“I literally don’t think you can get some of these candid takes that I’m giving because most sites are biased in some way. They can give the numbers but some of the analysis online makes no sense to me”
-Steven Han (my friend whose wisdom is shared before you in this lengthy, but hopefully slightly useful, post…
Hey guys this is Danny, HermanPotter’s son. My friend Steven Han, who just graduated from University of Texas in computer science and is going to begin his MS in Computer Science at University of Washington in the fall and his Ph.D. in China in 2020, has been in China visiting his family the past couple months. Steven and I play a lot of basketball together and during the life saving breaks in the shade from the Houston heat he asks me questions about investing. He’s a smart kid so when I explained some basic finance, accounting, and options related stuff he picked it all up in a couple hours. As is the Motley Fool nature, I encouraged him to do some grassroots research while in China. His curiosity is impressive and he begged me for some books before he boarded the plane so I lent him my copy of “One Up on Wall Street” and “The Education of a Value Investor”. I think those are good starters. He already told me he really liked them. I also gave Steven some probing questions to consider before he went to China. It’s a rather long list of requests but he told me to be as specific as possible. I’m not going to reiterate what I asked him because he does a good job answering everything and adding his own take. What I was most curious about was trends, brand perception, culture, labor standards, and most importantly the attitude towards Americans and American companies. I also asked him to gather findings specifically on 7 companies, 4 American and 3 Chinese. I own all 4 of the American companies along with Baidu and I am interested in owning the other two Chinese companies.
The American companies are: SBUX, NVDA, ANET, and MDB
The Chinese companies are: BIDU, BABA, TCEHY
Steven’s findings (so far, he’s still in China) start with a broad overview then delve deeper into specific questions that I asked him. He is in china for another few weeks so let me know if you want me to ask him anything specific. I’m sure he would be happy to help.
Alright here we go!
Volume 1 contains general trends of China’s social, economical and cultural landscape that any American (or westerner) will need to understand before understanding the Chinese market and its companies. This is about as unbiased of an analysis of China as you can get.
Basic facts: 1 USD exchanges for about 6-7 Chinese yuan. Big cities have massive public transportation infrastructures, and Beijing is probably 3 times to size of Houston. Traveling to different cities is by train, not airplane. Population is huge and the pollution still exists. Smog looks like fog/clouds, smells like dust. The attitude of Chinese people is entirely different from the West.
Service industry: As you know, due to the large population, labor is very cheap. Compared to the US, you will feel like it’s almost slavery. Therefore, services like taking rideshare/taxis are extremely affordable. Food delivery infrastructure is light years ahead of the US already. Without looking at numbers, I’d say 33-50% of food services have become delivery. Shipping has shifted away from post offices. There’s plenty of small scale delivery services, don’t think of them like FedEX or UPS but more like Favor/Uber eats for packages. These things are so affordable now the common low-middle class person can easily afford it. There’s a high supply of these services.
Technology: In terms of technology, China is close to or equal to the US. Per capita, usage of smartphones is likely higher than that of the US. The market has immersed the middle aged demographic, so literally everybody between ages 0-60 uses smartphones. I’d go so far as to say that most smartphone users in China are more addicted than the US. You see a ton of people chilling on the sidewalks staring at their phone. Overall smartphones are more useful in China than the US as well (obviously doing nothing productive). Apps exist for everything just the same as the West, but things like Alipay or WeChat pay are nowhere near as prevalent in the US when compared to China. Although some people use credit cards, they’re not as common as the aforementioned methods of payment.
Etiquette: While technologically China has caught up with the progression of the West, in many ways what needed development is modern culture and etiquette. Most of the over 40s grew up in a 3rd world country where they struggled to have enough food to eat, but suddenly just like that they all have access to smartphones. There’s a variety of still unhygienic and impolite practices that foreigners might find offensive or shocking. For example, dog poop sometimes litters the sidewalk, people spitting basically right by your feet, no toilet paper in the stalls provided bring your own, janitors sweeping the floor while you’re still standing there, etc. I believe these things will start to change as the younger generations start to take over. Let me know if you want me to elaborate further into this.
