Reflections From a Long Trip to China

GGV.15

I recently returned from a two-week trip to China, during which my partners at GGV and I held our 15th Anniversary celebratory event.  The festivities were kicked off by GGV Partners Jixun Foo and Jenny Lee, punctuated with heartfelt welcome toasts by Qunar’s CC Zhuang, on whose board Jixun has been for several years, and YY’s David Li, on whose board Jenny has participated for many years as well.  During the main program, emceed and organized by GGV Partner Hans Tung, we had about 15 of our companies’ founders & CEOs present, grouped around topics such as IoE (internet of everything), which Jenny spearheaded, mobile commerce, which GGV Partner Jeff Richards and Hans led, and O2O (online to offline), which Jixun and I put together. Additionally, Jixun interviewed Tao Dong, a CS economist spoke, two GGV Vice Presidents, Joshua Wu and Erica Yu, reported on a survey of China’s millennials and there were presentations by Xiaomi’s Lei Jun, in conversation with Hans, Alibaba’s Joe Tsai, in conversation with GGV Partner Hany Nada, and Yahoo founder/ Alibaba board member Jerry Yang, also in conversation with Hans.  There were also two great panels focused on China inbound and China outbound models, put together by Hans and GGV Principal, Mark Pols.  It was truly a remarkable event, full of content, great people and energy.

Having now returned from my trip, I wanted to share some insights from my time in Beijing.

China’s founders are now on par with elite US founders.  Ten years ago, most of the founders I met in China were raw – smart, hungry and visionary, but inexperienced and sometimes a bit naïve about what it would take to achieve a big success.  This has changed meaningfully over the past decade.  Now, many of the Chinese founders in the GGV portfolio have had experience working at (1) high growth tech companies (such as Tencent, Alibaba, Baidu or Youku/ Tudou), (2) other start-ups (many are founders of previous ventures), and/or (3) training at strong global players (eg, tech companies, consulting firms and academic institutions).  Like their US counterparts, these experienced entrepreneurs move quickly, not making the same mistakes made previously.  They also know a lot about the US tech scene, rapidly adapting best practices from the US.  Finally, the best of these entrepreneurs exhibit plenty of grit.  Just as in the US, grit is a key component of success.

IP coming out of China is accelerating and has eclipsed the US in many areas.  In the US, China is still largely viewed as a fast follower of western innovation.  For example, Peter Thiel has repeatedly suggested that China’s growth is a result of knocking off US technologies, not creating new things.  Innovation in the IT sector in China, however, is booming, rapidly gaining speed over the past few years.  For example, in connected devices or IOT, where China’s hardware manufacturing capabilities and growing software prowess give it an edge, Chinese companies are well in front of US rivals.  For example, in the drone arena, Chinese companies such as DJI and GGV portfolio company eHang are unquestionably leading the global market.  Similarly, Chinese consumer mobile companies such as Tencent now have far more advanced user experiences and business models than similar companies in the US, and the top US companies are known to be scanning Chinese apps regularly for new ideas. Total patent applications in China have zoomed past US, Japanese and Korean figures over the past decade, as has the number of new PhDs minted in China each versus these countries.  In short, the horse has left the stable and China will be increasingly recognized as an innovation powerhouse over the coming years.

Western companies are respected, but will they win?  US tech companies are clearly spending more time and energy focused on China.  There’s lots of talk about Uber in China these days.  Uber is doing very well in China for sure, but it’s still much smaller than local incumbent GGV portfolio company Didi Chuxing.  Depending on who you believe, Uber’s market share is somewhere between 10% – 30% with Didi Chuxing having the balance.  Apple is another company doing very well in China, but it’s still selling fewer phones than Huawei and Xiaomi.  Google also seems to be looking for a way to re-enter China but for now search is dominated by Baidu.  Meanwhile, local Chinese tech giants are growing market share and power.  Tencent, Alibaba and Baidu are all investing in and acquiring emerging leaders in China (and outside).  Every top US-based internet and mobile company is now thinking about China (as they should), but “winning” will be incredibly challenging in China given the strength of the incumbents.  Partnering selectively seems like a more viable strategy.

Dynamics and volatility around move to consumer-led economy.  At $11 Trillion, China’s GDP is the second largest in the world.  There’s a global fascination over whether China’s growth can continue at 7% or higher.  7% growth would mean about $770 billion of new GDP created this year.  To put that in perspective, the US is expected to grow 2.5% at best in ’15, generating roughly $400 billion in new GDP.  If China only grows at 6% this year, China will create $660 billion of new GDP.  In short, whatever the growth rate, lots of GDP is being created.  Consumerism is needed to continue to drive growth in China.  While lots of millionaires have been created in China (China has more millionaires and ultra high net worth ($50M+) folks than all other nations, apart from the US), a real question becomes how will the middle class behave over time.  It does seem that the transition to more consumerism as a component of GDP growth will lead to more volatility – its far easier to manage to a government spend number than to predict an aggregate consumer spend number – but it’s unclear what the path will look like exactly.  With more of a consumer-led economy, China is likely to start looking more like the US with respect to this volatility.

China’s economy remains an amazingly fast paced and dynamic arena, where innovation and experience are ascending as the key ingredients to success.  The doors are more open these days to US companies, but localization and partnerships will play an important role.  The market is big and people are resilient and ambitious.  The incumbents are strong.  I look forward to watching how the market continues to evolve.

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