Special: 2021 China Tech Trends (with Tech Buzz China)

We team up with two of the very best English-language analysts covering China tech today, Rui Ma and Ying Lu from the Tech Buzz China podcast, to talk about the big trends happening on the ground in China right now. We've had Rui and Ying's episodes on repeat in our own podcast players for many years as we researched our Meituan, PDD, Tencent and Alibaba episodes, and we're so excited to have them finally join us live. We had a blast and learned much more about what's actually happening in the world's largest market than the relative trickle of news Western audiences normally receive. Tune in! Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC Topics and trends covered:How Rui and Ying stay on top of trends in China tech remotely from the USThe rise of “tech company like” CPG and other consumer brands in China and extremely fast product development and iteration: e.g., Genki Forest, Perfect Diary and SheinCommunity group buying and the reinvention of commerce in rural China (along with an eye-opening discussion of what qualifies as “rural” in China... which is very different from the West!)Autonomous and electric vehicle design and production in China (which is the world's largest car market), and the government's push for China to become a global leader in bothThe current state of anti-trust in China and why investors and operators on the ground in China are optimistic about recent developmentsLinks: Tech Buzz China: https://www.techbuzzchina.com https://www.techbuzzchina.com/TBC's fantastic Insider community for investors and operators: https://www.techbuzzchina.com/insider

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  Your format on TechBuzz China is, well, probably a similar amount of piles of research to Acquired. Your format is way different. You actually write the whole thing out beforehand, right?

• 0:12Speaker 01

  Yeah, we actually do. We don't even record synchronously at this point.

• 0:16Ben Gilbert?

  That's the craziest thing. So wait, can you explain what that means?

• 0:20Speaker 01

  We just record separately. I record my part and then Ying records her part.

• 0:24Ben Gilbert?

  It's more like an audiobook each episode, but sort of like two people reacting to each other who are not in real time in the same room. It's wild.

• 0:33Speaker 01

  Yeah, yeah.

• 0:44Ben Gilbert?

  Welcome to this special episode of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I am the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures.

• 0:59David Rosenthal?

  And I'm David Rosenthal, and I am an angel investor based in San Francisco.

• 1:04Ben Gilbert?

  And we are your hosts. On today's show, we have a crossover episode with Ray Ma and Ying Liu from the TechBuzz China podcast.

• 1:14David Rosenthal?

  Woo, so excited about this one.

• 1:16Ben Gilbert?

  Been thinking about doing this for a while.

• 1:17David Rosenthal?

  I know. I've been listening to Ray and Ying for many years, listening many, many times over on repeat while doing research for Meituan and PDD and Tencent, Alibaba, Xiaomi and all of our China tech episodes. They are the best English language China tech podcast out there and so excited to finally do this crossover.

• 1:40Ben Gilbert?

  Yeah, no kidding. We wanted to cover a few things and thought that the best way to do sort of a broad, general China episode that's not specifically about a company would be to collaborate on one and do it together. So today, we're going to talk about trends in 2021 for China tech, how Ray and Ying do their research, given that they both live in the US, their views on the China tech landscape and how those have evolved over the last decade as that ecosystem has rapidly developed, as we've covered on the show, and a little fun comparing and contrasting our two shows. All right, listeners. Now is a great time to tell you about a longtime friend of the

• 2:20Ben Gilbert?

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• 2:35David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature, or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 2:56Ben Gilbert?

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• 3:18David Rosenthal?

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• 3:36Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you. Now, onto our conversation with TechBuzz China. All right, Ray and Ying, great to be doing an episode with you.

• 4:11Speaker 01

  Yeah, yeah. Totally. We're big fans of Acquired. Our goal is to be like the Acquired, but for, you know, China Tech. Oh, my god.

• 4:20David Rosenthal?

  That's true, though. You guys are great.

• 4:23Ben Gilbert?

  Well, why don't we turn it over to you real quick for give us your personal backstories, a little bit about the show. Both of you live in California, right? Not actually in China?

• 4:34Speaker 01

  Yeah, we live both in the Bay Area right now. Was born in China, immigrated to the States as a kid when I was eight and grew up primarily in Silicon Valley, actually. You know, went to school at Berkeley and then when I graduated, went into investment banking, doing technology because I wasn't good enough to be an engineer. So I studied engineering college and then went into finance. And in 2007, for personal reasons, moved to China and then ended up staying there for the next eight years, working in a variety of jobs, but starting first in real estate, investing and then going into, even did some cross-border M and A and then media private equity

• 5:16Speaker 01

  and then finally really, really early-stage startup investing at 500 startups, which is very, very early stage accelerator and seed fund. And then moved back to the Bay Area at the very end of 2015. Didn't think I was going to do much with China anymore, but was, you know, still keeping tabs on, on things. And I was like, hey, podcasts are all the rage. This is in 2017. Should do a podcast on China tech. Seems like it could be fun. And then very quickly, what I realized is that, you know, by the end of 2019, I would call it, I was like, wow, some of these companies that I'm just sort of covering for fun and personal passion for tech

• 5:58Speaker 01

  buzz are actually really doing really, really well. And I should really think harder about whether or not I want to drop the China connection. And then so in 2020, decided to really pick it up full-time. We took some investors to China with us in 2019 to visit a bunch of the companies that we talk about on the podcast. And then we were going to do that last year more, you know, as part of tech buzz, but then the pandemic cut short all that. So we've pivoted into more of a community now online for investors. And then I personally do a bunch of consulting for funds interested in investing in China tech.

• 6:37Ben Gilbert?

  That's great.

• 6:38David Rosenthal?

  Well, it comes through on the show.

• 6:40Speaker 01

  Yeah. I can't talk about everything I get, you know, a lot of information is proprietary, but I try to share what I can.

• 6:47Ben Gilbert?

  There's so much that is happening that is reported if you are Chinese, but if you're American, you're like, I, I just occasionally get this random story about Jack Ma disappearing. Like, I would love to, I would love to understand thematically what's going on under those headlines in China.

• 7:05Speaker 01

  Yeah. And, you know, I think one thing I should point out when it comes to my personal experience, and also this happens to Jia Weiting, because we, that's where we met. We met when we're both living in Beijing, which is that we were there, in retrospect, at a very auspicious time in China tech, because prior to, let's call it 2013, 14, China tech was really, really small. So I was really there when the first couple of years, really, you could count on your hand the number of people doing angel investments in China, right? So there, there literally was a book called Angel Investors of China. I think it had like 12 men in it.

• 7:42Ben Gilbert?

  Oh, my gosh.

• 7:43Speaker 01

  Yeah.

• 7:44David Rosenthal?

  It's like the, the Warren Buffett used to go through, you know, the Moody's Manual of Companies to like, look at all the companies that there's like a manual of the.

• 7:53Speaker 01

  Here you go. Here are all the people. And then, so I happened to then join 500, which at the time, by the way, a lot of people were like, why are you doing this? This, this is way too early. This is really bizarre. This is not a business model that works in China. And then, it's not like I knew what policies were coming, but then, two years later, boom, you have a couple thousand accelerators, you have hundreds of early-stage funds, and you have a total sea change, shift in attitudes around entrepreneurship and startups, where people went from thinking that was something, honestly, only losers did if they couldn't get a real job, to now, oh, all the best and brightest would, of course, go and create their own startups. And that happened really around 2014 or so. And, and I think you can

• 8:38Speaker 01

  see it in the types of companies that are public today, right? Some of the most popular companies that are always talked about in media, you know, Pinduoduo, ByteDance, Meituan, etc. All these companies really started in the last decade. And Pinduoduo is a great example of a company that started in the last, you know, five, six years. This is when it all happened. Basically, all the capital started flooding in and the social attitudes changed. Before the pandemic, both of us used to go back quite often. I would say probably quarterly. Now, because of the travel restrictions, then it is primarily online. But the good thing is that because of the pandemic, actually, everyone in China is also

• 9:19Speaker 01

  more used to being online. In fact, some of the VC GPs that I talked to, they themselves are not even based in China right now. They're like in Singapore or Taiwan or something.

• 9:30Ben Gilbert?

  Very cool. All right, Ying, what's your story?

