BYD on Tuesday unseated Volkswagen and became the world’s third-biggest automaker by market capitalization. The milestone came at the same time when the Chinese automaker also announced plans to supply batteries to Tesla.

Why it matters: This is an unprecedented high for BYD, reflecting investors’ excitement around the Chinese automaker’s potential to be a dominant force as the auto industry makes the transition to EVs.

Details: BYD’s market capitalization as of Tuesday was $128.8 billion, as shares in the Shenzhen-listed automaker rose 6.4% to hit an intraday high of RMB 320.47 ($48) on Monday, according to market valuation data.

• BYD took over the third spot from Volkswagen (market cap of $117.5 billion). BYD’s market cap is only a little over half of Toyota, the second place with $228.4 billion. Tesla ranks first with a market cap of $742.5 billion.
• China’s second-biggest battery maker will also begin supplying batteries to Tesla “very soon,” BYD’s executive vice president Liang Yubo said in an interview with CGTN released on Wednesday, without offering further details.
• This confirms previous reports that BYD’s lithium-ion phosphate batteries, also known as blade batteries, have already been tested in Tesla’s locally-made vehicles in the Chinese market.

Context: BYD is among the biggest winners in China’s decade-long push into green energy vehicles and has maintained strong momentum despite coronavirus outbreaks and lockdowns. The company made sales of 507,314 vehicles for the first five months of 2022, up 348% compared with a year earlier.

• The Warren Buffett-backed automaker also had a market share of 11.1% in the global EV battery market from January to March, following CATL and LG Energy Solution at 34.4% and 15.9%, respectively, Bloomberg reported, citing figures from SNE Research.
• Tesla’s deal with BYD could scale back the US automaker’s reliance on its current suppliers CATL and LG Energy Solution. CATL shares declined as much as 6.9% intraday following the news but closed up 0.22% on Wednesday.
• Chinese automakers Great Wall Motors and Nio were also high on the list of most valuable vehicle companies, ranking eleventh and thirteenth, with a market cap of $39.3 billion and $32.8 billion, respectively.

Xpeng Motors released first-quarter earnings on Monday night, giving a second-quarter forecast that fell far below estimate. The company said it has made progress in ensuring the production against the backdrop of a global shortage of chip and battery supplies, but investors remained concerned that a prolonged supply crunch and China’s strict Covid-19 measures will hurt margins this quarter.  

Why it matters: Xpeng is joining a long list of Chinese tech companies facing a challenging quarter with production cuts and profits squeezed. The company expects deliveries to fall between 31,000 and 34,000 units in the three months until June, compared to the 34,561 vehicle deliveries in the first quarter of 2022.

Details: On Monday, Xpeng reported revenue of RMB 7.45 billion ($1.2 billion) in the first quarter of 2022, up 152.6% from the same quarter last year. However, net loss more than doubled year-on-year to RMB 1.7 billion. The company’s share prices fell 5.5% on Monday.

• Xpeng expects second-quarter revenue to reach up to RMB 7.5 billion, well below analysts’ average estimate of RMB 8.3 billion, according to data compiled by Bloomberg. Gross margin will also be impacted due to existing supply chain constraints, but is set to improve in September with the delivery of higher-priced new models to customers, said Dennis Lu, vice president of finance at Xpeng.
• Xpeng executives said on Monday that the company has expanded efforts to reduce the impact of supply-chain difficulties and China’s Covid-19 lockdowns. In addition, it has contracted multiple new suppliers and implemented more flexible design and manufacturing for its EVs.
• During an earnings call, Chief executive He Xiaopeng said that the company has begun to see significant progress as it aims to secure enough battery supply to meet demand in the current quarter. More “optimization” is likely to happen during the second half of 2022, thanks to a multi-sourcing strategy and the decline of battery prices, He said.
• However, the ongoing semiconductor shortage is getting worse, as the electric vehicle (EV) maker can only monitor the impact on the production of chip supply chains one week into the future. He added that the current semiconductor supply bottleneck could last into 2023 or even longer, in contrast to a previous estimate that the issue could be resolved or alleviated by the end of 2022.

Context: Earlier this month, rival EV maker Li Auto also delivered a gloomy revenue forecast for the second quarter, expecting up to RMB 7.04 billion, which is 36% lower than previous estimates, with the company citing supply chain issues related to Covid-19 lockdowns in China. Li Auto’s vehicle delivery plunged by 62% in April from the previous month to 4,167 vehicles, with Nio’s and Xpeng’s volumes nearly cut in half over the same period.  

READ MORE: Nio, Xpeng, Li Auto see dismal April deliveries as coronavirus lockdowns disrupt production

Nio and Li Auto’s vehicle deliveries halved in April compared to the previous month, while Xpeng saw a nearly 41% drop. These Chinese EV upstarts have cut production as China fights a new wave of widespread coronavirus outbreaks with frequent lockdown measures since late March.

Why it matters: The massive drop comes as a wave of omicron cases and strict lockdown measures have led to severe supply chain and logistical disruptions to automakers and parts suppliers in Shanghai and surrounding areas, a major auto manufacturing hub for the country.

Details: Li Auto took the biggest hit among the main Chinese electric vehicle (EV) makers, reporting a 62% monthly drop to 4,167 vehicle deliveries for April. Nio saw vehicle deliveries plunge nearly 50% to 5,074 units in April from a month earlier, while Xpeng’s volume dropped 41.6% to 9,002 over the same period.

• Li Auto’s vehicle assemblies in Changzhou, a neighboring city to Shanghai in the eastern Jiangsu province, sat idle after stockpiles of components became depleted during the past month. Over 80% of the company’s parts suppliers are located within the region and many were hit by factory disclosures and logistics difficulties over the period, president Shen Yanan said in an announcement.
• With a factory in the eastern city of Hefei and its global headquarters in Shanghai, Nio was also forced to halt operations for a few days early last month before parts of its business resumed operations beginning April 14. Xpeng was less affected due to its operations being primarily based in the southern city of Guangzhou, saying that it is navigating the pandemic-driven disruption.
• Some traditional auto majors with southern bases weathered the storm better, with Shenzhen-based BYD selling (in Chinese) 106,042 vehicles to customers in April, up 313% from a year ago and 1% up a month earlier. State-owned GAC, also with manufacturing bases in the southern Guangdong province, said that deliveries of its Aion-branded EVs increased 23% year-on-year to around 10,200 last month.
• The ongoing lockdowns have also had minor effects on smaller players such as Leapmotor and Hozon, which reported decreases of 9.7% and 26.7%, respectively, in April deliveries month-on-month. Leapmotor delivered 9,087 vehicles last month, followed by Hozon’s 8,813, local media reported.

Context: The China Passenger Car Association projected total passenger vehicle sales in China in April will plunge to 1.1 million units, a 31.9% drop compared to the same period last year, as the auto industry needs time to recover from the effects of the pandemic.

• Some automakers like Tesla and Volkswagen are gradually resuming production at their factories in Shanghai and the surrounding areas, which have been shut down for weeks due to the lockdowns but still face various hurdles such as parts shortages and a limited workforce.

BYD reported an impressive increase in sales in the first quarter while extended Covid-19 lockdowns in eastern and northern Chinese regions hit other automakers hard, according to the latest official figures released on Monday.

Why it matters: The sales figures highlight China’s accelerated shift from petrol and diesel engines to electric vehicles (EVs) and clean energy. It also showed the continued impact of supply chain disruption on the auto industry, worsened by the Russia-Ukraine war and Chinese authorities’ lockdown measures in controlling the coronavirus outbreaks.

Details: BYD’s sales jumped 179.8% year-on-year, reaching 291,378 vehicles in the first quarter of 2022, while FAW and BAIC saw their sales slide by more than 20% compared to a year ago, figures from the China Association of Automobile Manufacturers (CAAM) showed Monday.

• Shenzhen-based BYD was an outlier for an industry hit by supply chain woes and lockdowns. BYD has been less affected by China’s pandemic control measures as Shenzhen quickly controlled an outbreak in March. The automaker also makes some of its own EV batteries and chips, protecting it from the wider supply chain shock. In addition, the EV giant is phasing out internal combustion engine vehicles faster than other automakers. Sales of new energy vehicles (NEVs), including EVs and plug-in hybrids, account for 98% of its total car sales. 
• FAW’s sales plunged due to omicron outbreaks in Changchun, the capital city of northeastern Jilin province, where the manufacturer’s joint ventures with Volkswagen and Toyota were shut down for four days in March, resulting in lost output of 50,000 vehicles.
• BAIC sales also fell off a cliff, partly because the firm cut production during the Beijing Winter Olympics early this year as the city government embraced strict anti-Covid measures. Great Wall Motor reported a 16.3% decline in quarterly sales, as the virus and lockdown orders hurt supply chains.
• GAC is also catching up, reporting a 150% annual increase in sales to 45,000 EVs under its Aion brand, while Changan and Geely have done a modest job, reporting flat EV sales for the first quarter.

Context: Industry experts are concerned about the Chinese automotive sector slipping into lower gear this year as supply chains face mounting strains such as the rising cost of raw materials and frequent lockdowns.

• The CAAM in January predicted China’s auto sales would grow 5% in 2022, compared with a 3.8% gain last year, but said early this month that the industry now faces new obstacles to achieving that goal, according to a report from Caixin (in Chinese).
• Sales in the world’s biggest car market increased 0.2% to 6.5 million vehicles from a year earlier in the first three months of this year, while NEV sales more than doubled to around 1.2 million units, said the industry group.

After China’s ride-hailing giant Didi was put under a cybersecurity review by the Chinese authorities last July, the country’s internet sector quickly entered a period of painful adjustments. Companies began closing unprofitable units and cutting staff wherever they could. Layoffs have since become so widespread that some Chinese tech majors have been attempting to soften the blow by telling fired employees that they have “graduated,” but it has become increasingly difficult to put a positive spin on such moves, as China’s consumer-facing tech companies go through a significant upheaval. 

Since July 2021, major Chinese tech companies have laid off at least 72,779 employees, TechNode research has found. After compiling news reports, company statements, and other sources from the past nine months, TechNode found 27 instances where major Chinese tech companies were reported to be making significant layoffs, with at least 10 such instances affecting more than 30% of employees at their respective companies. Some firms dismissed entire departments almost overnight.

After combing through the statistics, it is clear that layoffs have become a regular occurrence at Chinese tech companies. In the past nine months, there has been an average of two rounds of layoffs per month. Moreover, in the same period, ByteDance has had five separate rounds of staff reductions alone, making it the top cutter among the major tech companies in the country.

China’s “great layoff” first hit the edtech sector, prompted by a surprise national regulation barring all private curriculum tutoring, which took effect in July. It then hit less profitable units in the e-commerce sector, and most recently, it spread to Meituan, Alibaba, and Tencent, powerful leaders of their own sectors that had previously proven largely immune to the effects of any regulatory changes or downturns. 

Education, e-commerce, and the content and entertainment industry are the three sectors to bear the main brunt of this wave of layoffs. But just how far-reaching have the cuts been?

Cloud services, social platforms, and more

In March, Tencent, a major cloud service provider in China, started a 20% layoff of its team in the sector, affecting an estimated 12,000 employees. ​​The firm’s Cloud & Smart Industries Business and Platform and Content Group took the biggest hit.

Twitter-like microblogging service Weibo, one of the biggest social platforms in China, laid off at least 200 employees and introduced a stricter performance review standard in February 2022. Weibo has declined to describe the moves as a layoff, saying they were “structural adjustments.”

ByteDance also cut numbers at its customer service unit in October 2021, removing somewhere between 30% and 70% of the team due to what it termed “business adjustments.” 

Didi, which is still going through a national cybersecurity review that launched nine months ago and is looking to delist from the US stock market, reportedly cut 20% of its employees in February. 

Content and entertainment

The content and entertainment industry is another area where players large and small have been handing their employees grim news. Since last July, four major companies in the sector have undergone six rounds of dismissals and restructuring. 

ByteDance laid off at least 179 employees in two rounds last year, one of which was mainly focused on its gaming development business, Ohayoo. The company said that recently-hired college graduates would be reassigned to other vacancies as part of the round. The TikTok parent company followed this with another round of layoffs on October 20, aimed primarily at its commercialization and gaming businesses.

TikTok’s major rival in China, Kuaishou, started to lay off staff at the end of 2021, first in its commercialization team and then across multiple sectors. The company reportedly removed somewhere between 10% and 30% of its employees.

iQiyi, a Netflix-like streaming platform backed by Baidu, was reported to have cut between 20% and 40% of employees in December 2021. The company promised to compensate these unlucky employees, offering them bonuses based on how long they had worked at the firm.

While it’s undoubtedly been impacted by the overall economic downturn, the content and entertainment sector has also been hit by regulatory scrutiny, with crackdowns targeting celebrity culture and related idol content as well as the gaming sector. Pop Idol-like shows on platforms such as iQiyi have been banned and China put a pause on issuing new gaming licenses last year, essentially stopping companies from releasing new games. In addition, China has introduced strict controls targeting teenage players, limiting their playing time and payment for games. In response, Chinese gaming companies have shut down numerous development projects and turned to overseas markets, with their China workforces naturally being affected. 

E-commerce

E-commerce, a longtime booming sector in China, has also seen contractions. From July 2021 to March of this year, at least 11 major tech companies in the industry have downsized their workforces, according to TechNode statistics. 

Most recently, Meituan began on April 8 with an up to 20% cut across its business lines, including its core food delivery and hotel booking businesses.

Chinese e-commerce giant Alibaba has been through two rounds of layoffs in the first quarter of 2022 alone. The first round was in January this year, when it cut headcounts at its food delivery platform Ele.me and local shop review business Koubei. Two months later, Alibaba’s layoff expanded to the entire local service sector, with 30% of its employees losing their jobs.

Tencent also announced that it was making 30% of the staff at its e-commerce platform Mogujie redundant in late 2021, blaming the unit’s poor market performance. 

Community group buy, a subsector that caught on during the height of the first wave of the coronavirus pandemic in 2020, has seen deep cuts as part of the ongoing layoffs. The cash-burning sector quickly cooled down after the State Administration for Market Regulation (SAMR) demanded companies stop price dumping and other unfair competition practices in December 2020.  

Smaller players in this subsector have been hit hard, with one example being Tongcheng Life, which filed for bankruptcy last July. Those backed by bigger companies have also been forced to make adjustments to remain competitive. Didi’s Chengxin Youxuan cut about a third of its staff, while Alibaba-backed Nice Tuan stopped operating in several cities. 

Fast forward to late March, and JD was reportedly planning company-wide cuts of between 10% and 30%. Its community group buy unit Jingxi is thought to see the deepest cuts.

Other tech companies offering local services, such as apartment rental platform Ke.com and farm-to-table grocery startup Meicai, have followed suit. Ke.com cut its entire development team in October 2021, while Meicai laid off nearly half of its workforce around September 2021.

Dian, a Chinese startup offering rental charge packages for phones, was reported to have laid off 40% of its employees on March 1. According to Chinese financial media Lanjing, the company dismissed at least 2,000 employees. However, the company denied the news, saying it was merely making “adjustments in employee structure.” 

In addition, popular milk tea brand HeyTea, which makes heavy use of e-commerce and online promotions to support its business, was reported to have cut its workforce by 30% in February this year.

Education

After China’s new regulation on education agencies took effect in July 2021, there were at least five rounds of layoffs in tech companies focusing on education. More than 5,400 people lost their jobs.

Companies in the sector saw their stock prices crash after July 24. Within a day, Gaotu fell by 54%, New Oriental by 63%, and TAL Education saw more than 70% wiped off its share price.

Gaotu was reported to have laid off more than 10,000 employees in early August 2021. Another education giant New Oriental reportedly dismissed over 40,000 employees in mid-September. It wasn’t just the leading names in the industry who were hit, however,  Acadsoc, a Chinese company offering courses by foreign teachers, laid off 90% of its workforce on July 29, 2021.

Chinese tech unicorn ByteDance was also forced to make cuts. The company went through a series of downsizings in its education sector, with a first round in early August followed by a second round in December, shedding more than 1,000 employees. 

Looking ahead

On April 8, China’s internet regulator, the Cyberspace Administration of China (CAC), confirmed in a statement that 12 major Chinese tech companies (Tencent, Alibaba, Ant Group, ByteDance, Meituan, Pinduoduo, Kuaishou, Baidu, JD, NetEase, Weibo, and Bilibili) have laid off 216,800 staff from last July to March. However, CAC said “the number of employees in internet companies has remained stable,” disputing the layoff trend, adding that these companies have also hired about 295,900 new employees during the period. 

As painful as these adjustments have been to date, it seems unlikely that Chinese tech majors are in the clear just yet. Regulatory scrutiny will continue (perhaps in a more predictable fashion as the government prioritizes economic growth), rising geopolitical concerns mean that firms listed on US exchanges, in particular, will come under pressure, and China’s ongoing attempts to pursue a ‘zero Covid’ policy may mean further disruption for businesses. 

Since early March, China has extended lockdowns in the key growth city of Shanghai and introduced new control measures across the country to adhere to its zero Covid policy amid a resurgence in the number of coronavirus cases. As China’s economy takes a hit, the country’s tech sector is likely to come under more pressure. China’s State Council executive meeting on April 6 also acknowledged the challenge ahead, admitting that the country’s economy faces “complexity and uncertainties” that have exceeded expectations, and that “the recent Covid-19 outbreak in China has increased difficulties for market entities, and increased new downward pressure on the economy.”

There are some glimmers of hope, however. Although Didi’s investigation put a pause on Chinese tech companies seeking overseas listings, there appear to be moves to help Chinese businesses raise money more easily on foreign stock markets. Chinese Vice Premier Liu He said in a mid-March meeting that “China continues to support companies seeking to go public overseas,” offering the first major positive signal on the issue in nine months. Moreover, China’s securities regulator has proposed changes to long-standing rules in an attempt to avoid US-listed Chinese companies being delisted by American regulators.  

Nevertheless, the big picture remains unpredictable for China’s tech powerhouses. After years of unbridled growth, it’s clear that the industry has been through a turbulent period of late. Whether the widespread “adjustments” made across multiple sectors will be enough to stave off further disruption remains to be seen.

As the Russia-Ukraine war drags on, the market for rare gasses has seen greater volatility. High purity rare gasses used in semiconductor production have seen a rapid price surge, with neon gas prices growing tenfold and krypton gas up by almost half since the conflict. 

Rare gasses are primarily inert and gaseous elements of neon, argon, krypton, xenon, and others. They are key raw materials used in semiconductor productions. 

Until the war broke out in late February, Ukraine supplied nearly 70% of the world’s neon gas, the rare gas used in chip production, according to Trendforce, a semiconductor consultancy based in Taiwan. On March 11, three weeks into the conflict, two major Ukrainian neon gas suppliers, Ingas and Cryoin, were forced to halt their operations. The two companies together make up almost half of the global neon production, according to Reuters. 

TechNode looks at China’s rare gas industry and how it might influence the country’s reaction to the rising rare gas prices. 

Rare gas: veins of semiconductor

Rare gasses like neon play a vital part in the semiconductor manufacturing process. Neon gas is the main gas used in excimer laser, a production device used in the chip-making process called photolithography, which uses lasers to “print” circuits onto silicon wafers, the foundation of a semiconductor. 

Rare gasses, when energized, emit light, which makes them essential in electronic lumination units. Rare gas mixtures are also used as filling materials to produce lasers, with such devices needed to be replenished routinely. And neon discharges are the most efficient of all rare gasses in producing visible light.

Rare gasses or noble gasses are so named because they are rare compared to other elements. Helium, neon, argon, krypton, and xenon comprise these rare gasses listed in the rightmost column of the periodic table of the elements. These elements cause almost no chemical reaction with others, and, for this reason, are regularly used as shielding gasses in industrial production.

How surging market price for rare gasses has affected China

The price of neon has risen more than 10 times since the Russia-Ukraine war, while krypton price rose more than 44% since mid-February.

Ren Lu, an industrial gas expert, told the state media Global Times in mid-February that China has achieved a breakthrough in rare gas productions, and the country can now purify rare gas. Ren added that the Russia-Ukraine war would only lead to a short-term price rise.

Rare gasses like neon, krypton, and xenon are also a side product of the steel industry. Being a top global steel producer, China can expand its rare gas production to fill in gaps that Ukrainian producers have left.

China produced 1.06 billion tons of raw steel in 2020, ranking first worldwide, 10 times the amount produced by India, the second-largest steel producer in the world. Russia ranked fifth place, with raw steel production of 71.6 million tons.

On Feb. 17, Chinese gas company Yingde Gases announced a plan to expand its xenon and krypton production, while the Hangzhou Oxygen plant group stated that its new xenon and krypton production devices will be used later this year.

The local market and major players in China’s rare gas industry

China doesn’t provide a detailed breakdown of its rare gas industry, but a look at China’s electronic gas industry offers clues. Electronic gas is a category that looks at gases used in the production of electronics, consisting of high purity rare gasses and other compound gasses.

China’s production of gasses used for electronic production grew 23% year-on-year in 2021, reaching a market size of RMB 21.6 billion. 62% of China’s electronic gas is used to produce semiconductors, of which 43% are used in integrated circuits, and the rest goes to make photovoltaic and LED circuits, according to Yidu Data. 

The country’s electronic gas market is also highly concentrated and controlled by foreign companies, with the top five firms taking an 85% share of the entire market in 2020. They are US-based Airproducts, US-based Praxair, France-based Airliquide, Japan-based Taiyo Nippon Sanso, and German-based Linde. 

There are four main electronic gas producers in China: Huate Gas, Jinhong Gas, Nata Opto-electronic Material, and Yoke Technology. Huate Gas provides neon to ASML, the global lithography giant from the Netherlands. Jinhong Gas is capable of producing Xenon, as noted on its official website. Jinhong will start supplying electronic gas to China’s top chipmaker Semiconductor Manufacturing International Corporation in April. However, these four companies only accounted for a tiny fraction of the market share, accounting for only 6.27% of China’s total special gas supply. Special gas is a broader category that includes electronic gas, which includes rare gas.  

In addition, Kaimeite Gasses, a neon gas supplier based in the central Chinese province of Hunan, announced last week that they are in talks with ASML and expediting the process.

Chinese tech unicorn ByteDance has acquired no-code startup Hipa Cloud, a company that focuses on customized enterprise management systems, Chinese media outlet 36Kr reported on Monday. The acquisition appears to boost ByteDance’s enterprise software as a service business and transform the competitiveness of Feishu, its Slack-like messaging tool for businesses, in a sector currently dominated in China by Alibaba’s DingTalk.

Why it matters: ByteDance’s short video app Douyin (TikTok for the overseas market) has given the company huge success with its customer-facing business. Yet Feishu (Lark for the overseas market) has thus far failed to replicate that success in the enterprise-facing services sector. The acquisition of Hipa seems to be an attempt to change that. 

• The demand for customized team management and messaging tool systems for businesses has seen significant upswing since the beginning of the pandemic.
• Software development without coding has also become a major focus for the industry in recent years, with Microsoft, Google, and Github announcing no-code software development projects.

Details: Founded in 2019, Hipa Cloud focuses on no-code development platforms for enterprise clients, assisting them in developing customized management systems.

• Hipa Cloud announced on March 20 that it would be halting its services on May 31 following the ByteDance deal, urging users to export and migrate their data to other platforms, such as Feishu and Mingdao, ahead of the deadline.
• Hipa founder Chen Jinzhou and part of his team will be incorporated into ByteDance’s Feishu unit after the acquisition. Chen will report directly to ByteDance’s vice president Xie Xin who is in charge of Feishu, 36Kr reported.

Context: ByteDance first developed the Slack-like Feishu as an internal team collaborative management tool in 2016, launching it as a business in 2019.

• Rivals Alibaba and Tencent launched DingTalk and WeChat Work in 2014 and 2016 respectively. Huawei also released their own teamwork platform WeLink in 2017.
• DingTalk leads the market in China with 200,863 average daily downloads, while WeChat Work has 92,358 downloads per day. Feishu’s average daily downloads currently number just 19,795, according to Qimai Data.

Chinese flying car startup HT Aero has raised $500 million as part of a new round of funding as it pushes to popularize its technology.

Why it matters: HT Aero, an Xpeng-affiliated company, said the fund is the largest venture funding round for a startup in Asia’s passenger flying vehicle sector to date, according to a Tuesday press release. 

Details: Electric vehicle maker Xpeng Motors led the Series A funding round, along with Chinese venture capitalists IDG Capital and 5Y Capital.

• A number of other new investors also jumped on board, including Sequoia China, Eastern Bell Capital, and GGV Capitals. HT Aero saw its valuation rise above $1 billion before the investment.
• The Guangzhou-based aviation startup plans to use the proceeds to develop a new version of its flying vehicles for both low-altitude air travel and road driving, scheduled for release in 2024, founder Zhao Deli said in the press release.  
• “The investment in HT Aero will further accelerate the build-up of our ecosystem to integrate driving and flying,” Xpeng chief executive He Xiaopeng said.

Context: HT Aero in July unveiled its latest electric passenger drone, Voyager X2, featuring a flight time of 35 minutes and a maximum speed of 130km per hour (around 80mph). Yet the company has no plans for mass production of the two-seater flying vehicle prototype, for now, Caixin (in Chinese) reported Wednesday, citing a company representative.

• The technology is still at an experimental stage, making market valuation difficult. Morgan Stanley estimated the global autonomous urban aircraft sector to be worth $1.5 trillion in a report published in May 2020. However, they cut this figure to $1 trillion earlier this year.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts.

In this episode, the guys are joined by regular guest Michael Norris to review some Q2 earnings highlights of Kuaishou, Tencent, and Xiaomi: The three companies have faced dramatically different fates in recent months, and their trajectories may offer insights into the current state of China’s tech and its regulatory overhaul.

Hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD.com
• Pinduoduo
• Meituan-Dianping
• Kuaishou

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:

• Michael Norris – @briefnorris

Editor:

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

Chinese video streaming site Bilibili on Thursday posted better-than-expected financial results for the quarter ending in June, but the company’s shares dropped as regulatory concerns linger.

Why it matters: Bilibili’s share drop reflects investors’ concerns about the loss-making company amid China’s regulatory crackdowns on the tech sector. 

READ MORE: CHINA VOICES | ‘Bilibili is becoming Chinese Youtube’

Details: Bilibili’s revenue jumped 72% year-on-year to RMB 4.49 billion ($696.2 million) in the second quarter of this year, topping the high end of the forecasts (RMB 4.25 billion to RMB 4.35 billion) compiled by Yahoo Finance. The company’s share dropped 6% on Thursday on the Nasdaq.

• Bilibili’s stock hit a low in 2021 earlier this week as China’s tech crackdown continued to trigger sell-offs affecting a wide range of listed Chinese tech majors, including Alibaba and Tencent.
• Bilibili keeps attracting more users who are spending more time on the platform. The firm’s monthly active users jumped 38% year on year to 237 million in the second quarter. Users spend, on average, 81 minutes on the platform every day, a record high.
• The company’s net loss widened 96% from RMB 570.9 million to RMB 1.12 billion due to rising marketing, administration, and research and development spending.
• Sam Fan, Bilibili’s chief financial officer, attributed the company’s revenue growth to the rapid rise of its advertising business, which grew more than 200% since the same period in 2020 and represented 23% of Bilibili’s total net revenues, according to the earnings report. 
• The company expects its net revenues for the third quarter of 2021 to be between RMB 5.1 billion and RMB 5.2 billion.
• CEO Chen Rui said he feels “optimistic” about China’s regulatory moves in the video content and gaming content industry. “We believe our industry is experiencing fast growth, certain regulation is actually beneficial for this industry’s long-term and healthy growth,” Chen said during a Thursday earnings call. 

Context: Bilibili hit a record of more than 65 million daily active users in early August, making it China’s third-largest long-form video site, following iQiyi and Tencent Video.

• Bilibili started in 2012 as a content hub for Chinese fans of animation, comics, and games. The company has in recent years evolved into a mainstream video site offering a variety of content. 

Neolix, a startup developing autonomous vehicles (AV) for delivery services, said on Wednesday it has raised “hundreds of millions of RMB” from Softbank Ventures Asia, an early-stage investment arm of the Japanese tech giant, among others. Hundreds of millions of RMB means the total funding amount is between about $15 million and $154 million.

Why it matters: The funding marks the latest bet by Softbank on Chinese startups as the Japanese tech giant seeks to dominate the future of artificial intelligence.

Details: Softbank Ventures Asia and CICC Capital, the private equity unit of Chinese investment banking firm CICC, led a Series B investment round in Neolix that closed earlier this year, a spokesperson of the Beijing-based startup said on Wednesday.

• Existing investors and venture capital firms Yunqi Partners and Glory Ventures also joined the round. 
• Neolix did not disclose the valuation at which the funds were raised.
• Neolix planned to use the funds mainly to expand its delivery service, while accelerating its steps into overseas markets, according to a Wednesday announcement (in Chinese).
• The three-year-old company added that it has deployed a fleet of nearly 1,000 robots in around 30 domestic cities, delivering over 1 million orders to around 300,000 users for retailers and restaurants such as KFC and Pizza Hut in China since mid-2020.

Context: Softbank has been a leading funder of ambitious Chinese companies for decades, but amid a wide-ranging crackdown on tech observers have asked if it is repositioning.

• Softbank CEO Masayoshi Son last week said only 11% of its Vision Fund investment has been directed into China since April. The company later told Chinese media that Son’s comments were misinterpreted, insisting that its commitment to China remains unchanged and that it continues to invest in the Chinese market.
• Softbank’s Vision Fund in February 2019 led a $940 million Series B of Nuro, a California-based self-driving grocery delivery service, TechCrunch reported.
• Neolix raised RMB 200 million in a Series A+ financing led by Chinese electric vehicle maker Li Auto in March 2020.

Qcraft, an autonomous vehicle startup backed by several prominent investors, announced on Monday that it had secured a $100 million investment. Investors include YF Capital, a private equity firm founded by Jack Ma, Longzhu Capital, the investment arm of life service app Meituan, and others.

Why it matters: Founded by a group of former engineers at Waymo, a self-driving car company owned by Google’s parent company Alphabet, the funding round serves as a stamp of approval for the two-year-old company. Chinese tech giants are betting big on Qcraft as they move more seriously into the robocar space.

Details: Qcraft has raised a new $100 million Series A+ led by YF Capital and venture capital firm Genesis Capital. Longzhu Capital, a venture capital fund of Chinese on-demand service giant Meituan, participated in the round. 

• Currently piloting around 70 robobuses open to the public in five cities around China, the two-year-old company plans to expand its test fleet to include more than 100 vehicles by the end of this year, according to its Monday statement (in Chinese).
• Qcraft is also exploring new applications in self-driving technology, with plans to launch a ride-hailing service in the eastern city of Suzhou later this year, LatePost reported on Monday, citing the company’s CEO Yu Qian.
• Qcraft declined to disclose its valuation when contacted by TechNode on Monday.

Context: Self-driving car companies are investing more time and energy in autonomous trucks and buses. The trend is driven by the fact that self-driving trucks and buses tend to have more predictable routes and are easier to manage than self-driving taxis.

• Baidu earlier this month rolled out a new version of its autonomous minibus Apolong. It started deploying the robobus in partnership with the government of the southern city of Guangzhou. The search giant said it has been operating an undisclosed number of first-generation Apolong buses in 22 domestic cities since mid-2018.
• Chinese robotaxi unicorn WeRide in December secured $200 million in a funding round from China’s biggest bus maker Yutong. Since January, the company has begun testing its fleet of robobuses in Chinese cities including Guangzhou and Nanjing.
• Qcraft in early 2020 closed a $24 million seed round from investors including IDG Capital and Vision Plus Capital, an investment firm led by Wu Yongming, an Alibaba co-founder, according to figures from business information platform Crunchbase. ByteDance also reportedly planned to invest $25 million in the company in March, according to Bloomberg.

China’s biggest chipmaker, Semiconductor Manufacturing International Corp (SMIC), posted strong revenue and profit growth in earnings released on Thursday.

Why it matters: SMIC posted robust growth despite being banned from importing US technology. The company attributed the growth to strong domestic demand and rising chips prices due to a global semiconductor shortage that began early this year. 

Details: SMIC’s net profit jumped 63% year on year to $405 million in the quarter ending in June, according to a Thursday earnings report (in Chinese). Revenue grew 43% year on year to $1.34 billion. On Friday, SMIC’s share price opened 8.6% higher than the previous day’s close price and soon lost most of its gain. At the time of writing, the stock was up 0.9%.

• SMIC raised its full-year growth forecast to 30%, up from “less than 10%” forecast in February.
• SMIC’s profit margin was 30% in the quarter, up from last year’s 27%. 
• Zhao Haijun, SMIC co-CEO, said in a Friday earnings call that growth in the second quarter was mainly driven by strong domestic demand for consumer electronics and electric vehicles chips.
• Zhao said being added to the US export blacklist has hurt the company’s ability to develop advanced chip-making technology. In December, the Trump administration placed SMIC on the Department of Commerce entity list, which bars the company from importing US technology without a government license.
• Zhao said SMIC has faced difficulties importing US equipment to make advanced 14-nanometer and 28-nanometer chips. He added that the company is communicating with the US government and suppliers to address the issue.

Context: Shanghai-based SMIC is backed by the Chinese government and state-owned investment firms. The company is China’s largest contract chipmaker, manufacturing chip designs for companies including Huawei and Qualcomm.

Chinese ride-hailing platform Didi filed for an initial public offering on Thursday. The company plans to trade on either the New York Stock Exchange or Nasdaq. 

Why it matters: Valued at $62 billion, Didi is among the world’s five highest-valued unicorns. The company’s listing could be one of the biggest IPO this year. 

• The Beijing-based startup is also the world’s biggest mobility platform, with around 156 million monthly active users (MAUs) in the three months ended March 31, 2021, according to its prospectus. To compare, Uber had 98 million MAUs during the same period.

Details: Didi’s IPO filing highlights its quick recovery from the impact of the Covid-19 pandemic. The company reported a net income of RMB 196 million ($30 million) in the three months ended March 31, up from a net loss of nearly RMB 4 billion a year earlier.

• Didi’s revenue for the first quarter of this year was RMB 42.2 billion, doubling its figures from the same period in 2020. The company reported a RMB 10.7 billion loss on RMB 141.7 billion in revenue for 2020. 
• Didi plans to use 30% of the proceeds from its IPO to fund its international expansion. The company intends to spend another 30% on technology development, including electric vehicles and autonomous driving, according to the filing.
• Didi is ramping up its push into electric vehicles (EVs) to cut operational costs. Last November, the company released its first EV, the D1, with Chinese carmaker BYD. It also partnered with Guangzhou Automobile Group Co Ltd (GAC Group) to develop self-driving cars last month.
• Didi didn’t disclose how much money it seeks to raise, but listed a placeholder amount of $100 million on the filing.

Context: As part of its rapid expansion plan for the next three years, Didi is expanding into overseas markets and aggressively entering new verticals. 

• In November, the Chinese mobility giant launched its ride-hailing service in Auckland, New Zealand, three months after making its debut in Russia. It is also reportedly eyeing western Europe, where it seeks to enter the UK, France, and Germany.
• Domestically, Didi has been diversifying its business by expanding into grocery delivery and mini-van services for logistics. In January, the company reportedly closed a $1.5 billion round of funding for its mini-van service. It plans to spin off its grocery delivery service in a separate listing as early as next year.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts.

