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🔑 Key Takeaways

  1. Learn about emerging trends and strategies for researching China's tech ecosystem from experienced investors and special guests, and explore investment opportunities in China's lucrative tech market.
  2. To succeed in China's tech industry, entrepreneurs and investors must adapt to rapidly-evolving trends, constantly update their knowledge, and embrace virtual interactions. Community-building and sharing insights are crucial for growth.
  3. Improved manufacturing and design processes in China, coupled with the emergence of direct-to-consumer brands, are predicted to disrupt the traditional FMCG market, leading to a significant market share for domestic Chinese brands such as Genki Forest.
  4. Chinese companies are revolutionizing physical product development with small batch testing and flexible supply chains, faster turnaround times, and a focus on online marketing. However, there is increasing concern about the environmental impact of fast fashion.
  5. The success of Chinese DTC fashion brands like SHEIN lies in their adoption of just-in-time supply chain innovations and heavy reliance on social media. This model can be extended to other industries to expand overseas and maintain profit margins.
  6. E-commerce platforms in China prioritize personalized promotions and content for a more engaging customer experience, while Bilibili offers a diverse range of features beyond video creation for increased user engagement. Advertising is not always the go-to revenue source in China's market.
  7. In China, community group buying platforms like Meituan and Alibaba prioritize distribution over advertising. By aggregating demand and working with local farmers, these platforms offer hyperlocal access to fresh groceries while expanding into branded products.
  8. With underdeveloped logistics and supply chain, investing in China's per capita cold storage capacity is a lucrative opportunity for growth in rural regions, where tier 3, 4, and below cities make up a billion people and 10% annual GDP growth.
  9. Despite appearing to have higher income levels in tier one cities, real estate costs can lead to lower final lifestyle purchases. China is at the forefront of sustainability efforts, with significant investments in electric vehicles, autonomous driving, and AI.
  10. China's push towards electric vehicles and autonomous driving solutions presents opportunities and challenges for companies. Perkins Coie can provide reliable legal counsel for navigating the market and ensuring protection for intellectual property.
  11. China's recent antitrust laws provide a fair environment for startup investors and founders. With significant increases in the upper cap for violations, big tech companies will be forced to play fair. This supports the growth of innovation in various sectors, including internalization, and ecommerce is well-positioned for this trend.
  12. Chinese companies are highly adaptable and driven by profit, investing in a variety of sectors from fintech to EVs, while US companies focus on their core competencies.

📝 Podcast Summary

Experts Discuss China's Thriving Tech Scene and Future Opportunities

On this special episode of Acquired, experienced investors Ben Gilbert and David Rosenthal collaborate with Rui Ma and Ying Lu from Tech Buzz China to discuss China's evolving tech landscape. The hosts give insights into trends for 2021, the best ways to research about China's tech ecosystem while living in the U.S. and share their views about the future tech scene. James Avery, the founder and CEO of Kevel, also shares his journey in the digital advertising ecosystem and his mission to make the internet a better place. This episode provides valuable insights for investors seeking opportunities in the lucrative China tech market.

The Evolution of China's Tech Industry and the Importance of Knowledge Updating

China's tech industry has gone through a drastic transformation in the last decade. Early-stage funds and accelerators are now prominent features of the ecosystem, and there has been a significant shift in attitudes toward entrepreneurship and startups. Ying, an expert on China tech, stresses the importance of constantly updating knowledge. Tech Buzz's focus for this year is on trends that may produce China's next big tech companies. The pandemic has moved most activity online, resulting in everyone in China becoming more comfortable with virtual interactions. The podcast has pivoted into more of a community for investors, and Rui shares what she can, given her many engagements. They believe that their communities benefit from an updated understanding of China's evolving tech landscape.

The Rise of Domestic Chinese Consumer Brands

Domestic Chinese consumer brands are expected to gain market share in China due to improved manufacturing and design processes. This trend is further accelerated by the fact that original equipment manufacturers (OEMs) have transformed into original brand manufacturers (OBMs), taking care of various parts of the process like design and marketing. The emergence of direct-to-consumer brands is expected to disrupt the traditional FMCG market in China, with experts predicting that Chinese domestic brands will soon capture a significant market share. One such example is Genki Forest, a brand run by people from a social gaming background, aiming to be the Coca-Cola of China. They are quickly iterating through different skews and using AB testing to perfect their marketing.

Chinese Companies Innovate with Small Batch Testing and Flexible Supply Chains

Chinese companies are using small batch testing and collaborations to quickly iterate and innovate in their physical product offerings, similar to how internet software products are developed. These companies have access to advanced and flexible supply chains, which enable them to have faster turnaround times and more flexible manufacturing. SHEIN, an overseas DTC brand from China, is producing 1000 new designs a day with only five days from design to shipping. The focus on marketing and online marketing is also highly valued, and companies like SHEIN have amassed a large following on Instagram. However, there is concern about the environmental impact of fast fashion.