• 9:33Speaker 03

  So I think Ray brought me into the story when she mentioned that we met in China. It's been like 10 years ago when I went to China right after college. And even when we started this podcast, China wasn't a super hot topic in China tech even three years ago, was not as appreciated. And I feel like things have just totally changed. And it's interesting to be able to say, oh, I've seen the rise of different sectors of tech, especially like online to offline, companies going overseas, like the rise of all the digital live streaming and e-commerce happen in China while like also watching concurrent trends in the US. But to go back, I came to the US when I was two from Guangxi. I'm actually a fourth tier

• 10:16Speaker 03

  city and a lot of my extended family that I'm very close with are still in like fourth tier and some third tier cities and they're all in Guangxi, except my parents and brother. So throughout my career, I've been more on the operator side. I've worked with over, I would say over half, so over 50% China-based, fully Chinese teams, like embedded as part of the team. I've been an employee. I've been a startup co-founder in China. This was like 2012 to 2014. I fell into this niche initially when I moved to the Bay area from China in 2014. And that was the year that a lot of Chinese apps were trying to go overseas. You guys might know about this. And I'd be brought on to help them with their US business deals

• 10:57Speaker 03

  or set up an office or like do PR and tell their story. And today I have two partners in China. Most of my deep rooted opinions and like cultural schemas of China have been shaped by a combination of family backgrounds and early personal and professional experiences. But I do want to emphasize that we really have to put in time. To gather current knowledge. So you know, when people use the term like China expert or refer to tech buzz, I do think it's not something we just can spit off. It's just like you guys making an acquired episode and you have to put in a lot of the time to do the research.

• 11:33Ben Gilbert?

  Well, you could not have teed us up better to discussing what is happening now in China in terms of trends for entrepreneurship. So I'd sort of like to turn it back to you. Feel free to start wherever you want, but for both of our audiences, what are some trends that they should be paying attention to and that will be covering three to five years from now in the next Meituan and the next Pinduoduo in future episodes?

• 11:56Speaker 01

  So actually, that's a great question. And at least in the near future, what we're focused on at our insider community, what I said for this year, what I think are going to be really interesting are a couple of things. One is consumer brands, and that's specifically on consumer brands being run like internet companies, which we can talk about. There is also community group buying, which is very disruptive and it's a new form of e-commerce that's happening now in rural China that really kicked into high gear last year because of the pandemic. And then actually, the third thing, I will briefly mention it, but I don't actually have too much to share on the topic at the moment, which is if we think about China tech more broadly than just internet or than even just

• 12:40Speaker 01

  software, then this whole new thing of electric vehicles and autonomous driving is really, really interesting in China as well. And actually, a lot of experts I talked to think that the US and China are really kind of on par, or some people even think China is ahead in that sector. And that's definitely something I'm watching. I'm more familiar with the AV front and less with the actual vehicle making, but those are all interesting things.

• 13:06Ben Gilbert?

  Well, maybe let's first start with that direct to consumer and that brand piece and kick it over to Ying. Sort of, how do you think about that and what's going on in China there?

• 13:16Speaker 03

  So at a high level, I think we've always thought that, you know, in my observation, the level of quality of Chinese consumer brands, like Ray mentioned, is going to go up. And this is totally in parallel with innovation in China continuing, China no longer being a copycat manufacturing and designing a lot of its own products. Ray, you mentioned consumer companies being run more like tech companies, but I'll delve more into the specifically the DTC side, so direct to consumer brands.

• 13:45Speaker 01

  So I think there's a huge market opportunity for domestic Chinese brands to gain market share in China. And that's not just because, you know, again, the media narrative is all about like the youth being very nationalist, but actually it's because if you look at developed countries, right? So for example, the United States, we actually have something like a quarter of FMCG products are foreign brands are non-US. But if you go to China.

• 14:11Ben Gilbert?

  What's FMCG?

• 14:12Speaker 01

  FMCG, fast-moving consumer goods.

• 14:14Ben Gilbert?

  Ah.

• 14:15Speaker 01

  Yeah. So, so, so you're basically consumer staples, et cetera. Right. But if you look at China, again, the foreign brand penetration is actually north of 40%, very, very much higher than that for certain other categories. And so if we assume that China is going to look more like the rest of the world in terms of how strong its domestic economy and brands are relative to foreign ones, then right, there's a, there's a huge market share that domestic brands can capture. And this is accelerated by the fact that in recent years, manufacturing, design, all these things that go into brand has significantly improved. So like I was saying to you, Ben, the OEM of the past, the original equipment manufacturers

• 14:58Speaker 01

  were, you know, the model is that you go to China, you already have your product spec, you already have your brand, you have your design, you go there just looking for someone to make it for you. Those days are long past. OEMs are now ODMs, right? They also do a lot of design where you can just go then with some sort of much fuzzier, let's call it product spec, and then they'll actually design something for you as well as manufacture it to today. I hear people call it, you know, call these factories, OBM's, right? Original brand manufacturers where literally they're doing pretty much everything for you except the final branding, you know, they, they even will do a lot of the marketing copy,

• 15:40Speaker 01

  et cetera, for you as well, because they've just gotten so much better at all these. Parts of the entire process. I should caveat with saying that is still, in my opinion, a lot of PR. So not all the, so the, the quote original brand manufacturing is, is basically still, you know, ODMs. But the point is that they're significantly better than before, right? So you will see, again, you see this already on, like in the US and Amazon, right? You already have a bunch of brands from China, like trying to brand themselves, right? Uh, on, on Amazon, selling commodity products. What we're talking about, however, is not, you know, your like no name, unpronounceable brand from China selling like an Apple firewire or something.

• 16:25David Rosenthal?

  Right, iPhone chargers or stuff.

• 16:27Speaker 01

  Yeah, we're talking more now about like people building real brand IP, right? So I think one of the examples that is very, very popular in China right now is probably less well known outside of China is this brand called Genki Forest. And it is right now a $6 billion valuation company that wants to be the Coca-Cola of China, right? So we already saw last year, this company called Yatzen, uh, AKA Perfect Diary, wants to be the L'Oréal of China. And then last year, we actually already also saw the listing of the PNG of China. So there's all these brands trying to take over the consumer staples categories. And the newest entrant, and I think is really interesting, is Genki Forest, which is Coca-Cola of China.

• 17:12Speaker 01

  And they are just starting off with basically your carbonated beverages. And the different thing that they're doing is that the company is actually run by people who come from a social gaming background. So they think about everything in terms of, you know, marketing ROI, right? And doing very, very quick A B testing and very, very quick iterations.

• 17:33David Rosenthal?

  And are they using O B Ms, O D Ms to, to actually make the soda? They're, they're just a, a brand.

• 17:40Speaker 01

  They're just a brand. They're just slapping on their brand and marketing, right? So they did start with their own factory, but it was only in mid last year. And that's after, you know, that, that's, that's a, that's a few years after they started, right? So same thing with Perfect Diary, by the way, the cosmetics brand. When they went public, they had also just started, you know, their own factory.

• 18:00Ben Gilbert?

  I will say in the beverage industry, even in the US, that's super common. So like I, this is gonna sound a little trite, but I know the, uh, the founders of Four Loko. And at one point in 2011, they had a hundred people working at the company. Ninety-six of them were salespeople.

• 18:20Speaker 01

  Oh, my God.

• 18:21Ben Gilbert?

  And they had the founders and a CFO and they work with a contract manufacturer. So I think it's technically a contract brewer. And this is the most common way for any beverage, or especially alcoholic beverages in the US to start, is to contract out everything but the distribution and the branding.

• 18:38David Rosenthal?

  Huh.

• 18:39Speaker 01

  That makes a lot, that makes a lot of sense. I don't think, I don't think Genki Forest is quite that. I mean, uh, they are doing more R and D, but I think what differentiates them is how many SKUs that they're constantly trying. So they do small batch testing and then they will, they will do it on both the marketing front as well as sort of the physical products, of course. And then, you know, according to their founder, only 5% of their products make it into sort of mass channels, right? Because the mass, the mass offline channels are actually very hard to penetrate and also to manage.

• 19:13David Rosenthal?

  But so like, this isn't like Coca-Cola where it's the recipe that has been one soda that's been sold for

• 19:19Speaker 01

  No.

• 19:20David Rosenthal?

  150 years. It's lots of different products.

