2/13/22 Tech Buzz China Insider Digest
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Insider Digest 2/13/22: Pinduoduo & Consumption Upgrade / Downgrade, Predictions for US-China Tech Policy, AInnovation the first AI + Manufacturing IPO
Housekeeping / Announcements / Fun:
True.ly: There is a new metaverse-y avatar-based social app taking China by storm and it’s called True.ly (啫喱, Zheli, or the Chinese word for Jelly). I wasn’t able to get my account activated before it shut down new registrations over the weekend claiming “massive malicious attacks” from competitors re: data security. People’s Daily even chimed in, saying that while True.ly does need to ensure its data security is aboveboard, the big platforms have been resting on their laurels and do need to be disrupted, and should not suppress newcomers. A pointed warning, mayhaps?
2/11/22 Why Consumption Upgrade vs Downgrade is a Stupid Distinction
2/11/22 What Do Chinese Government Research Orgs Think US is Going to Do to China Tech?
2/12/22 AInnovation: Really the first AI + Manufacturing IPO in China?
2/11/22 Why Consumption Upgrade vs Downgrade is a Stupid Distinction
Before 2017, there was only talk of consumption upgrade. (This is absolutely true, it was one of the most overused phrases in that era ...) That is, growth in consumer purchasing power, an expanding middle class and their need for ever better goods and services. But along came Pinduoduo and a different explanation arose: consumption downgrade. We talked about this at length in our podcast on Pinduoduo. This, of course, means the opposite of upgrade: consumers were in fact happy to buy cheaper items of lesser quality, which of course was the entire value proposition of Pinduoduo.
But did founder Colin Huang agree? No. Pinduoduo was merely addressing consumption upgrade of rural Chinese citizens, that’s all. In addition, let’s remember that actually pre 2012, Taobao was known for having low quality products. The only true consumption upgrade platform at the time was JD.
Nonetheless, this narrative stuck. Alibaba, investors complained, was overly focused on consumption upgrade and neglected to see the opportunity in consumption downgrade, thereby losing significant GMV to PDD. This is not untrue. Alibaba’s logic for traffic distribution remains focused on prioritizing branded stores (whether they are single brand or omni-brand, flagship or not) and only in last / 6th place is the C2C Taobao store by individuals selling mostly unbranded goods. Yet this last category was taking up 50%+ of the GMV as late as 2019, showing that there is incredible demand for these types of products. Alibaba’s strategy then, can be summarized as this: exploit the large base of small, unbranded sellers and sell the traffic they generate to large branded stores, who have a much higher willingness to pay.
2/11/22 What Do Chinese Government Research Orgs Think US is Going to Do to China Tech?
The following came from the China Institutes of Contemporary International Relations WeChat account. But it is a repost from the China Information Security magazine, also a government organization. The author is Li Zheng. I’m not familiar with the magazine, but the Institute seems fairly well regarded for what it does. I wouldn’t consider this any kind of official government stance though — I’m merely sharing a set of predictions from what I believe to be an informed and thoughtful source.
Predicted impact on Chinese tech:
Biden will not loosen on tech exports to China. This is the most practical problem facing Chinese companies. Trump increased the power of the Commerce and Industrial Safety Departments to limit tech exports with China as the main target. Biden has only expanded various “black lists,” so while the frequency of such actions could decrease, they will be just as rigorous.
Biden will likely increase restrictions on Chinese investment. CFIUS has repeatedly interfered with Chinese M&A abroad, and FIRRMA increased the scope to overseas. The Biden administration seems to think the execution could be even stronger here. Can perhaps expect US to strengthen interfering in “third country” transactions such as the Magnachip deal above. Chinese companies operating in developing countries or Europe may be affected.
Biden will continue discriminatory enforcement against Chinese tech companies overseas. More incidents like Meng Wanzhou may happen. More Chinese tech company executives may be detained by the US under the reason of undermining US national security.
Biden will increase collaboration with American tech companies to fight against Chinese tech companies for markets and users. Biden’s biggest difference with Trump is his focus on Chinese and US competition in other countries (”third parties”). He is actively beginning partnerships with other countries, is trying to increase investment into developing country infrastructure, may more actively use international investment and trade agreements to support American businesses in implementing asymmetric competitive behavior against Chinese companies. US will continue to use human rights to damage Chinese companies’ credibility overseas. Chinese companies should cultivate awareness of the national strategy, realize the seriousness and long-term nature of the US-China tech competition, and focus on becoming independent of American technology and supply chains.
2/12/22 AInnovation: Really the first AI + Manufacturing IPO in China?
AInnovation (创新奇智) went public on HKSE on Jan. 26, 2022 and received a good amount of coverage because it claimed that it is the first to do so under the “AI + manufacturing” banner, with the “AI” crown having been taken by Sensetime. But most of that coverage was very negative, and for good reason too, as we’ll see below. (The company’s weak debut — pricing at the lower end of range and dropping immediately upon listing — has not helped.)
AInnovation’s prospectus confirms a few general facts about the industry:
The financial sector’s willingness to pay for enterprise solutions is significantly higher than those of others. Specifically, banking sticks out as having the most profitable customers. Insurance is just a much smaller sector at the moment. This is why 4Paradigm focused on bank-specific products first (5 SOE banks are its shareholders). For AInnovation, manufacturing has only won out in the last year, and if it weren’t for a surge in automotive clients, wouldn’t be the largest segment!
Picking the right sector to concentrate on is of the utmost importance, it’s possible that after financial services, automotive might be the segment you want to be in. It also has some of the best gross margins at 37%.
Nonetheless, for AInnovation, the gross margin of financial services dropped tremendously (78% to 29%, and as low as 23% for banking) due to a change in product mix towards solutions with more hardware components ... which brings me to my next point ...
It’s very, very hard to be a software-only business in China if you are selling to traditional companies. (Sensetime really distinguishes itself here, with its 70%+ gross margins. It also sells quite a bit to other tech companies or entities whose primary purpose is to deploy tech solutions.) But most companies are going to have margin profiles that look much more like AInnovation, as technology is not the main aim, but a means to an end. Companies in the space generally say that it is not possible for them to get large orders without throwing in some hardware solutions. The executives of these traditional enterprises want something they can hold and point to for all the money they’ve spent. This may change in the next decade ... but doubtful in the next few years.
Finally, someone is hiring a Mandarin speaking internet analyst in New York at a Bn+ hedge fund! I have no idea who it is, and I’m just sending this along because maybe one of you are / know someone interested.
Have any comments or questions? See you on the Discord server!
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