It’s another earnings episode, so the guys welcome Michael Norris back to the show. They discuss the quarterly earnings of Baidu, Tencent, and JD, while also answering questions from listeners. Key topics include what a new era in tech regulation means for stocks.

Hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Kuaishou

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:

• Michael Norris – @briefnorris

Editor:

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

Chinese e-commerce giant Pinduoduo posted better-than-expected results for the first quarter of this year, readying for more investments in agriculture research and logistics.

Why it matters: Facing intensified competition in China’s e-commerce market, the Shanghai-based company has become laser-focused on “digitizing agriculture” and the grocery sector.

• Investment into agriculture aligns with the government’s drive to modernize agriculture. It’s also a priority for rivals like Alibaba and JD.

Revenue beat: Pinduoduo posted first quarter revenue of RMB 22.2 billion ($3.4 billion), climbing 239% year-on-year from RMB 6.5 billion in the same quarter of 2020. The increase was primarily driven by revenue increase from online marketing services and merchandise sales. 

• Revenue beat the average analyst estimate of $3.2 billion compiled by Yahoo Finance.
• Pinduoduo’s annual active buyers rose 31% year on year to 823.8 million as of March, slightly higher than Alibaba’s 811 million.
• But the company’s budget sensitive users continue to spend less than Alibaba’s. Based on its latest GMV figures Pinduoduo, had per-user spending of RMB 2,115 in 2020, compared to Alibaba’s RMB 9,200 in Q1 2021.  
• The company’s net loss attributable to shareholders narrowed to RMB 2.9 billion from RMB 4.1 billion in the same quarter of last year, though the figure is significantly wider compared with an RMB 1.4 billion net loss in the previous quarter.
• Despite the revenue beat, shares of Pinduoduo dropped 5.5% on Wednesday amid regulatory concerns and lingering impact of departure of founder Colin Huang in March.
• The company’s shares have sunk by about 40% from a historic high in February this year.

Focus on ag: The discount e-commerce platform is doubling down on a pivot to agriculture, now describing itself in investor materials as “the largest agriculture platform in China.”

• Pinduoduo announced a plan to boost investment in logistics infrastructure, the e-commerce backbone that is even more critical for perishable agricultural products. 
• “In building China’s first agri-focused infrastructure, our priority remains partnering existing third-party service providers first and foremost on everything from cold-chain logistics, warehousing, sorting, and delivery,” said Chen Lei, Pinduoduo chairman and chief executive officer, during the Wednesday earnings call.
• The firm also announced a partnership with the Singapore Institute of Food and Biotechnology Innovation (SIFBI) for studies on nutritional impact from replacing traditional animal proteins with plant-based proteins.

Context: China has imposed fines totaling RMB 6.5 million on five community group-buy platforms in March, including Pinduoduo’s Duoduo Maicai, for irregular pricing.

• The ongoing regulatory crackdown on Chinese internet firms casts shadows on the e-commerce company. The Shanghai Consumer Council ordered Pinduoduo to address consumer rights issues this May.

Cryptocurrency markets crashed on Wednesday night, with Bitcoin hitting $30,000 its lowest price since January. The abrupt sell-off came amid a plunging market and was widely attributed to a “ban” on crypto in China. As of writing, Bitcoin prices have recovered from the Wednesday drop, but are still far off their April peak. 

So, did China crash Bitcoin? 

The news that came out of China was very minor: Chinese authorities didn’t instate any new restrictions on cryptocurrencies this week. On Tuesday, three Chinese finance industry associations reiterated a 2017 ban on providing crypto related services. The effects on China’s crypto industry will likely be minor.

But the insignificance of the news didn’t determine the perception and consequent actions of already-skittish investors. It appears likely this minor news, in translation, really did set off a market crash.

Timing lines up

The timing of the news breaking and the sell-off suggests that international traders were responding to news from China. 

The statement was posted on the evening of May 18, while Bitcoin was trading at around $45,000, after falling 30% in the previous 30 days. 

Stories on a crypto “ban” in China made the rounds in international media on the afternoon of May 19, meanwhile the price of Bitcoin started to drop faster, losing $2,000 in a couple of hours. 

Google searches for the keywords “China,”  “crypto,” “bitcoin,” and “ban” started increasing around 10:00 p.m. China Standard Time on May 18. Around 9:00 p.m. May 19, searches spiked, at almost the same time that Bitcoin spiked downward to $30,000 just after 9:00 p.m. the next night.

But the Chinese internet was not very interested in the associations’ statement. 

Chinese state-owned TV channel CCTV reported on the statement a little after 10.00 a.m. on March 19. The news then circulated in Chinese social media. On China’s Twitter-like platform Weibo, related hashtags started picking up steam in the afternoon. As of the time of writing, they have been viewed at least 2.5 million times. That makes the news a mid-sized Weibo trend, garnering similar views as news on US artist Beeple selling a non-fungible token (NFTs) for $69 million back in March. 

Only when Bitcoin entered freefall on the evening of March 19 did Weibo blow up. Related hashtags have been viewed at least 800 million times since Wednesday night. The hashtag “Bitcoin collapse” was Weibo’s number three trending topic last night. 

What did China do? 

The government didn’t do anything, but some industry associations reminded finance and payments providers that they are not allowed to offer crypto services.

Some in China’s crypto community have pointed fingers at Reuters for distorting the news.

The China Internet Finance Association, the China Banking Association, and the China Payment and Settlement Association said that financial and payments providers are prohibited from conducting business related to virtual currencies, reiterating a 2017 regulation on cryptocurrency activities. Their statement was posted on the People’s Bank of China official WeChat account. 

The list of prohibitions for finance and payments providers is longer and more comprehensive, compared to the 2017 rules, but they broadly refer to the same types of activities. The associations’ words are not legally binding, unlike the 2017 regulations. 

The 2017 rules essentially banned IPO-like initial coin offerings (ICOs) and exchanges. The rules prohibited exchange platforms from converting fiat currencies like the Renminbi to virtual currencies like Bitcoin, companies from issuing crypto tokens in initial coin offerings, and financial and non-bank payment institutions from offering crypto-related services: 

Financial institutions and non-bank payment institutions shall not conduct business related to token issuance financing transactions. Financial institutions and non-bank payment institutions shall not directly or indirectly provide account opening, registration, trading, clearing, settlement and other products or services for token issuance financing and “virtual currency,” and shall not underwrite related tokens and “virtual currency.” The insurance business may include tokens and “virtual currency” into the scope of insurance liability. Financial institutions and non-bank payment institutions shall promptly report to the relevant authorities if they find clues about the illegality of token issuance financing transactions.

September 2017 statement from People’s Bank of China, Central Cyberspace Administration, Ministry of Industry and Information Technology, State Administration for Industry and Commerce, China Banking Regulatory Commission, China Securities Regulatory Commission, and China Insurance Regulatory Commission

In the four years since the 2017 rules, crypto exchanges have continued to offer their services and run massive offices in China, blockchain companies have launched ICOs, and most of the world’s crypto mining has been in China. 

Last year, however, authorities cracked down on crypto exchanges and particularly over-the-counter traders. 

The three industry bodies’ Tuesday announcement said essentially the same thing;: that financial and payment companies should not provide crypto services:

Financial institutions, payment institutions and other members must effectively strengthen their social responsibilities. They must not use virtual currency to price products and services, and must not underwrite insurance businesses related to virtual currencies or include virtual currencies in the scope of insurance liability. They must not directly or indirectly provide customers with other services. Services related to virtual currency, including but not limited to: providing customers with virtual currency registration, trading, clearing, settlement and other services; accepting virtual currency or using virtual currency as a payment and settlement tool; developing virtual currency exchange services with RMB and foreign currencies; develop virtual currency storage, custody, mortgage and other businesses; issue financial products related to virtual currency; use virtual currency as investment targets for trusts, funds, etc. Financial institutions, payment institutions and other member units should effectively strengthen the monitoring of virtual currency transaction funds, rely on industry self-discipline mechanisms, strengthen risk information sharing, and improve the level of industry risk joint prevention and control; if clues of violations of laws and regulations are found, they must promptly adopt restrictions, suspensions or procedures in accordance with procedures. Terminate relevant transactions, services, and other measures, and report to relevant departments; at the same time, actively use multi-channel and diversified access methods to strengthen customer publicity and warning education, and take the initiative to make warnings about risks related to virtual currencies. Internet platform corporate member units shall not provide services such as online business premises, commercial display, marketing and publicity, and paid diversion for virtual currency-related business activities. If clues of related problems are found, they shall promptly report to relevant departments and provide technical support for related investigations and assistance. 

March 18 statement from China Internet Finance Association, China Banking Association, and China Payment and Settlement Association

Carbon complications

An overblown story from China doesn’t explain all of the recent drop in crypto markets. In the last month, Bitcoin has lost 30% of its value, likely because investors are skittish amid looming environmental and regulatory concerns. 

A further plunge crstarted after tech CEO Elon Musk tweeted that Tesla will not accept Bitcoin as payment on March 13, citing environmental concerns. The digital asset has lost 30% of its value in the week since Musks’s statement. 

“This recent crash reflects the misunderstandings [of the effects of] Bitcoin mining on the environment in my opinion, but perhaps also has been driven by the ESG-minded companies that have been influenced by Musk’s latest stance on Bitcoin,” Flex Yang, CEO and co-founder of Babel Finance, a crypto financial services firm, told TechNode. 

The associations’ statement probably won’t bring dramatic change to China’s rules on crypto, but concerns about environmental regulation are mounting for crypto miners in the country. 

As the central government pursues carbon neutrality, local governments are increasingly hostile to crypto mining activities. Inner Mongolia has already proposed a ban on the industry, and crypto miners in Sichuan, which is usually more friendly, are expecting increased pressure in the coming months. 

READ MORE:  Losercoin, and a new crypto mining crackdown? Blockheads

Last week, China released its once-a-decade census figures. The results are largely in line with predictions: The nation saw its slowest population growth in decades, and the proportion of older people continues to grow. Some have estimated that China’s population will start to decline in 2027. What do these numbers mean to China tech? 

Bottom line: The demographic dividend that tech companies have enjoyed to fuel their growth in the past decades seems to be coming to an end. China’s population is growing older, which will pose challenges for both internet startups in Beijing and smartphone factories in Shenzhen. But there are also opportunities as the country moves to raise productivity and to upgrade its labor-intensive manufacturing sector into smart factories. Even as the overall population levels off, the urban and educated population is still growing fast.

Here are the key numbers:

• China’s population was 1.41 billion in 2020, 0.7% more than that of the year before and 5.4% more than that of 2010, when the last census was conducted.
• Average annual population growth was 0.54% over the past 10 years, down from an average rate of 0.57% between 2000 and 2010.
• The portion of Chinese over the age of 60 was 18.7% in 2020, a sharp rise from 13.3% in 2010.
• The percentage of Chinese aged between 15 and 59 was 63.35% in 2020, down from 70.1% a decade before.
• The percentage of Chinese who had received a college education or above was 15.5% in 2020, up from 8.9% in 2010.
• Around 902 million Chinese, or 63.9% of the population, now live in urban areas. The number was around 666 million in 2010, or 49.7% of the total population then.

The challenges

Internet population: For many years, tech companies’ growth has relied on the ever-growing number of internet users. 

• But China’s internet penetration is heading to a state of saturation. China’s internet users stood at 989 million by the end of 2020. That was already more than 70% of the population.
• As population growth slows and internet penetration plateau, growth will be harder for internet companies.

Population aging: “Aging has become a basic national condition of China for a period of time to come,” said Ning Jizhe, the head of China’s National Bureau of Statistics, at the release of the census data.

Higher wages:

• For decades, China’s manufacturing industry relied on an endless supply of young workers who are willing to work for low wages. It is now the world’s largest exporter of consumer electronics like smartphones and personal computers. 
• Now, workers are in shortage and labor costs are rising, prompting contract makers to shift some production lines from China to neighboring countries like Vietnam and India.
• China’s gig economy—including its booming ride-hailing and food-delivery markets—also relies on widely available cheap labor. The situation is unlikely to maintain with a lower childbirth rate and an aging population.

READ MORE: 996 and China speed—Slowing growth in the face of a changing workforce

Less innovation? Fewer young people may mean less innovation, argued Liang Jianzhang, a professor at China’s Peking University and a demographics expert. 

• Liang is also the founder of China’s largest online travel agency Ctrip. He resigned as Ctrip’s executive in 2006 to focus on demographic issues. He argues (in Chinese) that China should spend around 1% to 5% of its GDP on encouraging more childbirth.
• Liang told Chinese media after the release of the census data that population aging would keep more older workforce in the labor market, preventing young people from entering the market and thus, curb innovation.
• Decreasing demand would also hurt innovation, according to Liang. “Hotels in China are in surplus, but the entire demand for hotels is now declining,” he said. “No one will build new hotels, and new hotel technologies will have no testing ground.” (Our translation)
• A 2019 paper by Li Zipu, a professor of Zhongnan University of Economics and Law, found that population aging had a negative impact on several provinces’ science and technology innovation, after their proportions of the elderly exceeded 13.3%. Li argued that an aging population and delayed retirement age will discourage enterprises from hiring young workers and that the existing younger generation may lose opportunities for promotion in their careers. 
• Another paper by Shanghai University of Finance and Economics’s Wang Wei and Jiang Zhenmao, however, argues that population aging has positive effects on technological innovation because elderly workers may turn their experience into new methods. Their study was based on the number of patents filed by different age groups.

The opportunities

The productivity market: As the so-called demographic dividend of China ebbs and labor costs rise, demand for productivity tools is surging. Enterprise service software became one of the hottest VC investment segments in China.

• China’s software as a service (SaaS) market is still small but has been seeing impressive growth. The market was worth RMB 19.4 billion ($3 billion) in 2019, up 34.2% from the previous year.
• Automation is sounding more lucrative to enterprises than ever. Research firm IDC estimates that China’s robotic process automation (EPR) market will grow at an annual compound growth rate of 64% from 2018 to 2023. The market was worth $1 billion in 2020, said IDC.
• “Once the Lewis turning point is passed, we enter the neoclassical development stage. Labor supply shifts from surplus to shortage, and economic development no longer relies on the crude input of labor force, but on the improvement of production efficiency,” Shao Yu, chief economist at Orient Securities, wrote in a note (our translation). China reached the Lewis Turning Point in 2013, according to Standard Chartered.
• China’s latest five-year economic plan has vowed better vocational education and more investment in automation and digital infrastructure.

READ MORE: Chasing opportunity in China’s SaaS scene

Healthcare: Population aging also means investment opportunities in areas such as healthcare and elderly care, said analysts. As spending increases, both startups and big tech are rushing to digitize these industries.

• With no major incumbents, senior care may be ripe for innovation, wrote Luo Zhineng, an analyst at brokerage Yuekai Securities. “China’s senior care industry has not yet formed a mature business model, with small scale and immature profit model, and its development level lags far behind the huge number of aging population in China. As the ‘one-child generation’ becomes the backbone of society, family elderly care will gradually give way to institutional elderly care” (our translation). 
• An investment note by China Securities analysts Huang Wentao and Wang Zexuan said that an aging population will bring in a surge in demand for healthcare services. The rural population may rely especially on services enabled by remote-communication technologies.
• The Covid-19 pandemic has already fueled investment in medtech. Healthcare apps that went public in the past year include JD Health, Medlive, and Tencent-baked WeDoctor.

READ MORE: High tide for healthcare apps?

Industrial upgrading in tech: To offset the impact of the aging of the country’s workforce, China has long been pushing for a transformation and upgrading of its manufacturing sector. 

• Strategies that have been taken into place include “Smart Manufacturing,” which aims at digitizing factories.
• “More importantly, China (should) continue to sustain growth through technological development, go for high tech, go for high value-add, go for transformation of the whole supply chain, in order to support the economic growth on a sustainable basis,” Raymond Yeung, Greater China chief economist at ANZ, told CNBC this week.
• Yeung said upgrading China’s manufacturing sector is a “more realistic” approach than trying to renew population growth.

Growth in cities: Another good thing to look at China’s census data is how much the urban population has grown in the past decade—it grew more than 35% between 2010 and 2020. Most of China’s urban population growth in the past five years was in small cities, according to a report (in Chinese) by Evergrande Research.

• This means the user pool for companies seeking to tap into the “sinking market”—China’s lower-tier cities and small towns—is huge, and is in high-speed growth.
• China’s current urbanization rate is 63.9%. The goal set in China’s latest five-year plan that ends in 2025 is to raise the rate to 65%, which means an increase of roughly 15.5 million people living in towns and cities.
• Companies that have seen great success in the sinking market include e-commerce upstart Pinduoduo, video-sharing app Kuaishou, and news aggregator Qutoutiao.

Additional contributions by Julia Lu.

Xpeng Motors CEO He Xiaopeng promised Wall Street analysts May 13 that the company would roll out a new generation of autonomous driving (AV) software early next year. The company said recently that its Xpilot 3.5 system will be able to drive autonomously 90% of the time.

Why it matters: Improved AV capabilities could give the electric vehicle (EV) startup a leg up as it faces challenges. Last week, Chinese tech giants set out ambitious targets for their self-driving tech businesses in partnership with legacy automakers.

Earnings: Xpeng on Thursday reported a record RMB 2.95 billion ($450.4 million) in revenue in its first-quarter results, rising more than sixfold from a year earlier, exceeding a consensus estimate from analysts polled by FactSet, according to MarketWatch. However, Xpeng shares fell 4.8% to $23.56 on Thursday following the call.

• Gross margin expanded to 11.2% from 7.4% in the fourth quarter last year and losses attributable to shareholders was flat quarter on quarter at RMB 786.6 million.
• The young EV maker also revealed its software figures for the first time, generating around RMB 80 million ($12.4 million) in software revenue in the first quarter, and accounting for 2.5% of gross profits.
• Approximately 25% of P7 owners, Xpeng’s first sedan upgradable to advanced self-driving capability, have bought their cars with Xpilot 3.0 for an additional one-time fee ofof RMB 20,000 as of March, according to He. The company had delivered around 23,000 P7 sedans as of March.

Race to AV: He was asked about competition from Baidu and Huawei, which last month made public debuts of self-driving systems for city streets. He said the AV solutions provided by some companies are currently for limited driving scenarios or “at a very high cost.”

• In late January, Xpeng launched its Xpilot 3.0 advanced driver assistance system (ADAS), which allows vehicles to drive themselves on national highways.
• During an online conference on Apr 20, Wu Xinzhou, vice president of autonomous driving, said Xpilot 3.5 could allow autonomous driving on 90% road travel from the current 10%, as the function extends its reach from highways to city streets.
• “We are coming up with a solution that can balance all the aspects with a reasonable cost to deliver the most superior experience to our customers. This is an art,” He said.

READ MORE: Drive I/O: Key takeaways from Auto Shanghai 2021

Context: Chinese young EV makers are feeling the heat as local tech giants strive for self-driving leadership with the launch of their advanced AV solutions during this year’s Auto Shanghai last month.

• Huawei on Apr 17 announced to spend a whopping $1 billion in AV this year as the company, along with its auto partner BAIC, is pushing to deliver urban self-driving functionality first to customers from Beijing, Shanghai, Guangzhou and Shenzhen by year-end.
• Chinese search engine Baidu during the show said its ADAS solution for urban self-driving called Autonomous Navigation Pilot (ANP) will be available on vehicles launched by partners first in 20 cities by year-end and then over 100 cities by 2023.

Hello Inc., the bike rental startup behind China’s ubiquitous blue HelloBikes, has submitted a prospectus to the US Securities and Exchange Commission in preparation for a Nasdaq IPO. This is a rare look into the economics of the bike-sharing industry, as it’s the first time a company in the sector has released extensive financial data.

Why it matters: Hello’s filing is a sign that the once-volatile bike rental industry is moving beyond its growth phase.

• Hello and its competitors Qingju (an offshoot of Didi) and Meituan Bike survived the initial price wars and are shifting priorities from investment to profit.

READ MORE: The bike rental boom is dead. Long live bike rental

Details: The numbers in the filing reveal that Hello still has a ways to go to reach maturity.

• The company has yet to turn a yearly profit. Nevertheless, its figures have been steadily improving, rising from a net loss of RMB 2.2 billion ($340 million) in 2018 to RMB 170 million in 2020.
• The company’s revenue grew 25% to reach RMB 6 billion in 2020.
• Hello hopes to raise $100 million in its Nasdaq debut.
• The company has diversified beyond bike rental. Hello has added electric bikes to capture more of the market, and its ride-hailing platform has proven to be a strong competitor to market leader Didi

On track for profits? Industry experts weigh in.

• “For me, the main surprises [from the company’s filing] were around HelloBike’s market share. On the basis of its figures, alongside research it commissioned, HelloBike is the world’s largest bike rental provider, China’s second-largest carpool platform, and the country’s third-largest local services platform,” Michael Norris, research and strategy manager at AgencyChina, told TechNode. 
• Doug Young of the market research agency The Bamboo Works was less optimistic: “The company’s net loss attributable to ordinary shareholders ballooned by 50% last year to RMB 4.5 billion ($700 million) … Also, somewhat worrisome were figures for the company’s shared bike and electric scooter transaction volume, which is its core business and accounts for 91% of revenue. The prospectus showed revenue from that part of the service actually fell in every quarter of last year from the same quarter a year earlier, including a 6% drop in the fourth quarter.”
• The company warns that it is not immune to Beijing’s recent crackdown on tech firms. Among the risks the company mentioned in its filing is the possibility of anti-monopoly claims. Hello’s main competitors Didi and Meituan have both been subject to fines from regulators in the last two months.

“HelloBike was a latecomer to the bike-sharing money wars. Its come-from-behind two-wheel leadership, as well as its growing carpool share, suggest the company is the beneficiary of savvy strategists and operators.”

—Michael Norris

Context: At its peak, 80 companies around China operated in the bike rental industry. But the sector soon became bloated and dozens of these firms went under.

• The three remaining dominant bike rental players have survived in part because of deep-pocketed backers: Meituan Bike was formerly Mobike before being absorbed into lifestyle services giant Meituan, Hellobike’s largest shareholder is Alibaba’s Ant Group, and Qingju is of course under Didi.
• Their success is also due to evolving market strategies, raising prices and expanding offerings to develop sustainable businesses.
• Energy Monster, the leader in China’s power bank rental market, is another sharing economy representative that has recently IPO’d on Nasdaq.

Chinese electric vehicle maker Nio downplayed competition while delivering its first-quarter results on Friday, with chief executive William Li relaying minimal concern about its growing list of challengers in China.

“In the premium market, we haven’t seen any brand having the same level of competitiveness [as Nio] in terms of product, service, technology, user experience and community,” Li said during a call with analysts on Friday. Li added that many traditional automakers are “moving fast as followers” in building direct service channels and user community, but would face pressure in pricing their new products. Such automakers are “lagging behind“ in terms of in-car digital service and autonomous driving capabilities, he said.

“We believe we can solidify our position in the market… our competitiveness will continue to grow and stay strong in the long run,” Li said.

Nio on Friday beat Wall Street expectations for first-quarter revenue, boosted by better-than-expected deliveries despite an ongoing chip shortage that has hammered the auto industry globally. The company reported Q1 revenue of RMB 7.98 billion ($1.22 billion), exceeding the $1.06 billion consensus expectation in a FactSet poll of analysts, according to MarketWatch.

Nio’s Q1 delivery of 20,060 vehicles was a 16% quarter-over-quarter increase, and a fourfold increase on an annual basis. The company in late March lowered its Q1 delivery forecast to 19,500 vehicles from 20,000, citing the chip shortage. Automotive gross margins in the first three months of this year were 21.2%, up from 17.2% in the previous quarter and -7.4% in the first quarter of 2020, which the company attributed to increased adoption of higher-priced options and lowered costs for materials.

Losses attributable to shareholders expanded 183% year on year to RMB 4.87 billion, which the company attributed to the RMB 4.4 billion expense during the first quarter to redeem equity interest from investors of its China entity.

The company will not reduce the price of its cars in order to win market share, Li emphasized, but would increase investment to improve products and services with “a reasonable gross margin” as a long-term strategy. Nio announced last week during the Auto Shanghai expo that it would build 100 battery swap stations and 500 supercharging stations in China’s eight northern provinces over the next three years.

Nio also promised to invest heavily in the research and development of new products and technologies, aiming to gain a long-term competitive advantage as more big auto players move into the booming segment. Li said on Friday that he expected research and development expenses to increase significantly in Q2 as it moves aggressively to mass produce of its first sedan, the ET7, slated to begin deliveries in Q1 2022, as well as new models and self-driving technology development. The company in March announced it would double its R&D budget to RMB 5 billion this year.

Traditional automakers’ recent and aggressive push into electric cars is pressuring Tesla and young Chinese EV makers. In the latest example, state-owned BAIC partnered with Huawei to equip its latest premium sedan, the Alpha S, with customized software and hardware technologies from the tech giant. BAIC said it had secured over 1,000 orders after the debut on April 17. Two days earlier, China’s biggest private automaker, Geely, unveiled plans to deliver the first model from its new premium EV brand Zeekr in October, adopting a direct sales and community strategy similar to Nio’s.

“Competition will definitely heat up in the Chinese electric vehicle market, as not only legacy automakers from China and the globe but also local tech giants are actively joining in the race. The vehicle autonomy and electrification revolution will accelerate as more money pours into the market, but the competition would be very diverse, dynamic, and intense,” (our translation) Paul Gong, UBS’s China auto analyst said last week during an online conference call.

China imported $350 billion worth of semiconductors in 2020—more than the value of the crude oil it imported the same year, according to the country’s customs data. Importing semiconductors also accounts for the country’s largest categorical trade deficit, where the difference between what China imports and exports for this particular type of goods is the widest.

China has been the world’s largest importer of chips since 2005. As a result, global chipmakers and the governments in their home countries have grown obsessed with its plan to pursue independence on semiconductors for the past few years. They fear that China is looking to build a domestic chip supply chain and decrease its reliance on imports that have proved profitable for certain economies, most notably South Korea, Taiwan, and the United States. 

It is true that China is determined to increase its domestic chip production. But the goal is not to make China a silicon locavore, entirely independent from global supply chains. Making a chip is a hugely complicated process involving hundreds of companies that specialize in different steps, and no country does it all. China is trying to bring the highest value-added steps in the process, like chip design and manufacturing, on shore, but no matter how well this goes the country will remain dependent on the industrys’ global supply chains.

The actual source of the 70% figure is hazy—in fact, it may have been invented for television. It was first mentioned by China Central Television in August. Citing “relevant data from the State Council,” the state broadcaster said that China will realize a “self-sufficiency rate of 70%” in semiconductors by 2025. But there is no support for such a claim in any Chinese official document. Media reports cite the country’s Made in China 2025 initiative, first released in 2015, as the source of the 70% goal, which is misleading. The plan did call for improving domestic chip-designing ability, but it did not set a specific timeline for self sufficiency or a figure.

Beijing certainly wants to bring more semiconductor manufacturing on shore—but its goals appear to be relatively realistic. 

Chips are China’s biggest imports

China’s semiconductor imports surged to an all-time high in March to stockpile against the threat of a global chip shortage. That month, the country imported 58.9 billion semiconductor units worth $35.9 billion, according to data released by China’s General Administration of Customs, the South China Morning Post reported.

In 2020, China spent more money on semiconductors than on crude oil, according to the data. In fact, semiconductors were China’s largest imports last year as well as the country’s largest categorical trade deficit. In 2020, China booked an overall trade surplus of $570.4 billion, while semiconductors ran at a trade deficit of $233.4 billion. By comparison, the trade deficit within crude oil was $185.6 billion in 2020.

China’s trade deficit in semiconductors is getting deeper, increasing 15.3% in 2020 from the previous year and surging nearly 150% compared with 2014.

One of the reasons for China’s push for self-reliance on semiconductors is to “develop high value-added manufacturing and service industries and help reduce the country’s largest source of trade deficit,“ wrote insurance firm Euler Hermes in a report (in Chinese) in February. 

And China is chips’ largest importer

China needs chips, but chip makers around the world also need China. The country accounts for a huge part of their revenue—56% for Qualcomm and 26% for Intel. Numbers for the industry as a whole were not available. The US-China decoupling on technology has been bad news for them and we’ve seen they have lobbied for less restrictions on chips exports to China.

The bottom of the semiconductor value chain

China is the world’s largest buyer of semiconductors, but most of what China buys isn’t consumed at home. Instead, chips are used to make other products and then exported. The chips are incorporated into end products like smartphones, personal computers, and telecommunications equipment, which are then exported to other markets.

Market research firm IC Insights estimated that 60% of semiconductors sold in China in 2020 were components for export products.Making gadgets out of imported semiconductors is a low-margin business. Semiconductor revenue earned by companies headquartered in China only accounted for 5% of global semiconductor sales in 2019, according to data from the Semiconductor Industry Association, a US-based industry body.

China has been involved in the global semiconductor supply chain for a few decades, allowing companies to nurture the talent and skills to move up the value chain and reap greater economic benefits.

China has seen Taiwan improve its standing in the semiconductor industry over the past 60 years. The island has moved steadily up the value chain since the 1960s when American companies began setting up assembly plants there. Today, the island is the world’s second-largest semiconductor manufacturer behind South Korea, and home to Taiwan Semiconductor Manufacturing Company, the world’s largest contract chipmaker. Chip manufacturing now contributes to more than 56% of Taiwan’s semiconductor industry.

For China, the push for self-reliance in semiconductors is not only about making semiconductors at home. It is about pushing the industry upstream on the value chain—making chips rather than using chips, designing chips rather than packaging chips.

While this has already been in process over the past two decades, Beijing’s call for self-reliance on semiconductors is likely to accelerate the pace. The following chart shows the decrease in low-value activities for China and an increase in activities higher up the value chain, specifically chip design.

Rational growth

China’s ambitious semiconductor autonomy plan is about improving the proportions of chip designing and chip manufacturing in the industry, the Euler Hermes report said. 

By doing so, the country has increased investment in the segment. This newsletter mentioned in March that cash flowing into China’s semiconductor firms surged more than fourfold in 2020 compared with the previous year. One of the biggest underwriters is the state. 

The country’s National Integrated Circuit Industry Investment Fund, known as the Big Fund, manages more than RMB 340 billion ($52.5 billion). Around 84% of the Big Fund’s investment went into chip manufacturing and design firms. The rest went mostly into chip packing and testing firms, lower-value inputs necessary to the ecosystem.

Meanwhile, provincial governments have set up guidance funds totaling more than RMB 300 billion to support local semiconductor industries. 

The numbers seem massive, but the state is not throwing its support behind chip firms at any cost, support that some of China’s biggest firms have enjoyed in the past. In November, the government allowed Tsinghua Unigroup, a major state-owned semiconductor manufacturer, to default on a RMB 1.3 billion bond.

“Tsinghua Unigroup is one of China’s largest and most advanced semiconductor firms,” wrote Euler Hermes. “Tsinghua Unigroup’s default sends a signal that China probably won’t provide funds to its leading companies at all costs.”

Chinese telecommunications equipment maker Huawei reported Wednesday that its revenue for the first quarter fell 16.5% year on year, in the company’s largest quarterly top-line decrease since US export restrictions took hold.

Why it matters: The decrease in revenue reflects the toll that US sanctions have taken on a company that was once the world’s largest smartphone maker.

• US sanctions imposed in 2020 and 2019 barred Huawei from access to critical semiconductors it needs to produce consumer products. The company was also banned from using Google’s Android mobile operating system, which heavily dented the appeal of its smartphone offerings in overseas markets.

Details: Huawei said in a statement Wednesday that its revenue for the first quarter of this year was RMB 152.2 billion (around $23.5 billion), a year-on-year decrease of 16.5%.

• The company said the results were “in line with forecast.”
• Net profit in the quarter was RMB 16.7 billion, up from RMB 13.3 billion in the same quarter last year.
• “2021 will be another challenging year for us, but it’s also the year that our future development strategy will begin to take shape,” said Eric Xu, Huawei’s rotating chairman.
• “No matter what challenges come our way, we will continue to maintain our business resilience. Not just to survive, but do so sustainably,” Xu said in the statement.

Context: Huawei said earlier this month that its revenue for 2020 reached RMB 891.4 billion, up 3.8% year on year, but slower than the annual growth rate of 19.1% in 2019.

• The company saw revenue growth from its consumer business—which includes smartphones, tablets, and computers—fall sharply. Growth in this segment fell to 3.3% last year from 34% in 2019. 
• Huawei’s revenue for the fourth quarter of 2020 fell 11% year on year to RMB 220.1 billion—the first time on record that its quarterly revenue contracted.

Revenue growth for Chinese telecommunications equipment maker Huawei fell dramatically in 2020 as overseas sales shrank in the wake of US sanctions and disruptions caused by the Covid-19 pandemic, the company reported on Wednesday.

Why it matters: The decline comes as Huawei’s revenues shrank in all markets but China. Huawei was placed on a US trade blacklist in 2019, blocking the company from sourcing US-made components without permission.

• Huawei has faced pushback across international markets as countries around the world place restrictions on rolling out the company’s telecommunications equipment.
• Huawei’s smartphone sales have fallen drastically since the ban. In the fourth quarter of 2020, Huawei shipped just 33 million handsets globally, down 41% year on year, data from Counterpoint Research showed.

Details: Huawei’s revenue reached RMB 891.4 billion in 2020, up 3.8% year on year, but down from an annual growth rate of 19.1% in 2019.

• The company saw revenue growth from its consumer business—which includes smartphones, tablets, and computers—fall off a cliff. Growth in this segment fell from 34% in 2019 to 3.3% last year.
• “The US restrictions have impacted our business, especially our mobile phone business, and that resulted in modest growth last year,” Ken Hu, Huawei’s rotating chairman, said during a press conference on Wednesday.
• Sales from the company’s enterprise business were a bright spot, increasing 23% year on year to reach RMB 100 billion. Revenue from its carrier business increased just 0.2% annually to RMB 300 billion, slowing from 3.8% in 2019.
• The company’s net profit hit RMB 64.6 billion, up 3.2% on the year but slower than the 5.8% in 2019.
• China accounted for much larger portion of the company’s overall sales. The country made up nearly two-thirds of its revenue last year. In 2019, sales from China accounted for just under 60% of its revenue.

This article has been corrected to reflect that Huawei’s consumer business revenue growth fell, not its revenue as previously stated. 

The billionaire founder and chairman of Pinduoduo, Colin Huang, has stepped down as board chairman and handed responsibilities to company chief executive officer Chen Lei just as the e-commerce giant overtook its rival Alibaba as China’s largest online selling platform.

Why it matters: Chinese workplace culture is to a great extent influenced and shaped by founders’ personalities and management styles. The departure of a leader as notoriously driven as Huang is expected to prompt a significant shift at Pinduoduo.

• The company’s share prices slumped 7.1% Wednesday on the news.  
• Huang’s resignation comes at a time when the company faces criticism for its grueling overtime culture, brought to light after the highly publicized deaths of two employees and complaints from others.

READ MORE: Tech in the five-year-plan

Details: Colin Huang said in a letter sent to shareholders on Wednesday that he had resigned as the company’s chairman. Chen Lei will take over while continuing in his existing role as CEO.