• 19:23Speaker 01

  Yeah, it's a lot of like, so maybe, maybe even a better example is to, is to look at Perfect Diary, which is they're doing a lot of collaborations, right? So like all the new brands these days, right? They're doing a lot of collaborations. They're making like very sort of seasonal-ish products. So they'll put out something, I think their average is one new product a week. And then whatever makes it, you know, quote unquote, becomes a best seller, then they'll put more, more resources around it. And it's the same thing for Genki Forest, right? So they are supposedly coming out with a new product every few days. And then they'll do sort of small batch testing with it. And then of 5% or so of these products will then become, you know,

• 20:04Speaker 01

  A sort of further best seller that they'll they'll put into more distribution. And that is basically how, if you think about it, it's very similar to how you iterate on a internet software product, right? So this is what I mean by companies and brands in China are now trying to do this, applying it to physical products. And they're doing this because they have such good access to a very, very advanced and flexible supply chain. I think a lot of people, when I talk to them, they're thinking of factories as like, you know, still very manual and, you know, people on these like long lines. But I visited some of these factories and they're actually quite advanced, right? So there's a lot of automation. Like I said, they're, they're, they're all running software to manage themselves and

• 20:48Speaker 01

  they have a lot of design in-house talent. And, you know, the advancements in manufacturing have gotten, have really primarily focused on speed in China. So when you think about manufacturing, the minimum order quantity is always a barrier for most people, right? So especially in consumer products like clothing and, well, clothing being, I think, the main one, China has really been able to push forward on having more flexible manufacturing. By what I mean is when we visited Wuhan, who is a, I don't even know how you say their English name is Wuhan, but anyways, they're just about to go private, but they were previously,

• 21:31Speaker 01

  you know, we did an episode on them, how they were started by the quote unquote Kylie Jenner of China. So it's basically influencers making their own clothing and branded products.

• 21:41Ben Gilbert?

  And when you say about to go private, are they public now?

• 21:44Speaker 01

  They are public now. Yeah, about to go private. Haven't done that well. But we, when we visited them, we, we saw all their, you know, like all their clothing and all this stuff. And then we also visited Mooguji, who is a, you know, live streaming shopping app. And, you know, both of them told us that like, number one, you know, they had such good access to manufacturing and turnaround times were so fast. It's about seven days, right? From a design to being made and then shipped out the door, right? Seven days. That's actually really, really fast. And for a company like Shein. Which Ying can talk about, that is apparently down to five days. And yeah, like a company like Shein is pushing out a thousand new SKUs every day on their website.

• 22:29David Rosenthal?

  Amazing. Yeah. Yeah. I want to hear about Shein.

• 22:31Ben Gilbert?

  Yeah, I've heard about this. This is crazy. Ying, bring us up to speed here.

• 22:36Speaker 03

  Okay, so I think that what Ray talked about with marketing and like really flexible supply chains, enabling the tech-based teams to focus on marketing and online marketing, which is actually like a highly valued skill, just like it is in the US. So Shein takes five days of designing to ship. This is on average and they're producing a thousand new designs a day. They have $10 billion in revenue.

• 23:03David Rosenthal?

  Amazing. It's all women's clothes, right?

• 23:05Speaker 03

  Yeah, all women's clothes. It's kind of like H and M, fast fashion.

• 23:08Speaker 01

  They might have some men's clothes. I feel like they might have some men's clothes. I don't know. We can check.

• 23:14Speaker 03

  We should check.

• 23:14Speaker 01

  I can check.

• 23:16Speaker 01

  Do you want some, David?

• 23:18David Rosenthal?

  I do. I do.

• 23:20Speaker 03

  It's super cheap, too.

• 23:22Speaker 01

  It's super cheap. I don't know if you want to wear them.

• 23:24David Rosenthal?

  Well, no, they do have they have men's and kids and beauty.

• 23:26Ben Gilbert?

  So I can order something that was designed five days ago?

• 23:29Speaker 03

  Yes, it might take longer to ship and get to you, but five days, yeah.

• 23:33Speaker 01

  It will take a long time to ship.

• 23:35Ben Gilbert?

  Yeah.

• 23:36Speaker 01

  Wow. It's like Wish shipping times.

• 23:38Speaker 03

  Yeah.

• 23:38Speaker 01

  Slightly better.

• 23:39Speaker 03

  Have you guys ever ordered from Wish?

• 23:41Ben Gilbert?

  I haven't.

• 23:41David Rosenthal?

  I've been tempted to, but I never have.

• 23:43Ben Gilbert?

  I know only of Wish because I've seen it on Laker jerseys.

• 23:48Speaker 03

  Yeah, this has like Wish. I do think that's a good comparison. So you order and the quality of clothes, in my opinion, isn't very high. I think I did an order just to test it, but this was because I was benchmarking to another company. But Shein has, as of time of recording, 19 million fans on Instagram. So note that I'm saying Instagram. This is not a Chinese social media platform. And we'll get a little bit into that, too, with some of the cross-border DTC happenings.

• 24:14David Rosenthal?

  This is amazing. There I'm on the men's section and

• 24:18Speaker 03

  Oh.

• 24:19David Rosenthal?

  You can get swimsuits for $3.90.

• 24:23Speaker 03

  It's true.

• 24:24David Rosenthal?

  Wow.

• 24:25Speaker 01

  Oh, my God.

• 24:26Speaker 03

  Yeah. And for reference, Uniqlo's at $26 billion. So we're kind of benchmarking Shein as the success story of overseas DTC brands coming out of China. And then Ray had mentioned, we visited Mogu Jia in October 2018, and they're also doing small batch designs and producing a lot of new designs. So this is all innovations within the supply chain and shortening the time it takes to get new designs to market.

• 24:56Ben Gilbert?

  And when people used to refer to fast fashion, you'd look at like a Zara or something, the knock was, oh, they're busting their ass to get this to customers' hands, you know, five weeks after they come up with a concept. And now we've shortened it to like five days. Is that right?

• 25:11Speaker 01

  Yeah. Well, there's the shipping aspect of it. But yeah, if this was happening in China, then you can get, you probably get it shipped the next day. Yeah, that's right.

• 25:21David Rosenthal?

  Wow.

• 25:22Ben Gilbert?

  Wow. And there's always been a bunch of people that are concerned about the environmental impact. And at least I know there's a lot of negative sentiment around fast fashion. How does that play into how all this is developing?

• 25:34Speaker 01

  I would say, at least right now, like for a company like Shein, right? First of all, Shein is called ultra fast fashion now, I guess. I don't think the environmental impact is probably fully baked into it. And I'm personally not a fan of the model. But I think the point we're trying to make is just that the supply chain is really flexible now. And the end goal really is to have it to be so flexible that you can make it as demand comes in, right? So that it is completely just in time. And then you have zero inventory risk or zero inventory. You basically lower your cost so much.

• 26:09David Rosenthal?

  Yeah, it's like not even inventory. It's not even like just in time manufacturing. It's just in time creation and design of products. So they're like, there's no, there's not even any product risk.

• 26:19Speaker 01

  Yeah, exactly. Well, that's where people are trying to get to. We're definitely not quite there yet. Yeah. But that is the future. And yeah, we pick these categories. Shein is actually an old company. It's over 10 years old because again, these supply chain innovations take a long time. Right. But the supply chain innovations then can also be extended to other industries. Like you were saying, you know, or like we were saying, the drinks as well as cosmetics, et cetera, and all these other categories.

• 26:46Speaker 03

  There's a growing proportion of Chinese companies that want to sell into overseas markets, including the US, that are DTC fashion brands. I've personally seen a number of business plans, including one women's fashion brand that I'm currently working with, and all of themselves benchmark themselves to Shein. So they'll have a graph on their pitch deck of like, here's the supply chain process. Here's like what Shein does. Here's what we're doing. Pretty much looks the same, or there will be some minor tweaks. And then the end product is a little different, but it's usually in fashion, women's clothing. I haven't seen cosmetics yet. But while their innovation in how they handle the supply chain and how they position themselves to consumers might vary a little bit.

• 27:29Speaker 03

  What they share with Shein is a commonality of low price, a heavy reliance on social media. So remember when we said Shein had 19 million Instagram followers? This is something that I personally see as kind of similar to a heavy-handed version of the whole utility apps overseas craze of like 2015, 16, or 14, in that you can have a domestic-based team really master social media, as long as they speak English and get some help with your customer management, and then get the right operational scale. So kind of like use labor to make up for what you don't have in either local savvy or necessarily like B2B software technology

• 28:10Speaker 03

  in order to just like get the performance marketing right and sell purely online, straight to consumers. And like, there's some tweaks with this, but in general, like investors seem to think it's worth betting on.

• 28:23David Rosenthal?

  And Shein, it's also on Amazon, right?

• 28:27Speaker 03

  Yes.

• 28:27Speaker 01

  Yep.

• 28:28Speaker 03

  I don't think all their stuff is, though. Not everything.

• 28:31Speaker 01

  We're not the target customer here. It's funny, because I asked on Twitter, I was like, hey, have, have anyone heard of this app called Shein? And then all the people who replied were basically dads who had teenage daughters. They're like, yes, my daughter orders for this all the time.

• 28:48Ben Gilbert?

  Fascinating.

• 28:49David Rosenthal?

  Interesting.

