2/20/22 Tech Buzz China Insider Digest
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Insider Digest 2/20/22: What's Behind Meituan & Tencent’s Drops; Not Much Time Left for Starbucks in China?; Fenbeitong: China’s Corporate Card Unicorn, and Well-Link: Cloud Gaming in China
Housekeeping / Announcements / Fun:
I’ll actually be taking the next ten days off so expect lighter participation from me in Discord! The last vacation didn’t quite work out as it ended up being a COVID-fest. But we’ll still be sending out a newsletter at the end of the week.
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2/20/22 Meituan -15% and Tencent -6%: The Power of Rumor in These Jittery Markets
On Meituan:
In my opinion, there seems to be clearly a deliberate intent in business media to make “much ado about nothing,” especially when you consider the fact that there is no attempt to include very important context in articles such as this one from Bloomberg. What’s the context, you ask? Well ...
The highest reaches of government has been guiding to lower platform take rates dates to at least March 2021. As I noted in Discord and on Twitter:
Premier Li Keqiang had already mentioned guiding to lowered platform take rates during his annual 2021 Government Working Report on 3/12/21: ”Guide platform companies to reasonably reduce merchant service fees” is part of the many recommendations in point 4, which is about increasing domestic consumption. (Increasing rural e-commerce is also part of it.)
It was further solidified in a document from the State Council on 3/25/21 that gave more implementation level details on how to increase domestic consumption: Point 19 on pg. 9 of 11 talked about how platform fees on food delivery, ridehailing, e-commerce and payments should all be guided to lower so as to decrease the operational burden of SMEs and individuals doing business on the platform.
Responsible reporting would have pointed this out, that this has become a fixed “talking point” of the government, and that the pandemic-related document was not in fact, any sort of new news.
2/20/22 "Not Much Time Left for Starbucks ... in China"
The following is a quick and dirty translation of a popular article that shows the difference in coverage between current English and Chinese perspectives on Starbucks and some thoughts I had about the company's fate. I don't really look at coffee that much but you'd be surprised how much writing on coffee there is in Chinese tech media and general business press. In any case, some other Insider members also noticed this and I thought it would be helpful to share.
Background: On February 1, Starbucks announced that for Q4 2021, same-store sales in the Chinese market fell by 14%, the average customer unit price dropped 9%, and transaction value declined 6%. The management largely blamed this on the pandemic, while Chinese media have been scouring the company for its "arrogance" and lack of competitiveness. So ... which is it?
I think it might be competition. Hint: here is an example of a newly opened cafe in a 5th-tier city in China.
2/20/22 Fenbeitong: China's Corporate Card Unicorn
Fenbeitong is the latest Chinese enterprise services startup to reach unicorn status after a successful Series C+ $140mm fundraise led by DST, with participation from existing investors Hillhouse, Ribbit, Stau, Glade Brook, and Bit Rock as well as new investors including D1 Capital Partners, WhaleRock, Saudi Aramco's P7 Ventures, and Emergence. Thanks to fellow Insider Hugo Chan for highlighting this deal. Very curiously, this round had minimal participation from Chinese investors, and was dominated by foreign names, despite using a very local financial advisor.
Lessons from Fenbeitong:
In China, SaaS+X is winning over pure SaaS.
That X could be hardware, transactions, or services of some sort. We’ve already seen this in the recent writeup on AInnovation. Pure SaaS doesn’t really work unless you’re selling primarily to technology companies.
Lan’s reasons for this are simple: 1) labor is still sufficiently cheap that it’s not yet economical to pay for automation and 2) since enterprise software is still relatively undeveloped in China, most businesses think of web-based solutions when they think about software, and those are often free, so the purchasing habits haven’t yet been built up.
Fenbeitong’s target SaaS revenue contribution is just 30%!
Many larger Chinese customers want customized solutions, you cannot avoid it unless you just focus on smaller customers.
For large customers, this seems unavoidable. It’s expensive, time-consuming, and there isn’t really room to negotiate. (This is perhaps one of the weaker points of a 4Paradigm, for example.) Fenbeitong’s strategy is to focus on medium-sized businesses only, so 200-2000 employees. (They had been servicing small and microenterprise before, and learned the hard way that doesn’t work.)
BTW, Fenbeitong does have some large customers as case studies (ie Haidilao, the hotpot chain) but it does seem to have largely medium sized customers.
Well-Link: Series B Cloud Gaming Provider in China
Well-link (蔚领时代), provides video cloud computing solutions. Specifically, its claim to fame is as a cloud gaming solutions provider, and one of its key clients (and investors) is the maker of Genshin Impact, Mihoyo. (If you are not familiar with cloud gaming, you might want to read up on it here, but it is basically “streaming” gaming to your device instead of using dedicated hardware, and the “metaverse,” whatever that ends up being, is considered one of its big use cases. US-based solutions that you might have heard of include nVidia’s GeForce and Google’s Stadia.)
… Unfortunately, it’s way too early to say what will happen in the cloud gaming industry as a whole, much less China specifically. There have been no standout successes so far, and a few resounding failures, such as Google’s Stadia. In China, the industry is estimated to be 163mm players as of 2020, with a market size of $370mm, which is paltry. Cloud gaming players in China are younger than average, with 50% choosing to play shooters and 40% RPGs and 65% accessing cloud games on their smartphones. (The average age and preferences of the entire gaming population in China are skewed by the older, casual game-playing user.)
But the main issues in China are content and payment. There is an appalling lack of games on cloud gaming servers, especially with 3A titles, and the country still doesn’t have a good subscription habit yet. In fact, the greatest predictor of cloud gamers is whether or not they also subscribe to other services. Nonetheless, because of the heavy investment into infrastructure that China has committed, and the country’s large gaming population, the outlook on cloud gaming is pretty rosy. Why not? Especially as smartphones have become the dominant device. Meanwhile, there’s not much to do except to keep an eye out on the industry.
Have any comments or questions? See you on the Discord server!
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