• Huang’s voting rights were passed to the board, but the 1:10 super voting rights attached to his shares will no longer apply. He pledged to hold his 29.4% share of Pinduoduo for the next three years.
• Huang said he is embarking on a new journey exploring food and life sciences.
• Along with shareholder letter, Pinduoduo reported fourth quarter revenue of RMB 26.5 billion ($4.1 billion), climbing 146% year on year from RMB 10.8 billion in the same quarter of 2019. The growth was primarily driven by an increase in ad revenue and contribution from merchandise sales, the company said. Pinduoduo’s revenue beat the high end of analyst estimates compiled by Yahoo Finance.
• The company’s active buyers in 2020 jumped 35% year on year to 788.4 million from 585.2 million in 2019, overtaking rival Alibaba, which reported 779 million annual active users during the same period.
• The e-commerce platform is repositioning itself as China’s largest agriculture platform, according to CEO Chen Lei’s comments during the earnings call held Wednesday evening, as it shifts toward selling agricultural products and offering services to farmers. 
• Chen said Pinduoduo’s gross merchandise volume (GMV) for agricultural products doubled on an annual basis to more than RMB 270 billion in 2020, though it remained a modest share compared with the company’s total GMV of RMB 1.7 trillion for the year.

Context: Serial entrepreneur Huang, 41, has stepped away from the company he founded five years ago to devote himself to the research of food and life science. The areas have significant overlap with Pinduoduo’s new business focus—agriculture. Agritech was mentioned in the 14^th Five-Year Plan an important industry for China, which seeks to shore up agricultural efficiency and innovation.

• Colin Huang handed his CEO role to Chen Lei in July.
• Forbes once listed Huang, a former Google employee, the second-richest man in China, on its Real-Time Billionaires List, though he had fallen to 24th place as of publication.

China is vastly increasing investment in semiconductors. In 2020, cash flowing into China’s semiconductor firms amounted to RMB 227.6 billion (around $35.2 billion) through the primary and secondary markets, a stunning 407% increase from the previous year, according to TechNode’s research.

China is the world’s largest consumer of semiconductors, and the lion’s share of revenue from purchasing these chips go to foreign firms. China consumed $143.4 billion worth of wafers in 2020, and just 5.9% of them were produced by companies headquartered in China. 

China has sought to make more of its own chips for years. In 2017, Chinese vice premier Ma Kai said: “We cannot be reliant on foreign chips.” Last year, President Xi Jinping called to “make technological self-sufficiency a strategic pillar of national development.” Beijing is expected to add “a suite of measures to bolster research, education, and financing” for the semiconductor industry to a draft of this year’s 14th five-year plan, China’s top-level policy blueprint for the following half decade, Bloomberg reported.

Concern over chip dependency has grown higher over the past two years as the US used semiconductors as leverage against companies like Huawei, a Chinese “national champion” which supports the country’s mission to lead the world in the next-generation wireless technology known as 5G.

The Trump administration banned Huawei from buying components from US companies in 2019 and cut the company off from third-nation suppliers that use American technology in 2020. The moves prompted Chinese business and political leaders to resolve to never again be put into such a situation.

China has massively increased investment in semiconductors over the past two years. The central and local governments have launched hundreds of policy funds, or guidance funds, to support the industry. The private sector also jumped onto the bandwagon. Venture capital investment into the semiconductors sector more than tripled in 2020 from the previous year. China also tapped its massive private capital market by opening up its financial market to let individual investors directly support high-tech firms that are not yet profitable. In 2020, 32 chip companies went public on China’s A-share market, up from 18 in 2019.

Big funds

The National Integrated Circuit Industry Investment Fund, known as the Big Fund, is the Chinese government’s main vehicle for semiconductor investment. The fund was first set up in 2014 by China’s Ministry of Finance and China Development Bank Capital, as well as several other state-owned enterprises, which together injected RMB 138.7 billion into the fund.

The Big Fund was established to invest in chip manufacturing and design, and promote mergers and acquisitions, according to China’s Ministry of Industry and Information Technology (MIIT), which supervises the fund.

It has shown a strong preference for semiconductor manufacturing companies, as China strives to produce cutting-edge 7-nanometer chips. The RMB 138.7 billion first Big Fund closed all of its investment projects at the end of 2019. Around 67% of its total investment went to semiconductor manufacturing firms, according to a report by Eastmoney Securities, a Chinese brokerage.

The first Big Fund had backed companies like Shanghai-based Semiconductors Manufacturing International Corporation (SMIC) and Huahong Semiconductor Limited. SMIC is China’s largest contract maker of semiconductors. It was also added to a US export blacklist in 2020.

In October 2019, the Big Fund raised another RMB 204 billion in a new funding round from the finance ministry, state-owned enterprises, and local governments.

Meanwhile, provincial governments have set up guidance funds totaling more than RMB 300 billion to support local semiconductor industries.

Opened stock market

In July 2019, China opened up a Nasdaq-style board on the Shanghai Stock Exchange. The STAR Market is the first Chinese exchange to allow unprofitable companies to list., revamping China’s earlier stock market rules.

However, not every unprofitable tech company is welcome. The Shanghai bourse has said that the STAR Market prefers companies that align with the “Made in China 2025” blueprint, Beijing’s plan for self-sufficiency in strategic sectors such as semiconductors and artificial intelligence.

Of the 216 companies listed on the STAR Market, 36 are semiconductors firms, as of the end of January. They include SMIC, which debuted on the market in July 2020 and saw its shares jump more than 200% on the first day of trading.

The STAR Market’s appetite for semiconductors has spurred a rush of activity in the sector. More semiconductor companies went public in 2019 and 2020 than all of those from 2010 to 2018. In 2020, some 32 chip companies went public on China’s A-share market, raising a total of RMB 87.6 billion. 

VC money more than tripled

At the same time, private capital is quickly moving into the sector.

In 2020, the total amount of VC investment into Chinese semiconductor companies grew more than 366% from the previous year to RMB 140 billion, according to data from Itjuzi, a Chinese VC funding database. The total number of VC investment deals also nearly doubled in 2020 to 413.

Thanks to a robust stock market that gives investors more options to exit, later-stage rounds in semiconductors have seen steady growth. The percentage of investment deals after Series A had increased to 55.8% in 2020 from 33.1% in 2018.

Unlike government-led funds, VC firms prefer chip-design firms to manufacturing companies. Chip designers accounted for around 67.2% of VC investment deals in 2020.

What’s next?

Despite heavy investment from the government and private investors, experts have said that China will fall far short of its 2025 goal.

While China’s goal is to make 70% of the chips it uses by 2025, IC Insights, a market research firm, forecasted that China will produce only 20.7% of its chip consumption in 2024, growing only 3% from 2020.

The country not only needs to produce more chips, but it also needs to make sophisticated chips that can meet the demands of modern computing devices, such as high-end smartphones and supercomputers. However, experts said mainland China’s chip-making capability is “generations behind” the leading edge in Taiwan.

Though a complete value chain in five years may be a dream, China is making progress in the sector. Changxin Memory Technology, a state-backed semiconductor startup, started mass production of the country’s first locally designed dynamic random-access memory (DRAM) chip in September 2019. HiSilicon, Huawei’s chip-design branch, ranked among the world’s top 10 vendors of semiconductors in August for the first time. 

But to emerge as a world-class semiconductor maker, analysts say, that China also needs to narrow a talent gap. It faces a talent shortfall of around 300,000 people, according to the China Semiconductor Industry Association.

How many of China’s top university graduates end up working for the domestic semiconductors industry? Where do Chinese chip makers find talent? Will the talent gap narrow as China continues to invest in the sector? We will dive into that topic in the next issue of this newsletter.

Nio CEO William Li said Tuesday an industry-wide shortage of electric vehicle batteries and semiconductor chips will continue to hamper production for the next few months. The EV maker is planning a significant acceleration in manufacturing in the second half of 2021 as it gears up for an aggressive sales and service expansion to complete coverage of its home market.

Nio had achieved a production rate of 10,000 vehicles in its Hefei plant during the Chinese New Year in February, Li said during the company’s fourth quarter earnings call on Tuesday. However, the company expects monthly output to remain at around 7,500 units through the second quarter due to “lower-than-estimated” battery supply and a global chipset shortage.

With supply chain restrictions expected to ease in July, Li said the company does expect to have sufficient parts to meet its needs. This, along with a significant expansion of its retail footprint and recharging network, is forecasted to help reach “a much higher sales performance in the second half of the year,” according to Li, who did not further elaborate. Nio guided up to 20,500 deliveries for Q1, compared with Li Auto’s forecasted ceiling of 11,500 units.

READ MORE: Li Auto may have controlled its costs in 2020 too well

“China is a very big market… We are quite confident this should be able to help us to achieve our sales target,” Li said.

Nevertheless, it fell short of generating profits in Q4, reporting a wider-than-expected net loss of RMB 1.39 billion ($212.8 million), double analyst estimates, according to Bloomberg. Aggressive geographic expansion plans this year could limit its positive cash flow from operations in Q4 to a one-off, Jefferies analysts said in a Tuesday report.

Nio is pursuing an ambitious timetable to unlock growth in China’s booming EV market, the world’s biggest. It aims to open another 20 clubhouse-style showrooms called Nio Houses and 120 of its smaller Nio Spaces by year-end. The company is focusing efforts to expand in lower-tier cities where EV penetration is low. “In all the cities where Mercedes-Benz, BMW, and Audi have sales presence, we will also be there this year,” Li said (our translation). Nio has operated 226 sales locations across 121 major cities as of February.

The company is planning to more than double the number of its battery swap stations to upwards of 500, along with quadrupling the number of its supercharging stations to over 600 in the same time period. The seven-year-old EV upstart has become Tesla’s most prominent challenger in China, delivering 43,728 vehicles last year using a war chest of around $4.8 billion made by selling additional shares, and scoring a $1 billion cash injection.

China produced a scant 5.9% of semiconductors it used in 2020, according to a report published Thursday, indicating significant reliance on foreign technology as the country pushes for independence on chips.

Why it matters: China, the world’s largest semiconductor market, is determined to increase domestic production of chips, and plans to make 70% of chips it uses by 2025.

Details: China’s integrated circuit (IC) market increased 9% to $143.4 billion in 2020 compared with a year earlier, according to a Thursday report by market research firm IC Insights. China-headquartered firms, however, only made $8.3 billion worth of ICs sold in the country in the same year, the report said.

• Around 15.9% of ICs sold in China in 2020 were made locally, but most of them were made by foreign companies with wafer fabrication plants in the country, such as Taiwan Semiconductors Manufacturing Company, SK Hynix, and Samsung. Together, such firms made around 10% of chips sold in China last year.
• IC Insights estimated in the report that 60% of semiconductors produced in China were components for exported products. The country is home to some of the largest smartphone makers in the world, including Xiaomi, Huawei, and Oppo.
• Programmable logic devices, which are used to store the logic pattern integrated onto chips during programming, was the largest segment of China’s IC market in 2020, accounting for 26% of total wafers sold.
• Strong sales of smartphones and other computing systems during the pandemic drove growth in microprocessors, which was the second-largest IC product segment in China last year, according to IC Insights. The category grew 12% last year to $32.7 billion.

Context: In December, the US added China’s largest chipmaker, Shanghai-based Semiconductors Manufacturing International Corp (SMIC), to an “Entity List” that effectively cut the company off from American technology.

• Huawei, the world’s largest maker of telecommunications equipment, has been been plagued by US sanctions. The company has now essentially been cut off a supply of advanced semiconductors.

Chinese retail conglomerate Alibaba posted better-than-expected revenue growth for the quarter ended December and first-ever profits for its cloud-computing business.

Why it matters: The e-commerce giant has had a rocky past few months. An anti-monopoly investigation, the suspension of the public listing for its financial affiliate Ant Group, and speculation about the location of its once high-profile founder Jack Ma after a months-long disappearance from the public spotlight have pressured the company, once seen as a darling of China’s tech sector.

• Profitability and robust momentum from its non-core cloud-computing and logistics businesses could help build investor confidence at a time when the company faces increasing regulatory scrutiny.

Details: December quarter revenue grew 37% year on year to RMB 221.08 billion ($33.88 billion), beating the $33.35 billion average analyst estimate compiled by Yahoo Finance. 

• The company attributed revenue momentum to growth in its core commerce business boosted by the Singles Day promotion held in November, as well as strong growth in its cloud-computing business.
• However, growth excluding revenue from Sun Art, a supermarket chain the company acquired in October, rose 27% during the quarter, signaling a deceleration from the 30% seen in the September quarter and 34% year-on-year growth in the June quarter.
• Core commerce revenue jumped 38% year on year to RMB 196 billion ($30.3 billion), accounting for 88% of total company revenue, thanks to a recovery in consumer spending in China.
• Cloud computing income reached RMB 16.1 billion, up 50% year on year and representing 7% of total revenue, primarily driven by robust growth from customers in the internet and retail industries, as well as the public sector. 
• “The cloud division is one-fifth the size of AWS, but it already has many advanced cloud services addressing the needs of key verticals, and it is growing twice as fast as AWS,” Martin Garner, chief operating officer at market information and intelligence agency CCS Insight, wrote in an email to TechNode on Wednesday.
• Net income attributable to ordinary shareholders rose 52% to RMB 79.43 billion during the quarter compared with RMB 52.31 billion from the same quarter in 2019. Alibaba’s equity investments in public companies recorded big increases in value, boosting the bottom line.
• Monthly active users of Alibaba’s China marketplaces reached 902 million, an increase of 21 million from the previous quarter. Taobao Deals, Alibaba’s Pinduoduo counterpart, surpassed 100 million monthly active users as the company continues to focus on budget buyers in lower-tier markets.
• Cainiao, Alibaba’s logistics arm, finished the quarter for the first time with positive cash flow. It earned RMB 11.4 billion ($1.8 billion) during the time period, up 51% over the same period a year ago.
• Alibaba chairman Daniel Zhang offered few updates on the ongoing anti-monopoly investigation during the earnings call held Tuesday night, but reiterated that the company’s “cooperative, receptive and open mindset” toward the investigation.
• Regulator scrutiny of Ant Group has raised concerns that a potential reduction in consumer credit services such as Huabei would impact consumer spending on Alibaba’s e-commerce market places. Zhang said Alibaba attracts buyers with “comprehensive and high-quality product and service offerings” and that payment using Huabei represents “a very small percentage” of total credit granted under Huabei. He added that the vast majority of Alibaba buyers “have linked their payment accounts to multiple funding sources, including credit cards.”
• Alibaba shares fell 3.9% on Tuesday in New York, while its Hong Kong-listed shares declined 3.9% in morning trading on Wednesday.

READ MORE: Singles Day 2020—bigger, longer, and more live

GGV Capital, an investor behind some of China’s most successful tech startups including ByteDance and Didi Chuxing, said Thursday it had closed a $2.5 billion funding round—the largest in its 20-year history.

The US- and China-based venture capital firm’s latest capital raise comes amid an uptick in inflows to VCs from domestic and international limited partners (LPs) looking to profit from China’s tech growth. On Tuesday, Qiming Venture Partners, a Beijing-based VC firm that has invested in food delivery app Meituan and smartphone maker Xiaomi, said it had closed a new RMB 2.9 billion (around $448 million) financing round, following a $1.2 billion capital raise in September.

The two deals are part of a trend: foreign investors are increasingly injecting funds into China’s growing tech sector, as the global economy slows. Investors and analysts have said that foreign LPs are optimistic about China’s tech startups following last year’s initial public offering (IPO) boom. China, meanwhile, is gradually opening its finance market, increasing its appeal to international investors, they said.

Two big fundraising deals

GGV said it had raised in this financing round $1.46 billion for its GGV Capital VIII fund, $366 million for the GGV Capital VIII Plus fund, $610 million for its Discovery III fund, and $80 million for its Entrepreneur VIII fund. The firm said it will focus on investment in sectors such as new retail, cloud-based enterprise services, and social media.

The firm said it also expects to soon close a separate financing round of RMB 3.4 billion, increasing its total assets under management to around $9.2 billion.

The company did not disclose the names of its backers in this round. It has previously raised US dollar funds from North America-based pension funds, family asset management firms, and universities. A GGV representative declined to comment.

Qiming’s latest financing round was backed by two government-led guidance funds in Shanghai and Beijing, as well as several domestic insurance companies, TechNode has learned. The firm’s $1.2 billion financing round closed in September was mainly backed by American university endowments and pension funds.

“Top domestic and international LPs are optimistic about our investment strategy to invest in China’s innovative and developing science and technology, even during the challenging global Covid-19 epidemic as well as changing global environments,” (our translation) Duane Kuang, Qiming’s founding managing partner, said in a company statement on Tuesday.

US dollar funds become more active

In 2020, Chinese US dollar funds raised 12% more money than the previous year, even though total capital flowing into the market dropped nearly 39%, according to data from PE Data, which tracks China’s VC activities.

“US dollar funds into Chinese VC firms increased in 2020 both because the Chinese government had loosened its regulations of foreign investment and because overseas LPs are a lot more confident about the Chinese market,” (our translation) Liu Xiaoqing, research director at Itjuzi, a Chinese VC activity database, told TechNode.

American LPs are finding Chinese tech firms increasingly attractive and the market is rapidly developing after some Chinese tech firms went public in 2020 and offered investors high returns, she added. Some of the largest Chinese tech IPOs last year included electric vehicle maker Xpeng and Li Auto, as well as gaming giant Netease’s dual listing in Hong Kong.

VC-backed Chinese video-sharing app Kuaishou is preparing for what is expected to be the world’s largest public listing since the pandemic. The company is seeking to raise around $5 billion on the Hong Kong stock exchange, implying a market capitalization of as much as $60.9 billion. The firm was valued at $18 billion in a funding round in January 2018, meaning early investors are expected to net returns of nearly 233%.

A clearer picture

US investor interest in Chinese tech firms was hampered last year by two Trump-era policies, but signs from the Biden administration, which has thus far indicated an aversion to over-broad and arbitrary restrictions on Chinese tech firms, are stoking optimism.

In May, the US Labor Department advised US federal pension funds—important backers of Chinese USD VC firms—against investing in Chinese companies. In November, former US President Donald Trump signed an executive order which banned starting Jan. 28 American investment in companies that are deemed related to the Chinese military. Smartphone maker Xiaomi, China’s three biggest telecommunications operators, and Chinese chipmaker SMIC are on the blacklist.

However, in a sign that it is easing Trump’s “tough-on-China” tech policies, the newly inaugurated Biden government said on Wednesday it is delaying the investment ban on certain Chinese firms to May 27.

China’s economy expanded 2.3% in 2020 according to government data (in Chinese) released last week, as economies in the rest of the world grapple with the stranglehold on business brought by the coronavirus pandemic.

China brought in $163 billion in foreign investment in 2020, surpassing the US as the world’s hottest destination of foreign direct investment, according to a report by the United Nations Conference on Trade and Development released on Sunday. In 2019, the US took $251 billion in foreign inflows and China got $140 billion.

“LPs are planning for the longer term,” said Liu of Itjuzi. “They are not only confident about China’s economy in 2021. They are at least confident about China in the next 10 years.”

Chinese tech giants typically focus on the consumer market. But their appetite for semiconductors is growing. 

These deals highlight a trend: Chinese tech giants are trying to secure their future growth by making investments in the semiconductors industry.

Funding China’s semiconductor industry also underscores tech giants’ concerns about being cut off from the global semiconductor supply chain after the US effectively banned Huawei from sourcing American-made components. 

Other active chip investors are Tencent and e-commerce behemoth Alibaba, which have focused on investing in the artificial intelligence chips and computer processors that power their cloud computing businesses. Earlier this month, Tencent participated in artificial intelligence chip maker Enflame Technology’s RMB 1.8 billion (around $278.3 million) Series C.

Tencent and Xiaomi have been targets of Trump’s actions against Chinese tech firms, but they have so far not had trouble getting chips.

Increasing investment in semiconductors is also in line with Beijing’s push for self-sufficiency in strategically important technologies. Unlike Huawei, which is locked in geopolitical disputes with the US and is barred from most high-end semiconductors that use American technology, the other companies making these investments are largely free from US sanctions.

China has vowed to produce 75% of all the chips it uses by 2025—and it is putting a lot of money behind this goal. Total VC investments into China’s semiconductor industry quadrupled (in Chinese) in 2020 to RMB 140 billion from the previous year. The country has also set up a series of government-backed funds to support semiconductors startups, including a $29 billion “Big Fund.”

In this issue of VC Roundup, we look into how Chinese tech giants are making investments in semiconductors.

Huawei: The Shenzhen-based telecoms company, which produces everything from smartphones to base stations for next-generation 5G networks, has felt the pain of a shortage of semiconductors. The company may have to stop manufacturing smartphones in the middle of this year if the US doesn’t lift sanctions.

• In April 2019, Huawei set up its Hubble investment unit, led by Bai Yi, the then president of Huawei’s global financial risks control center. The company had RMB 700 million in registered capital when it was founded. In October, Huawei increased the investment unit’s registered capital to RMB 2.7 billion. Hubble has invested in 27 companies so far, all of them in the semiconductor sector.
• In August 2019, three months after Washington added Huawei to a technology export list, Hubble made its first investment in a Hangzhou-based battery integrated circuit (IC) designer.
• In 2020, Hubble invested in 20 semiconductors companies, according to Chinese corporate information platform Tianyancha (in Chinese).
• They include NineCube, a maker of chip-designing tools; ALLSEMI, a semiconductor manufacturing equipment maker; and Onmicro, an IC designer of processors and radio frequency (RF) front-end modules used in handsets.
• Industry insiders believe that Hubble’s investments are linked to Huawei’s plan to “de-Americanize” its supply chain. “The investments are clearly replacing US companies they can no longer get access to,” a chip industry executive told the Financial Times in December.
• Some of Hubble’s investments, such as RF module designers Onmicro and Evisionics, are aimed at replacing US counterparts, like Qorvo and Skyworks, said Stewart Randall, head of electronics and embedded software at Shanghai-based consultancy Intralink. 

But chip design won’t “help too much” if they don’t have access to chip contract manufacturers like Taiwan Semiconductor Manufacturing Company (TSMC) and South Korea’s Samsung, Randall added. TSMC and Samsung are also subject to US export restrictions on Huawei because their production lines contain American technology.

Xiaomi: Xiaomi made its first foray into chips in 2014 when it launched a semiconductor division that focuses on SoC design. In 2017, the unit, called Pinecone, launched its first and only mobile processor, the Surge S1, which was featured in Xiaomi’s Mi 5C smartphone.

• In 2019, Xiaomi began rethinking its chip ambitions by pivoting to investment. In July 2019, it bought a 6% stake in Shanghai-based chip designer VeriSilicon.
• Xiaomi has since become a more active chip investor than Huawei. In 2020, the company funded some 30 early-stage semiconductor firms, most of which are designers of smartphone chips.
• There is some overlap between Xiaomi and Huawei’s portfolios. Both companies have invested in Onmicro and SmartSens Technology, a Shanghai-based digital camera image sensors maker.

Internet companies: E-commerce giant Alibaba is also China’s biggest cloud computing service provider. The company has been pouring money into making silicon for its cloud computing business to reduce reliance on foreign chipmakers such as Intel and Nvidia.

Alibaba’s semiconductor push began in 2017. The company invested in a series of artificial intelligence chip makers such as Cambricon (in Chinese) and DeePhi Technology (in Chinese).

• In April 2018, Alibaba acquired C-sky, a designer of homegrown 32-bit processors for servers. Alibaba then merged C-sky and Damo Academy, an in-house semiconductor research institution founded in 2017 to form T-head, a chip-designing unit.
• T-head’s offerings include the Xuantie processor series and the Wujian SoC Platforms series, which are mainly used to power IoT devices; and the Hanguang neural processing unit (NPU), which is used in servers in Alibaba’s data centers, according to the company’s website.

Artificial intelligence chips have also caught Tencent’s eye. The company participated in three financing rounds for chipmaker Enflame between 2019 and 2021. 

• Tencent is China’s second-largest cloud computing service provider after Alibaba, but the company is not as active in semiconductor investments as Alibaba. 
• Apart from Enflame, the only other semiconductor firm Tencent had a stake in is Shenzhen-based SDMC, a smart television chipmaker. In August, Tencent led a RMB 44 million (in Chinese) financing round in SDMC.
• Internet companies’ investment in semiconductors is a “global phenomenon,” Randall of Intralink told TechNode. “Facebook, Google, Amazon, etc. all have their own chip teams now. Alibaba and Tencent followed this trend,” he said.

A mixed picture: While the US hasn’t targeted the majority of Chinese tech giants with technology export restrictions, some companies have already found themselves in the crosshairs of US-China geopolitical disputes. It’s unclear whether their investment strategies will mitigate this risk. Huawei has demonstrated that investing in chips can be more profitable than strategic.

• “For Chinese companies at least it is also some form of protection,” said Randall. “If we get cut off from Nvidia then we at least have some in-house expertise to maybe create something to keep our services running as they grow.”
• But Huawei’s efforts to invest in the domestic semiconductors supply chain didn’t prevent it from being cut off crucial chips it needs to produce smartphones. The company had to sell its budget handset brand Honor in November. Reuters reported this week that Huawei is in early-stage talks to sell its premium smartphone brands P and Mate.
• Randall says these may just be good investments. “Sometimes you can make more profit that way. Like Qualcomm makes more off a Xiaomi phone than Xiaomi,” he said.

Big deals: semiconductors edition

• Jan. 25: Xiaomi injects RMB 200 million into Cvitek, a Beijing-based chip designer for video surveillance equipment.
• Jan 7: Beijing-based AI chip designer Horizon closes a $400 million Series C2 led by British firm Baillie Gifford and Hong Kong-based Aspex Management.
• Jan 5: Enflame closes a RMB 1.8 billion Series C led by state-owned Citic Private Equity and participated by Tencent.
• Dec 28: Huawei’s Hubble investment unit injected more than RMB 10 million into Ninecube.
• Dec 21: Senscomm, a wireless semiconductors designer based in Jiangsu province, closes a RMB 150 million Series A led by Oriza Holdings and Xiaomi.

Chinese self-driving vehicle startup Uisee has raised around $150 million in a new round of funding led by a state-backed venture capital fund, as the Covid-19 pandemic fuels demand for driverless vehicles.

Details: A national investment fund formed by a group of government agencies and state-owned enterprises led the RMB 1 billion funding round, according to an announcement released Monday. The fund has registered capital of RMB 147.2 billion. The Uisee valuation was not disclosed.

• China’s Ministry of Finance is the fund’s top shareholder holding a 15.3% stake, according to information on Chinese business research platform Tianyancha. Other major stakeholders also include China Development Bank Capital, the investment subsidiary of the state-owned policy bank, as well as China Insurance Investment Fund, a venture capital firm set up by a group of top Chinese insurers.
• Uisee said the proceeds will be used to enhance the development of its fully self-driving vehicle technology for use cases from passenger transport to logistics. The company’s public demonstrations have primarily showcased its logistics applications, enabling cars with self-driving technology to transport goods in and between warehouses.
• The Beijing-based AV startup said it is partnering with several big automakers to commercialize its technology, including equipping a fleet of more than 100 electric vehicles as trailers to transport auto parts in an SAIC-GM-Wuling plant in the southern Guangxi province. SAIC-GM-Wuling is a General Motors joint venture with its Chinese manufacturing partners.
• Uisee said that the fleet has logged more than 300,000 kilometers (186,411 miles) unmanned as of January in the 15 months since partnering with the carmaker. In an interview with Chinese media in April, founder and CEO Wu Gansha said that it is planning to enable daily operation of 1,000 AVs and achieve revenue of RMB 200 million by the end of 2021.
• Wu, formerly the director of Intel’s research institute in China, formed Uisee in early 2016. In February, it closed a Series B for an undisclosed amount led by Robert Bosch Venture Capital GmbH, the German auto supplier’s investment arm. Other early investors included Chinese venture capital firm ZhenFund, as well as Sinovation Ventures co-founded by former Google China head Kaifu Lee.

Context: Uisee is benefiting from pandemic-driven demand for unmanned transport, as one of a handful of Chinese AV startups getting a funding boost.

• Guangzhou-based WeRide earlier this month said it had closed a $310 million Series B from investors including China’s biggest electric bus maker Yutong, as the robotaxi startup begins expanding into self-driving minibuses.
• Plus.ai, a self-driving truck company backed by Sequoia Capital China, in November raised $100 million from Guotai Junan International, a Hong Kong-based investment and securities firm, and Hedosophia, a London-based VC firm.

On Nov. 11, 2019, Chinese people collectively bought more goods online than the population of any country on any other day since the invention of the internet—or of commerce, for that matter. 

Known as Singles Day, the promotion is China’s biggest annual online shopping festival, and eclipses the sales of the US’s Black Friday and Cyber Monday combined. In 2020, merchants on online platforms including Alibaba’s Tmall and Taobao, JD.com, and Pinduoduo, sold more than RMB 330 billion (around $51.3 billion) worth of goods in 24 hours, significantly lower than in 2019, according to data from China-based data services company Syntun.

That figure, known as gross merchandise volume (GMV), is equivalent to the price of more than 900,000 China-made Teslas or 6,600 of China’s homegrown passenger jets.

Platforms that report GMV make a big deal out of it. E-commerce companies plaster live totals on massive screens at media events and push these figures to investors as beacons of growth. But longer-term numbers are usually released only annually. 

Yet, the concept is sneakily deceptive. There is no standard definition for GMV—platforms measure their own sales figures in different ways, essentially creating their own definitions. 

Returns and cancelations

Every penny a customer commits to pay on a platform is counted as part of GMV—whether or not they pay, or later get the money refunded.

Imagine this scenario, a popular one among internet users in China. It’s 11:59 p.m. on Nov. 10. You have one minute to go until Singles Day promotions begin. Your shopping cart is full, stocked with items whose prices will fall as soon as the clock strikes 12. But, in the back of your mind, you wonder if you should be buying RMB 5,000 worth of goods. 

The moment comes. You quickly tap the pay button before your precious goods sell out. It’s done—your bank balance falls by RMB 5,000, while Alibaba books another RMB 5,000 in GMV.

But in the morning, you wake up feeling guilty. Slowly, you realize that you probably don’t need another winter coat, so you cancel the order.

Down in Yiwu, the merchant doesn’t mind too much—in fact, it helps them climb in search results. They’re busy buying and canceling thousands of orders for the same coat from dummy accounts, boosting their rank. 

Meanwhile, in Hangzhou, Alibaba’s GMV ticker keeps rising, undeterred by thousands of similar cancellations that may be processed every minute. In fact, that ticker will never fall, because GMV totals include all transactions on a platform, even when those goods are cancelled or returned. 

According to Alibaba’s 2019 annual report, the company GMV figures include all orders for products and services on its platform regardless of whether items are actually sold, delivered, or returned. Rival e-commerce platforms JD.com and Pinduoduo also include unfulfilled orders in their GMV totals. 

“Like other measures of economic scale, such as GDP, GMV is imperfect. Depending on the company definition, it can include unpaid orders, orders that have been added to cart but ultimately not purchased, cancelled orders, or returned orders,” Michael Norris, research and strategy lead at AgencyChina, told TechNode. 

Aside from including cancelled or returned orders, Alibaba, JD.com, and Pinduoduo all include shipping costs in their GMV calculations, further inflating sales volume. 

The metric may be flawed, but it’s the only game in town when it comes to shopping festivals.

GMV calculations have even led to spats between rival e-commerce platforms. In 2017, Alibaba’s public relations head mocked JD.com for releasing an extended 11-day sales figure, as it always does. JD.com racked up RMB 127 billion in GMV between Nov. 1 and Nov. 11 while Alibaba’s figure reached RMB 164 billion in 24 hours.

JD Retail’s then chief marketing officer and now CEO, Xu Lei, hit back at the e-commerce giant, saying that Alibaba’s 24-hour GMV figures were driven by pent-up consumption from users all looking for a discount on one day of sales. Alibaba has now extended its Singles Day promotions to 11 days. 

Fake orders

Beyond all of the generous inclusions in GMV, there is something more insidious that boosts sales metrics: brushed orders. Here, stores on e-commerce platforms pay people to order items that are very cheap or are cancelled later. A store’s motivation can be higher seller ratings or increased visibility of their products in search results. 

China’s government is attempting to root out brushed orders. In June, Beijing tax authorities sent out alerts to a group of nearly 2,000 merchants who were required to make supplementary tax payments based on inflated numbers that resulted from brushed orders. The government has also proposed a law that would make merchants liable to pay tax on falsified sales.

“Brand retailers nowadays don’t do much of that anymore, but small mom-and-pop merchants use brushing as a service to market their products during [shopping] festivals, ” said Li Junheng, founder of JL Warren Capital, a China-focused equity research firm. 

Investors are aware of the pitfalls of the GMV figures e-commerce platforms report and attempt to adjust for brushed and unfulfilled orders to get a better sense of what a company’s “real” GMV may be. 

“I typically apply a discount rate of between 20% and 40%, depending on the platform,” said AgencyChina’s Norris.

Investors also get around misleading numbers by comparing figures year on year, as opposed to using the absolute values. 

Keeping up with the times

With the pandemic, livestreaming sales hit the big time, and it’s only expected to become more popular. The explosion in popularity could create even more problems for people trying to separate the signal from the noise in GMV figures. 

The problem? Livestream purchases have extremely high return rates, more so than any other type of purchase. 

“A general rule of thumb is that the GMV sold during livestreaming sessions have the highest return rates, as they target compulsive shoppers,” said Li. Depending on the category, up to 50% of all purchases are returned. The effects can be at their worst when livestreams are hosted by online influencers, who have an incentive to book as many orders as possible to boost their value as advertisers. 

According to Alibaba, more than 30 livestreaming channels on its platforms generated in excess of RMB 100 million in sales each during last year’s 11-day Singles Day shopping festival. Over 500 channels generated RMB 10 million each during the same period. 

The figures will only increase. KPMG expected livestreaming e-commerce in China to reach more than RMB 1 trillion in 2020, up from RMB 430 billion in 2019. With half of all goods being returned, reported GMV metrics could become far less useful to gauge a platform’s scale. 

“Over time, as livestream e-commerce becomes a bigger chunk of the overall e-commerce pie, analysts will need to adjust the discount rate they apply to platform GMV,” said Norris. 

Xpeng-backed self-driving startup WeRide has raised $200 million in a round of fresh funding from China’s biggest electric bus maker Yutong, it announced Dec. 23. The two companies also announced the development of a fully automated minibus with no controls.

Why it matters: The deal comes as Chinese automakers are pushing into the country’s autonomous vehicle industry, and as local authorities are allowing AV testing on public roads in bid to catch up in the global battle for tech dominance.

• The central government has reaffirmed a goal to “adopt highly autonomous cars on a massive scale” by 2025 in its finalized blueprint (in Chinese) for intelligent and electric vehicles released late October.

Details: Yutong put $200 million into WeRide in a solo Series B1 investment, according to a joint announcement released Wednesday. Based in the central Henan province, Yutong is China’s biggest medium and large-sized electric bus maker with more than a third market share in its domestic market, followed by BYD and Dongfeng Motors, among others.

• WeRide said that it and Yutong have jointly developed an autonomous minibus, which has no steering wheel, accelerator, or brake, without revealing details.
• The Guangzhou-based company did not disclose its valuation, nor details of other investors involved in its Series B.

READ MORE: The Chinese startup bringing robotaxis to the masses

Context: WeRide has been testing fully driverless vehicles on open roads in Guangzhou since July. It is the second company in the world to test fully driverless vehicles on open roads, following the US’s Waymo.