• 28:50Speaker 03

  So there's another factor in this overseas expansion, which is that within China, DTC brands insist on having a gross profit margin of 30 to 40%. So that's kind of just the benchmark. Otherwise, consumers will think, oh, your prices are too high and it won't work. But depending on the industry, brands can charge like a roughly 10% margin on their costs. But when someone like Xiaomi enters the same market, then they'll kind of push all of the prices down to, to something like 5%. And all of the other players will die. So this is kind of another case of like, the market in China is so saturated in many categories that some people think it's less vicious to try to sell overseas, even though they don't have the native competitive advantage.

• 29:32Ben Gilbert?

  Oh, that's fascinating. It's very similar to what we were talking about, David, on the Meituan episode where you have to move so quickly and grow so quickly, because there's like 10 times the number of people at any given time trying to do the same company that you're doing. And there's enough consumers to sort of like support several different companies at once. And if there is any winner take all dynamic, then it's just going to accrue very quickly to whoever gets out ahead the fastest. And otherwise, there's just like a massive race to the bottom on who will be willing to compress their margins the most.

• 30:05Speaker 01

  Yeah, I totally agree with that.

• 30:08Ben Gilbert?

  It's just so competitive.

• 30:09Speaker 01

  Yeah, it's so competitive unless you can create the superior brand or customer experience, right?

• 30:15Ben Gilbert?

  All right, listeners, now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

• 30:29David Rosenthal?

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• 30:43Ben Gilbert?

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• 30:53David Rosenthal?

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• 31:10Ben Gilbert?

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• 31:26David Rosenthal?

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• 31:43Ben Gilbert?

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• 31:52David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you. So for Shein and all these other brands in China, how is offline playing into this? Is, are they also doing physical retail in China or overseas? Or are these purely online brands?

• 32:19Speaker 01

  Yeah. So for Shein, that's actually a purely online brand, selling exclusively outside of China. But for a lot of the new innovations that we're seeing inside of China, it's actually a merging of online, offline, right? So it depends, it's happening at two levels. The earlier we were talking about primarily at the brand level, there's also innovation happening at the channel level. And by channel, I basically mean like retail stores, right? So I think one thing that China definitely leads in, that gets lost a little bit in all the coverage, is that yes, China leads in e-commerce, but China actually also leads in digital retail. By digital retail, what I mean is actually an offline experience

• 33:00Speaker 01

  that is highly digitized, right? So that's very, very different from the US. And I actually, this is something you can sort of intuitively understand when you go shopping in China. But I think the, we did an episode with Jordan Burke, who is the former head of Walmart e-commerce and digital experience in China. And I think the way he breaks it down is really smart. And during the pandemic, we saw US stores, right? Use their shops as pickup points for e-commerce, right? But in China, actually, that's something that's been happening for the last 10 years, where shops are designed that way from the get-go because e-commerce has such a high penetration. So it's totally normal for people to, you know, shop online and go pick up at their local store.

• 33:45Speaker 01

  So the way the store is laid out is even different, right? Like where the warehouses are, how much, you know, what the flow of the store, et cetera. And this is because, you know, if you ask Gen Z here in the US, like they see less and less difference between online and offline. Well, I think in China, because the society is so highly digitized, that's, that's actually the typical experience for many, many consumers. They just think of it as shopping. They don't think of it as necessarily like

• 34:13David Rosenthal?

  Online shopping versus

• 34:14Speaker 01

  Yeah.

• 34:15David Rosenthal?

  Going to the store, huh?

• 34:16Speaker 01

  Yeah, the stores have, like I said, number one, their outfit for picking, being able to be picked up. They're also much more integrated with their apps, right? So how many times you go to Costco and, or at least I go to Costco and I, I'm asking for some help and they're like, we can't help you because that's Costco.com, right?

• 34:35David Rosenthal?

  Yeah.

• 34:35Speaker 01

  And you're in the store, right? But, but in China, like a lot, a lot of these experiences are fully integrated. And then the app is also something people use when they're inside the store. And then there's also a lot more personalization, right? Because again, personalization is very important to the average Chinese consumer. But it's been shown that Asian consumers in general actually require a lot, a lot higher personalization or want a lot higher personalization than Western consumers.

• 35:04Ben Gilbert?

  And what's an example of that? When you say personalization, like who, what's a company that's done it well?

• 35:08Speaker 01

  What's an example of personalization? Well, what I mean is like the, actually all the e-commerce, I would say all the e-commerce companies in China do it fairly well, like in the sense that the user behavior on some platforms, especially like Pinduoduo, is much more of a feed-based and recommendation pushed experience.

• 35:27David Rosenthal?

  Is in like the merchandising that you're seeing in your shopping experience is

• 35:31Speaker 01

  Yes.

• 35:32David Rosenthal?

  Like versus, you know, you walk into a Target and literally everybody who walks into that Target gets the same merchandising experience.

• 35:40Speaker 01

  Yeah, that's a big part of it, but basically getting recommended. What the store thinks you want based on your past purchases, right? Based on your, you know, experiences, but also getting very personalized promotions. Right? So I think something that, I don't know if this is too much of a tangent, but in China, like there is a huge team called operations. That's really hard to find a analog in the, you know, in Silicon Valley companies. But all the e-commerce platforms actually have huge operations teams that are constantly working through promotions and working with merchants. So that every time that you log on as a user, you're seeing, you know, different content than when you logged on, you know, the day before or this morning or whatever.

• 36:24Speaker 01

  Yeah. Because people expect like, you know, people expect, you know, new content and new things to be offered to them constantly.

• 36:31Ben Gilbert?

  It's funny that while this is not really a big thing in e-commerce in the U.S., I'm sure some companies do it well, but to your point, much more common in China. It's actually very common in gaming companies in the U.S. to have a live operations team. You'll see, I spent a year working in the gaming industry and you'll frequently see people whose background includes live ops. And that basically means they were running the in-game stores promotions for, you know, a live period of time with a lot of personalization built in.

• 36:59Speaker 01

  Oh, my gosh, that's the, I didn't realize that.

• 37:02Speaker 03

  She's a gamer.

• 37:02Speaker 01

  But that makes a lot of, yeah. But I didn't realize that, but that makes a lot of sense now that I think about it. First of all, gaming was basically how, like, I would say 10 years ago, most people were working on some sort of gaming company. Or if they weren't working on a gaming company, their ultimate monetization was gaming. Right? So they could be working on XYZ, but they were basically trying to funnel people into games because that was the only, like, that was basically the only business model that worked in China.

• 37:29Ben Gilbert?

  Yeah.

• 37:29Speaker 01

  Yeah. So a lot of people have this thing.

• 37:31David Rosenthal?

  We got a tangent here for a sec. What kind of gaming are we talking, like, like League, like League of Legends or like mobile gaming?

• 37:39Speaker 01

  Oh, Ying thinks that my gamer, just because like I played more games than she did. But yeah, my.

• 37:45Speaker 03

  In college, she was like, I played games all through school. Yeah.

• 37:49Speaker 01

  I did. Yeah. Yeah, exactly. In college, I played a lot of StarCraft and, you know, EverQuest. And this is very, this is very much dating myself.

• 37:59Ben Gilbert?

  EverQuest is like setting the bar.

• 38:01Speaker 01

  Yeah.

• 38:01Ben Gilbert?

  That is.

• 38:02David Rosenthal?

  Well, we, I mean, the way that.

• 38:04Speaker 01

  World of Warcraft.

• 38:05David Rosenthal?

  Yeah. When we had Rahul Vora from Superhuman on the show, I mean, he really like, yeah, superhuman is great and all, but he really like won cred with me when he was like, oh yeah, like, uh, I was a game designer. And we're like, wait, I did the research thing. You were like an original game designer on RuneScape.

• 38:21Speaker 01

  Oh, wow. RuneScape. Yeah. Wow, that's crazy. That was one of the deals I worked on at Rain, actually.

• 38:30David Rosenthal?

  I love it.

• 38:31Speaker 01

  Rain invested in Jagex, which was.

• 38:32David Rosenthal?

  That's right.

• 38:33Speaker 01

  Their company of RuneScape. Yeah.

• 38:34David Rosenthal?

  That's right.

• 38:36Speaker 01

  That's hilarious. But I think, I think, you know, Ben, what you said is, is just a really good point that I think actually that's a lot of where Chinese companies probably get their inspiration. But to, to this day, right, operations remain really, really important. And, you know, everything is quote unquote operated on, by the way, even the bullet comments on Billy Billy have operators, right? Like getting special promotions or planting comments.

• 39:03Ben Gilbert?

  Oh, yeah. We, we haven't colored Billy Billy yet on the show. So introduce us to that company. What is Billy Billy?

