Today we sit down with Tian Cheng, a senior partner at Shunwei Capital covering TMT and consumer related industries. Previously he held senior positions at Goldman and Temasek, and he has participated in many investments including: Alibaba, Xiaomi, VANCL, Youku-Tudou, Tuniu, Shanda Literature, Mogujie, Momo, Didi, Rong360, Jiuxian, etc.
We examine bike-sharing in more detail, and in particular Shunwei's investment in Ofo (小黄车）. Tian Ge will cover topics including: how is Chinese bike-sharing different from that in the US, e.g. Citi-Bike in NYC? What are the underlying factors required that enable bike-sharing at scale, and is this unique to China or could it be replicated in other markets?
Separately, we'll also examine other examples of domestic innovation, and how China is exporting new concepts and business models abroad. Did you know that Musical.ly was created by a Chinese founder? We didn't either…
Bike-sharing: Differences Between China and the U.S.
A lot of folks overseas are familiar with the concept of bike-sharing. For example, in New York, Citi Bike is very popular and enjoyed by both tourists and residents. But the thing is, Citi Bike has not raised a tremendous funding and is not considered as a unicorn. And in general, the U.S. comparables are not nearly as hyped as bike-sharing companies in China, such as Ofo and Mobike.
So, can you tell us more about the difference between these Chinese bike-sharing companies and their U.S. counterparts? I mean, the obvious difference that comes to my mind is that, for NYC Citi Bike, there are docks involved, while in China you can leave your bike literally anywhere.
Tian: Right. As you said, these Chinese bike-sharing companies do not have docks, so you can leave the bikes in any public area in the city. To enable the service, a lot of innovations are involved. First, you need to leverage mobile internet technologies. Users can use the apps to get access to the bikes by registering their identity. Second, bikes usually have a smart lock, which comes with a GPS system so that users can search and find bikes through the applications.
Also, for this business model to proliferate, another critical infrastructure is mobile payment. For the last few years, tech giants Tencent and Alibaba have been spending tons of money to cultivate users’ habit of using online payment. Almost every internet user in the city areas in China has become an online/mobile payment user. Users can easily pay for using the bikes via an app.
So, as I said, the bikes need to be smart, meaning they have a GPS system. And users need to be “smart,” meaning you need to have a smart phone with an app for using the bikes. Also, the infrastructure needs to be smart, which means that you need an online/mobile payment infrastructure. Putting together all these factors, you can make things happen. That’s why bike-sharing is unique in China.
Adam: Right. There certainly seems to be a number of complex factors that are required for this to take off. I’ll also add that in addition to leveraging mobile, the GPS component and using mobile payment, which is much more prevalent in China, there is a real user need in China.
China is a biking nation. Bike-sharing is a very affordable and efficient way to get around in the city. If we look at other alternatives, for example, car sharing like Didi, rides used to be cheap. But as Didi consolidated the market after winning the battle against Uber, the prices now are quite comparable with that of taxis. So, this bike-sharing, which is a lot cheaper and allows riders to get to the subway faster, is a very good substitute for most Chinese.
Then for me, the question becomes: is this a business model that is specific to the Chinese market, or is this something we can replicate in the overseas market? Ofo, for example, is looking at not just China, but also Singapore, the U.S., and the UK. So, what is your view on this move, and do you think Ofo and similar companies will be able to succeed globally?
Going Overseas: Ofo, Xiaomi and More
Tian: I think all those companies are trying to enter the overseas market. Ofo, Mobike and other leading bike-sharing companies are also taking in local teams who are trying to copy this successful Chinese model overseas. But whether they can be successful in those markets, we still need to wait and see. Given the fact that, as I said, you need to have the infrastructure and the user habits of using mobile payment. Also, regarding managing and operating the bike fleet, you need a lot of operational expertise and support or cooperation from the local government. These factors may exist in some markets, but not in others.
Finally, you need to test whether there is such need in those overseas markets. For example, in Singapore, the user need is not as high. The public transportation in terms of subway and buses is already convenient and sophisticated. So, bike-sharing in Singapore may not gain enough traction as compared to China.
Adam: Ok, got it. Thanks Tian Ge. Also, you mentioned earlier that there are increasingly more Chinese companies going overseas. That’s very interesting , because back in the day, it was very difficult for US tech companies to enter China and become a dominant player.
These days, some Chinese companies are doing very well domestically and trying to replicate their business models, leverage their technology and resources to go overseas. So, could you talk a little more about that, what are some good examples, what is the trend there, what are you guys seeing?
Tian: I think there is a clear trend in the TMT sector in China. A lot of startups have started to target their expansion in the overseas markets, which is quite new in the last five years. And we are seeing initial successes in some leading companies.
One of those success stories is Xiaomi. Xiaomi has become a miracle in the TMT startup space. They reached a revenue of $10 billion per year after only five years of operation. They are one of the most valuable companies in TMT sector globally.