• The company in December 2018 closed an undisclosed amount in a Series A from the Renault-Nissan-Mitsubishi Alliance, along with Chinese artificial intelligence unicorn Sensetime, Xpeng CEO He Xiaopeng, and others.
• WeRide claimed to have offered more than 147,000 rides to 60,000 passengers in a robotaxi pilot program in a 55-square-mile area on the outskirts of the city as of November. 
• WeRide peer Pony.ai revealed last month an undisclosed amount of funding from the state-owned FAW Group, which it claimed was the first bet on AV by a Chinese state-owned automaker.

Share prices for electric vehicle makers Nio and Xpeng plunged more than 10% on Tuesday despite triple-digit annual growth in November deliveries. Investors were unimpressed with growth numbers bolstered by a very low base in 2019 when China’s EV sales sank by nearly half after government subsidies were slashed.

On the same day, news broke that Congress is likely to pass legislation this week forcing Chinese companies delist from US stock markets with new audit-oversight rules.

Nio delivered 5,291 electric crossovers in November, more than doubling the number in the same month last year, according to an announcement from Monday. However the EC6 drove growth with a 71% month-on-month rise while the ES8 and ES6 declined slightly from a month earlier. The growth rate slowed to 4.7% on a monthly basis.

The EV maker, backed by the government of Hefei city in eastern China, said that it is expanding the manufacturing capacity of its Hefei plant to meet order growth but did not disclose the number of order backlogs. The company in September reached a monthly capacity of 5,000 units on a single shift and aims to increase the number by 50% by January, CEO William Li said during its third-quarter earnings call.

Xpeng Motors recorded deliveries of 4,224 EVs in November, up by 342% year on year and 38.9% sequentially. A low base in 2019 and a dip in October a result of competition from Tesla’s China-made Model 3 boosted the comparisons. The Guangzhou-based EV maker sold 1,016 G3 sports utility vehicles in the same month a year ago, according to figures from industry group China Passenger Car Association. It forecasted deliveries of around 10,000 vehicles for the fourth quarter.

Li Auto reported November deliveries of 4,646 EVs after market close on Monday, growing 25.8% on a monthly basis. The Beijing-based EV maker, which began vehicle deliveries last December, said the number of deliveries as well as new orders in November surpassed 5,000 units.

READ MORE: Nio, Xpeng, Li Auto: your cheat sheet to China’s listed Tesla rivals

Even as Bitcoin prices rocketed, cryptocurrency mining rig maker Canaan Creative’s losses in the third quarter jumped four fold to RMB 86.4 million, which company management attributed to pandemic and economic headwinds while competition intensified from rivals such as Bitmain and Microbt.

Why it matters: Canaan is one of China’s biggest crypto mining equipment makers, and one of only two listed in the US along with rival Ebang.

• In Q3, Bitcoin’s price more than doubled to exceed $19,000, nearing a historical high. The surge was a missed opportunity for the embattled crypto mining rig maker.
• Canaan’s share price in New York dropped 17.5% on Monday.

Details: Canaan’s third quarter losses widened to RMB 86.4 million ($12.7 million) from RMB 16.7 million in the previous quarter, according to a company filing released on Monday. In the same quarter a year ago, Canaan reported net income of RMB 94.6 million.

• Canaan’s net revenues sank 76% year on year to RMB 163.0 million, a 8% decline from the second quarter.
• Computing power sold dropped to 2.9 million terahash per second, a 20.7% decrease from the same period last year when the figure stood at 3.7 million terhahash/second, and a 13.4% quarter-on-quarter drop.
• Revenue divided by computing power sold indicate that Canaan has significantly reduced its equipment prices to boost sales.
• In the quarter ended Sept. 30, the price was $8.10 per terahash/second, compared with $27.5 per terahash/second in the same quarter a year ago.
• Canaan has been spending more on short-term investments, which has drained its cash and cash equivalents. It spent RMB 204.6 million in the third quarter compared with RMB 11 million in the same period a year ago. Its cash and cash equivalents fell by almost 66% to RMB 177.4 million in the same time period.
• The company’s spending on research and development rose to RMB 32.1 million from RMB 26.1 million in Q2. A short report in February accused Canaan of underspending on R & D and creating inferior products.

Context: The short report by Marcus Aurelius Value said that it found “undisclosed related party transactions, irregularities involving many customers and distributors, as well as a business model that we view as broken.”

• Canaan tried to list three times in Asia before managing to go public on the Nasdaq in 2019.
• The company’s stock lost 65% of its value between Feb. 20, when the short report was released, and the end of October, when Bitcoin’s price started to surge, and Canaan stock started to rebound. It had managed to halve its losses on a sequential basis in the previous quarter.
• Canaan’s latest mining rig, the Avalon A1246 Pro, can mine up to 90 terahash/second with a 38 jule/terahash power efficiency. It is losing out to the latest models by other companies including Bitmain’s Antminer S19 Pro which can mine up to 110 terahash/second consuming 29.5 jule/terahash, and Microbt’s Whatsminer M40 which can mine up to 410 terahash/second with a power efficiency of 25 jules/terahash.

Xiaomi reported on Tuesday better-than-expected revenue of RMB 72.2 billion (around $11 billion) for the third quarter, the fastest growth the Chinese smartphone maker has seen since its 2018 listing.

Why it matters: The strong performance shows how the Beijing-based company has benefited following US sanctions imposed on its archrival Huawei. Xiaomi’s global smartphone shipments grew 45% year on year to 47.1 million units in the third quarter while Huawei’s fell 23% year on year to 51.7 million units, according to market research firm Canalys.

• However, Xiaomi President Wang Xiang warned of a “supply chain shortage” in the fourth quarter during an earnings call late Tuesday. Wang did not provide further details but said the difficulty could last until next year.
• Unlike Huawei, which has been essentially cut off from the global semiconductor supply chain because of US sanctions, Xiaomi is free of geopolitical tensions. 

Details: Revenue for the world’s third-biggest smartphone vendor in the September quarter grew 34.5% year on year, said the company in a filing with the Hong Kong exchange Tuesday.

• More than half of Xiaomi’s third-quarter revenue came from overseas markets, which grew 52.1% year on year to RMB 39.8 billion, the company said. Its smartphone shipments in Europe grew 90.7% year on year in the same period, seizing an 18.7% market share, said the company, citing Canalys data.
• Xiaomi’s adjusted net income for the quarter grew 18.9% year on year to RMB 4.1 billion, according to the unaudited results. Shares of the company more than doubled this year.

Context: Xiaomi beat Apple to rank the world’s third-largest smartphone vendor in the third quarter behind South Korea’s Samsung and Huawei, according to Canalys.

• The company is also expected to benefit from the sale of Honor, Huawei’s budget phone brand, just last week. Analysts suggested that the company could gain around 15 million units in additional smartphone shipments because of Honor’s exit.
• Xiaomi’s Wang said during the Tuesday earnings call that the company has no plans to change its market strategy because of the Honor sale. “We were also informed by the media that Huawei sold Honor. Anyway, our strategy is unchanged and I don’t see the necessity to change it,” he said.

Chinese electric vehicle maker Nio on Tuesday reported third-quarter revenue that beat Wall Street expectations alongside record delivery volumes and double-digit profit margin, though share prices fell 3.3% by market close on Wednesday.

The China’s most valuable EV maker earned revenue of RMB 4.5 billion ($666.6 million) in the third quarter, up 146% from the same period a year earlier and higher than the consensus estimate of $663.2 million compiled by Bloomberg.

Gross margin improved sequentially to 12.9% from 8.4%, though rival Li Auto outperformed with an impressive 19.8% margin during the same period. Quarterly losses narrowed 11% quarter-on-quarter to RMB 1.05 billion, lower than the RMB 1.15 billion posted by its peer, Xpeng Motors.

Nio in Q3 nearly tripled on an annual basis the number of vehicles delivered to 12,206 units, and forecasted a new high for Q4 of 17,000 cars. Its output growth rate exceeds its peers. However, challenges loom as the company fights for market share amid growing competition from both domestic and international rivals in the crowded Chinese EV market.

Nio improves margin

During its Tuesday earnings call, Nio attributed gross margin improvement mainly to an increase of RMB 10,000 per unit in average selling price for the quarter as sales for the higher-priced ES8 crossovers rose in Q3. Deliveries of Nio’s first model recovered by September when it sold 1,482 units following the launch of a revamped model after hitting bottom in February at just 36 units.

Significantly cheaper material costs including battery packs boosted margin, vice president of finance Stanley Qu said during the earnings call. A top client of Chinese battery supplier CATL, Nio in March said that it expected battery costs to decrease more than 20% year on year in the fourth quarter.

The Shanghai-based EV maker aims to further drive sales and boost gross profit. It is forming ambitious volume and service expansion plans for the coming months, setting a monthly production target of 7,500 vehicles in January, up 50% from September.

Another initiative for next year is constructing 300 newly designed battery swap stations across the country. The company’s recharging network numbered 158 battery replacement facilities as of September. Each of its swap stations cost RMB 2 million on average to set up, but that number will be decline by half next year thanks to design improvements, CEO William Li Bin told Chinese media earlier this year.

Currently the best-financed Chinese EV startup, Nio’s cash on hand almost doubled to RMB 22.2 billion in Q3. It expects to maintain cash burn at a modest rate looking ahead, Qu said during the call, pledging to ensure service network expansion is well planned and executed. Most of the capital expenditure for capacity expansion will be covered by its manufacturing partner JAC Motors, according to Nio financial chief Steven Feng.

Hurdles remain

With gross margin shy of double digits, Nio’s may continue to struggle for profits amid internal issues such as production delays. Supply chain partners continue to weigh on production capacity.

Currently, Nio customers have to wait for up to six weeks for deliveries as demand rises and parts remain in limited supply. Nio hopes to reduce that time length to three to four weeks, according to Li. Li said Nio would reach its target capacity of 7,500 units in January, while acknowledging it would not immediately be able to shorten delivery times.

Xpeng faces the same issue, with CEO He Xiaopeng last week acknowledging to analysts that the company was encountering “a temporary bottleneck” in battery supply, which would probably continue for a few months. Still, He said supply chain partners would expand their capacity to meet Xpeng’s needs in the next six to 12 months.

Faced with growing competition from both automakers at home and abroad, both Nio and Li Auto are expected to accelerate spending on research and development to gain an edge in self-driving technologies. Nio’s Li during the call said the firm’s second-generation technology platform, called NT 2.0, equipped with “the most advanced chipset in the industry” and enhanced artificial intelligence capabilities, would be deployed on its first sedan scheduled for release early next year.

The EV maker, backed by Chinese internet giant Tencent, recently released its advanced driver assistance function, Navigate on Pilot, in head-to-head competition with Tesla and Alibaba-backed Xpeng. Li Auto plans to catch up by tripling the size of its self-driving team to 200 scientists and engineers by June, and launching a similar function as early as 2021.

Competition heats up

US-listed Chinese EV makers have collectively delivered 70,399 vehicles as of October this year, lagging Tesla’s nearly 100,000 China-made sedans during the same period, according to figures from China Passenger Car Association.

Concerns linger about the company’s profitability after short seller Citron Research last week warned that Nio’s valuation was too high to be justified by market share, along with a possible sales hit by the upcoming launch of Tesla’s locally built Model Y early next year.

Li maintained during the call that Nio targets a more premium consumer segment than Tesla with a higher average selling price. With deliveries in October more than double on an annual basis, it is clearly not affected by Tesla’s most recent price cuts, he said. October deliveries for Xpeng, whose P7 model directly competes with the Model 3, declined 14.4% from a month earlier.

Nio’s share price has surged over 1,000% since January, indicating that a correction may be due along with near-term pressure from Tesla. Still, around 63% of analysts covering Nio have rated its shares “buy.” Bank of America, Deutsche Bank, and JP Morgan on Wednesday raising their price targets on the stock, according to a CNBC report.

 “We believe Nio will continue to take share in the premium segment from traditional ICE incumbents, …ultimately emerging a major winner in the China auto market by the middle of the decade,” Deutsche Bank analysts led by Edison Yu wrote in report on Wednesday.

Shares of Chinese electric vehicle maker Xpeng Motors jumped 33.4% to $44.73 on Thursday after the company recorded positive results for the third quarter following bullish analyst comments. Now perceived as a strong challenger to Tesla, the EV upstart is gearing up for an ambitious goal: setting a benchmark for driver assistance technology in China that rivals will have to beat.

In the first report since its August debut on the New York Stock Exchange, the carmaker said it raked in RMB 1.99 billion ($293.1 million) in the third quarter of 2020, making for a 342% year-on-year surge in revenue, boosted by an uptick in vehicle deliveries. Quarterly deliveries grew 266% year-on-year to 8,578 units. That number included 6,210 P7 sedans—the company’s second mass production model directly targeting Tesla’s Model 3.

Xpeng CEO He Xiaopeng said during the earnings call that the company’s goal is to provide “the most advanced” assisted self-driving system in China. The dedication to in-house research and development on autonomous driving, he added, would be the key to build up core competencies and set it apart from its rivals. More notably, more than 98% of all the P7 vehicles delivered were equipped with hardware that supports software upgrades to the latest version of its advanced driver assistance system (ADAS) Xpilot.

The company’s quarterly losses grew to RMB 1.15 billion from RMB 776 million in 2019 but its gross margin shrunk to 4.6% from -10.1% for the same period. Operating expenses climbed 60% quarter-on-quarter, to RMB 1.8 billion. This is even more than the RMB 1.47 billion in expenses that Nio incurred in the second quarter. The rival Chinese EV maker has gained notoriety for its high cash-burning rate.

Boasting of being one of only two automakers in the world to have developed all core self-driving capabilities in-house, Xpeng is the only Chinese automaker taking the same approach as Tesla. However, the cost has been high and the payoff is uncertain, as it has taken much longer than initially promised by industry players to get mature self-driving technologies ready for the road.

How much of an advantage is Xpeng in targeting Tesla in a self-driving race? Here are some of the notable takeaways gleaned from analysts and Xpeng executives, including Wu Xinzhou, vice president of autonomous driving who recently spoke to TechNode.

Upcoming features

Xpeng is currently on track to release its semi-self-driving function, called Navigation Guide Pilot (NGP), in the beginning of next year. The feature enables a car to self-drive on urban highways, including navigating from a highway on-ramp to off-ramp, changing lanes, and taking exits.

The NGP technology is expected to handle real-world scenarios on the busy Chinese urban highways, taking a burden off the drivers, enabling users to remain engaged in driving but without their hands on the steering wheel all the time. NGP is similar to Tesla’s Navigate on Autopilot (NOA), that carmaker’s most advanced driver-assisted offering. Nio launched a similar feature in late September.

The company has set a goal to achieve “a single-digit number” of times per 1,000 kilometers (621 miles) on highways that drivers are required to take control of the vehicles, according to Wu.

On city roads, human intervention will still often be needed, as the company’s current ADAS features are unable to recognize traffic lights and handle requests such as lane merging. Still, a “future-proof” hardware and software architecture would allow the company to push forward more advanced features, Wu said.

Long-term benefits

In reply to an analyst during the earnings call, the CEO said the company plans to launch more driver-assistance features beginning in the second half of 2021. One of these features, called “autonomous following,” will be specifically designed for the complex traffic conditions in major Chinese cities. It will enable drivers to closely follow the cars in front of them to make sure that they are not left behind.

“ADAS is not going to be a major boost to overall sales in the short term. Most consumers are not overly focused on those functions if it’s not standard or part of a luxury package,” said Daniel J. Kollar, head of Automotive & Mobility Practice at consultancy Intralink Group, on Thursday. However, he said the internal focus on self-driving development likely would have long-term benefits as the industry moves towards commercialization of semi- and above-vehicle autonomy.

“China market consolidation will likely favor Tesla and a few surviving EV upstarts,” according to a Thursday report from Chinese online firm Tiger Brokers. The report noted, though, that the release of NGP and continuous roll-out of ADAS functions could “bring a high-margin software revenue stream throughout 2021.”

READ MORE: Tesla’s apprentice: Is Tesla bullying its own biggest fan?

Share prices for Pinduoduo rocketed 20% in New York on Thursday after reporting robust top-line growth which easily beat analyst estimates as well as a surprise adjusted quarterly profit—its first since going public in 2018.

Why it matters: The results renewed investor confidence in Pinduoduo, which had missed market expectations in earlier quarters and faced mounting scrutiny for its inability to turn a profit.

• Chinese tech stocks plunged earlier this week after Beijing rolled out on Tuesday anti-trust draft rules aimed at some of the country’s biggest internet companies. Pinduoduo shares dipped along with its peers but creeped upward on Wednesday. The new rules could benefit smaller platforms and have more impact on larger names, Barron’s reported citing analysts at research firm Morningstar.
• Alibaba shares closed down around 9% on Wednesday on news of the rules, shadowing its Singles Day feat of booking gross merchandise volume of RMB 498.2 billion during the promotion.

Details: Pinduoduo posted third quarter revenue of RMB 14.2 billion ($2.1 billion), climbing 89% year on year from RMB 7.5 billion in the same quarter of 2019. Revenue reached the high end of analyst estimates compiled by Yahoo Finance. Growth decelerated from the 129% annual rate seen in Q3 last year.

• Pinduoduo’s annual active buyers rose 36% year on year to 731 million in the 12 months ended September, representing a net add of 48 million from Q2. The user size is on par with rival Alibaba, which added 15 million to reported 757 million annual active buyers in the quarter ended September.
• However, Pinduoduo’s clientele are significantly more budget-conscious that those of its peers. Annual spend per active buyer on the platform in the 12-month period ended September was RMB 1,993 ($293.6), an increase of 27% from RMB 1,567 over the same period last year. Annual spend per active buyer for rival Alibaba was around RMB 9,000 per buyer, and approximately RMB 6,000 for JD.com.
• The company recorded its first quarterly adjusted profit with non-GAAP net profit attributable to shareholders hitting RMB 466 million compared with a net loss of RMB 1.6 billion the same quarter a year ago. Adjustments noted in its filing included share-based compensation and interest payments related to its convertible bonds.
• Pinduoduo will continue to invest in its “New Brand” initiative by providing support to merchants and manufacturers under the “consumer-to-manufacturer” model.
• The company recently launched Duo Duo Maicai, an agricultural product sales channel. To address the specific logistics demands for produce, the company is “prepared to go heavy in building” and “accelerating the development of agriculture infrastructure,” David Liu, vice president of strategy, said during the earnings call held Thursday night.
• Tiger Brokers analysts expect the company will swing back into a loss in Q4 given the huge marketing expense for Singles Day. However, they are bullish on the company’s long-term prospects. “Profitability is just a matter of time after the model is proven,” the analysts wrote in a research note.

Context: Pinduoduo and Alibaba, two of the largest e-commerce platforms in China, have long been locked in a public spat about “forced exclusivity,” whereby marketplace platforms force sellers to exclusively list on one online marketplace.

• Chinese market regulators began to curb such unfair practices last year, reminding more than 20 e-commerce sites on a forum that forced exclusivity is illegal.
• “Intensified” forced exclusivity efforts from rivals has weighed on Pinduoduo’s performance, according to the company.

Chinese e-commerce giant Alibaba reported stronger-than-expected results for the September quarter, but its share price in New York declined 2.7% on slower sales growth and the suspension of the dual public listing for its fintech affiliate Ant Group.

Why it matters: Alibaba’s sales were buoyed in the September quarter from an economic rebound in China, much like the preceding quarter. But the Ant Group public offering mishap weighed on the parent company, which holds a third of the fintech company.

•  The Thursday dip in share price followed a 8% drop on Tuesday in New York after the Shanghai exchange halted Ant Group’s mega listing due to “significant changes” in the regulatory environment.

READ MORE: Ant Group IPO delay and Jack Ma’s ill-timed speech

Details: Alibaba reported revenue of RMB 155 billion ($23 billion) in the quarter ended Sept. 30, representing a 30% year-on-year increase from the same period in 2019, the company said in a statement on Thursday. The earnings beat the average analyst estimate compiled by Yahoo Finance.

• Revenue growth decelerated significantly from the 40% year on year growth figure seen in the same period of last year, but was still a strong quarter for Alibaba given lingering coronavirus impact, according to Marina Koytcheva of CCS Insight. Its results are “strongly suggesting that the transition to online shopping and digitalization of services is a sustainable trend even as life in China has now mostly returned to its pre-pandemic normal,” she said in an emailed comment.
• Net income attributable to ordinary shareholders fell 60% year on year to RMB 28.8 billion, mainly attributable to a one-time gain from equity interest in Ant Group last year as well as share-based compensation expenses during the quarter, according to the filing.
• Representing 84% of total revenue, the company’s core e-commerce revenue increased to RMB 130.9 billion. The figure grew 29% year on year compared with 40% year on year growth in the same period last year.
• Taobao Deals, Alibaba’s Pinduoduo-like business targeting value-conscious consumers, became a key driver for user acquisition as the company competes head-on with rivals like Pinduoduo and JD.com in expanding to lower-tier markets. Taobao Deals launched a major new update in March, and monthly active users jumped 75% quarter on quarter to 70 million as of September.
• Cloud computing revenue grew 60% year over year to RMB 14.9 billion, driven by growth in revenues from customers in the internet, finance, and retail industries.
• Cost of revenue in the quarter was RMB 89.9 billion, or 58% of revenue, up 3% year on year mainly driven by increased cost of inventory from direct sales businesses such as Tmall Supermarket.
• Domestic consumption, cloud computing and data intelligence, and globalization will remain the company’s three long-term growth engines, Daniel Zhang, chairman and chief executive officer of Alibaba Group, said in a statement.
• Zhang said in a conference call with analysts that the company is “actively evaluating the impact” of the regulation change on Ant Group’s listing and “will take appropriate measures accordingly.”

Context: Ant Group this week will begin refunding Shanghai investors who had placed orders for the postponed public listing.

• Alibaba sold its stakes in Meinian Onehealth Healthcare Holdings, Shanghai-listed medical examination services provider, according to a Meinian filing on Wednesday.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

Elliott and James welcome Joe Ridsdale, CEO of West Street Capital Partners. Joe explains why his firm is one of many who have a short position on Chinese ed-tech company GSX. The three of them also discuss the structural barriers to exposing fraud in such circumstances.

Hosts may have interests in some of the stocks discussed. Short sellers, such as the guest in this episode, earn money if the price of a stock falls. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:             

• Joe Ridsdale– @Ridsdalejoe

Editor:

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

From app bans in the US and India to the Chinese government’s increased push for self-reliance in cutting-edge technologies, 2020 has been a rollercoaster year for China tech. How has China’s VC industry been faring? Last week, TechNode held its Emerge 2020 conference in Shanghai. On the sidelines of the event, we chatted with William Bao Bean, an experienced venture capital investor who has been active in China since 2007.

Bean is a general partner at investment firm SOSV. SOSV runs Chinaccelerator, a startup accelerator based in Shanghai.

We took the opportunity for an interview. We’ve printed it in full below, edited for brevity and clarity.

TechNode: What are the new trends that you see in China’s VC market this year?

William Bao Bean: There are two major trends. First is enterprise B2B (business to business), where AI is becoming more important. Traditionally, large Chinese companies did not want to pay for their software, but now, one of the biggest applications of AI is personalization. For example, it can be used to tailor the messaging and advertising you see on an e-commerce site to each consumer’s preference. It’s very difficult for startups and other companies to build their own AI systems, because AI scientists are quite expensive to hire, and the big guys like Alibaba, Tencent, and Baidu basically hired most of the experts. So there’s actual demand for AI services from companies who want to remain competitive. Since the only way to remain competitive is personalization, companies are willing to actually pay to bring in AI solutions. 

Second, there’s a huge amount of investment happening around government policy. The Chinese government is really supporting investments in semiconductors, telecoms equipment, and a lot of hardcore traditional technology. Previously, you saw Chinese companies developing their own solutions. But because of the US-China tech decoupling and the difficulty in sourcing international semiconductors, telecoms equipment, and even manufacturing equipment, you’re seeing massive investment in these areas in China. It is a huge opportunity for local companies, and a very big opportunity for Chinese investors. 

TN: Do you think putting in more money will help China catch up with the world’s leading players in semiconductors?

WBB: China’s semiconductor industry is behind. But when you dump money on a problem, generally, you get a solution faster. I still think China is still four to seven years behind, but a huge amount of capital is flowing into the industry, so I think you will see the technology innovation gap narrowing. Often in China, when you have big government backing, there’s a huge amount of opportunity in that space—we’re seeing a huge amount of activity there. 

TN: What are the impacts of recent US-China tensions? Are China-based VC firms having a hard time raising money from the US?

WBB: Not so far. In China, VC firms have raised a lot of money from US investors. Now, we don’t know whether future funds will have difficulty raising money from those same limited partners (LPs). A friend of mine just closed a new $200 million fund from big traditional US LPs, and he is focused just on deep tech in China. He successfully closed last month in the middle of the Covid-19 pandemic. So far, the early data that we see is that it’s not having an impact. Investors are after returns, they don’t care about politics.

TN: We have seen many Chinese tech companies delist from US stock exchanges and more companies choosing to dual-list their shares in Hong Kong this year. What do you think these trends mean to tech investment in China?

WBB: 2020 has been a record year for Chinese companies listing in the US. When startups are getting bigger, they go where the capital is. It’s still the case that the US is where the higher valuations and the big capital willing to invest in technology can be found. 

In China, tech companies that list face a lot of restrictions. For example, they generally need to be profitable. Most technology companies are not profitable for three years —they grow fast and they’re investing money in the future. The restrictions on listing also make it very difficult for Chinese companies to tap global capital markets, so they choose to go abroad. The second thing is that the international appetite for technology investments is much higher than in China. In China, you have a huge interest in consumer-facing companies, but not so much interest in hardcore technology. And so those two issues combine to drive continued interest in an overseas listing. 

TN: Shanghai’s STAR Market doesn’t require companies to be profitable to list. How do you think this change in listing rules has impacted investment in China? Do you see increasing competition from RMB funds against US funds?

WBB: Startups just go where the capital goes. Many US dollar funds also have RMB funds. If you’re doing something on the consumer side, RMB funds make sense. RMB investors like investing in Chinese consumer-facing players—products that they can see and feel. For some companies that are not profitable, or require huge amounts of money, and have historically raised US dollars, they have to go the international path. Sometimes you move the company from offshore to onshore, or from offshore to onshore based on where the money is. It’s just a pure market effect. One is not competing against the other. It’s just what makes sense for the company to get the best value to be able to raise the money and then to exit.

Big deals

One of the biggest investments in China’s tech sector in the third quarter went to Yuanfudao, an online education firm. On Oct. 21, the company raised $1.2 billion from investors including DST Global, CITIC PE, and Temasek, valuing it at $15.5 billion.

Ted Mo Chen, a Beijing-based edtech entrepreneur, wrote in a column published on TechNode last month that the Covid-19 pandemic ignited a “unicorns take all” game in China’s online education market—and edtech startups have attracted big checks from investors.

Here are some of the biggest deals in China tech in the third quarter.

• July 23: Meiri Youxian, a grocery delivery startup, raised $495 million from investors including CICC Capital and Tencent, valuing the company at $5 billion.
• Aug. 5: Yipin Shengxian, a grocery delivery company, raised RMB 2.5 billion ($374 million) from Tencent and Capital Today with a valuation of RMB 15 billion.
• Aug. 18: JD Health, the healthcare unit of e-commerce giant JD.com, raised $830 million from Hillhouse Capital with a valuation of $30 billion. 
• Sept. 22: Electric vehicle maker VM Motor raised a RMB 10 billion (around $1.5 billion) Series D from investors including state-backed SAIC Capital, Baidu, and SIG China, hitting a valuation of RMB 35 billion.
• Oct. 21: Edtech company Yuanfudao raised $1.2 billion from investors including DST Global, CITIC PE, and Temasek, valuing it at $15.5 billion.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

Elliott and James welcome IDC’s VP of Device Research Bryan Ma to the show. They discuss how Xiaomi is benefiting from Huawei’s international troubles, the foothold they continue to establish in India and SE Asia, and how the pandemic has been a surprisingly good year for PC makers.

For a map of the Xiaomi ecosystem, and more information on its web of product partners, check out VC Roundup | How big China tech uses investments to build empires.

Hosts may have interests in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:             

• Bryan Ma– @bryanbma

Editor:

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

The Chinese National Day holiday, known as “Golden Week” for spurring travel and other consumption, ended on Thursday. This year, the holiday was watched particularly closely—as the last major holiday of the year, it was seen as a harbinger of whether China’s battered tourism industry would rebound quickly following the onset of the pandemic early this year.

Shift to domestic travel

Although the virus may be less of a concern for Chinese tourists compared with those in other countries, the government and consumers themselves remained cautious about traveling overseas.

• Golden Week travel this year was primarily driven by domestic travel, when in recent years the holiday has been viewed as a time for Chinese tourists to take overseas trips.
• Last year there were more than 7 million (in Chinese) overseas trips made during the holiday. This year, various restrictions on visa applications and quarantine requirements have made cross-border trips impractical.
• The focus on domestic trips could further slow a full rebound for China’s largest online travel platform, Trip.com, which earned around 35% of its revenue through international travel in the first half of 2019.
• Demand for short journeys increased, giving rise to self-driving tourism as more holiday makers sought to avoid package tours and exposure to crowded public transportation centers.
• The shift boosted car rental businesses during the holiday. The number of car rental days on Trip.com platform climbed 50% compared with a year ago, the company said in a statement sent to TechNode. Average spending per car rental order exceeded RMB 2,000. Southwestern Yunnan province and southern Hainan province were popular tourist destinations for those driving themselves.

Competition among travel platforms

• The shift to domestic tourism has weighed on China’s largest online travel platform, Trip.com. The company has been focused on growing its international travel business amid sharpening competition from Alibaba’s Fliggy and Meituan in domestic travel.
• In 2018, the company said that it was aiming for its global travel business to make up 40% to 50% of its total revenue within five years.
• Trip.com expects its revenue to drop by around 50% year on year in the third quarter after it reported that its second quarter revenue plunged 64% year on year.
• China’s online travel industry is among the worst-hit sectors by the pandemic, which began spreading widely in the country during Spring Festival holiday, the world’s largest human migration event.

Edging toward normalcy

China, where the coronavirus first appeared late last year, had an early start advantage in post-pandemic economic recovery as the government’s measures to control the spread of the virus have largely proved effective. However, the impact of the epidemic is expected to linger as rates of infection worldwide remain stubbornly high. 

• China tourists generated RMB 466.6 billion ($69.7 billion) in revenue from 637 million  domestic trips during the eight-day Golden Week holiday, according (in Chinese) to the Ministry of Culture and Tourism. The holiday was extended by one day thanks to overlap with the Mid-Autumn Festival this year.
• The number of domestic trips was around 80% of last year’s 782 million during the seven-day holiday, which generated nearly RMB 650 billion in tourism revenue.
• Revenue from this year’s Golden Week tourism accounted for around 70% of revenue earned during the same holiday a year ago. This is a significant improvement over tourism revenue earned during this year’s Tomb Sweeping Day in early April, which sank 80% compared with a year ago.
• China’s tourism watchdog expects the country’s tourism revenue as well as the number of tourists to halve in 2020. 
• Official controls have loosened, but remain in place. Scenic spots like Beijing’s Forbidden City required online reservation in advance and operated at 75% capacity during the holiday. Municipal governments including Shanghai recommended that students and their families refrain from travel. Those who traveled out of the city would have to quarantine for 14 days, which effectively eliminated travel plans for many families, even short-distance trips.

New regulations lend pressure

In addition to the travel slowdown brought by the pandemic, China’s tourism industry is also facing new challenges from the government, which is stepping up regulation of the market.

• China’s first laws regulating online travel platforms and agencies took effect on Oct. 1. It includes a raft of rules that ban the abuse of big data and other new technologies used in unfair business practices such as user targeting to boost prices, removing negative user reviews, and more.
• Consumers have accused large Chinese online travel platforms, including Trip.com and Alibaba-backed Fliggy, of charging higher prices to customers who they think will be willing to pay more for the same product or service by analyzing user data. Both companies have denied the allegations.
• Implementation is expected to quash such practices in the online travel market, where price manipulation is common. It may also act as an example for other sectors that are thought to use similar tactics, such as ride-hailing and e-commerce.
• The rules could have short-term cooling effects on revenue while long-term benefits could include better user retention. An industry analyst told Xinhua (in Chinese) that without the rule, there was little reason to do away with the practice, which could grow revenues 20%.

I recently got back home to China, after years working overseas in venture capital. I’ve spent much of this time focusing on software-as-a-service (SaaS). So I’ve been asking myself a question: Where are China’s giant SaaS companies?

While the US has Amazon, Facebook and Google, China has Alibaba, Tencent and Baidu. While the US has Salesforce, Adobe and ServiceNow, China… well, China has no equivalent. 

In China, mass SaaS adoption has the potential to address many of the country’s workplace challenges. From a macro perspective, the end of the demographic dividend—in which the working-age population is greater than the population that does not work—will result in rising labor costs. SaaS can help bridge the labor gap by automating workflows and increasing the productivity of workers. As Covid-19 has triggered short-term demand for remote work, digitized workflows will prevent the virus, in the event of a resurgence, from wreaking weeks of lost productivity and income. 

Chinese SaaS today

As a baseline, here is a chart of the 20 biggest US tech companies by market cap on August 29th this year: enterprise companies account for 55% by numbers and 40% by value. 

Most of the enterprise companies are SaaS or something very close to it.

In contrast, here is a chart of the 20 biggest Chinese tech companies by market cap. Enterprise companies account for 30% by numbers and 3% by value. There are no SaaS companies among them.

The SaaS companies are not hiding in the private market either. Here are the top 20 companies on the latest Chinese unicorn list from CB Insights (Ant Group was spun-off Alibaba, so it is not shown here):

While one might argue that there are big SaaS companies, these are all housed inside mega-corporations like Alibaba and Tencent. Aliyun, alongside the other cloud players such as Tencent and JD, are Platform-as-a-Service providers similar to Amazon Web Services: you need to build other SaaS applications on top of them for these platforms to achieve their full potential. For example, I can’t use Aliyun to do my taxes off the shelf per say, but if my data was stored in the cloud I can definitely utilize a SaaS offering to perform the task more quickly. 

The strategy of software like Dingtalk, Lark, Wechat Work, and others is to attract users and lock them into the parent vendor, rather than behave as platform-neutral offerings which prioritize user needs. From this perspective, I think it’s good that Alibaba and others are educating the market on how software can be useful, but this may create long-term problems for the SaaS market if it reinforces the impression that software should be free.

Estimates for the Chinese SaaS market range from $3.7 billion to $6 billion for 2019, less than 6% of the total world SaaS market. In the chart below, compiled by Bain & Company, we can see that China lags behind the developed world on investments in IT relative to its size.

What’s stopping SaaS adoption?

For Chinese SMEs, which account for roughly 60% of China’s production GDP, adopting SaaS is not an intuitive decision. Historically, cheap labor in China has meant that manual execution is still feasible for most tasks, and automating or documenting through software is rare. Coupled with this, Chinese SMEs generally do not have sufficient cash reserves to invest in systematic upgrades. When they do have the investment capacity, the ubiquity of software piracy in the 2000s has left a general lack of desire to pay for software. Many companies often do not see the value in utilizing software.

This mindset makes SaaS adoption in China particularly hard. Well-capitalized mid-sized firms are traditionally the takeoff point for SaaS companies in both the US and Europe. Without this firm client base to build upon in China, many SaaS companies must try marketing to more challenging enterprise customers straight away.

