Episode 4: Rui Ma- Understanding China Tech, ByteDance, TikTok and Much More!
About Rui (Rey):
My next guest on The One Percent Project is Rui (Rey) Ma. She is the Writer & Co-Host of The Tech Buzz China podcast. A biweekly China tech podcast on unique insights & takeaways on China tech.She has over fifteen years of experience in investment banking and investing, spanning seed stage to pre-IPO investing, and spent eight of those years working across multiple industries including real estate and media as well as technology in Shanghai and Beijing. She is currently an angel investor and advisor to several startups and funds. Rui is also active in philanthropy and currently runs Rookie Fund, a nonprofit student venture fund network in mainland China, Hong Kong and Taiwan.
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In this conversation, she talks about:
The Chinese tech ecosystem- its strengths and myths.
What makes Chinese Tech businesses good at scaling?
How the second generation of Chinese Tech startups such as ByteDance, Pingduoduo, Meituan and others are giving B.A.T: Baidu, Alibaba and Tencent, a run for their money?
The contrast between Western and Eastern Chinese consumers.
How ByteDance’s initial traction came from the less Tech-savvy Chinese consumer?
Can Non-Chinese Tech businesses enter and scale in China?
Venture investment appetite of Chinese Vs Silicon Valley investors?
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Transcript:
*The transcripts are not 100% accurate.
Pritish: Welcome to The One Project. Tell us about yourself and Tech Buzz China
Rui: I am a former investor. So I worked about 15 years in investment banking, private equity and venture capital early stage venture capital, in both the US and China grew up in Silicon Valley and spent about eight years in China working from 2007 to 2015 and that is why I started a podcasts. When I moved back to the US to Silicon Valley, on China tech and that's Tech Buzz China. Biweekly podcast, roughly about half an hour on what we like to think of as unique insights and perspectives on headlines that don't usually get covered in English language coverage.
Pritish: A big fan of Tech Buzz China. I recommend everybody to get onto it if they are interested in the Chinese tech scene. It's full of insights. It's full of things that I don't think as a non-Chinese or somebody who doesn't live in China would actually get that much of perspective. Brilliant, podcast. I strongly recommend it.
Rui: Thank you so much.
Pritish: How do you see the China tech scene? What are the myths? What are the things to look at when you are observing and understanding the China tech scene?
Rui: Gosh, there are so many I think. So for me, because I've been looking at it for so long, a lot of these are pretty obvious to me. So it's hard for me to say, what are the myths? When so many of these things I've already internalised, but a lot of times the questions I get asked over and over is whether or not the Chinese tech companies have real technology and also whether or not they're going to be globally competitive. And I think more and more it's become obvious, that yes Chinese tech companies actually have very good technology not all of it is world-leading per se or is not all of it is necessarily research and development that is completely original, but at the same time, I think there has to be a distinction we make between companies that make, a technology for the first time and tech companies that can scale. And that's what we see in China. So while I do think there are a couple of companies that are really going to give Silicon Valley tech a run for their money, but really what you see is Chinese internet companies, in particular, are very good at scaling and applying new technologies. So in that sense, I think they're very innovative because I think a lot of the misconception is that, Oh, it's just a business model innovation. So when you have hundreds of millions of concurrent users doing, billion sometimes of transactions in a very short period of time, you bet there's real technology in there.
Pritish: What makes the Chinese founder of the ecosystem so awesome at scaling?
Rui: I don't know that they're more brilliant necessarily. It's really just a function of the size of the market and the growth of the market. So when you are dealing with this type of traffic, I think you can't help, but find solutions or else your product won't scale. So I'll give you an example this is from over a decade ago. I remember, when I was looking at peer to peer video streaming companies and doing technical diligence, not me, but hired a technical consultant to do due diligence on these companies because we were considering an investment. And at the time we were basically told that yes even though the technology itself did not originate from China, for example, but just the demand of the network, at the time it was like, I remember was 10 plus million concurrent users, which is a big deal for over a decade ago, that these were the very few companies in the world that could handle it with the kind of latency and quality that it was doing at the time.