• 39:08Speaker 01

  Billy Billy likes to call itself the YouTube of China, but it's basically the stickiest platform for Gen Z to create and watch videos. I mean, that's not really how they make money. They have a more diverse set of revenue sources, but what they're really known for is this platform, much like YouTube, where people are uploading creative videos generally between, I think, five and 20 minutes. So longer, not short videos.

• 39:36Ben Gilbert?

  Oh, so not, not like Douyin?

• 39:38Speaker 01

  Not like Douyin.

• 39:39Ben Gilbert?

  Like TikTok type.

• 39:39Speaker 01

  Exactly. And more, much, much more like YouTube. That's why they do compare themselves to YouTube, except their business model is different, right? They don't make much money off of advertising. They have also a gaming platform. They have live streaming, e-commerce. It's actually pretty diverse at this point. Yeah.

• 39:57Ben Gilbert?

  Huh. I mean, that's just so, that is so much more common in China than the US where like, it's just not an advertising driven economy.

• 40:03Speaker 01

  It's, yeah, yeah, you're right. Yeah. With the exception of ByteDance, who has made huge strides in advertising, yes, that I would say, you know, well, actually Alibaba as well is really an advertising based company in many senses. But yes, you're correct.

• 40:21Ben Gilbert?

  Yeah. And I guess I should clarify when I say that too, because I don't know like GDP figures spend on advertising. But in China, it seems like it never really was the default answer that so many people are like, oh, we'll put games in or we'll steer you toward commerce. Like there will be a more direct way to create and capture value.

• 40:36Speaker 01

  That's absolutely right. I mean, it has a lot to do with the fact that it was just kind of early, right? Like China just crossed like $10,000 in GDP per capita. I don't know if you guys know the US number, but it's over 65,000, right? There's a pretty big gap. And, you know, for, I would say the first couple of years I was in China, I had a lot of friends in advertising and they could tell you that it was really difficult to sell advertising. Well, why? Because at the time, you really, you should just invest your profits into growing distribution that you got way more bang for your buck out of just organically growing, you know, distribution points than trying to advertise because advertising, if you think about it, it's really for a kind of saturated economy where all the distribution's

• 41:19Speaker 01

  already built out, right? And you're just trying to compete with each other. But at the, you know, with China, until recently at least, it really was just like, just get your products in front of the customer.

• 41:30Ben Gilbert?

  Yeah.

• 41:30Speaker 01

  You know, versus like trying to say I'm better than the other guy. It's like, no, no, you win just by being there.

• 41:36David Rosenthal?

  So this is, this is a great transition point to the next big trend. I think we wanted to discuss, which is community group buying, which we discussed a good bit with Lillian on the Meton follow up on the LP show. But for everybody else, I mean, to me like this is the, like a perfect example of this, the focus on distribution in China. Like this, that's what it's all about, right?

• 42:00Speaker 01

  Distribution. Yeah. This, this is exactly a distribution play. Yeah.

• 42:06Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 42:19David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 42:35Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 42:50David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 43:14Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 43:33David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 44:03Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at logora.com/acquired and just tell them that Ben and David sent you.

• 44:28Ben Gilbert?

  So yeah, what, what is community group buying?

• 44:31Speaker 01

  Community group buying is very simple. People are applying a group buying mechanism to buying fresh groceries to start with, but now also moving into other goods to parts of rural China, where there isn't a lot of choice and isn't great logistics for such products. And then, so what they're doing is they're collating demand, right? And they're aggregating it and then the platforms basically send it to you the next day for your own self pickup, thereby saving money on the last mile logistics.

• 45:02David Rosenthal?

  And these are like to the, you know, previous discussion about advertising and not needing to differentiate your products. Like these are the ultimate unbranded, like these are products from rural farmers, right? Like, like vegetables and stuff, right? Like that, that people are buying through community group buying platforms and the platforms are Meituan, PDD, Alibaba, like enormous tech companies, right?

• 45:31Speaker 01

  Yeah, although, although actually, if you look at community group buy, we just did a call with an alternative data firm on this and you can see that people are, so, so while fresh food is sort of like the way to get people hooked onto your platform. So like in China, for example, like everyone sells eggs because I don't know why, like eggs are just, people just love cheap eggs. And then I heard that nowadays, actually, they're trying to get people to get vaccinated by gifting you free eggs along with your vaccination. So eggs are just like We get donuts, they get eggs. Eggs are like, eggs are like one of the best sellers on all these platforms, actually. But you can also see from some of these platforms are shifting into more branded and non-perishable

• 46:16Speaker 01

  products as well. So like boxed milk, right? Juices, you know, and then there was one platform, I think they're just trying to brush their GMV. I won't say their name, but they're actually, their best seller was actually the iPhone 12. So.

• 46:30David Rosenthal?

  Wow.

• 46:33Ben Gilbert?

  Yeah, that doesn't quite seem like the same thing.

• 46:36David Rosenthal?

  So there's a platform that's selling iPhones.

• 46:39Speaker 01

  Yeah.

• 46:39David Rosenthal?

  Via this community group buying model in rural China.

• 46:42Speaker 01

  It's one of the, yeah, it's one of the top ones that are well funded. Yeah. So what I'm saying is that this is a model, but you can see, like, while it's starting off with groceries, you can see pretty clearly that this is really just rural e-commerce. And the group buying aspect is, you know, if you consider group buying as something like the order only happens when enough people order it, that's not really happening right now anymore either. Right? So like even the group buying aspect, I always say, everything about these words is kind of up for debate. I would just call it hyper local rural e-commerce. Which by the way, Alibaba, their new initiative, that's what they're calling it. They're calling it hyper local e-commerce.

• 47:25David Rosenthal?

  And the way this all works is fascinating, right? Like the platforms are pushing so much of the logistics work onto users and leaders of these group buying platforms themselves, right? So it's not like PDD or Meituan or whomever is actually doing very little to get these products in the hands of customers.

• 47:52Speaker 01

  Well, that's not strictly correct. You are correct in that they're not doing the last mile, but they have to do the entire procurement, which in the past in China would be, you know, you go to the farms. There were two or three layers of distribution before you as the final end customer, you know, got it from a grocery store or the wet market or whatever. But now then Meituan or Pinduoduo has to do this entire thing, which requires actually a lot of cold chain logistics for perishable foods that.

• 48:28Speaker 01

  Most of them don't have, right? So we did an episode on e-grocery in China and I don't remember the exact stat, but you can compare the, you know, per capita, I guess, cold storage sort of capacity and it China's like a fraction of what's here in the US. So, so that is actually a really, really good sector for you to invest in.

• 48:47David Rosenthal?

  Interesting. So they're doing all of the

• 48:49Speaker 01

  They are doing all the warehousing.

• 48:51David Rosenthal?

  Higher level supply chain. It's the last mile that they're pushing down onto users.

• 48:55Speaker 01

  Yeah. And, you know, it's arguable whether or not it's really, really all that much cheaper because the拼多多 CEO Chen Lei has actually said in agricultural e-commerce, it's not the last mile that's expensive. It's the first mile.

• 49:09David Rosenthal?

  Huh. And why is that?

• 49:10Speaker 01

  Because getting it from the farmer, I guess, to the warehouse and then doing all that is actually, um, you know, that part of the supply chain isn't as well developed as if you think about it, sort of the same day, same city courier system, like a lot of the e-commerce actually already accommodates that. They've already built that out.

• 49:30David Rosenthal?

  Yeah. Well, and just the refrigeration and cold storage.

• 49:33Speaker 01

  Yeah.

• 49:34David Rosenthal?

  I assume none of that is happening during the last mile.

• 49:38Speaker 01

  No, no. So it, yeah, the way it works right now for all the platforms is we, we actually like took some deep dives into the warehousing because that, that is really what you're going to understand if, if this platform is doing it correctly or sustainably and can make it, right? So they actually franchise out the warehouses. So you can go, for example, and become like a meituan CGP warehouse pickup point, I guess. And then you, you need to have like a, you'd have a certain number of capital. You have this building that fits the requirements. And then you need to have like cars or like some type of vehicle that fits their requirements, et cetera, and this number of laborers. And then you can go and become a franchisee of, of the system. Yeah.

• 50:24Ben Gilbert?

  Wow.