For Chinese enterprise companies, paying for software is not an issue, but the sector faces serious problems with cloud adoption. In a report on cloud adoption in China, McKinsey notes that as Chinese companies typically have less advanced technology stacks. Cloud migration is complicated and costly as they must typically create the hardware and software needed for the shift. As a result, public cloud vendors in China can’t claim that their services will reduce IT costs, at least over the first few years of migration, as they do in other countries. Even when companies manage to migrate to the cloud, they still face many concerns around the stability and security of a public cloud. Most opt for a private cloud or hybrid cloud deployment.

Another obstacle is demands for high-level customization. Most Chinese SaaS companies have difficulty with their customers’ convoluted internal company structure, processes, and workflows. This not only makes customisation highly time-consuming, but also doesn’t allow for much re-use of the work for other clients. For SaaS startups, the typical dilemma is between customizing to earn actual revenue, or focusing on features that everyone can use. 

This is a challenge faced by SaaS providers in all markets, but  China is an extreme case of no overlap between customisation product features and standardised product features list for most companies.

For example, three factories in the same industry will have different workflows internally to monitor the quality of their production line. In buying a production monitoring software, they would expect the product to reflect their respective workflows rather than change their processes to a more standardised one. On top of that, one will have in-house legacy systems built on old code that they want to port over to the new system, another might want to have a visualisation tool customised with their brand aesthetics and specific metrics (even if the software vendor doesn’t provide visualisation tools and had no plan to), the list of requests goes on and on. Many investors have complained that most Chinese enterprise SaaS companies are IT consulting services in disguise.

Other hindrances to SaaS adoption—including the inclination to build in-house, distrust of public cloud services, and even the lack of talent in scaling Chinese SaaS companies—reflect a SaaS market in its early stages, rather than a mark against the Chinese market in particular.

Looking ahead

Based on the observation that enterprise startups tend to follow consumer startups, I would order the China, Europe, and US tech ecosystems as follows:

While adoption hurdles can be complicated, the advances made by western startups have shown that the issues can be solved with time. VCs who have traditionally focused on consumer startups and were chasing the hyper-growth model that allows for quicker returns to investment (or death) have started to look for new opportunities. I frequently see Chinese commentators complain that since 2015, consumer startups have been yielding diminishing returns to capital. VCs have also started to focus more on the enterprise software segment and will hopefully have more patience for the longer timeline that business-to-business startups take to reach scale.

Many Chinese SaaS offerings like Bytedance’s Lark are incredibly comprehensive in functions, but they lack a killer feature (like Roam Research’s bi-directional links) that sparks joy. In trying to be all things to all people, these SaaS offerings often appear as pastiches of successful western startups, and they don’t account for the Chinese market’s nuances. China’s SaaS startups and consumer corporates are still trying to figure out issues like how to meet crucial needs and how to manage customer success in the Chinese market context. The lack of a quick feedback loop from a client base doesn’t help either.

The state of play of Chinese SaaS may seem dire, but there’s reason for hope. A lot of the influences mentioned are waning (such the end of demographic dividend will mean increasing labor costs in the future). At the same time, new trigger points have emerged as COVID has accelerated the adoption of cloud and remote working, and opportunities have arisen as the government has made a push for cloud adoption. 

One Chinese SaaS company—Agora, which enables developers to add HD interactive broadcast, voice, and video—recently saw a successful recent IPO; it boasts a current market cap of $4 billion—a sign of things yet to come.

China tech in Africa is nothing new. Telecommunications giant Huawei has built around 70% of the continent’s 4G networks. Smartphone manufacturer Transsion commands 40% of Africa’s smartphone market. 

Over the past few months, TechNode has been mapping Chinese tech giants overseas empires. Initially focused on the US, Chinese companies have since 2018 slowed down investing in the country, as tensions between the two superpowers rise. As we’ve written previously, companies including Alibaba and Tencent have instead sharpened their focus on the developing markets of India and Southeast Asia. 

Africa is no different. Lifestyle services giant Meituan-Dianping, gaming behemoths Tencent and Netease, as well as Transsion have made big bets on African companies. Alibaba has taken a different approach by launching training programs for aspiring African entrepreneurs.

Meanwhile, big-ticket Chinese venture capital firms including IDG Capital, Sequoia China, and Gaorong Capital have sharpened their focus on Africa. Investors expect to see a boom in financial services on the continent as connectivity improves and under-served populations come online. 

Africa is a huge market with massive potential. The continent boasts six of the world’s ten fastest-growing economies. With a diverse mix of 1.3 billion people, its population is expected to surpass China’s by 2025. 

To be sure, China tech’s footprint remains modest in Africa, but the trends point to a major shift. Chinese tech titans see opportunities and conditions similar to those that lifted themselves in China before the internet boom. 

Humble beginnings

Like China in the early 2000s, Africa supports a massive population, an under-served market, and a growing pool of tech talent. As the demand for digital services has increased, dynamic tech hubs have sprung up in Nigeria, Egypt, Kenya, and South Africa. 

In the past decade, some Chinese companies have seen massive success in Africa. While the US has pushed countries around the world to exclude Huawei from their telecommunications networks, African countries have welcomed the firm as they push to improve connectivity. 

Huawei was instrumental in rolling out 4G rollout across Africa and is set to drive 5G adoption on the continent. Alongside Chinese rival ZTE, Huawei received preferential loans from the Chinese government to establish telecom infrastructure throughout Africa, found Iginio Gagliardone, a professor at the University of the Witwatersrand who has written extensively about the influence of China in Africa. The government loans enabled the two companies to expand their influence across the continent with little risk.

A few other firms bet the farm on Africa, like Transsion. Founded in Shenzhen, the phone maker’s primary markets are all in Africa. The company controlled more than 40% of the African smartphone market at the end of last year, according to the International Data Corporation (IDC). Transsion also holds nearly 70% of the feature phone market, IDC data shows. The company, which operates R&D centers in Nigeria and Kenya, went public on the Shanghai Stock Exchange’s Nasdaq-like Star Market last year. 

Driven largely by the Chinese government, Chinese investments in Africa have historically focused on infrastructure projects. Chinese foreign direct investment in Africa reached $5.4 billion in 2018, up 30% from the year before, according to data from the China Africa Research Initiative at John Hopkins University’s School of Advanced International Studies. 

But things began to change that year. At the Forum on China-Africa Cooperation (FOCAC) in September 2018, Chinese President Xi Jinping encouraged Chinese companies to invest $10 billion in Africa over the following three years, pronouncing an important shift from public to private investment in Africa. 

“China has demonstrated its readiness to invest in areas deemed by foreign investors and donors as too risky, not sufficiently profitable, or not high priorities in the aid agenda,” Gagliardone wrote in his book “China, Africa, and the Future of the Internet.” 

Since 2018, Chinese companies have sharpened their focus on the continent, and 2019 saw record amounts of Chinese involvement in the continent’s tech sector. 

Increased presence

Alibaba began its Africa expansion in 2017—the year founder Jack Ma made his first visit. The company believes that its experience in China prepares it to develop Africa. ”I found myself propelled twenty years back in time, to the time when Alibaba was founded,” Ma said after the trip. 

During the visit, Ma launched a $10 million fund for young Africa entrepreneurs to bring their offline businesses online and pledged to take 200 young business people to China to learn from Alibaba. 

He returned a year later when Rwanda became the first country to join Alibaba’s Electronic World Trade Platform (eWTP), which promises to make cross-border trade easier for small to medium enterprises. 

Chilli and coffee farmers in Rwanda have used the platform to sell their products on Tmall, Alibaba’s business-to-consumer marketplace, while Ethiopia became the second African country to sign eWTP agreements late last year. It remains unclear how many companies are benefiting from the initiative.

Meanwhile, other tech giants have also increased their focus on Africa. In early 2019, Chinese smartphone giant Xiaomi set up a business group to grab at sales on the continent in order to offset slowing growth at home. The move put Xiaomi at odds with well-established Chinese rivals rival Transsion and Huawei, which claimed a market share of nearly 10%. 

Transsion had been able to avoid fierce competition from domestic rivals in its home market by focusing on Africa, but those companies were now also looking abroad for new sources of growth. 

In 2015 Transsion launched music-streaming service Boomplay through a joint venture with Chinese gaming giant Netease. The service is primarily focused on the African market: 85% of its users come from Nigeria, Ghana, Kenya, and Tanzania.

The company launched the service to make its phones more attractive to buyers and to boost revenue from non-hardware sales. The initiative has so far been a success. In April last year, Boomplay raised $20 million from Chinese investors including Maison Capital and Seas Capital. 

Fintech focus

Complementing the spread of China tech in Africa, Chinese investors have also increasingly sought out startups across Africa. These investors are looking to place their bets on Africans without bank accounts.

African startups raised a total of $2 billion in 2019, more than 70% than the year before, according to data from global investment firm Partech. While Chinese investments comprised only a small portion of that total, Africa has received a major boost in attention from Chinese investors. 

Fintech services developed early in Africa. Ten years ago, fintech platforms in Africa were more developed than those in China, prior to the launch of Ant Group’s Alipay or Wechat’s Wechat Pay. “Mobile money,” which allows people to make payments, and deposit or withdraw money on even the most basic mobile phones, gained widespread adoption.

In 2017, Chinese-owned, Norway-based software company Opera pledged to invest $100 million in Africa’s digital economy. The company later launched super app Opay in Nigeria, which combined payments, food delivery, and ride-hailing services. 

Opay was a handful of fintech beneficiaries from a boom in Chinese investment in Africa’s tech sector in 2019. The company closed two funding rounds last year, raising $170 million to help its expansion plans. Investors included some of the biggest Chinese names: Meituan, Gaorong Capital, Sequoia China, and IDG Capital. 

“Opay will facilitate the people in Nigeria, Ghana, South Africa, Kenya, and other African countries with the best fintech ecosystem that Africa has ever seen,” Zhou Yahui, CEO of Opay and founder of Kunlun, said in a statement at the time. 

But due to the Covid-19 pandemic, the company announced in July that it was suspending its non-fintech operations, including ride-hailing and food delivery service 

Meanwhile, Africa-focused fintech platform Palmpay launched in Nigeria after a $40 million investment from Transsion and Netease. The investment also included a partnership with Transsion to pre-install the Palmpay app on 20 million of Transsion’s phones this year. 

The focus on investing in fintech is driven by a broad-based effort to bring financial services to Africa’s unbanked. According to the World Bank, nearly two-thirds of sub-Saharan Africans do not have bank accounts. In 2019, fintech received the most venture funding out of any industry in Africa, according to Weetracker. 

Ant Group has taken notice of Africa’s fintech revolution. Last year the company partnered with Silicon Valley- and Lagos-based startup Flutterwave to add Alipay as a payment method for Flutterwave’s 60,000 merchants. 

In July, Ant Group partnered with South Africa mobile operator Vodacom to launch a payments app in the country. The two companies aim to tap the 11 million South Africans who don’t own bank accounts. 

Driving digital services

Africa represents an opportunity that Chinese tech firms caught onto early, and show no signs of paring back. Many of these same Chinese firms thrived after the internet boom in China and stand to leverage their knowledge to help spread digital products across Africa. 

As the digital divide on the continent narrows, more people in Africa will adopt these services, and like in India and Southeast Asia, Chinese companies and investors won’t want to miss out. Their current push onto the continent is likely only the beginning. 

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

In an earnings season tradition, Elliott and James bring on Michael Norris to discuss the quarterly earnings reports of Alibaba, JD, and Pinduoduo, and discuss what investors should be looking for from them going forward.

See supporting charts here.

Hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:

• Michael Norris– @briefnorris

Editor

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

Recent developments in the escalating US-China tech war signal that a full technology “decoupling” between the world’s two largest economies might be inevitable. So far, new measures have stifled sectors ranging from telecommunications equipment to social media. But is it chilling US VC activity in China? 

Two weeks ago, TechNode reporter Chris Udemans wrote that Chinese investments in US startups have fallen dramatically since 2018, the same year the US began to scruitizine Huawei and ZTE, two of China’s largest telecom manufacturers.

Overall US investment in Chinese startups—including deals made directly by US institutions or China-based venture capital (VC) firms investing in US dollars—has fallen since 2018, but this is in line with a broader cooldown in Chinese tech investment due to a slowing economy and growing financial headwinds.

But it could be that the slow-moving field is still processing the changed environment. Some investors and analysts told TechNode that politics is going to catch up with investments. Chinese VC firms that raise funds in US dollars, which have played a big role in China’s decade-long technology boom, are having a hard time raising money from their limited partners in America. Growing hostility from regulators and lawmakers toward US-listed Chinese companies may make it more challenging for Chinese firms to float shares in American financial markets, which is where most US dollar-based venture investors seek to exit.

US VC investment shrank amid ‘capital winter’

 American VC firms first entered the Chinese market in the early 2000s. Many credit these early  American investors with helping establish modern VC investing in China. Among them were firms like Sequoia Capital, IDG Capital, and Matrix Partners.

US-China Investment Project, a research initiative led by Rhodium Group and the National Committee on US-China Relations, estimates that US VC firms invested in nearly one-third of all venture capital-backed Chinese companies from 2000 to the first half of 2019. It also estimates that US investors channeled around $47 billion into Chinese startups over the period, accounting for 16% of the roughly $300 billion in total investments.

Investment into Chinese startups by US venture firms took off after 2014, peaking at $19.6 billion in 2018, according to a US-China Investment Project report. The findings attributed this spike to a few massive late-stage fundraising rounds for prominent Chinese technology companies like Ant Financial, Pinduoduo, and Bytedance.

Venture funding, however, fell dramatically to $5 billion in 2019, the lowest level since 2015, according to the report. The drop was in line with a broader slowdown in Chinese tech and venture capital markets. Investors were becoming “more selective in the face of increasing economic uncertainty and a growing perception that parts of China’s tech ecosystem had become overheated after years of rapid growth,” the report said.

Total VC investment into Chinese startups fell by almost half from $204 billion in 2018 to $119.7 billion in 2019, according to Itjuzi, a Chinese venture capital data provider.

US backers, Chinese funds

 US-owned VC firms only represent a small portion of the American capital that flows into Chinese startups. The majority of US dollar investments are made through Chinese VC firms that raise funds from American limited partners. These US dollar funds often include high-profile Chinese general partners such as Source Code Capital, which backed Chinese super-app Meituan Dianping; Lightspeed China Partners, which invested in social e-commerce upstart Pinduoduo; and Zhenfund, whose portfolio firms include social media app Xiaohongshu and the artificial intelligence unicorn Yitu.

Foreign backers in these Chinese US dollar funds include sovereign wealth funds, retirement funds, and big corporates, according to Liu Xiaoqing, analyst at Itjuzi. Liu told TechNode that while such funds raise money in countries like Japan and Singapore, the majority of their funding comes from the US.

Compared to RMB funds, US dollar funds participate in far fewer deals but tend to make substantially greater investments in each. The average investment made by RMB funds was $28.1 million in the first quarter, compared to an average of $103 million per deal by US dollar funds, according to a report (in Chinese) by financial advisory firm China Renaissance.

Investments by US dollar funds into Chinese startups peaked in the second quarter of 2018, with  $42.8 billion invested into 217 venture funding rounds. In 2019, Chinese venture capital dropped by more than half, though this is still in line with the overall performance of the Chinese tech VC market. The transaction volume of financing rounds made by US dollar funds in 2019 also halved compared to the year before, according to China Renaissance.

Money is ‘not political’

 In the second quarter, even as the US government tightened restrictions on Chinese tech companies, US dollar funds were still playing an important role in startups’ fundraising. US dollar funds accounted for 54% of VC transaction volume with Chinese tech startups in the quarter, according to Itjuzi (in Chinese).

Adam Lysenko, associate director at Rhodium Group, said there have also been tailwinds for increased investment over the last couple of years, such as Beijing’s embrace of foreign investment in the automobile and financial sectors, despite escalating US-China tensions. “Due to these factors, we haven’t seen a massive drop-off in US investment in China yet,” said  Lysenko, who co-authored the US-China investment report.

But experts warn that investment data moves slowly. If investors are getting cold feet now, the effects may not appear in the data for years. In the VC market, the time horizon may stretch longer. “There is a delay in market data considering that the lifecycle of VC funds could be three to eight years,” Liu told TechNode.

Xu Miaocheng of Unity Ventures, a Beijing-based early-stage VC firm, told TechNode that some Chinese US dollar fund managers are already having a hard time raising money from their American limited partners. Reasons include the Covid-19 crisis which has hampered business trips, as well as escalating conflicts between the Trump administration and Chinese tech companies.

Liu, however, insists the impact will be minimal because money is “not political.”

“The US government will not regulate US investment in China in the same way it scrutinizes Chinese investment in the US technology sector,” she said. Beyond a number of select Chinese firms currently sanctioned by US regulators, “they [the US government] don’t care which countries American limited partners invest in, as long as they are making money.”

Not everyone believes the calculus is so clear-cut. “The future trajectory of US investment in China will depend on whether political concerns outweigh the powerful commercial motives that still exist to deploy capital there[China],” said Lysenko. He added that US venture capitalists continue to see China as a crucial market for growth in a world with slower economic growth.

Given the interdependence between the two countries’ corporate sectors, he continued, “I expect that only a dramatic decoupling path—with sustained US government pressure on US firms—will result in a meaningful reduction in US investment in China.”

Additional contributions by Chris Udemans.

Alibaba’s fintech affiliate Ant Group filed draft IPO prospectuses for a dual listing on the Shanghai and Hong Kong stock exchanges on Tuesday, the first simultaneous listing for a Chinese tech company. 

Ant Group is reportedly eyeing a $200 billion valuation, which would make it the world’s most valuable fintech company. Such a valuation would top those of some of the world’s biggest banks, including China’s big four. It could be one of the biggest IPOs in recent years, potentially topping Saudi Arabian state-owned oil producer Aramco’s $29 billion listing. 

READ MORE: Ant Group’s dual listing will be one of the biggest IPOs of 2020

Ant Group’s 674-page Hong Kong prospectus reveals the extent of its empire, risk factors related to geopolitical tensions, and financial regulations. Here are five key takeaways. 

1. Impressive profits and growth potential 

In the first half of 2020, the company earned RMB 72.5 billion in revenue, a year-on-year increase of 38%. Digital finance services drove growth, growing 56% year on year to RMB 46 billion in the period.

The company booked a net profit of RMB 21.9 billion in the first half, outstripping its RMB 18.1 net profit for all of 2019, according to the prospectus. 

Monthly active users of mobile payment app Alipay, Ant Group’s key asset, reached 711 million as of end-June, while transaction volume for the app reached RMB 118 trillion during the 12 months ended June 30.

The bulk of Ant Group’s revenue comes from its “Credittech” business, which operates a range of loan services targeting individuals and merchants. Credittech revenue grew 59.5% year on year in the first six months of the year to RMB 28.6 billion, accounting for 39.4% of its total revenue in the period.

Credittech’s key products include Huabei, a virtual credit card service; Jiebei, a micro-lending service targeting individuals; and Mybank Loan, which lends money to small and medium-sized businesses (SMB). The company said in the prospectus that the consumer credit balance of its loan businesses was RMB 1.7 trillion and the SMB credit balance was RMB 400 billion as of the end of June.

2. Looming #techwar

Ant Group warned investors that rising geopolitical tensions could seriously impede its business. It emphasized rising risks of sanctions and trade restrictions on Chinese tech firms from the US government. 

READ MORE:  Techwar: Trump to end transactions with Tencent and Bytedance in 45 days

Such restrictions have the potential not only to banish Ant Group from US markets, but also disrupt its ability to participate in the US dollar-led global financial system, the company said. 

The company singled out its cross-border payments business as exposed to such actions, adding that cross-border payments will be a key area of investment for Ant Group in the future. 

Some analysts have said that new listing restrictions in the US are the very reason that Ant Group didn’t list in the US, as Alibaba did with massive success in 2014. 

In June and July, four Chinese companies, including China’s US IPO pioneer Sina and online travel agency Ctrip, announced plans to delist from the US stock market. Big Chinese tech companies listed in the US have also started dual listing their shares in Hong Kong, signaling a retreat from US financial markets.

3. Jack Ma remains at the helm 

The fintech company has tried to distance itself from Alibaba founder Jack Ma and Alibaba in the past, insisting that it is an independent company. Yet Alibaba shares in New York jumped 3.6% Tuesday on the back of Ant Group’s IPO news. 

The prospectus said the billionaire entrepreneur is Ant Group’s “ultimate controller,” holding a 50.52% stake in the company. Information about Ma’s stake after the IPO is redacted in the draft prospectus. 

The Alibaba and Ant Group founder helms a limited liability partnership, which controls two other partnerships that are Ant Group’s biggest shareholders. 

According to the prospectus, Ma transferred 66% of the controlling entity’s equity shares to Ant Group’s leadership on Aug. 18. He divided it equally between Eric Jing, the company’s executive chairman, Simon Hu, the CEO, and Fang Jiang, a non-executive director. 

Ant Group also recognized that its success is closely linked to Alibaba. The prospectus says Alibaba, mentioned 650 times in the document, is a “major shareholder,” and the prospectus reports that the two have a data sharing agreement. It lists conflicts of interest between the two giant companies as a risk factor, highlighting the fact they have “overlapping” user bases. 

There are “no assurances,” the prospectus says, that Alibaba won’t try to compete with  its fintech twin. 

4. Mounting regulations 

The prospectus warns of tightening regulations in key business segments for Ant Group, both globally and in China: payments, investment, insurance, and credit, among others. 

It makes special reference to China’s tightening anti-monopoly laws: Authorities have in recent years “strengthened enforcement,” it said. 

China’s central bank is reportedly not happy about Ant Group and Tencent’s hold over the domestic digital payments market through Alipay and Wechat. In late July, Reuters reported that Chinese regulators are preparing for an antitrust investigation in the two apps. 

READ MORE: INSIGHTS | China’s digital currency has a long way to go

The digital yuan’s e-wallet is expected to compete with the effective duopoly, possibly breaking Ant Group and Tencent’s chokehold on the market. 

“If we fail to adapt to these new initiatives in a timely manner, our business, financial condition, and results of operations may be materially and adversely affected,” the company said in reference to the digital yuan. 

5. [REDACTED]

Ant Group’s IPO filings are not final, and many pieces of crucial information were redacted, including the number and price of shares, and the company’s total valuation. 

“The A Share [REDACTED] comprises an [REDACTED] of initially [REDACTED] A Shares for subscription, representing approximately [REDACTED]% of our total outstanding Shares following the completion of the H Share [REDACTED] and the A Share [REDACTED], assuming that the [REDACTED] are not exercised.” 

Ant Group in its draft IPO prospectus filed at the Hong Kong Stock Exchange

Gains in revenue and users during its second quarter fell short of market expectations for Chinese e-commerce platform Pinduoduo, with shares prices dropping 12% by midday Friday on its topline miss and strategic focus on household essentials rather than consumer brands.

The social e-commerce platform’s Q2 revenue surged 67% year on year to RMB 12.19 billion ($1.73 billion), largely driven by ads, but missed analyst estimates of RMB 12.20 billion. 

The company added 81.4 million monthly active users (MAU) during the quarter, growing 55% year on year to 568.8 million, slower than first quarter’s 68% growth. Operating losses widened to RMB 1.64 billion ($232.1 million), a 10% increase year on year but a decrease from RMB 4.40 billion ($621.0 million) the first quarter. 

What investors are watching

Pinduoduo shrank its net loss attributable to shareholders to RMB 899.3 million ($127.3 million) from RMB 4.20 billion in Q1. But share prices on the Nasdaq dropped 12% to $85.77 by midday, signaling investor disappointment in its second quarter performance.

Momentum in GMV, a measure commonly used among e-commerce platforms in China to represent sales volume, fell below 100% for the first time to 79% annually from 108% in Q1, according to data compiled by Tiger Brokers. 

“Pinduoduo’s business looks like it is maturing. That will dissuade some investors, who were hoping for triple-digit GMV growth to continue,” said Michael Norris, leader of research and strategy at AgencyChina. For comparison, Alibaba’s GMV growth rate from fiscal year 2019 to 2020 was 23.2%. 

Strategic focus on users vs. rivals

Financial struggles brought on by the pandemic caused a notable consumption shift in Pinduoduo’s user base. “Users had strong demand for household necessities and agricultural products, and continued to be more cautious in discretionary spending,” Tony Ma, vice president of finance, said during the earnings call Friday. 

The company’s strategic focus during the 618 shopping holiday held in June was to meet consumers’ need for daily products rather than luxuries. 

The company will prioritize meeting user demand for necessities and farm produce through a “recommendation model” rather than focusing on brands and developing separate livestreaming services on the platform, a growth catalyst for rival Alibaba. Pinduoduo executives’s pledged to maintain its user-focused strategy and group-buying model during the Friday earnings call, disappointing investors.

“The prepared remarks focused more on everyday essentials and agricultural products, rather than branded goods,” in a shift away from what investors see as key test in its competition with rivals Alibaba and JD.com, “which I found disconcerting,” Norris said.

“In Q2 this year we observed consumers’ spending to be more value conscious,” Pinduoduo Vice President David Liu said. 

The company plans to continue investing in marketing to users through the rest of the year, as well as to drive research and innovation in agricultural technology. 

“We have demonstrated that our user-centric strategy works,” CEO Chen Lei said on the earnings call. “In particular, we started our business in agriculture, and plan to continue our strategy in agriculture.”

Pinduoduo’s user base is growing fast, and at 683 million is closing in on Alibaba’s 742 million users—though reaching the upper echelons of the e-commerce industry’s user base could represent a hard limit for the company. “This represents practically the entire online shopping population in China,” Wang Shan, an analyst at Tiger Brokers, wrote (in Chinese). “The growth rate is bound to slow down. If Pinduoduo is still a loss-making company, how will capital treat it?”

READ MORE: Tesla urges workers to defend company in Pinduoduo spat

US tech war

Additionally, an ongoing tech war between the Trump administration and Chinese firms listed in the US could lead to troubles for Pinduoduo. The White House recommended in early August that Chinese companies failing to comply with US audits would be delisted. On the earnings call, the company’s finance executive, Ma, expressed a commitment to working with US and Chinese regulators to address these concerns.

Yet regardless of the quarterly report nuances, e-commerce is growing, helped along by pandemic-driven digitization. “E commerce is generally doing well globally,” said Esme Pau, an analyst at equity firm China Tonghai Securities. “Consumers spending patterns are moving online.”

Shares of Alibaba closed slightly lower on Thursday despite its better-than-expected results for the June quarter which showed that most of its businesses had rebounded to pre-pandemic levels.  

The company’s revenue jumped 34% year on year to RMB 153.75 billion ($21.76 billion) for the quarter ended June, beating average analyst estimates of $21.34 billion for the e-commerce giant’s first quarter in the 2021 fiscal year. Core commerce retail and cloud computing businesses continued to be the main drivers for robust revenue growth.

Income from operations increased 42% in the quarter to RMB 34.71 billion, or 23% of the total revenue, from RMB 24. 38 billion, or 21% of revenue, in the same quarter of 2019. Meanwhile, the cost of revenue in the quarter increased by 40% year on year to RMB 84.52 billion due to increased contributions from direct sales businesses such as Tmall Supermarket and New Retail.

“Our domestic core commerce business has fully recovered to pre-Covid-19 levels across the board, while cloud computing revenue grew 59% year over year,” Maggie Wu, chief financial officer of Alibaba Group, said in a statement.

Falling short

The biggest theme of Alibaba’s June quarter result was “back to normalcy.” The majority of analysts TechNode spoke with saw the results as very “impressive,” demonstrating resilience in Alibaba’s businesses.

But share prices sagged 1.0% on Thursday in New York, signaling that investors expected more. While the company trumpeted a rebound, it was not seen as a complete return to “normalcy.”

Alibaba’s 34% year-on-year revenue growth during the quarter was robust, but it fell short of the roughly 40% average quarterly growth in the 12-month period before Covid-19.

The company’s core commerce business unit reflected the same deceleration. It generated RMB 133.32 billion in revenue in the June quarter, weakening to 34% year-on-year growth compared with 44% in the same year-ago period. Growth was mainly driven by higher purchase frequency and increasing penetration into lower-tier cities through Taobao Deals, which gained approximately 40 million monthly active users since its launch in March.

Covid-19 is still weighing on Alibaba, which earns much of its revenue from advertisement and commission fees. Both saw slower annual growth in the quarter.

Wang Shan, an analyst at Tiger Brokers, attributes this to Alibaba’s Covid-19 support policies, under which it waived platform and rental fees as well as commission for merchants on various platforms within its ecosystem from anywhere from two to six months. She further pointed out that downsized advertising budgets as a result of the pandemic also had an adverse impact on the company’s ad business.

Cloud computing revenue grew to RMB 12.35 billion, primarily driven by increased revenue contributions from both public cloud and hybrid cloud businesses. It clocked 59% annual growth in the quarter, the slowest growth since the 2018 fiscal year except for the March quarter.

Local life business unit, including Eleme and Koubei, slowed considerably under twin pressures of the Covid-19 pandemic and rising competition from Meituan. It grew 15% year on year compared with 137% in the same period a year ago.

Broader headwinds

The year 2020 has proven a difficult year for China tech firms and Alibaba may be shouldering an outsized portion of the pressure as a global firm whose performance is seen as an informal indicator of the Chinese economy.

Alibaba’s historical valuation is related to much “bigger picture issues,” John Freeman, vice president at CFRA Research, wrote in an email. “The risk for BABA is tied to the macro-economic situation, political risk, and possibility of a trade war,” he said.

Covid-19 is under control in China, but the far-reaching impact to the economy is far from over, said Michael Norris, leader of research and strategy at AgencyChina.

The country’s disposable income and urban consumption are still recovering, which means Alibaba’s consumers are still feeling the strain of reduced salaries and take-home pay. “Alibaba is only as strong as consumers’ wallets,” Norris added.

Others remained optimistic about the company’s longer-term growth prospects. “In the longer term, Alibaba is well-positioned to benefit from synergies arising from the deepening integration of its e-commerce platform (Tmall/Taobao) and its new retail and lifestyle ecosystem. We expect sustainable monetization improvements with the expansion of services offerings and stronger user acquisition and retention,” said Esme Pau, an analyst at equity firm China Tonghai Securities.

Alibaba and Tencent rarely invest in the same startup. Xiaohongshu, the social media and e-commerce hybrid commonly regarded as China’s Instagram, is one of the few exceptions.

Founded in 2013 by Charlwin Mao and Miranda Qu, Xiaohongshu, also called Little Red Book or Red, gained popularity among China’s young, middle-class, and mostly female consumers hungry for lifestyle and fashion tips. A favorite among investors, the consumption-oriented social media platform accumulated over $400 million in funding. Its most recent round, in June 2018, raised $300 million from the likes of both Alibaba and Tencent, among others, and valued the company at $3 billion.

Despite rapid early-stage growth, the content-driven app has struggled to land on a successful and scalable monetization model while maintaining its community feel. Unsuccessful attempts to commercialize have disappointed analysts and investors, who are losing patience with the company. So far, the app is still primarily a recommendation tool for users to post reviews and conduct research before making their purchases. With users heading to other e-commerce platforms or offline stores for the purchase itself, Xiaohongshu is leaving out the most lucrative link of an online buyer’s journey.

To reclaim public attention, Xiaohongshu unveiled a new strategy at its RED for Future Conference on July 22, even as most other companies cancelled big offline events due to Covid-19. 

Since monetizing consumer interactions through e-commerce has hit a wall, the company is branching into a model that targets brands and other businesses. To that end, Xiaohongshu unrolled a string of features to help brands promote themselves. The new measures include:

• Platform commission reduced to from 20% to 5%, identical to the commission charged by Tmall in the fashion and cosmetics industries. If traffic is coming from Xiaohongshu livestream ads, the sales commission decreases even lower to 3%.
• Online traffic funneling to promote new brands and livestreamers,
• Support plans to connect merchants to consumer reviewers who have large followings.

But will the pivot be enough to turn the company around?

Search for identity

Xiaohongshu is hard to define. It began as a PDF guide to luxury shopping in Hong Kong, and made its mark in the tech world in 2013 as a user-generated content (UGC) community, which encouraged users to post pictures and reviews of luxury goods. The style-obsessed app later adopted a cross-border e-commerce model, operating as both a proprietary e-commerce platform and third-party vendor—models resembling JD and Alibaba’s Tmall respectively. The aim was to become a place where people could find overseas niche products, but the effort failed after facing immense competition from established e-commerce giants like Alibaba, who have far superior supply chains. 

The app then switched to social e-commerce by creating more product categories and introducing Chinese local brands. However, the model didn’t work well either for the reasons mentioned above.

At its event in July, the company stressed its strong position as a lifestyle content community, minimizing its e-commerce element. At the same time, it proposed a transition to B2K2C (business-to-key opinion consumer-to-consumer) model, which would elevate key opinion consumers, or KOCs, as the link between brands and consumers.

Trust issues

One of Xiaohongshu’s main challenges has been balancing its two constituencies: users and advertisers.

The company’s first pivot to serving brands dates back to the beginning of 2019. That year, a series of major moves to commercialize the platform met with strong resistance, first from regular consumers, and then from KOLs. 

In January, the company launched an influencer platform, then followed up with a brand account platform and CPC (cost-per-click) advertising system in March. The accelerated efforts to monetize triggered backlash from users who began questioning the app’s credibility. In April, local headlines reported fake product reviews and scandals involving fraudulent content scandals.

When Xiaohongshu tried to address the customer trust issue by purging suspicious KOL accounts, many disheartened influencers balked at the severe response. In the aftermath of the negative PR crisis, Xiaohongshu was pulled from both Android and Apple’s local App Stores in July and only managed to return three months later.

The current strategy is an evolution of the company’s 2019 plans, amended to resolve the major problems it faced last year. While KOCs are able to market on any social media platform, Xiaohongshu appears more responsive to trending reviews and can promote lesser-known accounts more quickly. The personable and seemingly unbiased appeal of KOC marketers present a possible avenue for the platform to fix its credibility gap from last year’s crisis.

Squaring the circle?

Key opinion customers, the newest buzzword in the influencer world, emerged in 2019 as an alternative to glossier, more professional key opinion leaders (KOLs).

In theory, KOCs are more trustworthy than KOLs. They are real customers who promote the brand without being paid to. So far, users seem to accept this form of marketing better than KOL hype. 

But Elijah Whaley, chief marketing officer at KOL marketing platform Parklu, says Xiaohongshu is taking shortcuts with KOCs that threaten to undermine user trust. Instead of treating KOCs as customers, Whaley said, the app treats them as just another kind of KOL, encouraging brands to pay KOCs for promotions.

KOCs are everyday consumers who typically have a few hundred followers—far less than the thousands or millions of followers who anoint KOLs with celebrity status. Whaley argues that brands need to keep them separate from paid pitchmen to keep their cachet.

• “KOLs are in the business of building influence and monetizing influence,” Whaley writes. “KOLs might or might not truly love the brands they collaborate with, which occasionally brings their authenticity into question. KOC evangelize the brands or products they love because they want to help their family, friends, and colleagues make better purchase decisions…One of the most significant challenges to KOL marketing is scalability due to the fees and high-touch nature of managing campaigns, whereas KOC marketing strategies benefit from scales of economy.”