Pritish: That actually brings us to ByteDance which, who you are an expert off. And obviously it has achieved scale, not only in China but globally as well. And potentially I was reading somewhere. It is a true competitor to Tencent and Alibaba in China and potentially to Google outside China.
Rui: I'm not, I'm not claiming to be a total expert on ByteDance. It's one of the companies that I'm working on understanding a lot more. However, so like you said, for Tech Buzz, the podcast. We kind of cover a wide swath of mostly consumer internet so far in China. Haven't really delved into enterprise software, but for ByteDance, I've been spending, like a good portion of the last couple of months on trying to understand the company better. Partly because it's so interesting. It's one of the few companies coming over and spilling over into where I am, but also because it's a big deal in China as well. So you can't really get away from talking about it. If you just want to talk about China tech and, one of the things that you noted is that yes, ByteDance, a very, very, ambitious company. And, if you look at advertising revenues, which is it's primary business model right now. Yes, It's definitely competing with Tencent, Baidu and all it's recently started to do more partnerships on the eCommerce side. Part of them with Alibaba, but also Tencent affiliates, et cetera. But if you just look at the ambitions of the company overall, I would say that number one, it's definitely trying to go global. You already see that it's hired at a high level Disney executive as its global COO. It’s established, corporate offices everywhere. It's hiring a lot of people like a thousand people here in the US and we're basically seeing that it's rolling out products that are localised and operations are localised for every region that it's in. I don't know that it's a threat to Google and Facebook right now, but you can bet that I think it's going to want to eat a piece of that huge advertising pie, especially as, more and more developing countries, especially come online. And also even the developed economies we have we're developing and evolving different user behaviours. By going primarily to mobile. So I think ByteDance is a sort of mobile-first and maybe you could even call it like mobile-only company that could be a very, very interesting competitor to a lot of these Silicon Valley stalwarts that grew up in an earlier era of internet development.
Pritish: There's something about short videos that the world loves. So what did TikTok do well and is it the star product of ByteDance?
Rui: Oh, well, I think there are two-star products right now of ByteDance. I think they're working on many more. So one of the things, I think this ties back to what I was saying earlier. It's not necessarily that Chinese companies are the most original, but that when they do innovate a lot of the times, they're taking the best practices of both their competitors domestically, as well as globally putting it together in sort of this fresh new framework and then really being able to scale operationally. And TikTok, I think is a great example of that, so if you look at the product itself, I mean, The company ByteDance, I don't think they go around advertising that we copied, Musically, which is another Chinese company, but I don't think they shy away from saying that yeah, like Musically really inspired us. So did, by the way, the dozens of other short video apps that were already inChina since 2013, 14. So, the company was not shy about taking what it thought were the best pieces of these other competing products. seeing that there was still a vacuum that it could go into, particularly with its AI-driven, recommendation engine. And you're sort of using that as a strength, to push out it's domestic Chinese product Douyin, using the acquisition of Musically as a sort of seed for it to expand overseas. But actually, if you look at I think the two products, again, I'm still not a super big expert for but my understanding is that there is a sort of significant difference in the recommendation engine, the thought process behind it, at least, and some of the feature sets, especially around being able to use music actually freely and TikTok, that were a little bit different. So in those ways, TikTok did improve upon what it saw from its competitors. and the company ended up acquiring and then improving upon that and scaling that overseas at the same time. I do want to say that, we are recording this in June 2020 I'd wouldn't say it's super clear that TikTok is going to be a medium that's necessary here to stay. It feels like that right now, but again, consumer internet it's fickle. And like you said, there's, COVID, a lot of the growth could be because people are quarantined at home. One of the things I think that will dictate whether or not TikTok really does survive and become as mainstream is its domestic equivalent has is whether or not people that are not just teenagers, but people like my age, I'm 39 are going to be sticking on the platform. And I think that's still a question. I don't think that's a settled question. There's some evidence that, that's happening, but again, how much, are we at the tipping point where, okay. It really becomes, a medium for the masses. Like some of the Facebook properties have.