Exchange rate and work: Despite the 1USD to 6-7Yuan rate, income per person is about 1/3 to 1/2 of that in the US. Large wage inequality. Food is cheap, transportation is cheap, (offbrand) clothing is cheap, housing is not. With the large workforce, there is almost a mandatory early retirement. This means most men retiring in their late 50s and women in their early 50s.
Real estate: China real estate is just ridiculous at this point. I’m not sure if this is a housing bubble or what, but prices have gone through the roof. In some areas of Beijing, it could cost 100,000Yuan per square meter. Consider that your room is probably 20-30 sq meters. A standard apartment sized house in Beijing or Shanghai could cost upwards of 1 million USD. One wonders how middle class families can afford these houses with their wages less than ours. These houses aren’t particularly nice or luxurious either. Yet house prices are still trending upward with no end in sight. This is where the real money is.
American companies: Since the beginning of this email, I’ve already changed my understanding of how Chinese people currently perceived American brands. They’re certainly considered quality in tech and fashion/clothing. The good brands from the US cost more in China than in the US, by maybe 20% more. Considering the Chinese brands already sold for about 1/3 or 1/2 due to different income levels, American brands are EXPENSIVE! I have plenty more thoughts on this topic for next volume.
That’s it for volume 1, this was just a primer that any American should know about the ever-changing landscape of China. I got some notes already waiting in the wings for Alibaba, Tencent, techno-political landscape, coffee related things, and American food/ drink companies.
This edition I’m going to talk about some the preliminary things regarding the Chinese powerhouse brands, plus let’s talk coffee. Let’s get started.
Here’s the what I believe in right now: Alibaba and Tencent. I’m skeptical about Baidu thus far. China is moving towards a cashless society, and most 90% payment is through smartphones.
Link on alipay/WeChat pay: https://financefeeds.com/alipay-vs-wechat-pay-vs-unionpay-im…
Alibaba: It’s an absolute powerhouse in the payment and online shipping industry. Alipay and Taobao are arguably the top dogs in their markets. WeChat pay and Jingdong are their competitors in smartphone payments and online shopping, respectively. In smartphone payments, some smaller vendors only accept 1 or the other out of WeChat/Alipay, but any large store almost definitely accept both. Just in case you don’t know how WeChat/Alipay works, you basically just go on their app and register a bank account/debit card with your account. To pay either you scan the other person’s QR code or they scan you, and initiate a payment. Very simple and fast, and you enter a pin upon payment I believe. Although we have credit cards which give us an added layer of security and benefit for the customer, businesses in the US would benefit greatly cutting out from the 1-3% fee the credit card companies take off the top. I believe that the small Asian vendors on the street corners are disinclined to accept such a large service fee which is why credit cards like Visa have no chance in China but Alipay is growing extremely well. Alipay is growing this well while focused solely in China, so growth possibilities for other parts of Asia is favorable.
Tencent: I know Tencent has a lot of different businesses, but make no mistake. This company is the biggest and most influential through WeChat and in gaming. Let’s just start with WeChat. It’s the defacto method of communication between people and groups. They’ve captured the entire Chinese audience that uses smartphones, and made themselves social media which there is no real alternative ie Facebook with Twitter, Reddit, etc. Combine that with the fact they have WeChat pay, they pretty much know your interests and spending habits. What type of company do you know has this type of information? Just ridiculous. They could make an absolutely killing with ads, but they still keep it limited.
One thing you must know is that competition in China is often represented by sheer quantity. There’s so many knockoffs “shan zhai” that these knockoffs become legit brands in the Chinese market. Any successful product will instantly get pressured by a large volume of other companies so the real question is if they can withstand the competition onslaught and be recognized as the top 1-2 brands in a market.