On the brandwagon

At the same time, the company is jumping on the livestream e-commerce bandwagon. As a latecomer, Xiaohongshu experimented with livestreaming in June last year, but the function was not officially launched until November. Compared with incumbents like Taobao Live, Xiaohongshu is pushing more niche brands or high value products. After a quick browse on the app, I found that most Xiaohongshu livestreamers have dozens, or at most hundreds, of viewers—well below the scale of audiences on Taobao Live.

As e-commerce livestreaming hits its ceiling in driving sales, Xiaohongshu is taking a different approach by stressing its role in branding and marketing, rather than striking massive GMV figures. 

Taobao, which pioneered e-commerce livestreaming, also noticed the change. The top goal of livestreaming is branding, then it’s to bring new and very loyal customers and finally it’s the sales, Yu Feng, head of Taobao content e-commerce department, told local media this June.

Jie Si, head of Xiaohongshu open platform and e-commerce operations, said he expects advertising revenue to become the “pillar” of Xiaohongshu’s business. “E-commerce is only a part of our ecosystem. The primary goal is to service the demand of our customers,” he said. In addition to ad income from CPC advertising and branding, the lifestyle app also generates revenue from commissions from brands, membership fees, and a paid promotion tool called “Chips.”

Red flags remain

Xiaohongshu had over 100 million monthly active users (MAUs) in June, up from 85 million one year ago, according to company data.

However, third-party research firm QuestMobile reports a different outlook—a picture of stagnation. The research shop says that from June 2019 to March 2020, the number of Xiaohongshu’s MAU has contracted by roughly 10%, from 85 million to 77 million.

The 77 million MAU figure shows 15.3% year-on-year growth, but it is a much slower pace compared with the growth at Kuaishou and Bilibili, competitive platforms that are also looking into ad income. Both tech firms saw over 30% year-on-year growth from the windfall of users due to the Covice-19 pandemic.

“In tech, stagnation is a big red flag, contraction is a burial shroud. Very few social networks resurrect from MAU contraction,” Whaley said, who said he was disappointed by Xiaohongshu’s KOL purge last year. “Who cares about commercialization if there is a declining number of people to commercialize to,” he added.

The coronavirus pandemic has caused a considerable drop in advertising spending. Tech firms are benefiting with brands spending more on digital marketing, trying to access users who are spending more time online. But advertisers are flocking to the biggest platforms more than ever, which means a tougher situation for medium-sized vertical platforms.

In the competition for ad revenue, Xiaohongshu faces tough rivals like Baidu, Alibaba, Tencent, and Bytedance (BATB). China’s four most valuable tech companies accounted for a combined 86% of all digital advertising revenue in 2019, according to Totem Media. 

With its 100 million MAU, Xiaohongshu will also have a hard time challenging other content platforms like Tiktok and Kuaishou, which boast 518 million and 443 million MAU in June, respectively.

Steep climb ahead

To reach its next growth phase, Xiaohongshu has several hurdles to cross: regaining trust from users, entering the livestreaming business as a latecomer, and boxing out its rivals for advertising income. The company is putting its faith in its new B2K2C model to get them there. But such a strategy requires time to see results, which for the company is in short supply. Investors are already losing interest.

It’s been over two years since Xiaohongshu’s last funding injection. The company reportedly reached a break-even point in its finances late last year. It is reportedly fundraising for a $6 billion valuation, doubling what it achieved in its last round in 2018. It is a critical time for the company to produce a more convincing monetization model that will induce investors to open their purses.

No doubt Xiaohongshu still owns a key step in the journey of many consumers, particularly in the 18- to 35-year-old female demographic, but the clock is ticking for the company to show whether it can maintain that status, or achieve more.

JD.com shares closed nearly 8% higher on Monday after the Chinese online retailer posted robust top-line growth for the second quarter of this year, and announced a $830 million investment in its healthcare unit, JD Health.

Why it matters: JD announced its stronger-than-than expected results against a backdrop of domestic consumption slowly recovering from the disruption brought by the Covid-19 pandemic.

• Both the release of pent-up demand and shifting consumer behavior from offline to online boosted momentum for e-commerce giants in the quarter.
• Fresh from its June debut on the Hong Kong stock exchange, this is a critical time for JD with retail chief Xu Lei gradually taking over for founder Richard Liu as the Chinese online retailer’s new leader.

READ MORE: Much needed big numbers from 618 shopping festival

Details: JD.com reported net revenue of RMB 201.1 billion ($28.5 billion), representing a 33.8% increase from the same period in 2019, the company said in a statement on Monday. The revenue beat the high end of analyst estimates compiled by Yahoo Finance.

• The company’s net income attributable to ordinary shareholders was RMB 16.4 billion in the second quarter compared with RMB 600 million for the same period last year.
• Company CFO Sandy Xu attributed the strong growth to an improving macroeconomy and “record-high” 618 promotion, referring to its annual anniversary sale event held on June 18.
• The company also announced that healthcare unit JD Health received a $830 million investment from Hillhouse Capital through the purchase of Series B preference shares.
• The company’s annual active customer accounts increased by 29.9% year-on-year to 417.4 million in the 12 months ended June. “Over 80% of our new users added in the quarter came from lower-tier cities, the highest level on record,” Xu said during the earnings call on Monday.
• The cost of revenues rose in line with revenue growth, increased by 34.5% to RMB 172.4 billion for the second quarter of 2020 from RMB 128.2 billion for the second quarter of 2019.

Context: JD began this year moving to list a number of its affiliated companies, including JD Logistics, grocery delivery Dada JD Daojia, and fintech unit JD Digits.

• JD.com rival Alibaba will report quarterly results before the market open on Thursday, and Pinduoduo will release its Q2 report on Friday.

Revenue for Chinese search giant Baidu contracted 1% in the second quarter compared with the same year-ago period, with the company warning that the downward trend could continue in the second half of 2020.

Why it matters: Baidu narrowed a revenue decline from the first quarter, showing some signs of recovery after the Covid-19 outbreak in China.

• Nevertheless, the company’s ad sales, a major contributor to overall revenue, took a significant hit as companies in China have tightened their belts in the aftermath of Covid-19.

Details: Baidu’s revenue reached RMB 26.03 billion ($3.69 billion) in the quarter ended June 30, down 1% from the RMB 26.33 billion it earned during the same period in 2019, the company announced on Thursday. Baidu previously forecasted sales of between RMB 25 billion and RMB 27.3 billion in Q2.

• Revenue from online marketing was RMB 17.7 billion, falling 8% year on year, as Chinese companies weather the fallout from the Covid-19 outbreak and competition from rivals including Bytedance and Tencent increases.
• Baidu managed to narrow a decline in its revenue in the first quarter, which fell 7% year on year to RMB 22.55 billion.
• Net income reached RMB 3.6 billion, up 48% year on year, slowing from 62% annual growth it saw in Q2 2019.
• The company warned that a decline in overall sales could continue in the second half of the year. During the third quarter of 2020, Baidu expects revenues fall between RMB 26.3 billion and RMB 28.7 billion, representing a 6% year-on-year decline or 2% growth as a result of the “very limited” business visibility in China as a result of the Covid-19 pandemic.

Context: Baidu has plowed billions into diversifying its offerings in search of additional revenue streams. It has focused this spending on artificial intelligence and cloud computing, while the company is exploring enterprise services for growth.

• Nevertheless, a number of these investments, most notably its bet on autonomous driving, have yet to pay off. It’s unlikely the company’s self-driving car project will see significant returns in the next decade, putting additional pressure on its other businesses.

It wasn’t so long ago that China tech investment loved US startups. Now, the two tech markets feel like they’re on different planets.

So far, the American offensive specifically targets two companies, but ripple effects are creating uncertainty over just how wide-ranging the ban could be—especially for Wechat’s owner Tencent, which holds a formidable portfolio of US investments.

So how do geopolitical tensions affect Chinese tech’s overseas investments? Pretty significantly, it turns out. In fact, the story of American measures to stifle Chinese influence in its home market starts long before July.

I scraped and analyzed public funding data to pinpoint deals by Chinese tech majors in the US. The numbers highlight a turning point in 2018, when the US sharpened its focus on companies like telecommunications giants Huawei and ZTE. Since then, Chinese investments in US startups have fallen off a cliff. 

Tech giants like Alibaba, Tencent, and Baidu appear to have reversed their US investment strategies amid rising tensions between China and the US, as two superpowers tussle over the future of the companies that dominate the internet. 

Key takeaways:

• Chinese tech giants invested heavily in the US between 2010 and 2018, but quickly scaled back investments in US startups beginning in 2019. 
• The drop-off is partly explained by increased scrutiny in 2018, when the Committee on Foreign Investments in the United States (CFIUS) was given more power to review investments in US companies. 
• Since then, new Chinese investments in American startups have fallen dramatically. Contributions in the first quarter of 2020 dropped to $400 million, down by more than a third compared to the same period in 2019, according to the US-China Investment Project.
• The drop in funding occurred only among Chinese investors—overall investment flows into US startups largely remained the same in 2019.

Investment explosion

It started with a boom. After gaining a solid foothold in their home markets, Chinese tech giants started looking abroad for the next big thing. 

In 2008, Tencent became the first Chinese tech giant to set its sights on the US, investing in big-ticket companies like electric vehicle maker Tesla and social media giant Snap. 

The company has participated in 81 funding rounds for US startups since 2008. Its US investments peaked between 2014 and 2017, a period when it made three-quarters of its deals—62 in all. 

In 2010, the same year that Google bowed out of China over concerns of censorship and cyber threats, e-commerce giant Alibaba made its first move into the US. The e-commerce giant has since taken part in 27 funding rounds for US companies. These rounds totaled more than $5.4 billion. Given how companies guard information about their investments, the data presents only the total value of each funding round rather than Alibaba’s individual contributions.

Meanwhile, Baidu made its first US investment in 2013. Though it has taken part in significantly fewer funding rounds than either Alibaba or Tencent, Baidu’s investment peak came in 2016, when it participated in rounds for lidar-maker Velodyne, as well as fintech companies Circle and Zestfinance. 

Overall, Chinese venture funding in the US amounted to around $14 billion between 2013 and 2018, according to figures from the US-China Investment Project. Total investment spiked in 2018 at $4.7 billion, but otherwise plateaued between 2015 and 2019 at around $2.5 billion. 

The bust

Everything changed after 2018. In 2016, Baidu, Alibaba, and Tencent were involved in 22 deals in the US. In 2019, they took part in a paltry three investments.

The reason was almost certainly politics. As trade tensions between the world’s two largest economies flared, the US and Chinese tech sectors took most of the heat. Hostility grew and investments shrank.

Chinese investors that focused on US startups in previous years have sought distance from the sector. Tightening US regulations drove them away, while the prospect of bigger returns lured them to developing markets. New rules that give CFIUS extra power added another important reason for the decline.

In 2019, Tencent took part in just two funding rounds—one for social media news aggregator Reddit, and another for contacts manager Contacts+—a 90% decrease from its height of 23 deals in 2015, and a 70% year-on-year decline from 2018. 

While Alibaba’s US portfolio isn’t as expansive as Tencent’s, the company participated in 26 deals between 2010 and 2017, including high-profile investments into companies like mobility platform Lyft and Snap. Since 2018, it has taken part in only one US funding round.

Alibaba’s pullback from the US preceded Tencent’s. Business concerns may have also played a role, as the company pivoted to Asia’s lucrative developing markets when growth began to stagnate in its home market of China. Still, US scrutiny of Chinese firms was already intensifying, and rising tensions undoubtedly played a role in Alibaba shifting away. 

Even Baidu, which has far less at stake in the US given its smaller investment footprint, has pulled back from American investments. Just one of its 11 investments took place after 2018. 

As the number of Chinese funding rounds in the US declines, so does the amount of investment coming from China. The US-China Investment Project estimates that Chinese venture funding in the US totaled $400 million in the first quarter, down from $640 million during the same period in 2019 and $1 billion in 2018. Of course, a global pandemic beginning in China also contributed to this fall.

This dropoff was “distinctively Chinese,” according to the US-China Investment Project’s report. Despite the decrease in Chinese investment, overall funding in US startups largely remained the same. 

China’s tech giants have turned their eye to the developing markets. Firms including Alibaba and Tencent have increased their investments in the emerging markets of South and Southeast Asia. The two companies have divided up India’s tech scene without any overlap in their investments, while also making some big bets on promising tech companies in Southeast Asia. 

Tougher reviews

A significant factor contributing to the dropoff in China tech investment is the increasingly strict regulatory environment. In late 2018, the US introduced new measures that increase scrutiny of foreign investments in American companies. 

Dubbed the Foreign Investment Risk Review Modernization Act (FIRRMA), the changes gave CFIUS, an inter-agency body tasked with identifying risks from foreign investments, more power to scrutinize investments into American firms. 

FIRRMA came into effect amid fears that Chinese acquisitions of and investments into US companies were abetting technology transfers from the US to China, and having adverse effects on American companies and internet users.

Before the new rules, CFIUS typically reviewed deals only when a foreign investor took a controlling stake in a US company, focusing on deals involving sensitive technologies.

In early 2018, fintech giant Ant Financial found itself locking horns with CFIUS. The Alibaba-affiliated company had wanted to acquire American money transfer firm Moneygram, but was forced to withdraw from the deal after the regulatory committee rejected it over national security concerns. 

The proposed $1.2 billion deal would have made 2018 an even bigger year for China-US investment flows, increasing total investment that year to nearly $6 billion, based on figures from the US-China Investment Project. That figure would have more than doubled the previous year’s total. 

CFIUS has also blocked Chinese ownership of the LGBTQ dating app Grindr. The committee required Beijing Kunlun Technology, the app’s previous owner, to sell the app, citing national security concerns. Kunlun agreed to sell the app to San Vincente Acquisition in March. 

FIRRMA gave CFIUS a mandate to review non-controlling investments in US companies that produce critical technology, critical infrastructure, or that collect US citizens’ personal data. Critical technologies can include anything from semiconductors to batteries. 

Crucially, it also authorized the committee to target investors based on the country they are from. 

“While specific countries are not singled out, FIRRMA allows CFIUS to potentially discriminate among foreign investors by country of origin in reviewing certain investment transactions,” the Congressional Research Service, a US Congress-affiliated think tank, wrote in a February report.

According to CFIUS’ annual report, only three potential investments in critical technology originated from China in 2019. But even if CFIUS is not rejecting deals, the dramatic drop in Chinese investment shows that Chinese tech companies don’t think it’s worth trying.

“The broad impacts suggest systemic headwinds to Chinese venture activity, reflecting tighter investment screening and a deterioration in investor sentiment as US-China tensions increase,” said the report by the US-China Investment Project. 

Given the Trump administration’s latest move to shed Chinese technology from America’s digital networks, Chinese companies and investors will likely continue to be driven away by US politics.

Shares for Chinese electric vehicle maker Nio fell 8.6% on Tuesday after the company posted better-than-expected gross profits for the second quarter amid concerns over the long-term scalability of its ambitious battery-swap program.

These second-quarter financial results are an important milestone for Nio, which, for the first time reported a positive vehicle margin of 9.7%, nearly double the 5% company management had guided.

Nio attributed the improvement primarily to a record number of deliveries during the quarter, during which it handed over 10,331 vehicles to customers in the three months ended June 30. Total revenues jumped 146% year on year to RMB 3.7 billion ($526.4 million), beating analyst estimates of RMB 3.49 billion. Losses attributable to shareholders meanwhile narrowed 63.6% year on year to RMB 1.13 billion ($160.1 million).

The margin improvement owed much to a significant cost reduction in battery packs, among other materials. Nio now enjoys a much lower purchase price for battery packs from its supplier, CATL. It now pays RMB 0.8 per watt-hour (Wh) compared with an earlier rate of over RMB 1 Wh, Chinese media reported citing persons familiar with the matter. The six-year-old EV maker became CATL’s biggest battery client in the passenger vehicle segment during the first half of this year, according to figures from Chinese consulting firm GGII.

BaaS ready for Q3 launch

Nio said it has achieved “profound progress” in its plans for a “Battery-as-a-Service” (BaaS) offering, in which a battery rental service will be sold separately from cars. CEO William Li said Tuesday during the earnings call that it was in the final stages of preparing to launch its BaaS solution offering in the third quarter. All the necessary validation procedures with the government have been completed, he said.

Beijing has traditionally required automakers include a battery pack with each new energy vehicle sold, but the restrictions are now being lifted. A government announcement (in Chinese) last month revealed that Nio will be allowed to sell the EC6, its third mass production model, without a battery.

“We believe this is going to be a very good boost to our vehicle sales… and help us with the gross margin,” Li said. Nio expects a battery-leasing program to considerably lower the price of a Nio-branded premium crossover by one third to around RMB 258,000, for example, when renting a battery pack for daily use.

The Chinese Tesla challenger is betting heavily on battery-swapping technology as part of its broader BaaS strategy, which it hopes will resolve consumer range anxiety and effectively remove the issue as a barrier for EV adoption. The company now has a network of 142 battery swap stations in 63 Chinese cities, and is rapidly expanding the swap infrastructure by opening one station on average per week, Li said last month at a company event.

Investors unconvinced

However, multiple industry people TechNode recently spoke with have expressed doubts about the scalability of such battery replacement service, given a constantly evolving vehicle driving range and the ever-shortening EV recharge time. The difficulty in reaching a shared battery standard among multiple automakers is another hurdle, making battery swap a less economical solution for EVs over the long term, UBS analyst Paul Gong said in June during an online conference.

Nio said that it recently completed 750,000 battery swaps nationwide, highlighting growing adoption from its vehicle owners. It also boasted that each battery replacement took just three minutes, far faster than even the average 15 minute charge time at a Tesla V3 supercharger.

Nio is forging an alliance with giant industry players to minimize its financial burden in the swappable battery program. Li on Tuesday revealed plans to form a battery asset management company with multiple partners, in which Nio will hold a minority stake. The joint business is scheduled to open this month, which CATL reportedly (in Chinese) intends to invest in.

Tencent saw one of the fastest-growing quarters in years in both profits and revenue during the second quarter, largely due to a surge in the mobile games income and despite the Covid-19 pandemic and the US-China tech war. 

Why it matters: Tencent is one of the world’s largest companies, and its second quarter stats show that even geopolitics can’t slow down the juggernaut. The company’s focus on online gaming and investments in multiple regions and sectors helped Tencent defy expectations and increase profits. 

Details: A decline in media advertising revenues weighed on Tencent’s growth this quarter even as popular mobile games brought in the big bucks, according to its earnings release. A US ban on Wechat transactions is not expected to slow revenue from gaming, the company’s biggest source of revenue.

• Tencent’s operating profit in the second quarter increased 38% year on year to RMB 37.63 billion ($5.32 billion), compared with 26% year on year growth to RMB 27.52 billion ($4.00 billion) in the same period a year ago.
• Revenue increased 29% on an annual basis to RMB 114.88 billion ($16.23 billion), well past the $16.00 billion estimate compiled by Zacks Equity Research.
• Online game revenues grew 40% year on year to RMB 38.29 billion, driven by growth in revenue from mobile games including “Honor of Kings” and “Peacekeeper Elite” in both domestic and international markets.
• Social network revenues increased 29% annually, largely due to digital content services like Huya, a game-streaming platform Tencent owns a controlling stake in. 
• Media advertising revenues fell 25% year on year in the second quarter. Tencent cited “lower advertising revenues from Tencent Video as a result of weak brand advertising demand amid the challenging macro environment, as well as delayed content production and releases.”
• Tencent said that it does not expect Trump’s executive order banning Wechat transactions to materially weigh on its future growth. 
• “The US represents less than 2% of our global revenue. Within that, advertising in the US should be less than 1% of our total advertising revenue,” James Mitchell, Tencent’s Chief Strategy Officer, said during the earnings call. 
• According to Mitchell, the order only covers US jurisdiction, meaning US companies selling to Chinese markets will still be able to advertise on Tencent’s platforms in China, making it even less likely that the ban will weigh on ad revenue.

Mini programs are an increasingly important growth driver for apps, functioning as an entry point for Chinese mobile users to access online services, according to a recent report on Chinese internet trends in the first half of the year.

Why it matters: These lightweight applications are becoming must-have features for mainstream apps. They offer a diverse range of functions without requiring users to download separate programs or leave the main app.

Read more: Wechat mini programs: the future is e-commerce

Details: Monthly active users (MAU) for Wechat mini programs reached 829 million in June, up 11.6% year on year compared with 743 million a year ago, according to a Quest Mobile report published on Tuesday.

• Mini programs are an important channel for main apps, especially those offering high-frequency services like food delivery, according to the report.
• Eleme’s main app had 45 million MAUs as of June, while its mini program on the Alipay app had 33 million MAUs, with just 1.65 million overlapping users. Meituan’s Wechat mini program meanwhile had 97 million MAUs in June, almost double the main app’s 54 million.
• Mini programs offer a lightweight, convenient way to try out a limited version of a service, and are a crucial channel for apps to acquire new users who want to use the full range of services, the report said.
• Lifestyle services was the most popular category among Wechat mini program users in June, followed by video, shopping, tools, and transportation. Lifestyle services and video also topped the charts for Alipay and Baidu mini programs.
• Users of healthcare services surged more than nine-fold (up 841%) year on year due to the wide application of health codes. Online education, car-hailing, and rental services also saw users on Wechat mini programs more than doubled year on year in June.
• China’s retail sales in June weakened 1.8% year on year, an improvement from the 20.5% year on year decline in February during the country-wide lockdown, though growth slowed on an annual basis from a 9.8% increase in June last year.
• Online retail sales accounted for 25.2% of China’s total retail sales in June, up from 20% in June last year.

Context: First introduced by Wechat in 2017, mini programs have become ubiquitous on many of China’s biggest apps, including Tencent’s QQ, Baidu, Meituan, Alibaba’s Alipay, and Taobao, as well as Bytedance’s Jinri Toutiao and Douyin.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

After taking some time to welcome his newborn son, James returns to his co-hosting duties, as he and Elliott welcome Bloomberg Chief Economist Tom Orlik to the pod to discuss Tom’s new book China: The Bubble that Never Pops. Ell, James, and Tom discuss reasons to be optimistic about the future of the Chinese economy, and why it has avoided a major crisis in the decades following Reform and Opening Up.

James and Elliott also cover a few other hot topics in the news recently, such as the prospect of a Tiktok ban in the US.

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:

• Tom Orlik – @TomOrlik

Editor

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

Huawei said Monday its revenue during the first half of the year grew 13.1%, a significant slowdown from the same period last year as the company faces stricter sanctions from the United States.

Why it matters: The Shenzhen-based telecommunications gear maker’s business in the first six months of the year was hit by a double whammy—a new round of US sanctions imposed in May and the Covid-19 pandemic that has disrupted the global economy.

• “The complex external environment makes open collaboration and trust in global value chains more important than ever,” Huawei said in a statement Monday.

Details: Huawei booked RMB 454 billion (around $64.9 billion) in revenue in the first six months of the year with a net profit margin of 9.2%, the company said in the statement.

• Huawei’s consumer business earned RMB 255.8 billion, while its carrier and enterprise units reaped a respective RMB 159.6 billion and RMB 36.3 billion, the company said.
• Second quarter revenue rose 22.7% year on year, according to TechNode’s calculations based on stated data.

Context: The same period a year earlier, the company reported 23.2% year-on-year revenue growth, before the impact of a May 2019 US blacklisting that sought to cut the company off from American technology. Huawei touted the growth as proof that US sanctions had a limited impact on its business.

• The ban took effect in May after several reprieves. Before that, some of Huawei’s important American partners such as Google—which provides commercial licenses to millions of Huawei’s Android-powered smartphones—had already terminated cooperation with the company, dealing a blow to its consumer business, its biggest source of revenue.
• In May, the US Department of Commerce announced a new regulation requiring companies around the world to obtain licenses for sales to Huawei of semiconductors made with US technology, an upgraded version of a May 2019 ban that applied only to American companies.
• The new regulation could potentially cut Huawei off from the global semiconductor supply chain. Affected Huawei suppliers include Taiwan Semiconductor Manufacturing Co., the world’s largest contract chipmaker which produces high-end chip designs for Huawei; Taiwan’s Win Semiconductors, which makes Huawei’s radio frequency chip designs; and South Korea’s Samsung Electronics, which ships memory and storage to Huawei.
• Huawei had reportedly started shifting some production of its chip designs from overseas contract makers to domestic ones such as Shanghai-based Semiconductor Manufacturing International Corp., but experts believe the homegrown alternative is too backward in technology to supply the cutting-edge chips that Huawei needs.

According to the Paper (in Chinese), a source close to Bytedance says that the Chinese media giant behind Tiktok expects to suffer $6 billion in losses over India’s ban on Chinese apps. Bytedance products Tiktok, Helo, and Vigo Video are all listed.

Why it matters: India is Bytedance’s most important oversea market, with more than 200 million Tiktok users, and a user base of nearly 60 million on other apps. Bytedance has invested heavily in the market.

• In April 2019, Bytedance announced a $1 billion, three-year investment plan in India.
• In July 2019, it announced plans for its first Indian data center in an effort to assuage Indian concerns over data protection.
• The company has 2,000 staff in India as of today.

READ MORE: India ban on Chinese apps explained: Who, how, what now?

Context: The ban is believed to be a response to a border clash with China that left 20 Indian soldiers dead.

• Bytedance has already decided to shut down short video app Vigo Video, announcing plans in June to close Vigo and move its users to Tiktok by the end of October.
• Unlike other Chinese tech companies, Bytedance has already been banned in India once, for a week in April 2019 after the Madras High Court heard accusations that Tiktok exposes children to pornography.
• One day after the Court’s order, Prime Minister Narendra Modi’s Bharatiya Janata Party also asked for a ban on Helo, alleging China’s interference in Indian elections. It was not granted.

Chinese electric vehicle maker Nio set a record for quarterly vehicle deliveries despite disruptions due to the Covid-19 outbreak, sending its shares soaring 16.6% to $9.23 in premarket trading.

Why it matters: Amid an extended slump in China’s EV market, Nio is accelerating into the fast lane following a significant cash injection and new production model coming to the market.

• Nio on Monday announced it had already received RMB 4.8 billion ($678 million) of the first two installments totaling RMB 5 billion in its RMB 7 billion financing project with the government of Hefei, capital city of the eastern Anhui province.
• Registered capital of its newly established China entity, Nio (Anhui) Holding Ltd., surged to RMB 5.07 billion last month from RMB 11 million, according to information on Chinese business research platform Tianyancha.com.

Details: June deliveries for Nio’s two models nearly tripled to 3,740 units from a year earlier, pushing quarterly deliveries to 10,311 units in the second quarter of this year, 191% year-on-year growth, the company said Thursday.

• Q2 deliveries exceeded the upper limit of the company’s target of 9,500 to 10,000 vehicles. Nio’s financial chief Steven Feng expressed confidence about reaching previous goals including a 5% margin on vehicles in the second quarter.
• The Chinese auto market began to rebound—June sales increased 11% year-on-year to 2.28 million units, according to preliminary figures from the China Association of Automobile Manufacturers.
• China auto sales declined 17% year-on-year to 10.24 million units during the first half of the year.

Updates on the EC6: Nio is on track to launch the EC6, its third mass market model, an electric coupe SUV likened to Tesla’s Model Y, with pricing information to be available during the upcoming Chengdu Motor Show later this month, according to multiple sources familiar with the matter.

• A set of what it called “Battery as a Service” (BaaS) solutions will also be released, through which a battery rental service will sell separately from vehicles in bid to lower the threshold for purchasing, according to people close to the company.
• During the first quarter earnings call, CEO Li Bin said the company was working on new products and service solutions “based on the separation of vehicle and battery,” which Li expects will be released in the second half of this year.
• Last week, the company unveiled its first pre-production EC6 as part of its joint plan with Chinese automaker JAC in Hefei, reported Chinese media on microblogging platform Weibo.

China’s online shopping festivals are usually about racking up the biggest sales, but things were slightly different for this year’s 618 festival, the mid-year shopping frenzy that ended on Thursday of last week. In China, shopping festivals have become landmark events that are used to build a “new normal” for sales volumes and to test e-commerce infrastructure. “This year’s peak volume [for Singles’ Day] will become the norm for the next year,” Alibaba’s Jack Ma once boasted.

Here’s how it went down in 2020.

A showdown moment for e-commerce platforms

Annual shopping events like 618 and Singles’ Day are high-profile showdowns for e-commerce players. Observers use sales totals from shopping holidays to gauge which platforms have pulled ahead and who has fallen behind. Updates on shopping events are often dubbed “battle reports” by both the companies and local media to hype up the competition. 

Alibaba still leads the pack in terms of total sales, but their rival JD is catching up quickly. 

• Alibaba booked RMB 698.2 billion in sales over the 18-day shopping festival. The company didn’t publish overall sales data last year, addressing growth over time by saying only that more than 100 brands enjoyed a higher GMV for 618 this year than they did for Singles’ Day 2019.
• JD, which had its Hong Kong IPO on June 18, racked up a record RMB 269.2 billion in sales from June 1 to June 18, up from RMB 201.5 billion in last year. That’s 33.6% growth compared with last year’s 26.6% uptick. The sales are on par with Alibaba’s RMB 268.4 billion one-day Singles’ Day sales on November 11, 2019.
• Pinduoduo did not publish overall sales figures for 2020. When contacted by TechNode, they said only that their sales of baby formula increased 510% year-on-year—and that their users don’t need to wait for twice-yearly sales to get the best value for their money because they get the best value on Pinduoduo platform “every single day.” 

Subsidized shopping propels post-Covid recovery

This year’s 618 festival comes as Beijing is gradually easing coronavirus lockdowns and encouraging people to go out and spend money again. The state has even launched a new digital coupon program to incentivize consumers to re-open their wallets after a difficult spring. Current sales data does indicate signs of economic recovery as the outbreak recedes.

To incentivize user consumption, subsidized shopping has become the order of the day. For an RMB 327 order that I placed for menswear on Alibaba’s Tmall during the 618 festival, I received a discount of just over RMB 80. That discount comprised RMB 60 from Tmall and RMB 20 from the brand itself—on top of an RMB 2 government consumption coupon. 

• The digital coupons issued by the state and distributed over various platforms—such as Alipay, WeChat, and shopping apps—totaled RMB 5.6 billion by the end of May. Though not issued specifically for the promotion, these digital coupons bolstered the consumption-boosting efforts and will continue beyond the holiday.
• Alibaba says this year’s 618 festival featured the biggest giveaway of consumer coupons and subsidies in the event’s history, totaling over RMB 14 billion in value.
• Pinduoduo claimed they had no upper limit for subsidies for the festival, doing anything they could to sweeten the GMV percentage increase. The company also pledged to make coupon usage easy by removing various pre-sales and deposit payment tricks that are popular on other platforms. (Such tricks are often very complicated, with bargain-seekers often joking that you need a talent for math to get the best deals.)
• JD.com planned to offer RMB 10 billion in subsidies, another RMB 10 billion in coupons, and “hundreds of billions of RMB worth of discounts.”
• China’s omnichannel retailer Suning launched their “J-10%” subsidy plan, targeting household appliances, mobile phones, computers, and groceries. The company pledged the products sold on its platform would be at least “10% lower than other major e-commerce platforms,” evidently benchmarking their rival JD. This is clearly a direct response to JD’s similar subsidy program aimed at Suning in 2012.

Despite the expansive subsidy campaigns, the competition among mainstream e-commerce platforms, during 618 and beyond, is still “rational,” according to Liu Yuan, an analyst at UBS Investment Research. “There’s still sustained revenue and profit growth across platforms,” he said.

The months-long lockdown has turbocharged China’s transition to an online world and propelled a huge leap in online shopping. 

The percentage of online shopping (out of total retail) jumped from 20.4% in December to 24.3% in June, according to data from China’s National Bureau of Statistics. “We expect the figure to jump to nearly 40% within four to five years, although it may drop slightly in the near future because of the gradual recovery of offline businesses,” Liu said. 

“Export companies, factories, and farmers who leverage on online channels to boost their sales may contribute to the growth during the 618 festival,” he added.

Livestreaming is a must-have

Similar to Singles Day, which usually launches with a star-studded countdown gala, 618 is increasingly filled with glitz and glamour, and livestreaming has further blurred the line between shopping and entertainment.

Livestreaming was already a big deal during last year’s Singles’ Day, but the feature is now a must-have for shoppers after livestream e-commerce gained momentum during the pandemic. 

Analysts project that sales achieved through livestream e-commerce will total RMB 961 billion in 2010, compared to 2019’s total of RMB 433.8 billion. Livestream shopping is expected to make up 8.7% of all online purchases. 

• As JD geared up for the 618 promotion, the company entered a partnership with Kuaishou on May 27 in a deal that allows Kuaishou users to purchase JD’s self-run products directly without leaving the short-video app.
• Alibaba’s Taobao Live invited more than 300 performers and celebrities to join livestream sessions during the festival.

To reach a wider audience, livestreamers partnered with e-commerce platforms and attended popular variety shows as part of the 618 campaign. Viya, the “livestreaming queen” with 28 million followers on Taobao Live, joined several of the country’s top reality shows, such as “Go Fighting,” to participate in their livestreams.  

Conclusion

As sales rebound, 618 has basically fulfilled the hopes placed upon it by both e-commerce platforms and the government: to spur post-Covid consumption recovery as the biggest shopping event after a months-long nationwide lockdown. Coming at this critical time, 618 has a chance to step out of the shadow of the more established Singles’ Day.

The strategies adopted by e-commerce platforms have proved effective. Livestream e-commerce will continue to be an important tool to reach increasingly online buyers, while subsidized shopping—either through discounts or coupons—will be key to retaining users in a weak economy, as more price-sensitive users from lower-tier cities become the major growth engine for e-commerce.  

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

This week, James is taking some time off with his newborn, so CTI regular Michael Norris fills in as cohost. He and Elliott discuss Alibaba, Bilibili, and Pinduoduo’s Q1 earnings, as well as what the possibility of Chinese companies delisting from US exchanges will mean for investors.

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Links:

Bilibili and the niche vs mass market dilemma– Pingwest

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx
• Michael Norris– @briefnorris

Editor

• Peter Isachenko

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• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

It all started in 2008. That year, social media giant Tencent struck a deal to invest in Outspark, a small US-based gaming company.

Now, 12 years after Outspark’s $11 million Series B, Tencent has funded more than 140 companies outside China. These investments have been part of funding rounds worth a total of $46 billion, a total that includes other investors. Tencent has driven a set of companies that includes Uber, Gojek, and the studio behind popular mobile game “Clash of Clans.”

The idea for this newsletter came from a simple question we asked late last year: Where does Tencent put its money?

We thought finding the answer would be a matter of simply doing a search on Crunchbase. Two days of data cleaning and analysis later, we realized how little we knew. How many companies has Tencent taken a stake in? And in which industries? Good data just wasn’t available. So we decided to dig a little deeper.

I’ve spent the past few weeks scraping and analyzing the data in attempting to gain a more granular understanding of how the company operates around the globe. The data is still incomplete, because in most cases, Tencent’s individual contribution in each round is a closely guarded secret. Moreover, the terms of dozens of deals have not been made public, a common practice in the tech industry.

But what has emerged is a picture of a firm with global ambitions that has fashioned itself into something of a VC, taking stakes in companies unrelated to its core offering. I’ve plotted the data and here’s what I found:

• A third of all the funding rounds in which Tencent participated were focused on gaming companies. The majority of its acquisitions are also in this sector.
• The company has focused on small but numerous investments in early-stage startups. 
• The Covid-19 pandemic has had a negligible impact on Tencent’s investment volumes. 
• Tencent has a sprawling geographical footprint, but nearly half of all the funding rounds it has participated in are US-based. 