Pritish: For ByteDance or TikTok do you think to get success in a market like India or the U S. Which will be a bigger win?
Rui: What should be a bigger win. Wow, I think both would be really big wins. I think that the two markets are very, very different. I think that generally a lot of people think the US is a big win because it's true that the average revenue per user is higher here. It is of course, a first world country, blah, blah, blah. But at the same time, I think, India is a very interesting market that a lot of people in China entrepreneurs in China liken it to a few years behind China and they can really see the opportunity there and the growth. So, I think I'm more neutral on which one is quote-unquote the bigger opportunity short term. Yes, maybe the US but I think in the longterm if you truly want to be like a really, really big global company, you really have to pay attention to India. For sure.
Pritish: What are your views on how has COVID-19 impacted the China tech scene?
Rui: I think, on the consumer front you've seen a lot of the same impacts you have in China tech versus the rest of the world. So food delivery, grocery delivery, telemedicine, education, blah, blah, blah, have all seen really extreme in some cases, short term gains, but for China internet, I think the additional thing that's interesting is that it's really made a lot of traditional businesses and actually investors as well, just more cognizant of how much risk they're at if their businesses are not sufficiently digitized. So a lot of investors and myself included, although I'm no longer investing actively, is that we're looking at this and saying like, wow, there's a lot more opportunity to sell into enterprises now because people are truly starting to realize like, Oh, actually it's a risk. Like my business can really be severely hampered if I'm not sufficiently digitized and I'm not sufficiently automated. So a lot of things that you kind of already see it happening because Chinese labour costs have been going up. So you couldn't just throw people at every problem before it, efficiency started to matter. Productivity started to matter, but I think COVID really highlighted that because you saw that businesses that again, had the backend infrastructure and I'm talking about non-tech businesses. We are really much more able to deal with COVID-19 then businesses that we're still, for lack of a better word, pen and paper-based.
Pritish: You're based in Silicon Valley. You spent time in China. How do you see the consumption pattern of a Chinese tech consumer that to of a Wester world?
Rui: I think I can speak to some broad ones. but again, the two markets are both so big that you're going to find a spectrum. So let's take some obvious stereotypes that I think is true to my personal experience. So, I, as I said, I lived in China from 2007 to 2015. In the last couple of years, I've lived full time in Silicon Valley with frequent trips to China, until this COVID thing happened. But which, so I haven't been back since January, but basically I think in general, you still see that in China, even for some of the urban consumers, you see that they're less knowledgeable about brands. So yes, you have like the people who are very wealthy and very well educated, internationally travelled in the first-tier cities. Yes, they do know about, brands and products and new trends. But actually, if you go even just slightly more below in China, you go by tiers of cities. So even tier two, tier three cities, you start seeing consumers need a lot more help and education on what they need or what they want to buy. So that's why I think some of the reason behind live streaming e-commerce success in China can be explained by that because the lower-tier cities if you're going to go two, three, four, five, effectively rural China, or a lot of these products are really very, very new to these consumers and they need to be told or explained why they need this and how to use it. And what are the things they should be looking for? That's something I think for people living in very developed economies. Let's call it are not necessarily aware of or don't think too much about. Like the first time you encounter, I don't know, like a hairdryer or something you might not know, like what should I be looking for? Or what are the brands or nail polish or whatever it is that you're buying
Pritish: So there's this contrasting view about China. And you will not understand this unless you really land there and actually travel from the Eastern part of China to the Western part because they themselves are a contrast. The coastline is so well developed and everything associated with it. That it seems to be a very advanced country, which it is on Eastern side. The Western part is something that potentially China has a lot of work to do.
