyone with, one thing to focus on, what would it be?

Gary: It would have to be regulation, because the shifting sand is going to change everything. And so all of those other things that we touched on, they could all be either irrelevant or even more relevant than we’re making out to be right now because of the changing regulatory environment. And also the regulation impacts not only the domestic market, but it really impacts the global marketplace as well.

[00:38:11] Let’s not forget how many international companies have huge holdings within China. China is no longer just an island nation, closed off economic bubble. This idea of decoupling seems completely ridiculous to me. People who actually consider that it’s possible because China is just way to connect it to the global financial ecosystem. And so all of these changes that are happening in the domestic market is going to affect the world. 

Rui: Yeah. China is definitely not trying to decouple economically, but in a few key technologies or supply chains maybe, I do think it wants to be self-sufficient, but you’re right. That’s not decoupling. Or if it is, it’s very, very selective and very limited.

Gary: Not even. [00:38:53] And I would even say it’s not self-sufficient. I think China just doesn’t want to be reliant, because the issue with semiconductors as an example is that they are completely reliant on American IP. 

Rui: Okay. That’s a good distinction. Back to your point about financial markets. Maybe everyone has a very short memory, but just a few weeks ago, it seemed like the entire world was having a meltdown over Evergrande, the Chinese real estate developer. [00:39:18] That’s not a particularly compelling example of decoupling. Right? 

Okay. Final question for you, Gary. If you had more time, what would you have put into the report? 

Gary: We actually had a lot in the report. So the version of the report, then you and I have been speaking about throughout this podcast is the one that’s available to everyone. [00:39:34] It’s about 50 pages. It has a lot of insight in it.

But there is another version of it, that it’s about 140 pages. It is a paid version. It’s mostly for our corporate subscribers, but individuals can actually go and buy this version of the report as well, and it goes far deeper and to the trends that we’re seeing to the companies that are involved. By the way, when you buy it, you also get access to a bunch of webinars that we’re going to be hosting with access to Chinese tech experts and industry insiders.

[00:40:02] But I would say this, even considering this pro report, if we had more time, one thing I would want to understand more is what all of these changes mean for individuals in China. Right? And I think that those are some human interest stories that if we had more time and I know that our newsroom are chasing some of those right now, we would want to share with the world.

Rui: [00:40:23] Gary. Thanks so much for being here today. Thank you to your team that did such an excellent job, and I’m very much looking forward to next year’s SCMP China Internet Reports. Everyone, go download it. 

Gary: Thank you so much for having me.