Baidu: while this is supposedly Google of China, I’ve managed to completely bypass using it. If you get a nice VPN service like ExpressVPN, combined with the fact Baidu has a crowded interface when you go on it compared to Google’s simple webpage, I feel uncomfortable using the platform. If you are wondering how to use maps, there’s an app called GaoDe Maps (???)which I believe is superior to Baidu maps. Not a fan of Baidu’s search interface.
Starbucks- it’s somewhat difficult to judge the perceptions of Starbucks because to me I feel that this is a new brand just entering the Chinese market. Chinese people do drink coffee but they also drink their fair share of tea. Often times restaurants give you complimentary tea like they do water when you sit down. I think coffee is showing up in Chinese culture, but companies fight to be the top brand and establish their market share. Starbucks is a little late to the Chinese market.
That’s it for Volume 2. I know it’s late but I’m going to start Volume 3 where I plan on answering each of your questions directly.
Quick turnaround to v3. Here I’m answering the questions. Just follow along the email you sent me.
• growth of the coffee culture is good. It’s as you’d expect, and younger people really start to accept coffee in everyday life. I don’t see it as tea vs coffee. It’s more like they can coexist. If that’s not true, then I’d say coffee is gaining a slightly larger market share over time due to young people.
• Let me start by saying people don’t treat jobs with that attitude in China. It’s a whole different perspective and they treat it as a job. Don’t think of their employees like American Starbucks employees. Perception as a brand in my opinion is that most younger people who are in touch know about it, older people have no clue what it is. It’s more hip than mainstream I think. What you have to think is there are serious competitors like Costa Coffee (based in London?) and caffe bene(I hope I spelled that right).
• Yes. People spend freely on food and beverages nowadays. Look no further than success of Pizza Hut, KFC, and McDonalds.
• Status symbol? Probably not. I think combining the factors like the competitors and it’s fairly late arrival to China, I would say it’s not as much of a status symbol as you’d like to think.
Thoughts: I think Starbucks has a long ways to go to solidify its brand in China. I understand it’s growing and expanding but it’s got a lot of work to do. Hard to say if it can outdo a competitor like Costa Coffee which from my perspective in China looks just the same, has very similar products and the Starbucks vibe in its store. Starbucks and Costa coffee may end up splitting a lot of business. Unlike a Pizza Hut that has that market locked down. This outlook may not be nearly as optimistic as you had imagined.
• I’m just gonna skip this topic and get back to you when I get back to the States. Probably not the best use of time to do this research in China on an iPhone.
• Please note that I’m not as close to the high tech scene here as I will be when I come to study here in 2020. When I study here’s I’ll have way more insight on what’s happening in China’s tech/data world. I’m a tourist this time.
• I feel that there was a point that computer gaming was hot but currently smartphones are the most important part of gaming now. I may be wrong but I don’t think GPU demand is that high at all in gaming. People are playing Chinese fortnite on their phones. There’s certainly a computer gaming scene but this isn’t like Korean esports
• How popular are esports? I don’t know. This is an interesting question but idk who to ask (without looking online). This might be a question for when I come in 2020 and do tech stuff.
• Another different question to ask. I have a distant cousin who’s working at a startup doing blockchain, so it exists and they need computing power for that. I don’t really what’s happening in crypto in China. 2020 question.
• I’ll look into this some more, but fortnite is definitely not the only game in this space. There’s some really popular fortnite knockoffs, which is normal because fortnite itself is a knockoff of games like H1Z1. So I don’t think fortnite is the most popular game, since there’s Tencent games that are very similar to fortnite.
• I think Baidu is just “good enough”. If Google wasn’t blocked, they’d wipe Baidu out. I don’t think it has any particular element that impresses me, and after using Google all these years, Baidu search and maps have me unimpressed. I think it’s just better than its Chinese competitors in search so it got big because it’s China and it helps to be number 1 in China. But I don’t like it.