Rui: Yes, very much. So, actually, in fact, you basically touched upon a very key point and an often also a top misunderstanding. I think, of China and one, by the way, that many Chinese people are not even necessarily aware of so you're basically talking about the sort of the urban-rural divide, but because China is so big and because it's really only been 40 years since it started to develop economically that there are people who are living in conditions that you cannot possibly imagine. So not when you look at videos of like Shanghai or Beijing and recently the government actually, and this has been making headlines in the past couple of weeks is that the government actually said, Oh, Hey, about 600 million people in China live on less than a hundred. I think it was USD $140 a month of income. Which is very, very low. There's a large percentage of very very poor people. And it's not just that they're very poor is that they're living in places that are very underdeveloped. So actually I tweeted the other day because I watched a video of someone who had spent time in one of these villages where the roads a couple of years ago weren't even paved. So can you imagine the sort of life. How painful of a process it is for someone living in that village to even go to the next village, to get some much-needed goods. Don’t even think about like getting deliveries from JD.com they're like having trouble, just maybe visiting their neighbours. Because you can't drive heavy cars on these mud roads. and I think that's something that people don't realize, of course not all China's that poor, but you definitely have a large section of the Chinese economy that is still very much like developing. I mean, China itself is still a developing country, but a lot of people don't realize how many people fall into that category, which is why, if you look at the last couple of years Chinese internet companies that have done really well, actually all of them focus on this market. And this was a market that was actually relatively overlooked until the last five years, partly because it took that long for that market to get online. It only took, it was probably only in 2014, 15 that rural users started getting smartphones and going online on a massive basis. So, of course, it took a while for entrepreneurs and investors to discover that opportunity and ByteDance, by the way, is one of those. They haven't fully, been I wouldn't say that they fully rose on the backs of the rural customer, but their first very successful product Toutiao, which is a news app, I would say sort of like benefited from that segment and not the poorest, but the middle class, when you remove the really rich, urban coastal people that you were talking about earlier.
Pritish: Do you think that there is scope for a foreign tech product or a service to enter China and be successful?
Rui: So you're talking about like, aside from Apple and Starbucks like actual software. Well, I would say it kind of depends on your definition of success. Me in the sense that there are enterprise software companies with large offices in China who hire number one, at least good have research centres and develop IP from their China-based engineers and also sell software SAP, Oracle, whatever. These companies all have revenues there. Of course, there are not like the bulk of their revenues. So maybe that is a distinction between companies that have really made it versus just has a presence there. So I think that, well a good reason, the main reason is number one, consumer internet, as we know, because of various regulations, it's very difficult to expand their right for enterprise software. I think a lot of it is because no, one's really succeeded yet. Like I was saying earlier, actually, COVID is maybe one of the pivotal moments where people are realizing companies are realizing, Hey, we need to be more digitized and also there's just various reasons why I think if you take a Western company that sells primarily to businesses, it doesn't really work so well in China right now. That's not to say they may not succeed in the future, but I also think one of the main reasons is because Chinese homegrown companies have become so strong. So tech itself, when I arrived in China in 2007 was just not that big of a sector. Sure you still had Baidu, Alibaba, Tencent, but if you were like, Oh, I want to go start a company, I've never heard anyone who said they want to do start a tech startup. Like, sure. If you want to start like an import-export business. And it was really only in 2014 when the government put its full weight behind startup entrepreneurship that really exploded. There was already a lot of talent there just wasn't maybe the corresponding capital and corresponding sort of social awareness. Because let's face it, it does matter what your social status is as an entrepreneur. If it's cool to be an entrepreneur, you're just going to get more people doing it. So that happened. And now you just have a very, very competitive ecosystem where yes Western companies might have really good products, but guess what? They're also now Chinese talent and Chinese capital willing to invest in that talent that can also make similar quality products. So I think that unless there's a really good reason for the product to be global then it might be very difficult to compete effectively. And in China now, just like there aren't that many successful Chinese companies in the US. It's a very competitive market here.
Pritish: You mentioned about BAT, which is Baidu, Alibaba, and Tencent. Do you see they being worried, or they see ByteDance or other similar big tech firms to be a threat to them?