In the first 5-6 years of Xiaomi, they were focusing their business in China. After gaining enough traction domestically, they started to test their business model in the overseas markets, e.g., India, Russia, countries in Southeast Asia, and the U.S. as well.
In India, we’re very encouraged to see that after two years of operation, they are a top 3 smart phone company in term of shipment. And we’re confident in seeing them become a dominant player in the market. Behind the success in India is that they leveraged their experience in the China market and copied that to India. For example, in India, they also started to distribute their products through the online channel, e.g. Flipkart and Amazon. Later, they started to build their own network of offline stores. All these experiences and strategies, which have been successful in China, were also proven to be successful in India.
So, Xiaomi is one example. In other areas, we also see a lot of companies that started to see initial success. In the mobile application sector, we are seeing Chinese teams successfully tailoring their applications based on the needs in the overseas markets like Middle East, Southeast Asia and India. The reason behind that is, over the last decade, we have seen many domestic successes in mobile application verticals, like entertainment, news reading, social networking, online gaming, live streaming, etc. So, there is a lot of operational know-how and product know-how shared in the industry. When entering those similar markets in Southeast Asia and India, the know-how gained in China became very valuable, especially when they were trying to develop products and operating businesses locally.
The infrastructure in the TMT sector in China has become very advanced. Companies can leverage a lot of cloud services and outsourcing services provided by other companies. There is already an ecosystem established in China, so these companies know how to promote the products, how to spend their marketing dollars wisely by leveraging that infrastructure.
If you look at Google Play and the Apple Store in India and other SEA markets. Among the top 10 applications in those verticals, for example, social networking, live streaming, you will see 5-6 applications are developed by Chinese teams, which is phenomenal. And looking forward, I think this trend will continue. Given the fact that mobile internet has the potential to nurture business models that have no country barriers, we’re confident to see that there will be many leading mobile internet companies come from China in the next 5-10 years.
From Copy-to-China, to Copy-from-China
Adam: That's an interesting point. I do want to push a little bit. I think some of the markets you mentioned, like India, Southeast Asia etc, seem to be less developed. While China is relatively more developed, they had resources, engineers and know-how to bring their technologies over to these new markets. But when it comes to Chinese companies entering more developed markets, including the U.S., the U.K., etc., is that possible? Is that still an opportunity for the Chinese?
Tian: If you asked me this question 10 years ago, the answer is definitely no. As a VC, when we were investing in the China market three years ago, we were seeing a lot of so called the copycats of successful U.S. business models in the market. We call it the Copy-to-China strategy. At that time, there were no Chinese companies that had either the ability or ambition to enter those developed markets overseas.
But things have been changing gradually over the last few years. There are more and more success stories, or those so-called unicorns coming out. Some of them are becoming globally competitive. And second, we have started to cultivate some business models that are unique in the world. So, we are seeing the transition from Copy-to-China strategy to Copy-from-China strategy. Bike-sharing, which has been introduced to Silicon Valley, is one of those Chinese unique business models that has been copied to the U.S. Also, a lot of business models have been copied to the European countries.
Three years ago, obviously China was behind the U.S. market, in terms of the mobile internet development. But the gap has been narrowed quickly. Now for some vertical sectors, we’re leading the global market. There is an article in The Economist two or three months ago, that suggested fintech in China is leading global innovation in the internet and finance sectors.
Also for the last 2-3 years, we have seen some of the Chinese companies starting to test the U.S. market and gaining successes, such as musical.ly, which is a mobile app for video creation and sharing, and Cheetah Mobile, who has developed applications that are very popular in the U.S. I think the trend will continue and internet users in the U.S. will see more and more products that come from Chinese companies.
Adam: Sounds like there is a good momentum going on here, with increasingly more Chinese companies becoming competitive on the global scale. And not just competitive, I’d like to add, but also more innovative.
Next time we will talk more unique examples of Chinese innovation. For example, from the business model perspective, the Xiaomi ecosystem is fascinating, whereby, Xiaomi, a smart phone producer, is also investing in a lot of hardware product providers, and then selling those products via its own ecommerce store, and is doing very well. It’s something that we talk about consistently on The Harbinger.
Live video is another area of interest. In China, it is very lucrative because fans are able to tip the content creators directly by sending digital gifts that can be cashed out, given that Wechat Pay and Alipay are so pervasive and can be integrated into the live streaming apps. While it's a different story in the U.S. A lot of live video apps are ads-supported, which is a hard business to do well and can compromise user experience.
And business model aside, even when it comes to the frontier tech, China is making good strives in artificial intelligence. When you look at the top tech companies in the world, like Google, Baidu and Microsoft, the top research scientists and executives are all Chinese who are making significant contributions to the field. And increasingly, there are these AI scientists and machine learning experts here in China developing really cool technologies and trying to actually productize AI and make it useful, as opposed to just the headline term.
Until next time.
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