A tech VC?

Tencent’s international portfolio dwarfs that of rival tech giant Alibaba—the focus of the last edition of this newsletter. According to my analysis, the number of companies outside China that Tencent has invested in is more than double that of Alibaba.

While gaming is one of Tencent’s most important businesses, the company has spread its bets across a range of verticals. Some have connections to Tencent products, while others appear to be simply companies it believes in.

Tencent invests in a vast array of companies, from those that it pushes billions into, to smaller startups that it deems worthy of a few million dollars.

Mobility is a big-ticket item for Tencent, totaling more than $18 billion in investment rounds, or around 40% of the value of all global rounds in which Tencent has taken part.

But the company looks a lot like a VC. It has made dozens of bets on small, early-stage startups that focus on artificial intelligence, biotech, security, and aerospace.

Tencent’s approach is vastly different than Alibaba’s. While the Chinese e-commerce giant tends to focus on investments that could aid its new retail push, Tencent focuses more on returns.

Pre-Series C startups account for around 40% of all the rounds Tencent has participated in. (Companies up to Series B are widely defined as being early-stage.) The amount of money the company has contributed to these startups makes up just 6% of the total value of the rounds the company has taken part in.

Fifteen of these companies are gaming studios, while 12 focus on fintech. Of all startups from Seed to Series H, the vast majority were Series A or Series A+.

Global focus

Tencent has investments on every continent except Antarctica. Of the country’s more than 900 investments, around 180 are outside China. The company has injected money into several focus industries around the world. In North America and Southeast Asia, the focus is mobility. In these two regions, Tencent has spent billions of dollars on companies including Uber, Tesla, and Gojek.

In Africa, Australia, and South America, Tencent has been involved in high-value investments in fintech. In India, e-commerce comes out on top, albeit by a small margin.

Meanwhile, in Europe, the company has spent the most on gaming firms, including what was—at the time—the largest investment figure in gaming history.

According to the data, Tencent has shown little interest in the Middle East, particularly Israel, which has become a major focus of Chinese tech companies. The one investment we identified in the region was in Phytech, an Israeli firm that provides IoT and analytics services to farmers.

Another trend not represented in our charts: In more mature markets such as the US, Tencent makes lots of small bets in early-stage companies. In immature markets, it makes bigger bets—less frequently—on later-stage companies.

Betting on games

Tencent has attempted to dominate the global gaming industries through acquisitions and investments. Early on, its typical approach was to stay south of a billion dollars. It bought Riot Games for $400 million, its investment in Epic Games cost $330 million, and South Korea-based CJ Games’ venture round amounted to $500 million.

But in 2016, something changed. Tencent spent $8.6 billion on the Finnish gaming studio behind “Clash of Clans.” It stands out as their largest investment in a gaming company, and probably the largest it has made outside China. The only possible larger investment is Uber’s $9 billion fundraise in late 2017, in which Tencent took an undisclosed share.

Founded in 2010, Finland-based gaming studio Supercell started off developing browser games, but quickly made the switch to mobile. In 2012, the company released “Clash of Clans“ and “Hay Day”—both of which became hits in Apple’s App Store and Google’s Play Store. Clash of Clans has remained one of the top-grossing games in the App Store.

Supercell became one of Tencent’s largest-ever investments—made through a Luxembourg-based consortium, of which Tencent owned 50%. The Chinese tech giant went on to take a controlling stake in the consortium in 2019.

The acquisition was the largest in gaming history—only Activision Blizzard’s $5.9 billion buyout of “Candy Crush” developer King came close. For Tencent, Supercell was a means to become a mobile-first gaming company abroad, which executives had previously highlighted as an area of importance as gaming shifted to handheld devices.

Supercell also allowed Tencent to drastically scale its international presence. Because “Clash of Clans” was hugely popular outside China, buying Supercell was a way to quickly increase Tencent’s international market share.

For the most part, the values of Tencent’s gaming acquisitions were not disclosed. Details of the deals were shared in just five cases.

In the past 12 years, Tencent has invested in 11 gaming companies over 43 funding rounds. The value of these rounds total $11.6 billion, excluding those in which the terms were not disclosed.

No Covid slowdown

As Covid-19 began spreading across China in early 2020, the government took measures to limit the impact of the virus. Authorities shut down entire cities, bringing the economy to a halt.

According to the data, however, Tencent kept investing. The company took part in an average of four funding rounds per month during the first half of the year. Thus far, that amounts to 17 investments between January and June. During the same period in 2019, that number was 12.

At this rate, Tencent could outpace its 2015 high of 30 global investments.

Tencent’s sustained investments in the age of Covid-19 set the company apart from other VC investors, who had already been cutting back their investments before the pandemic hit. Tencent also stands alone among its peers, making smaller bets on lots of companies in various sectors in the pursuit of return on its investments.

If this trend continues, Tencent could keep the fire burning through China’s VC “ice age” and a slowdown in investments abroad, giving it more influence over global tech and positioning it for a post-Covid-19 world.

Shares of Chinese internet and gaming company Netease jumped 8.1% as they began trading in Hong Kong on Thursday. The company is one of a number of US-listed Chinese tech firms to pursue a second listing in Hong Kong.

Why it matters: The strong debut for Netease, China’s second-largest online gaming company after Tencent, is a good sign for companies that are looking at a dual listing.

• The Hangzhou-based company is the second Chinese tech company to complete a US-Hong Kong dual listing. It has been listed on the Nasdaq since 2000.
• E-commerce giant Alibaba began dual listing with a November 2019 Hong Kong IPO.

Details: Shares of Netease traded at HK$133 (around $17.2) shortly after the Hong Kong market opened at 9:30 am. 

• The company previously priced its shares at HK$123 each, seeking to raise around $2.6 billion.
• In a ceremony held in Hangzhou, Netease founder and CEO Ding Lei said the secondary listing in Hong Kong is a “fresh start” for the company, according to local media. The Hong Kong market has “a better understanding of Netease,“ Ding said.

Context: The Hong Kong dual-listing trend came as the Trump administration threatened to order US markets to delist Chinese firms. Nasdaq-listed JD.com, a Chinese e-commerce firm, is also seeking to trade its shares in Hong Kong starting on June 18.

• The US and China have a long-running dispute about oversight of US-listed Chinese firms. China’s government does not allow the US Public Company Accounting Oversight Board (PCAOB) to view audit records of Chinese companies.
• The US Senate in May overwhelmingly passed a bill that could ban securities of foreign companies from the US financial markets if the audit watchdog is unable to access their audit records for three consecutive years.
• In a filing to the Hong Kong bourse on Monday, JD.com said the US government’s efforts to increase regulatory access to audit information could cause the company to face uncertainties, including a delisting from the US markets.
• “We could be delisted if we are unable to cure the situation to meet the PCAOB inspection requirement in time,” the company said.

It was 2017, and the future of driving was right around the corner: Fleets of autonomous cars would cruise city streets while self-driving buses swerved around pedestrians. Three years ago, tech companies around the world, including Nvidia and Audi, felt confident enough in AVs to predict this driverless future would be a reality by 2020.

Venture capital funds snapped up self-driving startups, plowing cash into dozens of these companies in China and around the world. Pitchbook figures show the global deal count in the AV sector nearly tripled to 127 in 2017.

The industry had to grow up eventually, and it’s happening now. Small players are leaving the market as it matures around a few success stories; in China, central planners are pushing back targets to match reality. Easier, less flashy applications like delivery-robot autonomous trucks are getting more attention from investors.

Plenty of engineers are still working on the dream of L5 fully automated cars. But for now, we’d better get used to the existing L2 parking-assist features and L3 office park shuttles.

Q1 AV fundraising

Competition in China’s self-driving market is heating up, driven by a few companies that dominate fundraising.

Only ten Chinese AV startups won investment in the first quarter of 2020, yet these ten startups conquered a third of all investments in 2019, according to an analysis of public records and data from TechNode and Beijing-based consultancy EO Intelligence.

Some of the lesser-known companies winning new war chests claim to control 90% market share in their own domains, a possible sign of maturity among these firms.

As investors realize that the commercialization of AV technology is still a long way off, they are betting larger amounts on more mature companies instead of making smaller investments in a wider range of early-stage startups.

In fact, much of this year’s activity was driven by just two companies: self-driving startup Pony.ai and lidar maker Hesai.

In January, Hesai closed its $173 million Series C, led by German Tier-1 supplier Bosch, among others. A month later, Pony.ai announced it had raised $462 million at a valuation of $3 billion, in what was at the time the biggest-ever funding round in China’s self-driving industry.

Most other companies did not disclose the value of their funding rounds, instead saying they raised “dozens of millions of RMB.” The two exceptions include an autonomous mining startup that claimed to have closed a RMB 100 million ($140,000) round and a delivery robot maker that doubled that number.

China is aligned with global industry trends. Around the world, mobility deal volume and total investment fell while a few late-stage AV companies raised larger sums.

Plans scaled back

A 2017 government plan anticipated that more than half of all cars sold in 2020 would be equipped with autonomous driving functions—but the installment rate of major assistive driving functions on cars was less than 20% in 2019.

Although investors and innovators are rushing to get L3 vehicles on the road, those cars aren’t ready for real traffic conditions. So far, deploying full autonomy means lowering the speed (to roughly under 40 km/hr) and restricting them to a very limited area, which usually means a local community, a school campus, or a park.

“We’re following special-case AVs very closely,” Qi Lei, the investment principal at Alliance Venture, Renault-Nissan-Mitsubishi’s global investment organization, told Chinese media. She brought up parks and old people’s homes as being easier sites for robots to navigate safely.

But the problems of getting L3 passenger vehicles on the road were highlighted by Baidu’s 2017 self-driving minibus model, Apolong. With the high price tag of RMB 1.5 million per unit, Apolong’s market performance fell short of expectations last year. Baidu immediately denied the reports with the release of a second-generation model, without revealing sales and cost details. It is unlikely that Apolong is affordable enough to be rolled out widely.

In the latest blueprint released by the National Development and Reform Commission earlier this year, the top economic planner declined to give a specific goal for AV development, instead by saying the country would need to reach “mass production” of intelligent vehicles with conditional automated driving functions by 2025.

Still, another action plan released late last year by China’s industry ministry shed some light on Beijing’s hopes for the AV sector. The report predicted that sales of intelligent and connected cars are expected to constitute 30% of new car sales over the next five years.

“The national guidelines will drive growth in China’s AV industry … facilitating cost reduction and efficiency improvement as the supply chain will move in the same direction,” according to analysts. However, as China currently lacks legislation governing self-driving cars, analysts expect mass adoption of L3 automation of passenger vehicles will probably happen no sooner than 2021.

The government remains confident enough to start writing rules for these future cars. Beijing promises to finish drafting technical standards for commercial vehicles—including those for driver monitoring systems and automated lane changing—by the end of 2020. Research on regulations on driverless passenger transport and unmanned delivery are also among the priorities, indicating that legislation for unmanned vehicles has been put on the table.

Autonomous deliveries

Given the difficulties of building affordable passenger AVs, growing emphasis is now being put on autonomously delivering goods. The COVID-19 pandemic also has driven the need for safe, contactless deliveries.

AV companies are racing to fulfil this niche. Three out of the 10 Chinese AV startups raising funds in Q1 are making robots for grocery delivery, according to TechNode’s analysis of funding data. Meanwhile, six AV companies that secured financing over the past two months claimed that their sensor-based algorithms could facilitate trucking rigs with the capability to drive themselves on Chinese highways.

This trend partially explains why investors have piled into Chinese robot delivery startups during the first three months of this year:

• Uisee, formed by Wu Gansha, a former director at Intel’s laboratory in China, secured an undisclosed amount of fresh funding in February in its Series B from German auto supplier Bosch, among other investors.
• In May, Uisee said its fleet of 75 self-driving cars has driven more than 15,000 km in a pilot project in working with SAIC-GM Wuling, General Motors’ light-vehicle joint venture with Chinese automakers SAIC and Wuling Motors.
• In March, Neolix, a partner of Baidu’s self-driving platform Apollo, announced having closed an RMB 200 million Series A+ led by Chinese electric vehicle maker Li Auto (aka Lixiang) and followed by existing backers including Yunqi Partners.
• In the same month, Beijing-based White Rhino raised an undisclosed amount of funding from Chinese investment firm Estar Capital. The company was formed by a group of former Baidu engineers and transported medical supplies to a makeshift hospital in Wuhan during the outbreak.

Venture funds are also pursuing self-driving trucks for freight deliveries on Chinese highways, as the Chinese government forced the installation of autonomous emergency braking (AEB) systems on commercial vehicles last year.

• In March, Maxieye, a company that claims a market share of nearly 90% in the AEB sector, announced it had closed its Series A from Chinese Tier-1 supplier SORL Auto Parts, without revealing financial details.

• Maxieye said its perception algorithms combining data from a variety of sensors could enable warning and braking based on navigation with merely 1% perception errors from 1 to 50 meters, compared with the 50% error rate achieved by some competitors.
• Soon afterwards, Inceptio revealed a $100 million new war chest from Singapore’s logistics giant GLP, among other investors. The Shanghai-based robotruck startup is pushing forward the mass production of L3 autonomous trucks with partners including Dongfeng Motor, China’s second-biggest automaker, by the end of 2021.

“Innovators and VCs have been through a learning process over the past several years since 2016. We are having a better sense of the fact that there is a very high ceiling to achieve vehicle autonomy—and that the lifecycle either of the technology per se or of the business operation is a lengthy and complex one.”

—Inceptio CEO Julian Ma, speaking to TechNode

Looking ahead, self-driving companies are still among the primary targets for VCs, but the rise of unicorns means more difficulty for early-stage startups to raise capital. “It’s a race with incentive capital over a very long term,” said Ma. As automakers and startups struggle to find nearer-term solutions to monetize their technologies, they’re hoping that regulators will remove the barriers in their path.

As the slowing global economy turns China’s capital winter into a little ice age, it looks like all but a few tech sectors might have to bundle up heavily for the cold.

Normally one of the world’s most active venture capital markets, China’s technology VC investment boom from 2014 to 2015 brought up a new generation of unicorns such as Bytedance, TikTok’s owner, and ride-hailing platform Didi Chuxing.

But last year, that VC boom turned into a bust as investors struggled to deal with a slowing economy and growing financial headwinds, leaving the country’s cash-ravenous startups in a “capital winter.”

At the time, some investors were glad to see a correction to the overheated market. But now some are getting nervous. If capital winter in 2019 was “hard mode,” 2020 has become “hell mode,” said an article in the Chinese venture capital news outlet PE Daily. Between Covid-19 and the escalating US-China feud, VC activities in China’s tech sector nosedived in the first four months of 2020, and private-equity firms raised less money as the exit uncertainties scared investors away.

Investment in China’s tech startups totaled RMB 119.1 billion (around $16.7 billion) in the first quarter of this year, down 31.3% year-on-year, according to business information provider Itjuzi.com. Meanwhile, the number of VC funding deals to tech companies fell to 634 in the quarter from 1,143 a year earlier.

In April, Chinese businesses got back on track as the virus came under control. But VC activities didn’t climb out of the hole. Around 223 VC deals happened in China’s tech-related industries in April, with the disclosed sum of money raised totaling RMB 22.5 billion, according to Chinese venture market research institute Zero2ipo Research.

VCs in the time of corona

The dramatic fall in fundings to tech startups is due to a “more cautious approach“ taken by VC firms amid the coronavirus outbreak, according to Xu Miaocheng, investment vice president at Beijing-based VC firm Unity Venture, in an interview with TechNode last month.

Fear of economic hardship is not the only factor stopping venture capitalists from making deals with startups, said Xu. The national lockdown from late January to the end of March also got in the way of VC firms’ on-the-spot investigations of companies.

Meanwhile, VC firms raised less money from their backers. Chinese VC firms amassed a total of RMB 207.2 billion from limited partners in the first quarter, a year-on-year decrease of 19.8% and a quarter-on-quarter falloff of more than 40%, according to Zero2ipo Research.

The winners

A few companies have gotten funded even in hard times. You may not be surprised to hear that they’re in the strategic fields of semiconductors and biotech.

In the first quarter, companies in the biotech industry closed 41 venture capital funding rounds, raising a total of RMB 11.7 billion. Semiconductor companies, in the meantime, raised RMB 10.2 billion in 22 deals.

State-backed funds, which usually prefer semiconductors and manufacturing industries, became more active this year because of both the post-virus stimulus and Beijing’s push for high-tech self-reliance.

China’s second semiconductor-focused investment fund, which raised RMB 204 billion last year, began to make investments in March. The RMB 2.3 billion first deal of the state-backed “big fund” went to Shanghai-based chip-designing company Unisoc, according to Shanghai Securities News (in Chinese).

China also announced a so-called “new infrastructure” initiative, motivating local governments and enterprises to increase investment in seven key areas, including 5G networks, artificial intelligence, and data centers. Analysts expect the amount of investment from the public and private sectors into new infrastructure projects to reach RMB 1 trillion in 2020.

Fewer exit options

According to Itjuzi, in the first quarter, there were 85 acquisitions in China’s tech VC market, compared with 122 in the same quarter last year. However, more companies exited by listing their shares, powered by increasingly tech-friendly rules on mainland exchanges. The number of initial public offerings of tech companies rose to 66 from 44 a year earlier as early-stage companies came home for exits.

2020 has been a bad year for Chinese tech companies trying to raise funds in the US financial market. Short-sellers released a series of reports accusing some US-listed Chinese companies of committing fraud, including beverage chain Luckin, video-sharing platform IQiyi, and online education firm GSX, denting confidence in fast-growth China stories.

Last week, US President Donald Trump said his administration will study ways to safeguard American investors from the risks of investing in Chinese companies. On May 21, the US Senate passed a bill that could block some Chinese companies from listing shares on American stock exchanges.

Meanwhile, China continues to open its financial markets to tech firms. The country launched STAR Market, a Nasdaq-style high-tech board last year. In late April, China announced it would bring the listing process used by Shanghai’s STAR Market bourse to Shenzhen’s ChiNext startup board, in the country’s step to further mobilize private capital to assist companies hit by the outbreak and accelerating financial market reforms amid increasing scrutiny of Chinese firms in overseas stock markets.

In the first quarter, the Shanghai Stock Exchange and Shenzhen Stock Exchange were the most popular destinations for Chinese tech companies, with 35 and 18 firms going public on the two bourses, respectively, according to Itjuzi. Through the quarter, only four Chinese tech companies listed on Nasdaq, and one on the New York Stock Exchange. By comparison, 24 out of 149 newly listed Chinese tech companies chose Nasdaq last year, according to another Itjuzi report.

In the worst-case scenario, US markets will be shut down to many small Chinese companies. Q1 data shows startups are already moving back from New York to Shanghai and Shenzhen, meaning money flow to China’s tech sector will become less international. Chinese startups may lose appeal to investors looking to exit with “hard currency” in order to bypass China’s strict foreign exchange controls.

Big deals

• Feb 26: Pony.ai, a Guangzhou-based autonomous vehicle startup, raised $400 million from Japanese auto giant Toyota Motor Corporation.
• Mar 5: Beijing-based online housing platform Beike announced it has secured $2.4 billion in a Series D Plus from a consortium led by SoftBank’s Vision Fund and participated in by Tencent, Hillhouse Capital, and Sequoia Capital.
• Mar 31: Online education unicorn Yuanfudao raised $1 billion in a Series G from investors that included Hillhouse Capital, Tencent, and IDG Capital. The deal valued the company at $7.8 billion.
• May 29: Didi Chuxing’s autonomous driving subsidiary raised over $500 million in a fundraising round led by SoftBank’s Vision Fund 2.

Investor talk

Tony Verb, co-founder and managing partner at Greaterbay Ventures & Advisors

Tony Verb is a serial entrepreneur, urban innovator, venture capitalist, and film producer from Hungary, based in Hong Kong. Greaterbay Ventures & Advisors is an integrated investment and consulting firm specializing in modern urban development and smart cities.

What is the impact of the Luckin scandal on China’s venture capital market?

The Luckin coffee thing is a big deal. It’s a pretty big one in terms of the numbers and the distortions, and Luckin coffee was such a celebrated, high-optics example of the fast growth China story. It’s a major shame for the Chinese startup ecosystem that this happened, because people in the West are always questioning how much they can trust and rely on numbers in China.

I don’t think, ultimately, things will change too much. People will be investing in Chinese companies and Chinese IPOs. I think it’s more of a reputational thing, and it’s more likely to hurt the China brands. It is not the case that Chinese companies cannot raise funds anymore. But definitely, investors will be much more cautious and do stricter due diligence, which I think ultimately will be a good thing.

What does stricter due diligence mean for Chinese startups?

Investors can only do as much due diligence as the information they have access to. Ultimately, it might hurt the valuations of startups. Because when investors may take the risk of fraud into consideration, they’ll calculate that risk and it potentially hurts the premiums. From a macro perspective, it won’t change too much. It will just make investors more cautious and keep certain investors away from riskier-looking opportunities.

Chinese companies have been recently facing increasing scrutiny in the US capital markets. Recently the US Senate passed a bill that could delist some Chinese companies from US stock markets. How will this backlash affect China’s private equity market?

I think this means the exit strategy will be different for Chinese companies. I’m based in Hong Kong; it’s definitely not a bad piece of news for the Hong Kong Exchange. And we’ve been seeing the dual-listing trend going on in Hong Kong. Alibaba has listed its shares in Hong Kong, and JD.com is about to list. In the past years, Chinese companies have already been advised not to list in the US because of the risk they are facing right now.

Will Hong Kong be the next destination for Chinese tech startups? What’s Hong Kong’s appeal compared with China’s STAR Market and newly reformed ChiNext startup board?

The appeal of Hong Kong has not changed—it’s an international market for companies and entrepreneurs exiting in hard currency, which is very different from RMB. As long as China still has capital controls, Hong Kong will enjoy benefits over Shenzhen and Shanghai. Especially for Chinese companies that want to be positioned as more international, Hong Kong will always have more PR value and practical value over other exchanges.

Are Chinese companies’ dual-listings in Hong Kong a trend? Why is this happening?

I think this will be absolutely a trend, especially if what President Trump said becomes true. Some of the dual listings happened because companies want to mitigate the potential risk of such steps. Also, since dual-class shares have been allowed on the Hong Kong stock exchange, frankly, there isn’t much reason for not to list in Hong Kong. And it is closer to home.

As I said, as long as there is access to the international financial markets and foreign exchange in Hong Kong, this trend is going to increase. And as long as the risk in the US will be present, this trend will continue.

Shares of Nio decreased 8.2% to $3.83 by market close on Thursday, after the company reported a mixed first quarter with revenues that slumped more than half from a previous quarter, and yet slightly beat analysts’ expectations with a narrowed loss.

However, the company says they expect leapfrog growth in the second quarter with an “all-time high in quarterly deliveries” of up to 158% growth quarter-on-quarter in Q2, or around 10,000 cars. The EV maker claimed it has witnessed “a solid recovery” in sales, with deliveries more than doubled to 3,155 units in April from a month earlier.

The Chinese electric vehicle maker opened 44 new franchise stores over the first three months of this year, expanding its sales network of more than 110 stores with some clubhouses across 76 domestic cities.

During the earnings call on Thursday, founder and CEO William Li said the company is confident in further reducing losses to achieve a vehicle margin of 5% by the end of the second quarter. A gross margin of 3% is also part of the plan, which was -12.2% as of March and has remained negative for five seasons.

“We maintain the guidance of double-digit profit margins by year-end and so far we are confident to achieve it,” Li said, adding its series of cost control measures have made significant improvement in operating efficiency, cost of car parts including battery, and production rate since late last year.

Expanding production

Losing more than RMB 11 billion last year on operations, Tesla’s Chinese rival is still bleeding cash to make cars. According to its annual report released last month, Nio has paid a total of RMB 604.4 million to manufacturing partner JAC Motors to compensate for losses over the past two years.

However, it is now poised to expand its business, revealing plans to increase production capacity by up to one-fourth to 5,000 units every month around September, the company said on Thursday. Its joint plant with JAC has a monthly production capacity of 4,000 cars, but, at the moment, only 3,500 cars “at the most”, according to Li, come off the line each month due to a wide disruption in auto supply chain caused by the Covid-19 outbreak.

“Users have been waiting for deliveries . . . and we will strike a balance between order growth and our expansion plan from a long-term perspective,” said Li, who declined to reveal specific growth numbers over the past 30 days, while adding that a series of marketing events including livestreams gave “strong momentum.”

Hanging on by a thread in the absence of major financing for more than a year, Nio highlighted that it has found a financial lifeline that will “be sufficient to support” its operations in the next twelve months.

Nio vs Tesla

In a months-long market slump now extended by the pandemic, competition has become increasingly intense in the Chinese EV market. What’s more, as Tesla has been ramping up production of locally-made Model 3 sedans, the offline battle is now being extended to the online space.

The US EV giant last month opened its flagship store in Alibaba’s B2C marketplace Tmall in bid to expand its reach online, and soon secured 2,600 orders for test drive from 4 million viewers in a one-hour webcast by a Chinese livestream celebrity.

Nio fought back immediately with the help of Wang Hang, a national TV personality, in a livestream last week that attracted an audience of more than 20 million. More than 5,000 people signed up for a test drive and 320 made car orders, the company claimed.

Facing multiple consumer lawsuits in an alleged plot to offload sales for new models, Tesla is still dominating the Chinese EV market with deliveries of more than 16,000 vehicles in the first quarter, according to figures from China Passenger Car Association. Local EV startups such as Xpeng have also joined the battle. The company last month launched what it claimed to be China’s longest driving range only priced at a third of a Tesla Model S.

Winning with subsidies

Nio expects to close the $1 billion funding from a group of state-owned investment firms by the end of second quarter, with increased policy support from the Chinese government. It last month became the only premium automaker remaining eligible for the government subsidies on EV purchase due to its battery swapping technologies.

EVs priced at RMB 300,000 and above will be disqualified from the purchase incentives effective starting July 22, but those with swappable batteries will not be affected, Beijing says. Li said the company is accelerating the development of power service solutions in line with the new government policies and expecting a release in the second half of this year, without giving further details.

China will expand the construction of charging and swapping infrastructure to boost EV consumption, Miao Wei, minister of Industry and Information Technology told Chinese media during the country’s annual political gathering on Monday. Credit Suisse last month estimated a 33% year-on-year growth of EV charging stations to 48,000 by end of this year, as both public and private sectors are investing heavily to ease the bottleneck for EV uptake.

Correction: An earlier version of this story incorrectly said that more than 400 million viewers watched a webcast about Tesla’s made-in-China Model 3 on Alibaba’s online marketplace. The number of views for the livestream was 4 million.

Meituan Dianping reported smaller than expected losses in the first quarter as a result of the Covid-19 outbreak, sending its share prices up more than 8% in Tuesday trading.

Why it matters: Earnings season offers a closer look at how Chinese tech majors and potentially the country’s wider economy are weathering the aftermath of the pandemic.

• Earnings from the first quarter, the period worst hit by the outbreak, are likely an important gauge to evaluate the scale and degree of the pandemic’s impact on various industries.
• Different sectors have seen varying degrees of exposure. Meituan was more widely exposed due to the heavily offline nature of most of its businesses, while gaming giant Tencent saw a boost in gaming revenue as people turned to online entertainment while stuck at home.

Details: The company’s total Q1 revenues declined 12.6% year on year to RMB 16.8 billion ($2.4 billion) from RMB 19.2 billion in the same period of 2019, according to the company’s earnings report released on Monday.

• Meituan’s revenue beat the average analyst estimate of RMB 16.11 billion in revenue according to Refinitiv IBES data cited by Reuters.
• Q1 losses totaled RMB 1.58 billion, compared with an RMB 1.43 billion loss for the same year-ago period. Prior to Q1, the company had recorded profits for the past three consecutive quarters.
• The food delivery industry was recovering rapidly, company founder Xing Wang said during the earnings call held Monday night, with daily order volume returning to around 75% of the pre-pandemic level by the end of the quarter. Meituan’s core food delivery revenue decreased 11.4% year on year to RMB 9.5 billion in Q1.
• Revenue from the company’s in-store, hotel, and travel segment plummeted 31.1% year on year as consumers limited dining, travel, and other consumption.
• Short-term profitability “is never our priority,” Wang said during the call, adding that the company will allocate resources toward helping merchants resume business, improve their efficiencies, and digitize their operations.
• Meituan said that effects from Covid-19 would continue to weigh on the company’s performance for the rest of 2020. “Factors including the ongoing pandemic precautions, consumers’ insufficient confidence in offline consumption activities and the risk of merchants’ closure would continue to have a potential impact on our business performance,” the company said in a separate statement on Monday.

Context: Meituan faces a renewed challenge from Alibaba in the local lifestyle services segment from Alipay, which has redoubled efforts to attract users.

• During the coronavirus outbreak, Meituan faced mounting complaints from merchants which accused the platform of implementing excessive commission fees and exclusive partnership clauses.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

This week, the guys welcome Coindesk Asia Editor Wolfie Zhao to the pod to discuss the latest progress in China’s development of a digital currency, and also swap stories of the exciting and dynamic gray market in China that has built up around cryptocurrency mining and trading. James and Elliott also look into Pinduoduo’s 20-F and discuss the latest earnings reports from Tencent and JD.

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Guest:

• Wolfie Zhao – @Wolfiezhao

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Editor

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

Tencent reported Wednesday better-than-expected revenue for the first quarter thanks to a surge in gaming incomes.

Why it matters: The Covid-19 outbreak gave a boost to the company’s gaming revenue as people turned to online entertainment while stuck at home.

By the numbers: The company booked RMB 108 billion (around $15.2 billion) in total revenue in the quarter ended March 31, an increase of 26% compared with the same period of time last year, the company said Wednesday.

• Revenue from Tencent’s gaming business rose 31% to RMB 37.3 billion in the quarter, which the company attributed to a surge of daily active users (DAUs) of its flagship games PlayerUnknown’s Battlegrounds Mobile (branded as Peace Elite in China) and Honor of Kings during China’s stay-at-home period in February and March.
• The company’s ad revenue grew 32% year on year in the March quarter to reach RMB 17.7 billion despite a broader slowdown in China’s ad market.
• The company said its revenue from media ads fell 10% from a year ago due to “weak macro-economic conditions and suspension of sports events.”
• Tencent’s fintech and business services segment, which includes products such as Wechat Pay, consumer loan services, and cloud computing, grew to RMB 26.5 billion in the quarter, up 22% from the same quarter a year ago, but decreased 12% from the previous quarter.
• Monthly active users of Wechat, Tencent’s popular instant messaging app, reach 1.2 billion as of the end of March, up 8.2% from a year ago.

Headwinds: However, Tencent has also warned the upsurge could be temporary.

“We expect in-game consumption activities to largely normalize as people return to work, and we see some headwinds for the online advertising industry.”

Context: Shares of Hong Kong-listed Tencent have climbed by 14.4% since the beginning of this year, compared to a 15% decline in the Hong Kong exchange’s Hang Seng index.

• The company is also facing fierce competition from rising star Bytedance. The TikTok-owner is continuing to take ad revenue share from Tencent and has recently made a foray into Tencent’s home turf, the mobile gaming market.

Aswath Damodaran, the “dean of valuation,” says company valuation is the interplay between stories and numbers. Every number that makes up a valuation has a story behind it. Every story about a company has a number attached to it.

The growth story of Pinduoduo has been described as “miraculous.” It’s the fastest-growing e-commerce scale-up in China, cracking the RMB one trillion (about $141 billion) in transactions milestone in less than half the time it took Alibaba and JD. That, alongside a few other numbers, tells the story of an irresistible force shaking up China’s e-commerce landscape. If you took that story to the bank and picked up PDD shares at IPO, you’d be up 150% right now.

PDD’s growth story is on the verge of a plot twist: revenue growth is weaker than it should be. Questions are also mounting over its subsidy scheme. Here’s why it needs to write a new chapter better suited to its current circumstances, before investors get wise and start asking tougher questions.

Houston, we have a monetization problem

Two issues threaten to derail PDD’s tale of incredible growth and disruptive innovation.

The first is revenue growth. PDD’s revenue growth has missed analyst estimates two quarters in a row.

A quick word on PDD’s revenue: 90% comes from “online marketing services”, not commissions from e-commerce transactions. “Online marketing services” include keyword bidding and advertising placements such as banners, links, and logos. 

That means the best gauges of revenue health are the number of merchants on PDD and their online marketing services spend.

Here’s what those figures look like, per PDD’s annual report: Where do your eyes gravitate when you see this table?

I look at the last line. Merchants are spending next to nothing on online marketing services, despite massive increases in GMV. That RMB 5,257 per year works out to just $61 a month. The 64% increase looks impressive, until you realize it comes from such a low base.

But maybe it’s not the average merchant who matters, but the big ones. We’ll assume the Pareto Principle applies to PDD’s online marketing services revenue, whereby 20% of merchants are responsible for 80% of revenues.

Under these assumptions, top merchants might be spending an average of RMB 21,030 on PDD online marketing services. That’ll buy you one-tenth of a front-page banner on Taobao.

Scale vs advertising

PDD’s online marketing services are either cheap-as-chips, or merchants are parking their money elsewhere. On paper, Pinduoduo’s online marketing services, particularly keyword bidding, should follow a tight supply and demand model. Low per merchant revenue suggests that few merchants are keen to shell out .

In the short-term, PDD can divert attention away from low merchant spend by trotting out the hackneyed line that advertising revenue will pick up with increases in platform GMV and user expenditure.

However, there’s plenty of evidence that scale doesn’t automatically translate to big digital advertising bucks.

Given that Pinduoduo is already China’s second-largest e-commerce platform by users and third-largest by GMV, it’s only a matter of time before savvy investors ask why merchants aren’t spending more on digital advertising and preferred product listing slots.  

Subsidy accountability

The second issue that threatens to derail PDD’s growth story relates to subsidy accountability and investor relations.

PDD has never had a CFO. The previous VP of Finance departed in April 2019 (Chinese). The company is on the search for a CFO as it continues a subsidy program that is the longest ongoing subsidy program in China’s e-commerce history.

The subsidy program’s results are worth standalone treatment outside this article, but here’s the CliffsNotes version:

Supporters have argued the subsidies have given PDD more users and engagement. Detractors have argued the short-term spike in platform GMV masks issues with stubbornly low user spend and is too high a price to pay for continued losses.

Two charts show why Pinduoduo desperately needs an adult in the room to run a ruler over the subsidy program.

The first chart looks at GMV growth. It suggests subsidies may have been a stopgap to arrest declining sequential change in trailing 12-month GMV growth, but they didn’t work for long.

The second chart shows PDD’s cash and cash equivalents. This is, in part, a measure of how much free cash PDD has got on hand to commit towards its growth. Its subsidy program has cut that number by half.

Together, these two charts suggest that Pinduoduo may be overpaying to fight gravity. Any future CFO must determine whether it’s in the company’s best interest to continue a subsidy war with Alibaba, JD, and Suning. As I will discuss below, there are uses for cash other than incinerating it to juice metrics.

In addition to needing a CFO, Pinduoduo is walking on a few eggshells. It’s been called “the largest bubble in Chinese internet history” by Guosheng Securities (Chinese). The folks at Guosheng reckon PDD is subsidizing merchants and users, running up losses to keep products on the platform artificially cheap. This, they contend, is what’s driving PDD’s GMV growth. PDD has been suspected of not having the right payment clearance processes in place (in Chinese). All this signals a mounting level of market and regulatory scrutiny as Pinduoduo gets a seat at the big boy table.