Rui: Yeah. So it's been now narrative for a few years now. I would say maybe, maybe at least the last two years, but a little longer, even that these three companies, by the way, who are all like 20 years old, have lost their mojo and have basically been conceding their lead to some of the up and coming companies around 10 years old. So Meituan, DiDi and ByteDance are typically the ones that are cited. And then also you have like Pingduoduo. Yeah, I guess Pingduoduo is also the other one that's commonly cited. So these four companies. I agree with that assessment, the new generation of companies. I'm not saying that like BAT has no competitive advantage anymore, but the new generation of companies did grow up under a different environment. They're very aggressive. they have already watched the BAT, make all the mistakes and they've basically seen what strategies work, so you look at Chinese internet companies these days, as soon as they start. They use capital as a way to expand so they will make investments very early. They will make acquisitions very early. They will try expanding internationally very early. These are all things that you saw took Baidu, Tencent, Alibaba many years to come up with. So I do think that there is some benefit to be. The guys coming up later and watching your forebears learning from their best strategies and discarding, what hasn't worked
Pritish: The second-mover advantage,
Rui: Yeah. Second mover advantage. Exactly. And also of course, like it's a different market environment now. You have companies that have just the power of capital these companies now when they are ready to grow, there's so much more capital waiting for them because people can see that and primarily because BAT has been so successful. And people were like, Oh yeah, I want to be in the next Alibaba. I see what Chinese entrepreneurs can do in this market. So there's definitely that, it's just like easier time in some ways it's also more competitive, but in some ways. If you are good you have an easier time.
Pritish: Tell us about the third shy cousin of Alibaba and Tencent, which is Baidu. Baidu usually stays away from international media.
Rui: Okay. Yeah. So I think that question is really interesting because it gives me perspective on how you as someone, not based inside of mainland China views, these giants, and, how me, someone who knows a lot about China tech, but also comes into contact regularly with people in Silicon Valley who don't care or aren't aware of China tech might also see this and I don't think that's actually true. So my perception is that, even when you're talking about earlier like Tencent and WeChat. A lot of people don't know about it. It's only the people who sort of care, that know about it. So you know about it because you live in Hong Kong and Tencent has made a big splash overseas in a lot of gaming assets. And it's also just a super large company, and Alibaba is the same. However, I don't think that disparity in. I guess like in reputation or in knowledge actually exists as much as you think it does, because I think people here actually know, at least in Silicon Valley are very well aware of Baidu because it's the analog in our minds to Google and in fact Tencent is a little harder for them to understand. And Alibaba, everyone knows because of the big IPO. But I would not say that there's a true understanding of Alibaba's business model or like when people say Taobao or TMall. I don't think they know the difference or are aware. And even for Tencent, it's hard for people to understand. Some people think of it as WeChat. Some people think of it as gaming. It really depends on who you talk about. I think what's up with Baidu is overall to where you're sitting might seem like it has less renowned internationally, primarily because it doesn't operate internationally. So. I mean, yes, it does operate internationally, but it's not to the extent that some of these, some of its quote-unquote louder cousins do. And that's why in your, from your perspective, it doesn't actually seem that loud. But I know. I mean, I know international communications people on all of these corporate teams, and I can tell you that they would be like, no, we're talking all the time. We're trying to get press coverage. It's the press ignoring us. Yeah, it's really not for lack of their trying or product announcements, et cetera. In fact, I'm subscribed to basically all the Chinese tech companies newsletters, and I just got the one from Baidu and it's like a very, very, very long list of announcements, product announcements, strategy announcements for the last month. So, they're very active, but it's just of limited interest, I think when they don't have a big presence outside of China. So people just don't care as much.
Pritish: True. I completely agree with that. But do you think that Baidu has less threat or competition from the ByteDance or the upcoming Mega Techstars compared to Tencent and Alibaba?
Rui: Oh no, because actually Baidu's advertising revenues have already been affected by ByteDance. I think it depends on which sort of analyst you analyst report you look at. But basically a lot of people do put Baidu in sort of the same bucket as Tencent, but that's really because they are very social in nature. And their entertainment whereas Baidu still has like it and stuff like that. But when we think of like Baidu, we're thinking maybe of just the search, and, but it's also impacted and ByteDance by the way, has launched search. So, it's perfecting search and last year it actually made a big announcement about how it thinks search needs to be better and how it thinks it is the right company to make it better. So we'll see. By the way, WeChat has also done the same. So it's not like anyone is staying away from anyone's lane or territory. I think to be very honest, it's again, ByteDance and Pingduoduo like I said Meutian and Didi these are the four quote-unquote up and coming Chinese internet stars. They just have businesses that aren't, exact competitors to Baidu. So that's why ByteDance isn't. Maybe as often I'm used as a competitor or like often as often listed as a competitor for these companies. I definitely believe that it is being impacted.