• 50:25Speaker 03

  So I think to frame this, this is one of the areas that I'm personally really excited about seeing up close and in person when we can travel again, because again, a lot of the content that we're seeing around this is reported on and it's not people that Ray and I talk to on a daily basis because they're usually in first or second, maybe second tier cities. But this is really about, like we said, digital penetration into rural China. It is also about micro entrepreneurship. So the community leaders who are taking a cut of the total sales within their community are essentially, you know, being contracted and get like a nice partial salary every month for playing that role. And it's a way

• 51:09Speaker 03

  for the large platform. So you mentioned Pinduoduo PDD, but also Alibaba and JD of putting almost, I would say almost billions of dollars US.

• 51:18Speaker 01

  Yeah, no, no, not almost. Yeah, they are billions of dollars.

• 51:22Speaker 03

  Over like billions of dollars into their own platforms or into their investments. And sort of like at a high level too, what we talk about a lot on Tech Buzz is the whole, what was it trickle up consumption in, what was that phrase, Ray?

• 51:38Speaker 01

  It's hard to translate, but consumption upgrade is when people in China talk about the first and second tier cities, you know, increasing in their consumption and basically being like developed economy consumers. And then there is also the consumer quote unquote downgrade, which is when all the brands are now discovering that rural China is where it's at.

• 52:03Speaker 03

  Exactly. Yeah.

• 52:04Ben Gilbert?

  Hmm. And is this race pouring billions of dollars into the tier three and tier four cities? Is that just because they're out of growth in tier one and tier two cities? And this is where they need to go to grow? Or why is there a capital battle going on there?

• 52:19Speaker 01

  Yeah, huge. Because if you look at China, the growth has slowed down for all of China. But if you look at rural China, it's actually still something like 10% GDP growth per capita year on year. Right? So, and this is about, depending on how you slice it, but I generally like to take just the first and second tier cities out. The rest of China, quote unquote, rural China, third tier and below is is still a billion people.

• 52:44David Rosenthal?

  Yeah, this is, you know, for Western audiences, just to give a sense of scale, like tier one and tier two cities in China are like bigger than any cities in the West, right?

• 52:54Speaker 01

  Right, yeah.

• 52:55Speaker 03

  Like tier three and tier four are too. They're sometimes bigger, especially San Francisco. SF is really small. It's like a town.

• 53:02David Rosenthal?

  Yeah. So we're still talking about, yeah, as you say, a billion people in tier three and tier four cities in China.

• 53:11Speaker 01

  Yeah, yeah, and below. And even, you know, again, tier five, it's really interesting because China has really good infrastructure in some sense, but then and and a lot of people. But when you think about like retail distribution, think about like in the US, right? We have access to really good, you know, grocery stores, supermarkets, because it's been over 100 years that people have been investing in these logistics, real estate, cold chain, et cetera. And in China, it's just gonna take some time, right? Like, they're already growing really, really fast. But but to give you an example of what a fifth tier city looks like, a fifth tier city, because I was trying to explain to an African entrepreneur exploring CGB, I was like, I was like, oh, well, the, you know, in China, it really works well in these types of cities and

• 53:55Speaker 01

  fifth tier cities. She's like, what does that look like? So anyways, I found some stats and pictures for her. It's about a million people usually, so.

• 54:04David Rosenthal?

  Which is the size of San Francisco.

• 54:05Speaker 01

  Yeah, exactly. It's about a million people typically. I looked up like 10 cities. They're all about a million. And, you know, if you look at the skyline, they don't have like necessarily a ton of skyscrapers, but they have some tall buildings. The the main thing is that you'll find, I thought this was like hilarious, is that all of them have either a Starbucks about to open or just opened. So that that is like the level of GDP that you can think about. So and by the way, Starbucks is about three to $4 per cup in China, right? So it's not cheap. It's premium in China. So when Starbucks is opening, I think it's a great indicator of this this city being on the up and up and being able to consume more.

• 54:46David Rosenthal?

  Well, and this explains too, I think, you know, one of the things Lilian really talked about on on the LP episode about CGB, in the question of why, why is this so important? And why are all these big platforms investing billions of dollars into it? It's not about selling groceries to people. It's about capturing user behavior for all of these new people coming on to tech platforms. Right. And so if, if they start transacting for their staple everyday goods on PDD or on Metoo or on JD or on Alibaba, then there's a really good chance that they're going to keep doing more stuff on those platforms, especially as their disposable income goes up, right?

• 55:28Speaker 01

  Yeah, these are high frequency purchases and then, you know, even the disposable income, I think you can't just look at the, the pure like income level, right? Because it's the same thing as in the US where if you live in a quote unquote tier one urban center, you might have a high salary, but your real estate costs are super high as well. So your final like lifestyle purchases could actually be less in China if you live in Shanghai or something versus if you live in a quote unquote tier two city like Chengdu or a, you know, where Ying Ying's families from like a tier four city, people there might actually have more money to spend.

• 56:04David Rosenthal?

  Yeah.

• 56:05Speaker 01

  It's like, it's unintuitive, but it is true, right? Because the income disparity might be a factor of like two, three times, but the real estate prices might be a factor of 10 times.

• 56:16David Rosenthal?

  Yeah.

• 56:16Speaker 01

  Right. It's very like, like Shanghai, when, when I left, I bought an apartment there and I sold it and it was like already more expensive than most districts in San Francisco.

• 56:26David Rosenthal?

  Wow.

• 56:28Speaker 01

  This is five years ago. Yeah.

• 56:30Speaker 03

  So Ray mentioned my family and I just looked up the population of the fourth tier city that I was born in and it's fourth tier, but there's 5.77 million people. And, and what you were saying with disposable income and folks having more to spend discretionary in general, that's true. I, I feel like my aunt compared to my mom, she will spend hundreds of US dollars on clothing and her salary is probably like, not to out her, but probably like one or 2,000 US dollars a month. So we just don't know. Sometimes my mom's like, where is she getting the money for this? But it's because everything else is so cheap or if you're working kind of a government job, you get a ton of benefits, including

• 57:12Speaker 03

  Housing. And also, I want to just ingrain in listeners' minds when we do say rural China, like we've already described, we're not talking rural areas. We're talking cities like the one I just

• 57:25Speaker 01

  We're talking like Yeah, it's not like some field in the middle of nowhere.

• 57:29Speaker 03

  The reason this works in community group buying, like, it's not just, oh, people traveling 10 miles to deliver one bag of groceries to the final outlier. It's like they're in neighborhoods that are stacked, like, more densely than San Francisco. And so you have, like, the gatekeeper of the neighborhood taking the bulk orders and it's right downstairs before you go out.

• 57:49Ben Gilbert?

  So what do we call, like, people farming in China? If rural China means 5 million person cities in dense

• 57:56Speaker 03

  Farmers.

• 57:57Speaker 01

  Apartments.

• 58:01Speaker 01

  I think they're still called farmers.

• 58:04Ben Gilbert?

  Wow. All right. Well, I want to transition us to one other big topic that I think we want to hit in talking through China trends today, and that is electric vehicles. I think this is something that a lot of people have seen in the news, both because of SPACs that are happening, because of new battery technology companies, because of Tesla competitors, because of Tesla, you know, building a very large factory in China. Like, what the heck is going on with electric vehicles in China?

• 58:31Speaker 01

  So first of all, it's just like a big priority right now. I think if you look back 10 years ago, China probably didn't care that much about environmental damage or, or climate change, at least not at the expense of economic development. But in recent years, you've really seen China take a lead on climate change. And part of it is because, you know, they realize that reliance on oil and just, you know, all the devastation from climate change is actually bad for national security, right? It's destabilizing. So now, electric vehicles has become a huge priority in China, and every brand is jumping into it. So in the past month alone, we've seen Huawei announce that they're going to put in

• 59:13Speaker 01

  the software into EVs. We've seen, we've seen Xiaomi announce that they're going to invest $10 billion over the next 10 years into EVs. We've seen DJI, the drone maker, say they're going to participate in EVs. And, you know, the BAT and, you know, companies like, so Baidu is now effectively, basically, a autonomous driving company, actually, if you just look at their

• 59:34David Rosenthal?

  Really?

• 59:34Speaker 01

  Yeah, basically like they're that's really the that's really the main story now for that company.

• 59:40David Rosenthal?

  My and our unacquired sort of perspective on the BAT and Baidu specifically is like that they've just fallen off the map and it's just Alibaba and Tencent are the big players in in China now. But I at least haven't known anything about what's actually happened with Baidu.

• 59:58Speaker 01

  Yeah, basically like investors like I talked to are basically like, oh, you're basically investing in Baidu as a autonomous driving company and you're getting the search business for free.

• 1:00:08David Rosenthal?

  Wow.

• 1:00:09Speaker 01

  That's what it is.

• 1:00:09David Rosenthal?

  So it's like investing in Waymo and getting Google for free.