• I’m not sure but I’m gonna say no, not in search. All Chinese people use it for searching stuff so it is the top company in this field. As long as the Chinese government doesn’t allow google.com, Baidu will be fine. If for some reason they unblock google, Baidu will be screwed.
• I’m using a VPN as I’m sending you this email through Gmail. A nice subscription based VPN like ExpressVPN is definitely worth it and you can bypass every and use the internet just like back in the US. I don’t need to use Baidu here
• I think we talked about Baidu’s self driving car platform Apollo, which I did my research project on, and Apollo did not work out for us. Maybe they’re making progress on it but I have some personal grudges against it for wasting my team’s time. iQiYi, the Chinese Netflix, costs about 5 yuan a month for online streaming shows. Let me remind you that things in China are cheaper and there is a larger customer base. iQiYi is nice and I’m sure people use it, but let me add another culturally important note. TV>computer in China. You have a cable box that everybody gets for about 18 yuan a month which is very affordable, has all the channels you need, can DVR/playback, and you can watch a lot of past shows just like Netflix. With that said, does anybody need iQiYi except for niche reasons to watch specific shows? I’d say probably no. You just watch TV and find the show on playback using your cable box.
• Baidu maps aren’t as good as GaoDe maps (???),Baidu wallet might be 4th on the mobile pay chain which means nobody uses it.
• Baidu is trying to compete in the takeout delivery business. Once again it’s third after MeiTuan (???) and E Le Ma (???)(no clue if that English name is right).
• Baidu does try to do a lot of things outside of search. Basically outside of search, it’s not a leader at anything else. Maybe it’s like Google in the respect…
• With respect to Alibaba, you’ve got my notes prior notes on it. I’m a big believer on the possibility of growth not just in China but also across Asia in the near future. Maybe even the US, but we’re still using our way outdated physical credit cards. (Why aren’t we using credit cards directly through our phone? The principle of credit card could be the same but we should be using our phone rather than a physical card). I think it would be hard for Alibaba to mess up at this point.
• Alipay collects .55% from vendors only I believe. Please read the link I sent last time. But more importantly they collect the data from your buying habits. Then they have Taobao aka amazon. You can buy pretty much anything, including movie tickets or concert tickets, or services like English lessons or haircuts. Taobao can give special discounts as they please, and that’s a game changer. Using the data they get from Alipay, and applying it on Taobao will be highly effective. They can keep tuning their strategy to increase profits.
• Outside of Alipay and Taobao, I think they lend some money, do a solid job with cloud computing. Not too familiar with those things
• WeChat is the dominant messaging app and will continue to be the best for a while. FB, instagram, Twitter, Reddit, WhatsApp, Skype are banned. It’s functionality is FB, instagram, and reddit combined. WeChat wallet also allows you to easily access third party services from WeChat itself to buy anything you need, including paying internet and electricity bills, buying train tickets, calling cabs, hotels, etc. With all this functionality, you almost don’t need any other websites. Alipay has similar functionality too but I prefer WeChat because it’s got messaging and paying.
• Tencent gaming is very popular and they have a wide range of titles, I can’t name any off the top of my head so I’ll get back to you on the titles. Frankly these fortnite type games basically just rip each other off with minor variations, but their games are mostly for the Chinese audience, which makes it successful. I get the feeling smartphone app gaming is what’s hot right now, while online PC gaming is more niche (I reserve the right to backtrack this statement)
• I make get a better understanding of the other businesses that Tencent runs in 2020. You have my notes from the previous volume on the wealth of data it has. They have people’s spending habit from WeChat pay and hobby/interests from the social media/gaming side. That’s info that no American company possesses, since they’d have one or the other but not both. The 35% growth rate seems like a moderate estimate. Tencent is still trending up, and they have a wealth of options on what they could do next. This company is really good.
Let me know what questions you have ASAP so I can have time to find the answers.