Pritish: How do you see the venture capital space in China? Do you see that there is scope for Chinese investors to invest in Chinese early and late-stage startups, or they're more willing to actually look outside China and invest in other growing companies?
Rui: Oh, I see both. It really depends on what you mean by more. Because I think there's a degree. So as in terms of venture capital, just based upon anecdotal experience, I don't have any statistics to support this, but my general feeling is that, first of all, there's a lot more venture capital now in China versus a few years ago, and people are definitely willing to invest early stage in fact, I think the early-stage was really where the bubble was a couple of years back in 2017, 18, there was like a glut of venture capital. And a lot of it was in the early stage, of course, that I think that has subsided now. And as a lot of those investors were actually not really seasoned VCs so lost their shirts. But now I think as there's a much more rational market, but still, there's a ton of capital across all stages. So I don't think you really have to worry about not having enough early-stage investors, per se. Of course, if you ask entrepreneurs, they're always going to be like, yeah, not enough early stage. If you look at the makeup of the capital overall, I think, it's relatively healthy. When you look at whether or not Chinese VCs are willing to invest abroad. I think right now they're still sort of following who they know. So they're still primarily following people they trust abroad. So meaning either Chinese entrepreneurs or people working with Chinese entrepreneurs where people who have worked collaborated with their portfolio companies or, basically some second degree or first-degree connection. That being said, I do see some experimenting, overseas. But usually, as I said, it's because they started off their first experiments following. So, Chinese person abroad, whether it be a Chinese Australian person, Chinese working in Africa, like whatever it is, there was some thread that got them to look at the ecosystem first. And I don't think it's, purely driven by a macro view of like, Oh, I see high growth there. We need to go there. Even though we know no one there because Venture is still such a people and relationship-based business where you must trust who you're working with.
Pritish: Yeah, absolutely. if I flip the question, Silicon Valley, is it still keen on investing in China?
Rui: I think that it really, really depends on who you ask. So that's a question I have been asked many times, and I think you can find examples of both. You can find examples of people retreating from China and you can find people who are trying to expand in China. But I think overall the strategy is much different. So before like, I'm talking about 15 years ago, you have people taking one of their partners and going you move to Asia. Yeah. Maybe Hong Kong, maybe Singapore, whatever. And now you're taking care of all of Asia Pacific for us or something like that. But, now you see more and more people are trying to set up franchises like Sequoia, Matrix, all these very successful Silicon Valley firms are trying to do sort of that model because you really need local talent. And now you actually have local talent. You can hire that being said, I'm not sure how many of them are very successful. I think overall though, what I see is that firms who have that type of thinking in general, across all of our venture capital. There are just very few people who have that type of thinking. Most people are like, I want to win in my lane in this race. And the race they have in their head is Silicon Valley B2B SaaS, or data analytics or dev ops or whatever it is that they have in their mind. And because it's so competitive, I completely understand why you don't want to look at China, because like it's so competitive to just keep in the top slots here. You just really don't have the energy. That being said I really wish that Silicon Valley investors and entrepreneurs would just occasionally take a look at what's going on outside, not just China, but like India, everywhere else in the world, just because the world is big and the world is catching up, especially in terms of technology. Technology is now no longer such a large gap. In terms of computing power or bandwidth, whatever it is that you want to measure. So there are lots of places where we can learn lessons. And that's actually one of the key reasons why we did Tech Buzz because we just thought it was a cool story and cool things to be looking at so we wanted to share it with more people.
Pritish: Thank you, Rui. It was amazing and a pleasure to have you
Rui: Thank you. Thank you for having me.