• 1:00:11Speaker 01

  Exactly, exactly. Right? So it's like if you and and you know, again, like when Baidu introduces itself now, I know a lot of the PR people there is basically we're an AI company. That's accurate. Yeah. Yeah. And they've made they've made, by the way, a lot of progress in autonomous driving. So no knock on them. But if you look at Alibaba, they also have a bunch of JVs in EV. We don't know what they're exactly what they're doing because they've only announced JVs, but no specifics. Tencent, of course, has invested in, I think they invested in Neo. Alibaba also invested in Xpeng and then Meituan invested in Li Auto, which are the three publicly listed Chinese EV companies. And then they've all made significant money, I guess, at least on paper, on these investments,

• 1:00:56Speaker 01

  because they're all up significantly in the last year, which is hilarious. Because when we visited Neo in October 2019, I remember our meeting got canceled that last minute because this was the period when people weren't sure if they were going to be in business. So their stock price was like hovering around.

• 1:01:14Ben Gilbert?

  And are they are they making cars? Like, are these companies cars on the road?

• 1:01:18Speaker 01

  Yeah, yeah. All of them have all of them have delivered vehicles. Of course, they're a fraction of Tesla, but they've all delivered vehicles. In fact, I think Neo now is a, I want to say, yeah, $59 billion company.

• 1:01:33David Rosenthal?

  Wow.

• 1:01:34Speaker 01

  Yeah, literally a year and a half ago, we weren't sure if they would be survive.

• 1:01:38David Rosenthal?

  Which is what Tesla was two years ago.

• 1:01:40Speaker 01

  Yeah, I know.

• 1:01:42Ben Gilbert?

  Well, it's funny, is the Tesla sales multiple being applied to all of these companies too? Is that what's happening?

• 1:01:49Speaker 01

  Yeah, I think so. The the exuberance is has lifted the entire sector. Yeah, and when you consider, of course, that China's, you know, largest car market and there is government push towards EVs, that, yeah, there's a lot of excitement.

• 1:02:08Ben Gilbert?

  And is it fair to say that the car market in China is probably four to five times as large as the car market in the US just by population?

• 1:02:15Speaker 01

  Yeah, I actually don't know. I did an episode on this, but I don't remember the exact numbers, but I do remember it's the largest. Yeah.

• 1:02:22Ben Gilbert?

  Huh, because I have heard this from other sources, sort of talking about the growth of electric vehicles. People saying, oh, well, the real growth is in China, just from a consumption perspective.

• 1:02:33Speaker 01

  Yeah, yeah.

• 1:02:34Ben Gilbert?

  And I think that's people betting on the continued development of the economy and the incredible demand and probably government incentives to be driving an electric car in the next few years.

• 1:02:43Speaker 01

  Definitely government incentives. Yeah, yeah. I mean, it's complicated. It's a complicated story. The government is tamping down incentives, but I think the overall demand is still going to be there. Yeah. And the but there's a lot of, there's a lot of competition, as you can see, basically every internet company, we've listed a bunch, I'm just waiting for Pinduoduo now to announce that they're gonna do some like discount car. Yeah.

• 1:03:05Ben Gilbert?

  EVs are the new games for Chinese companies.

• 1:03:07Speaker 01

  No, for sure, for sure. Yeah. And then the pretty much everyone's announced one. And then separately, in autonomous driving, which I think is also really interesting, but all of these companies are private, so so we don't know as much about them. But I've talked to a bunch of people who have invested in this space and I've talked to a few of the companies. I think that this is a space we should definitely be watching because China is going about it in a different way. So Baidu, for example, is working with the government on autonomous driving solutions that aren't just the software, but also include remaking the infrastructure on the road. Right? So so we'll see if that works. And then there are just, yeah, a bunch of players that are really like teams, actually, that came

• 1:03:51Speaker 01

  out of Baidu, also Google, just really, really top notch AI talent and.

• 1:03:57Speaker 01

  The word on the ground is that it's anyone's game. Like, who's going to get to level five first? It's not clear that it would be the US winning. I think China has a really strong chance. And this is like the first, this is what I would say is like the first sort of deep tech, right? Not like consumer internet lightweight app, but really deep tech that we see this competition play out that will be, that will have really, really interesting lasting effects, right? The first country to get to level five is going to experience tremendous efficiencies.

• 1:04:28David Rosenthal?

  Yeah. Yeah. Well, and you know, the infrastructure point is a, an interesting one too, because, you know, I remember, not that I've spent a ton of time in the autonomous space, but, you know, a few years ago, people were thinking, oh, well, if, you know, there's going to be new roads built or roads upgraded in the US that are going to be integrated with AVs and this is going to be great. The reality is like, that's not going to happen in the US anytime soon. But China could actually do this.

• 1:04:58Ben Gilbert?

  Right. The US is at a huge disadvantage for this, both because of the sort of like reliance on the existing system, whereas China will just make a government mandate and say, nope, we're building an all new system and people will snap too. But also because of the federal system, the, the idea that we're a whole bunch of states that are all going to pass laws independently. I think the ability to require that people stay at home during the coronavirus is a very similar example where if something is declared by fiat, it is much more likely to be followed than, you know, please, please, population, do something. Very different strategies that, that both have their trade offs.

• 1:05:34Speaker 01

  Yeah, yeah. I mean, it, it is not that centralized in China either, but I think there are, yeah, the, the local governments, who I've worked with some of them, I definitely have a lot more power, a lot more budget than, you know, than here in the States. I can't, I can't imagine some of the cities I've lived in, in the Bay Area, for example, really being able to remake the entire, you know, traffic light system or lane markers or whatever it is that's needed.

• 1:06:03David Rosenthal?

  Yeah.

• 1:06:03Speaker 01

  Probably.

• 1:06:04David Rosenthal?

  Like, it's just impossible to even imagine.

• 1:06:06Speaker 01

  I know, right? It's like, the potholes aren't even filled yet and you're going to make this a smart road? I don't know.

• 1:06:15David Rosenthal?

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• 1:06:22Ben Gilbert?

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• 1:06:32David Rosenthal?

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• 1:06:53Ben Gilbert?

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• 1:07:05David Rosenthal?

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• 1:07:16Ben Gilbert?

  All right, one more lightning topic here before we close, because I know it's on a lot of people's minds who follow China tech. What is going on with antitrust in China right now? And is it a good thing? Is it a bad thing? I will say it's definitely affecting asset prices and stock prices. So what's happening there?

• 1:07:32Speaker 01

  So I think the antitrust caught some people off guard. But actually, if you look at the history, this was pretty much inevitable, and it's actually been in play for quite a few years, right? So I talked to people who've been working on antitrust in China, and it's at least three or four years in the making. If you look at the history, Chinese antitrust law, the first version was passed in 2008, which is really late, right? Because in the US, it was like in the 1890s that was the first version.

• 1:08:00David Rosenthal?

  The Sherman Act, I think, was.

• 1:08:02Speaker 01

  Yeah, yeah, exactly, exactly. And so, and then nothing was done for the next 12 years. So, specific to tech, we had one case that was Xihu 360 and Tencent. They got into a fight where it was actually very similar to what's happening right now, where they basically told their users that the other software program was malware, and that if you wanted to use. My program, you had to uninstall the other program, right? Forcibly. And then Tencent actually won that case, but but it actually had ramifications in that it really changed how they thought about their strategy going forward. This is this is actually the time after which they stopped making a lot of products internally and started investing.

• 1:08:45Speaker 01

  So this is when they built their empire, so to speak. But after that case, then no cases were heard for like the next 10 years.

• 1:08:52David Rosenthal?

  Wow. So literally zero antitrust cases in China for 10 years.

• 1:08:56Speaker 01

  Yeah, yeah. Well, in tech, in tech, there were plenty of antitrust cases, but I mean for internet, for internet. So so let's make that clear. Then in January 2020, in an effort, honestly, to catch up with the rest of the world, right? So if you look at all the state media and the government proclamations, this is all about trying to catch up with the rest of the world. They issued the first draft and then a lot of the things were very reasonable. And then they issued more, of course, towards the end of last year, specifically around platform companies. But really, you've seen movements towards this direction for a while now. And all of the things are meant to really protect consumers as well as vendors who deal with these platform companies.

• 1:09:41Speaker 01

  Because let's face it, some of them, like Alibaba, who recently received the massive $2.8 billion fine, were really abusing their positions. Yeah, they were telling people that you could only do promotions or sell products on my platform and not JD. Right? So this is like, this is very egregious if you if you think about it. Yeah. And then the the laws also protect consumers against various other things, which is like discriminatory pricing. So a lot of the platforms were discovered by the public to be discriminating against users. And in fact, they were doing it against their most loyal customers, right? Because

• 1:10:18David Rosenthal?