Just-in-Time Product Innovation in Fashion Industry & Beyond

The supply chain innovations that allow for just-in-time creation and design of products, as seen in companies like SHEIN, can potentially be extended to other industries like drinks and cosmetics. Chinese DTC fashion brands benchmark themselves to SHEIN due to their commonality of low price and heavy reliance on social media. The overseas expansion of Chinese brands is driven by the saturated market in China and the need to maintain a gross profit margin of 30-40%. Offline retail stores in China are highly digitized to serve as pickup points for ecommerce, a trend that has been happening for the past 10 years.

Personalization and Diversification in China's Online Shopping Experience

In China, online and offline shopping experiences are fully integrated as personalized recommendations and promotions are very important to Chinese consumers. E-commerce platforms have huge operations teams that constantly work on promotions and personalized content, striving to offer something new and better to customers each time they log in. The YouTube equivalent in China called Bilibili, is more diverse with a gaming platform, live streaming, and e-commerce, offering a stickier platform to create and watch longer creative videos generally around 5 to 20 minutes. Unlike in the U.S where advertising is a default answer to revenue generation, it's not the usual case for China, except for some companies like ByteDance and Alibaba that are heavily advertising-based.

Community Group Buying in China: Leveraging Distribution over Advertising

In China, the focus is more on distribution than advertising due to the growing economy. Community group buying is one such example which is a hyperlocal rural e-commerce platform. These platforms leverage group buying mechanism to aggregate demand and procure fresh groceries from rural farmers. The platforms like Meituan, PDD, and Alibaba rely on leaders of these group-buying platforms for logistics and do little to get these products in the hands of customers. Even though these platforms started with fresh groceries, they are now moving into more branded and non-perishable products like boxed milk, juices, and even iPhones. Overall, the China market is more interested in distribution and community group buying is one model that emphasizes this.

Investing in China's Per Capita Cold Storage Capacity - A Look into Rural Growth and Infrastructure

Investing in China's per capita cold storage capacity is a lucrative sector to consider. While the last mile in agricultural e-commerce is cheaper, the first mile of getting produce from the farmer to the warehouse is expensive due to underdeveloped logistics and supply chain. The large platforms like Pinduoduo, Alibaba and JD are pouring billions of US dollars to penetrate digital consumption in rural China and micro-entrepreneurship of community leaders. Rural China accounts for a billion people comprising of tier 3,4 and below cities, with an annual growth per capita of 10% GDP. Infrastructure for retail distribution is still developing, taking inspiration from US logistics, real estate and cold chain investments. Starbucks opening is a great indicator of the city being on the up and up and being able to consume more.

The Evolving Consumer Landscape and Investment in Sustainable Technology in China

In China, high-frequency purchases of staple everyday goods on tech platforms like PDD, Meituan, JD, or Alibaba can lead to increased transactions on these platforms as disposable income goes up. Income levels in tier one urban centers can appear high, but real estate costs are also high. Therefore, final lifestyle purchases could actually be less in China compared to tier two or four cities with lower real estate prices. China has taken a lead on climate change and electric vehicles have become a major priority. Companies like Huawei, Xiaomi, and DJI are investing heavily in EVs while BAT companies like Baidu are focusing on autonomous driving and AI. Chinese EV companies like Nio, XPeng, and Li Auto have become significant players in the EV market.

China's Massive EV Market and Competition in the Autonomous Driving Solutions

The demand for electric vehicles in China is immense, with a government push towards EVs and government incentives driving development. China is the largest car market and has a lot of competition in the EV sector, with many companies investing in autonomous driving solutions. The infrastructure in China is expected to be upgraded to support EVs more efficiently. There is a lot of exuberance in the market, with some companies being valued at the level of Tesla, despite being private, while the antitrust caught some people off guard. Perkins Coie is a reliable partner for businesses in the technology industry, offering counsel for company formations, IP protection and enforcement, IPOs, mergers, acquisitions, and everything in between.

China's new antitrust laws create a level playing field for tech companies and investors.

China has been working on antitrust laws for years and has recently issued new laws to protect consumers and vendors against unfair practices by big tech companies. China's efforts to catch up with the rest of the world are not going away, and investors and consumers are cheering these resolutions. The upper cap for violations is increasing significantly, and it will force China big tech to play fair. This is great news for startup investors and founders, who can now expect a more level playing field. China tech is experiencing innovation in many sectors, including internalization, and ecommerce is well-positioned for this trend. Furthermore, founders with global education or success in different sectors are returning home to China where they can be well-funded and supported with a great lifestyle.

Hyper-adaptive Chinese Companies Diversifying into Multiple Sectors

Chinese companies are not limiting themselves to just one sector. They are going wherever the opportunity is as they have seen tremendous change in the past 30 years, and their GDP has gone up to 30 times in the same period. This makes Chinese entrepreneurs hyper-adaptive, always looking for the next thing. They have lots of capital and users, which makes them do lots of things. Their core competency is making money by investing, which is why they invest in a variety of sectors from fintech to hospitals to even EVs. Chinese companies like ByteDance and Xiaomi do whatever makes money and do not take anything for granted. In contrast, US companies focus on their core competencies like ecommerce, ridesharing, or social networking.