  Right. They're gonna be happy to pay more.

• 1:10:20Speaker 01

  Yeah, exactly. They're like, we know you're really sticky and you're very loyal, so we're gonna actually charge you more for the same thing than for a new user. So this was, this is obviously really not cool. Oh, so, so really, I think the proper takeaway is that China is really trying to catch up to the rest of the world. And this is something that is going to be in play. This is not something that's going away. China is very adamant about this. It's not going to go back to the days of the wild west, which I agree with. And if you talk to investors on the ground and consumers on the ground, they're all cheering these resolutions. In fact, they're like, why didn't this happen earlier? Right?

• 1:10:58Ben Gilbert?

  And why is that?

• 1:10:59Speaker 01

  Because again, some of the practices that were that these big tech companies were doing that were really, really unfair to both consumers and vendors. And there was just no recourse because the antitrust authorities weren't really even hearing any cases. Right? So all of the judgments also were, oh, I shouldn't say the antitrust, they were hearing cases, but I would say the judgments were very small. So prior to the draft laws changing this, I think the upper cap for violations was like a million RMB, right? Or 500,000 RMB, it might have been even lower, which is like $70,000. It's like,

• 1:11:36David Rosenthal?

  That's like, it's like a small tax you're gonna pay.

• 1:11:38Speaker 01

  Yeah, exactly. Like, imagine, imagine you're, you know, 200 billion dollar company. This means nothing.

• 1:11:45Ben Gilbert?

  So if you're a startup investor or startup founder employee, this is great news for you because, you know, this is going to force, you know, China big tech to play fair.

• 1:11:53Speaker 01

  Exactly. So, and that's exactly what's happened. If you talk to VCs on the ground, if you talk to entrepreneurs on the ground, one VC actually said something, this is more specific to fintech. He was like, oh yeah, I was previously not interested in consumer fintech at all. But now that all these rules came out, I think I'll start looking at it. Right? So.

• 1:12:11Ben Gilbert?

  Fascinating. All right. Well, as we close here, let's look with an eye toward the future. What should people sort of think about as what's next for China tech through 2021, 2022?

• 1:12:23Speaker 03

  So I think it's really hard to sum up what we should be looking at because as you've heard throughout our entire discussion, there's so much going on in China tech and so many sectors that are experiencing innovation. And you have like people who used to start internet companies going and making electric cars and raising a bunch of money for that. So that's happening domestically. But I think in my purview, there is a lot of increased internationalization that we kind of thought stopped last year because of COVID, but I actually see signs of it starting up again and accelerating. And this whole trend of Chinese companies not just coming to the US and Europe, but also going to Southeast

• 1:13:03Speaker 03

  Asia, to Brazil, to other emerging markets, India. That's again been ongoing. And I feel like having honed their chops at home, that's only going to accelerate. And there's certain sectors like e-commerce that are very well positioned for that. And there's companies that have already started to take advantage of those trends. And I think capital kind of in a cycle recognizes that as well. So definitely internationalization. I think from a talent point of view, too, founders who have found either success at home or success in a different sector, or have had global education. And I know you guys have seen this too with probably all the founders that you're meeting with, they take that knowledge and return home. And you know, it's like more comfortable to have a great

• 1:13:46Speaker 03

  lifestyle and to be well funded and well supported in the China market and from there kind of take on the rest of the world because you're you know how to hire teams in other places. So I think that that's going to continue. There's definitely continued innovation. I think Ray you wrote, McKinsey's head of China said, no China, no country, we're the main thing.

• 1:14:05Speaker 01

  Yeah. So and I think the this is more of a meta point, because I think we covered the sectors that we think are really interesting to look at for this year. The meta point is that I think for Chinese companies, don't expect them to impose any boundaries on themselves, right? So for example, we see that ByteDance is now going into local services and trying to move Maytuan's cheese, right? We see, of course, like Xiaomi going to EVs. But all these companies are going wherever the opportunity is next, because The amount of change that's really happened in the last 30 years in China, GDP went up 30 times in China in the last 30 years, right? That's the highest, like far, far higher than

• 1:14:47Speaker 01

  any other country, which makes both the customers in China hyper adaptive, but also makes the entrepreneurs, they're hyper adaptive as well. No one really takes anything for granted. They're looking for the next thing all the time.

• 1:15:00David Rosenthal?

  Right. Well, like the story of Meituan is that it started as a Groupon clone and today it's, you know, the largest travel player and a huge community group buying platform and you know, all sorts of stuff.

• 1:15:13Speaker 01

  Yeah, exactly. Meituan is, Meituan is a perfect example, like, you know, basically Wong Sing, like, I think it really embodies this, but so does Johnny Me at ByteDance, et cetera, right? There, they've just made a $4 billion acquisition of a gaming studio and then three weeks later, they made another acquisition, which I think is also billions of dollars. It was undisclosed, but just looking at the company, it's definitely, it's definitely up there.

• 1:15:37Ben Gilbert?

  Yeah. I mean, if I had to describe this trend, I think it would be US companies think that their core competency is something like e-commerce or ride sharing or social networking. And Chinese entrepreneurs think we have lots of competencies. We have a lot of capital. We have a lot of users.

• 1:15:56Speaker 01

  Yes.

• 1:15:57Ben Gilbert?

  Let's do whatever, let's do lots of things with that.

• 1:15:59Speaker 01

  Exactly. We'll, we'll do whatever makes money. Our core competency is making money. Either making money or for losing money, then raising money. So something like that. Yeah. So I, I definitely, there's this basically, I think existential anxiety that people have because they've seen so much change over the last, you know, during their lifetimes, that they can't take anything for granted, right? So people don't hold on to their laurels for too long and they're always investing. Yeah. Like, did you guys know, for example, ByteDance has invested big into fintech and even into hospital, right?

• 1:16:34David Rosenthal?

  Wow. No.

• 1:16:36Ben Gilbert?

  Whoa.

• 1:16:36Speaker 01

  Yeah. And then, and then of course there are rumors they're making their own EV as well, like, who knows, right? Everyone, everyone, you get an EV, you get an EV, everyone gets one.

• 1:16:45David Rosenthal?

  And it's still a private company.

• 1:16:47Speaker 01

  Yeah.

• 1:16:48David Rosenthal?

  Yeah.

• 1:16:50Ben Gilbert?

  Wow. Well, that's a great place to leave it. Ray and Ying, this was super fun. Thank you for doing this with us.

• 1:16:56Speaker 01

  Yeah, thank you for having us.

• 1:16:58Ben Gilbert?

  All right. Well, that wraps up our crossover episode with Tech Buzz China. If you liked what you heard and you want to listen to more, there are loads of great episodes from Ray and Ying. Just search Tech Buzz China in any podcast player and you'll be able to find it. If you want to talk about this episode, the goings on of the tech world, or just talk to genuinely smart people about what's going on in tech and business, you should join the Acquired Slack at acquired.fm/slash/Slack. If you love Acquired and you want to be a deeper part of what David and I do here, you should become an Acquired Limited Partner. We have obviously the loads of things that we normally talk about, the library of content, the VC fundamentals episodes, the interviews, the monthly Zoom calls. But this month, we

• 1:17:43Ben Gilbert?

  have a special announcement about our next book club. David, what are we doing?

• 1:17:48David Rosenthal?

  The triumphant return of the book club. We are so excited to bring it back. We are having Brad Stone back on Acquired to hang out with all of our LPs and talk about his new book dropping this month, Amazon Unbound. I can't wait to read this book. Ben and I both have it pre-ordered. Brad's first book on Amazon was just like a classic.

• 1:18:14Ben Gilbert?

  That's the Everything Store was the first one?

• 1:18:15David Rosenthal?

  The Everything Store. Yep. I learned so much from that book and Brad is just such a sensational reporter. And so much has happened since he last left Jeff. This is going to be awesome. So Brad is going to join us for live discussion with our LPs and we can't wait to see everybody there.

• 1:18:38Ben Gilbert?

  Yeah. And for you LPs, you'll get this in your email and an announcement with all the details of how to join. But read the book by May 21st, because that's when we'll be doing the discussion. And many of you may actually remember listening to Brad when he was on our Uber and Dee Dee episode as a guest back when he wrote his other book, The Upstarts, from the history of Uber and Airbnb. So join us, become an LP, tune in live and join us on the Zoom and ask Brad some questions too on May 21st. Well, with that, David, I think that's all we've got. So folks, we will see you next time.

• 1:19:15David Rosenthal?

  We'll see you next time. You.