A new story for Pinduoduo

If you buy into PDD’s current growth story, this is probably why: the scale of its e-commerce marketplace approaches Alibaba.

The story has worked wonders so far. Pinduoduo added $15 billion in market capitalization between Q1 and Q4 2019. That works out to roughly $100 in market capitalization for each user it added over the same period. Clearly, investors have high expectations for what PDD can do with its scale.

The warning signs covered earlier could sour these expectations. Even with PDD’s strong growth, merchants aren’t spending big on online marketing services, leaving a hole in revenues. And that’s not to mention macroeconomic or pandemic-induced headwinds that may dampen digital advertising spend or consumer confidence.

PDD’s growth story must change, before investors realize GMV growth isn’t attracting more online marketing services revenue.

PDD’s new narrative should center on its war chest.

The company raised $1 billion in March. That follows a similar-sized debt financing round in September 2019. That was after a follow-on equity raise in February 2019, also to the tune of $1 billion. Get the picture? PDD is a money-raising machine.

At present, Pinduoduo has a good chunk of these proceeds (and more)—about $5 billion—stashed away in highly-liquid short-term investments.

This war chest creates an opportunity for Pinduoduo to mold itself into a Tencent-like investor. The latter’s investment record is stellar—of the 800 companies Tencent has invested in, 160 hold unicorn status. Of these, five have generated returns of more than $1 billion, six have generated returns of more than $5 billion, and one company (unnamed) has generated returns of more than $10 billion.

Even if Pinduoduo doesn’t quite match Tencent’s lofty returns, their eye for disruptive commerce models could still be highly lucrative—think GGV Capital, who focus on spotting opportunities that transfer between developed and developing economies.

An appetite for change?

I predict that a combination of business challenges and increased scrutiny will make it challenging for Pinduoduo to keep parroting its previous growth story this year. But I’m not sure how much narrative shift the company is up for.

The company’s success to date and its current share price are powerful forces that could tempt it to stay course. Why rock the boat, especially when you have the mother of all scapegoats—COVID-19—up your sleeve?

We won’t have to wait long to find out. Pinduoduo’s Q1 2020 earnings will be with us very, very soon.

Correction (May 12): An earlier version of this article wrote that Pinduoduo added $15 billion in market capitalization between Q1 and Q4 2020. In fact, this happened between Q1 and Q4 2019.

Correction (May 14): A previous version of a chart in this article incorrectly labelled LTM GTV as Quarterly GMV. It also wrote that Pinduoduo’s CFO stepped down in April 2019. Pinduoduo has never had a CFO, and it was the VP of Finance who stepped down.

It has been one month since short seller Wolfpack Research accused Chinese video-streaming platform Iqiyi of inflating 2019 revenue by up to 40%. Iqiyi has provided no solid evidence to defend itself besides an indignant statement denying all the accusations, but neither has it made a sudden confession like fellow short-seller prey Luckin Coffee.

Investors still seem optimistic about the company, and shares are around where they were before the report. Is this a case of “fool me twice”? Or is there a better case for Iqiyi than there was for the hot drink humbugs?

A glancing blow: The share price of Iqiyi dropped only briefly by up to 11.2% when Wolfpack dropped the report on April 7 morning, and ended the day up 3.2%. In the following month, shares of the company fluctuated within a normal range, and now are at about the same level as before the report was released.

Like Luckin? Shares of Luckin Coffee behaved similarly after the first accusations surfaced in a report made public by short seller Muddy Waters in early February, wobbling without a sharp move. The nosedive came after the company made a surprise confession on April 2 that several employees, including its COO, had fabricated transactions for much of 2019, amounting to an estimated RMB 2.2 billion (around $311 million) in falsified sales. Shares of the company were wiped out by nearly 80% the same day.

What did the short report say? In a report published April 7 and tweeted by Muddy Waters, Wolfpack claims that Iqiyi had inflated its 2019 revenue by between approximately RMB 8 billion to RMB 13 billion, or 27% to 44%.

• The report argues that Iqiyi overstated its user numbers by around 42% to 60% to justify inflated revenue.
• It also claims that Iqiyi has exaggerated its expenses, including prices it pays for content, other assets, and acquisitions “in order to burn off fake cash to hide the fraud from its auditor and investors.”
• The report cited a handful of sources of its own, including a former Iqiyi employee and two Chinese advertising companies. By comparison, the report against Luckin claimed that it had mobilized 92 full-time and 1,418 part-time staff “on the ground” to run surveillance of 620 Luckin stores across the country.
• Wolfpack’s 37-page report, however, often bases its conclusions on hasty generalizations, and sometimes, on flimsy sources and comparisons of apples and oranges.

What did Iqiyi say? Iqiyi said in a statement on April 8 that the report “contains numerous errors, unsubstantiated statements and misleading conclusions and interpretations.” But the company didn’t provide any details to back up its claims.

• One month on, Iqiyi has yet to provide an update on its claims. The company told TechNode Friday it doesn’t have further comment on the report.
• The investor community has expressed their disappointment with the company’s lofty disdain. “If they [the management of Iqiyi] don’t step it up and respond and take things seriously, you kind of wonder, should investors trust them? Why should investors trust them?” said James Hull, analyst and portfolio manager at Hullx Capital, at a TechNode webinar on April 23. 
• “I think they should come back with a very detailed response, and hopefully they are working on that right now,” said Hull.

Problems with the Wolfpack report: Iqiyi may have a reason for its faint response: Wolfpack’s report has serious flaws in evidence and reasoning. It’s sloppy, too, about details, wrongly listing the cities of Guangzhou and Shenzhen among China’s four provincial-level metropolises. Guangzhou and Shenzhen are both in the province of Guangdong.

Over-generalization: In places, Wolfpack goes out on a limb to find figures to debunk. I’m not entirely convinced that Iqiyi ever really made some of the claims Wolfpack tries to disprove.

• Data provided by the two ad companies showed that the Iqiyi’s average mobile daily active users (DAUs) was 24.7 million in China’s 19 tier-1 cities in four days in September 2019. 
• Wolfpack then quoted two promotional reports by the company and a keynote speech by a company executive, extrapolating from them to produce an estimate that Iqiyi has “62.29 million DAUs in China’s tier 1 cities.”
• Wolfpack’s argument that Iqiyi inflated user numbers by 60% is an extrapolation from a single four-day period.
• The two promotional reports are not official filings to the US Securities and Exchange Commission; they’re just Iqiyi’s reports on China’s online movie industry in 2018 and 2019.

Comparison of apples and oranges: 

• Wolfpack quoted a report by market research firm QuestMobile in February as saying that Iqiyi’s average mobile DAUs were 126.2 million during the first 10 days of the 2020 Chinese Lunar New Year, comparing it to an Iqiyi claim of 180 million average DAUs in 2019.
• Wolfpack drew the conclusion that the company “overstates its DAU numbers by at least 42%.”
• But the 180 million figure is for all DAU across platforms, not mobile DAU. Iqiyi only said its average mobile DAUs were 139.9 million in its 2019 annual report, a difference of just under 10%.
• DAUs of video platforms vary from time to time. Video platforms usually saw their DAUs surge when a popular show was on. 

Problems with Iqiyi: Iqiyi certainly has real problems. It is often called China’s Netflix, and to some extent, it is. The company earns more than half of its revenue from paid membership services in the fourth quarter of 2019. However, memberships are not a profitable business yet, while other sources of revenue are in decline.

• Iqiyi said in its 2019 annual report that the company’s average mobile monthly active users (MAUs) were 476 million in the year. The company also said it has around 106 million paying subscribing members as of the end of last year, meaning only 22.3% of its MAUs were paying for its content.
• Revenue brought by the small proportion of paying users is not enough to cover its content expenses. The company earned RMB 3.9 billion from membership services in the fourth quarter. Nonetheless, it spent RMB 5.7 billion on content costs in the same period.
• “Content production in China is kind of a cash incinerator,” said Hull at the Webinar. “I don’t see any significant franchises that Iqiyi can create like Disney can create.”
• The losses from the gap between content cost and subscription revenue are partially made up by advertising revenue—thanks to its large proportion of free users—which accounted for 25% of Iqiyi’s Q4 revenue. 
• The company said its ad revenue was down 15% year on year in the quarter and attributed the drop to a “challenging macroeconomic environment in China.” What the company hasn’t mentioned here is rivalries from short video platforms such as Douyin and Kuaishou. Bytedance, the owner of Douyin, overtook Iqiyi-parent Baidu in 2019 to hold the second-largest share of China’s digital ad market, according to Totem Media.

Conclusion: Iqiyi is not Luckin, but neither is it Netflix. There’s no solid evidence of fraud, and there’s clearly a real business there. But by ordinary business metrics, it could well be overvalued. Iqiyi is not going to zero, but it could be headed for a drop.

Correction: An earlier version of this article, which appeared in TechNode’s Distilled newsletter on May 9, incorrectly stated Iqiyi’s content expenses as RMB 5.7 in the fourth quarter of 2019. The company’s content costs for the quarter were RMB 5.7 billion.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

An episode full of salacious scandals and controversy! In this episode, the guys welcome back Technode’s own Wei Sheng to discuss a recent lawsuit filed against Luckin Coffee in China, and how regulators are cracking down on the company since their admission of fraud. James and Elliott also discuss the controversy brewing between Meituan and their vendors, Pinduoduo’s recent moves, and the scandalous love affair involving some of the biggest names in the Alibaba ecosystem.   

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Links

• Meituan
• Jiang Fan/RUHN scandal
• Pinduoduo

Guest:

• Wei Sheng – @weishengn

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Editor

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

Smartphone sales in China fell 22% in the first quarter as a result of the Covid-19 outbreak, according to a report released Wednesday, with embattled Chinese smartphone maker Huawei the only manufacturer that saw a growth in the quarter.

Why it matters: The coronavirus outbreak has accelerated a downward trend in the world’s largest smartphone market.

• Analysts had forecasted a year-on-year drop of 15% to 20% in China’s Q1 smartphone shipments caused by delayed factory reopenings in February.
• The report by market research firm Counterpoint Research also attributed the decline to “dismal sales” in February. But e-commerce platforms, it said, have helped smartphone vendors to recover some of the losses.

“The drastic fall in Q1 China market was primarily dragged down by the dismal sales of smartphones in February (-35% YoY)… However, during the lockdown period in China, local e-commerce giants such as Alibaba and JD.com managed to sustain efficient business operations and delivery services in major Chinese cities outside of Hubei province. For the strong support from these e-commerce players, China’s smartphone sales appeared less negative than our original expectation.”

—Flora Tang, research analyst at Counterpoint Research

Details: Huawei was the only smartphone vendor in the top five that posted positive year-on-year growth of 6% in the first quarter, according to the report. The Shenzhen-based company retained the top spot in China’s smartphone market with 39% share.

• Sales of Apple’s iPhones fell 1% in the first quarter compared with the same period a year ago. The company sold less than half a million iPhones in China in February. However, sales surged in March, rocketing 406% from February to around 2.5 million units.
• Sales of smartphones compatible with 5G networks grew 120% compared with the previous quarter, the report said, as Chinese carriers step up efforts to build more 5G base stations in urban areas.
• “We expect 5G smartphones to rise to account for over 40% of total smartphone sales in China by the end of 2020,” said Mengmeng Zheng, research analyst at Counterpoint.

Context: Huawei said last week its total revenue for the first quarter grew only 1.4% year on year to RMB 182.2 billion (around $25.7 billion). During the same period, China’s GDP contracted 6.8%.

• In a bid to boost sales, Huawei has teamed up with food delivery platform Meituan, allowing consumers to order its smartphones and tablets and receive them within an hour from flagship stores.
• Observers were not optimistic about China’s smartphone market over the long term. According to a recent report by market research firm Strategy Analytics, 37% of Chinese consumers have delayed plans to upgrade their handsets.

The long-awaited bail-out for cash-strapped Nio from an imminent liquidity crisis is finally arriving. The electric vehicle maker announced Wednesday it will receive a RMB 7 billion cash infusion with final commitments from several state-run capital firms, its biggest ever funding round since listing in the US stock market in Sep. 2018.

Why it matters: Nio now can really go toe-to-toe with Tesla, the absolute leader in the market, and enhance its opportunities for more financing.

• Earlier this year, Nio and the government of Hefei in the eastern Anhui province, its major new backer, revealed plans for a domestic listing on China’s Nasdaq-like tech board by 2025.
• The company later declined to comment, reported Chinese media.

Details: Nio has signed “definitive agreements” for a RMB 7 billion ($990 million) financing project with strategic investors including Hefei City Construction and Investment Holding (Group) Co., Ltd., State Development & Investment Corp., Ltd, and Anhui Provincial Emerging Industry Investment Co., Ltd.

• The investment represents a 24.1% stake of the joint venture, “Nio China.”
• Nio will set up Nio China in the Hefei’s economic and technological development area with the group of strategic investors for the cash injection
• The rest of the shares will be taken by Nio at RMB 4.26 billion, alongside injection of its core business and assets into the new entity, including car development and production, supply chain and recharging service Nio Power, valued at RMB 17.77 billion.
• The company expects to close the deal in the second quarter of this year.
• A combined RMB 4.8 billion as a first installment will be on the account within five working days when it is closed.
• Nio’s stock prices soared 16.2% to $3.9 before trading on Wednesday as of this publication.

Context: Nio and the Hefei government signed a framework agreement for an expected RMB 10 billion funding plan in late February. This came at the same time when the company kicked off production of its third electric SUV model EC6, targeting Tesla Model Y, in its joint plant with JAC Motors in Hefei.

• Tencent-backed Nio had a bumpy road in financing over the past year, making no progress in a RMB 10 billion investment plan revealed in May with E-Town Capital, an investment entity of the Beijing municipal government.
• The company raised a total $435 million via convertible notes from four Asia-based investment funds since the start of this year, alongside two rounds of convertible bond financing totaling $850 million from major backers including Tencent last year.

Short sellers are helping to fight a “China hustle 2.0,” experts said at a TechNode webinar held on Zoom the evening of April 23. 

The recent admission that Luckin Coffee fabricated approximately half of its sales revenue reflects a wider problem, said TechNode contributor Michael Norris. Information asymmetries between tech-focused Chinese companies and US investors makes it easy for dishonest managers to lie to investors, said Norris, who is also Research and Strategy lead at AgencyChina.

Norris spoke alongside other TechNode reporters and contributors on “Thin Ice for US-listed Chinese Tech Companies,” the first speaker event in TechNode’s new monthly “Tech After Hours” webinar series. 

We’ve been here before

Language barriers and sheer distance make it difficult for American investors to check “gravity-defying” corporate reports, Norris said. The original “China hustle” worked because few investors were willing to travel to remote northeast China towns to check on claimed production facilities, Norris said, and bought into stories about the fast-growing economy driving mammoth demand for primary resources.

In the updated version, the ingredients are a little different: the narrative is about the scale of China’s online population, and the companies are online, or online-adjacent. Digital content and advertising figures are especially hard to check for some Chinese players, Norris said—unlike traditional products, obtaining confirmation of content views and ad inventory can be like peering into a black box.

But compared to 2011, Chinese regulators are taking a greater interest in holding Luckin to account, while lawsuits by Chinese investors could set a precedent for domestic accountability for defrauding overseas markets. Key to the change is that Chinese mom-and-pop investors increasingly have skin in the game in US capital markets.

In this murky environment, short sellers can be the only actors able to reveal serious problems at listed companies. But James Hull, analyst and portfolio manager at Hullx Capital and co-host of the China Tech Investor Podcast, recommended broad skepticism over a focus on fraud scares. 

Hull took the example of another recent short report, targeting Baidu-backed online video platform iQiyi, which accused the platform of inflating subscriber revenue. Hull said he had not been able to confirm the allegations through his own sources, but was bearish on the company owing to broader concerns about its business model, calling content production a “cash incinerator.”

“When someone yells fire in a crowded theater,” Hull said,”you have two options: you can get out the door first, or you can look around and check if there’s a real fire.”

But serious problems at Chinese companies are often revealed first in Chinese-language reporting, Norris said. At Luckin, the most important red flag was the tightly networked group of insiders who drove the company to unicorn status without vetting, a story Norris first wrote in English for TechNode before the company’s IPO, based on Chinese media reports.

Tight networks also mean that more companies, including China-listed A shares, will be hurt by Luckin’s fall from grace, said TechNode reporter Emma Lee. Shares of Luckin advertising partner Focus Media have already slid on reports that Luckin overstated ad spend with Focus, renewing negative attention on a company which moved from US to China listing after a Muddy Waters report. Luckin logistics partner SF Logistics and cheesemaker Milk Ground could also be affected, Lee said.

Updated April 24.

After taking a significant hit following the nationwide Covid-19 lockdown, electric vehicle (EV) sales in the world’s biggest market are finally showing signs of recovery.

In February, according to figures from the China Passenger Car Association (CPCA), new energy vehicle (NEV) sales plunged 77% year-on-year to a mere 11,000 vehicles—the lowest since January 2017, when Beijing began phasing out subsidies on electric vehicle purchases.

China’s biggest automakers have been the hardest hit by the virus. In March, the country’s NEV giants—BYD, BAIC, and Geely—saw their deliveries plummet by two-thirds year-on-year. This marked three consecutive months of decline, in which the automakers saw their deliveries fall by more than half.

Covid-19 had effectively crippled China’s mobility industry. In February, as lockdowns to contain the disease spread across China, the need for transportation services disappeared. Taxi and ride-hailing services—usually cash cows for China’s biggest OEMs—came to a standstill due to weak demand and poor revenue, the CPCA wrote in a March report (in Chinese).

BYD, BJEV, and Geely are the largest players in China’s business EV market. Not only do they supply EVs for mobility services in their home cities, but their vehicles are also deployed in countless cities nationwide as local governments electrify their taxi fleets.

Last year, BAIC reportedly received orders for more than 80,000 EVs from various ride-hailing services, while Geely inked a deal with Chengdu to replace the city’s fleet of 10,000 gas-powered taxis with EVs by the end of 2020. But the economic pressures faced by ride-hailing operators during the outbreak resulted in a “significant number” of new car orders being canceled, said Cui Dongshu, secretary-general of CPCA, on April 9. As infection rates climbed, electrification of these fleets became a low priority. Now, as more than 50 cities resume taxi services after a month-long suspension, China’s auto giants remain in the doldrums. 

EV startups taking the lead

However, there have been a few winners. Chinese EV darling Nio and the American carmaker Tesla have bucked the trend.

The US EV giant recently reported record-high first-quarter results but did not disclose figures for sales in China. However, according to figures obtained by CPCA, the company delivered 10,160 EVs in China last month. That figure made up over 20% of the country’s all-electric market, and Tesla trailed BYD—one of China’s biggest automakers—by just a few dozen deliveries.

Late last month, Tesla’s Shanghai Gigafactory achieved weekly production capacity of 3,000 Model 3s, and is poised to offload around 150,000 China-made EVs this year.

Nio, which has faced its share of struggles, also outperformed the country’s biggest manufacturers over the past three months. During the first two months of 2020, combined sales of its flagship ES8 SUV and smaller ES6 only decreased around 12% from a year earlier.

The fall was followed in March by a 12% year-on-year increase in deliveries to 1,533 vehicles. “All signs point to a much faster demand recovery in the premium segment versus mass,” Bernstein analysts led by Robin Zhu wrote in a research note on April 8.

This appears to explain Nio’s relatively strong performance in the crumbling market over the past few months. The company has beaten the giants in the Chinese luxury EV sector. Over the past year, sales of its ES6 came out ahead of Mercedes Benz’s EQC and Audi’s e-tron in China, according to official car registration data.

However, Tesla now poses a bigger threat. The China-made Model 3 and Y could take market share from Nio, preventing the Chinese EV maker from improving earnings, analysts at China’s Everbright Securities said in March.

Nio aims to sell 4,000 cars a month this year, which the company says could “basically support its operational targets,” including a double-digit profit margin in the fourth quarter. Bernstein analysts predict Nio sales will rebound in the second quarter as the pandemic fades. “But the threat of competition from Tesla will only become more pertinent over time,” they said.

Beijing’s bailout

The turnaround for smaller EV makers can be attributed in part to China’s push to revive its flagging EV sector.

Before the coronavirus outbreak, Beijing had already been fighting to keep its electric vehicle industry afloat. The sector had gone into drastic decline since June of last year, when authorities cut subsidies by up to 50% for EV purchases. The hope was that reductions would spur innovation in a sector many believed had become too reliant on government support.

But in early January, China’s industry minister said the country would suspend further subsidy reductions in order to counter the months-long slump. The announcement came 10 days before China’s economy was turned upside down by wide-ranging quarantines and stay-at-home orders to curb the spread of Covid-19. As infection rates soared, authorities shuttered production plants and closed brick-and-mortar stores. Although February is typically a slow month for China’s auto industry, the shutdowns led to an unprecedented decline in deliveries.

Beijing is now leading a sector-wide bailout of its EV industry by backtracking on plans to completely axe subsidies this year as well as lowering barriers to entry for new EV makers. The government hopes to restore growth in the world’s largest market for electrified transportation in an offensive that, at this stage, seems to be working.

As China moves closer to something resembling normalcy following the drastic disruption to the economy, the State Council, China’s cabinet, made a surprise announcement: Subsidies and tax breaks for EV buyers will remain in place until 2022. The government had originally planned to do away with them completely this year.

The communiqué, which came just two and a half months after regulators decided that no further cuts would be implemented in 2020, represent a dramatic shift in direction. After NEV deliveries slid by nearly 80% in February, authorities ultimately decided to take matters into their own hands instead of allowing the industry to stand on its own two feet.

Beyond subsidies

Postponing further subsidy cuts represents just one of the ways that Chinese authorities are attempting to restore the industry to its former glory and rescue automakers that have been deeply affected by the virus.

The country’s notorious production quota system is also reportedly being temporarily relaxed. The system has been used to drive EV production by requiring domestic automakers to follow strict guidelines on reaching EV building goals.

Bigger automakers—which have been some of the hardest hit in the past three months—may now be allowed to focus on better-selling gas-driven cars and to delay new EV launches in order to improve their dwindling cash reserves.

Local governments are also helping to bail out troubled automakers with massive cash injections. Nio has signed a deal with the government of Hefei, the capital of east China’s Anhui province, worth RMB 10 billion (around $1.4 billion). The long-awaited deal is expected to rescue the company from a liquidity crunch after months of no investment.

Meanwhile, the government of Henan province invested RMB 2.02 billion for a 60% stake in Shanghai-based EV maker Reech Auto. Although the company has yet to start producing vehicles, they have struck a deal with state-owned carmaker Changan to produce its vehicles.

Beijing is also making it easier for fledgling automakers to enter the market by lowering barriers to entry. The government will no longer insist that EV makers be capable of product development, according to draft changes to current policies released on April 7 by the Ministry of Industry and Information Technology. The measures had previously been put in place to calm a regulatory bubble that had seen nearly 500 EV companies established throughout China.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts.

In this episode, the guys welcome back Michael Zakkour, Founder and Chief Strategist of 5 New Digital. They discuss how the demands of the COVID-19 pandemic have spurred a leap forward in e-commerce and new retail in both China and the US, and which firms are positioned to benefit. James and Elliott also look at Meituan’s earnings, as well as recent short-report allegations of iQiyi.

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Guest:

• Michael Zakkour – @michaelzakkour

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Editor

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

The world of WeChat marketing is changing. For years, the super app was the alpha and omega of digital marketing in China, with more than a billion monthly active users and a whole industry’s worth of supporting services. But as user growth plateaus and other social media challenge WeChat’s lock on eyeballs, a report finds that WeChat is morphing from ad platform to a marketing Swiss Army Knife for luxury brands. 

In a report issued April 9, the Digital Luxury Group (DLG) and marketing automation specialists JINGdigital wrote that WeChat is evolving from a broadcasting platform into a broader customer relationship system, even as competing apps eat into its ad share.

Along with a user growth and engagement time slowdown, WeChat saw decelerating WeChat community growth in 2019. The growth rate of luxury brands that have over 100,000 followers on their WeChat official accounts slid to 18% in the first half of 2019 from 38% for the same period last year, according to the DLG and JINGDigital report. Those with less than 100,000 followers saw an even steeper slide to 6% in the reporting period from 31% a year ago.

Meanwhile, users are spending more time on short video and livestreaming, helping apps that lead in these formats emerge as the profitable new forms of marketing. Top luxury brands are trying to leverage the new models, marked by Louis Vuitton’s launch of livestreaming sessions on Xiaohongshu. Livestreaming is gaining popularity with the rise of content-driven e-commerce trends, although the format typically features a less premium shopping experience, akin to a traditional TV infomercial.

The shift in user attention to short video and livestreaming is reflected in the migration of ad budgets from brands, a major source of revenue for tech firms. ByteDance, the creator of Douyin, TikTok and news aggregation app Toutiao, has eroded ad revenue share from older tech peers Tencent, Baidu, and Alibaba.

Back on WeChat, brands are adjusting marketing strategies to focus on what the platform is best at. In addition to moving to a full-service model, they’re also shifting to a more focused, closer relationship with customers through WeChat.

Breadth to depth

“I don’t think WeChat official accounts are losing their attraction for users,” said Kai, chairman and partner of JINGdigital at a marketing webinar held on April 9. “There’s over 10 million official accounts as of last year, a slower growth is expected simply because the base is already very large,” he said.

At the same time, brand marketers are developing a more nuanced view of what WeChat official accounts are good for, Kai said. Until two to three years ago, the number of followers was the most important metric for measuring the success of WeChat accounts. The indicators later evolved to include unfollow rates, and the most recent center of focus has become material business impact—sales boost or conversion rates, he said.

“WeChat has slowly moved from being merely an information outlet towards a full service platform. It’s a pool the brands are trying to channel all their customers into,” said Kai.

Pablo Mauron, Partner & Managing Director China at DLG said that customers are moving from broad to deep brand engagement. “If my expectation towards WeChat is to have daily content that entertains me then I may pay attention to a broad number of brands. As my expectation for WeChat evolves to be a platform to speak with customer services, to buy your products, to make an appointment, my list of fifty brands that I found interesting probably shrinks to five. That does not mean they are less interesting—just that my expectations have changed,” he said.

Post-Covid comebacks

Luxury or not, brands are embracing e-commerce to maintain business during the global epidemic.

Even though the situation is getting better in China, traffic and sales at offline shops haven’t totally recovered. Mauron said that brands are trying to reawaken dormant customers as much as reach new ones.  “Most of the brands that expect revenue to pick up in China focused on CRM and re-engaging with clients, rather than just picking up where they have left before and focusing on acquisition,” he said.

Kai shared one interesting observation from a high-end fashion brand during the outbreak. Among the rising online transaction volume, those that come through tractional centralized channels like Tmall came down, but transaction volume being triggered by those client advisers through WeChat, the mini programs for example, are a lot higher as the private traffic on WeChat. “The brands still need to recruit new followers to enrich the funnel of potential customers… and monetizing through WeChat services is the close loop effort,” Kai said.

More posts

As growth slows down, luxury brands are posting content more often to public accounts. WeChat service accounts, favored by marketers, are allowed to push articles into followers’ inbox four times a month. More brands have hit this limit in recent months.

DLG and JINGdigital report shows that 67.52% of luxury brands on WeChat are using all four pushes per month, up from merely 17% in last year.  

Brands surveyed are changing how they use their pushes, with single-article pushes taking the lead over multiple. Over 78.32% of the brands surveyed choose to release a single article with each push, up from 42% last year. While cumulative engagement of multiple-article pushes is usually higher than single-article pushes, it comes at a cost in content production.

Thursday and Friday evening saw the most pushes but Mauron warns that A/B Testing is still the most reliable method to determine appropriate timelot for WeChat pushes.

China’s Huawei reported Tuesday sharply slower revenue growth in the first quarter of 2020 as the company faces both trade restrictions from the US and the global coronavirus outbreak.

Why it matters: The dismal revenue numbers for Q1 provide a picture of how the Covid-19 outbreak has affected China’s electronics manufacturing sector and smartphone market.

• The country reported last week that its first-quarter GDP contracted by 6.8% from a year ago—the first quarterly revenue decline of the country since at least 1992.
• Huawei, however, is expected to gain from China’s massive “new infrastructure” initiative that aims to stimulate the country’s virus-hit economy by pouring trillions of RMB into 5G networks, data centers, and artificial intelligence. 

Read more: China’s ‘new infrastructure’ projects, explained

Details: Huawei’s revenue for the first quarter grew only 1.4% year-on-year to RMB 182.2 billion (around $25.8 billion), according to a company statement published Tuesday.

• The growth rate for Q1 2019 was 39% year-on-year.
• “Huawei’s business is continuing as usual and its overall business results in Q1 2020 are in line with expectations,” said the company in the statement.
• Its net profit margin in the quarter was 7.3%, slightly lower than the 8% margin reported in the same period last year.

Context: Huawei reported 23.2% year-on-year revenue growth in the first half of 2019. This was shown by the company as proof that the US sanctions had a limited impact on its business.

• The Trump administration added Huawei on a trade blacklist in May, barring US companies from exporting to Huawei without government approvals.
• Huawei said in October its revenue growth for the first three quarters of 2019 was 24% year on year.
• The company said earlier this month its revenues for the full year 2019 rose 19.1% to RMB 858.8 billion.
• In an interview with the Wall Street Journal in March, Huawei founder and CEO Ren Zhengfei said the company had lower expectations for its first-quarter revenue but the company’s revenue for the whole year would keep moving ahead.

Beijing is promising big spending on “new infrastructure” amid post-virus stimulus. The government says it will focus on electric vehicle (EV) charging infrastructure, an upgraded electrical grid, artificial intelligence, 5G networks, improved transportation systems, and data centers to drive the economy towards recovery. 

While China has not announced official figures, analysts from China Sinolink Securities, which has produced the most comprehensive and widely cited estimates, expect the total to reach RMB 1 trillion (around $141.3 billion) in 2020. 

Bottom line: Don’t count on high-tech infrastructure to overcome a recession—it’s outweighed by traditional projects. But this investment gusher is accelerating deployment of technologies like connected roads, improved telecommunications networks, and electric vehicle charging stations. 

A familiar remedy: China has typically turned to infrastructure spending in the face of economic troubles. During the 1998 Asian Financial Crisis, the government issued billions of yuan in treasury bonds to increase investment in roads, utilities, railways, and telecommunications. 

• Ten years later, during the 2008 financial crisis, authorities took a similar approach, this time spending trillions of yuan as economies around the world faltered in the aftermath of the crash. 
• “How best to balance the epidemic’s negative impact on the economic downturn? The simplest and most effective way is to develop infrastructure,” Ren Zeping, chief economist of Evergrande Research Institute, wrote in a March 3 article.
• Local governments jump on buzzword policies like “new infrastructure,” with strange results. Some provinces have made implausible claims that they are spending upwards of RMB 3.6 trillion on “new infrastructure” in a single province, Southern Weekly (in Chinese) reports.

Connected roads

Expected investment: RMB 450 billion

Apart from traditional road infrastructure projects, China is looking to build intelligent transport systems that incorporate technologies such as 5G, artificial intelligence, and the Internet of Things. While Beijing has not outlined a budget for connected roads, Sinolink expects (in Chinese) the government to spend nearly RMB 450 billion on supporting technologies.

• Sinolink expects sales in the connected vehicle market to exceed RMB 100 billion this year, up by 70% from last year, given Beijing’s support for its new infrastructure project. 
• The boost in spending comes as the world realizes that commercial-scale fully autonomous vehicles may not be arriving anytime soon, driving the focus from smart cars to smart roads. 
• China is implementing “vehicle to everything” (V2X) systems, intended to allow vehicles, roads, and pedestrians to “talk” to one another, around the country.
• China’s approach relies on cellular networks, dovetailing with the country’s focus on 5G.
• For self-driving cars, the V2X could outsource vision and detection of other road users to the roads themselves, allowing for far greater visibility than if sensors were only put on cars. 
• Using fast 5G connections in the age of 5G, the framework could potentially allow for decision- making to be done centrally, instead of by autonomous vehicles themselves.

Read more: China’s AV edge? It’s the infrastructure

Baidu does well: China’s search giant Baidu has become a major beneficiary of China’s recent drive to increase spending on new infrastructure projects that incorporate these sorts of technologies.

• The company has this year won contracts to build V2X pilot zones in the southwestern Chinese city of Chongqing, central China’s Yanquan, and Hefei, a city in eastern China. 
• As part of these projects, Baidu will install road sensors, edge computing servers, and cloud-based control platforms for V2X and autonomous vehicles. 

A head start in a race to set standards: Early mass implementation of China’s standards for C-V2X could lead to wider adoption around the world, and more money for Chinese companies, as deliberation over opposing systems grows. 

• While China is adopting a cellular approach to smart road infrastructure, places like the EU have developed V2X standards based on Wi-Fi. 
• The debate over which standards to adopt has the telecoms and auto industry divided.  The outcome could decide which continent ends up leading in autonomous driving. 
• EU regulators are backing the WiFi standard, gaining support from automakers such as VW, Toyota, and Renault, as well as chipmaker NXP. 
• Broader adoption of the China-backed cellular standard is of strategic importance for the country, as the world’s biggest 5G equipment makers, including Huawei, are Chinese. If the world goes with wifi, they’ll miss out on lucrative projects.

5G networks

Expected investment: RMB 300 billion

The official cliché is that 5G is the “highway of the information age.” The next-generation wireless network is also seen by state media (in Chinese) as the “bellwether” for the seven key areas of the new infrastructure projects. 

• While Beijing has broad ambitions to be a global 5G leader, the current priority on its agenda is to build more 5G towers. 
• Sinolink expects total investment by local governments and telecoms companies into 5G base stations to reach RMB 300 billion this year.
• China Mobile, the world’s biggest telecoms operator by subscribers, has announced  a plan to install 300,000 5G cell towers this year. 
• The other two, China Unicom and China Telecom, have teamed up to build one 5G network expected to have 250,000 new base stations by the end of September.
• The three carriers’ combined budget for 5G buildout in 2020 is RMB 180.3 billion, according to state-run China News Service.

Some are more equal: While Beijing has repeatedly said that foreign companies have “equal opportunities” to participate in the rollout of its 5G networks, most of the budget will probably go to domestic vendors such as Huawei and ZTE.

• In China Mobile’s latest tender for the buildout of the majority of its targeted 5G base stations this year, Huawei and ZTE were awarded a combined share of 85.9% of the contract, by the number of base stations. 
• Swedish telecoms gear maker Ericsson, the only foreign company granted a tender, took only an 11.4% share. 
• Finnish company Nokia, another major Huawei rival, got none.

EV charging stations

Expected investment: RMB 10 billion

At the heart of the national policies for global leadership in technology, electric vehicles were not left out of the big funding boost. Beijing has announced plans to spend RMB 10 billion on the country’s scattered charging network in a bid to increase EV uptake.

• The National Development and Reform Commission, China’s top economic planner earlier this month revealed an RMB 10 billion initiative to build a combined 600,000 public and private charging piles across the country this year, a 50% increase from the current network. 
• State-owned power utility monopoly State Grid responded immediately with the announcement of an RMB 2.7 billion construction plan of charging facilities in more than 24 provinces and cities this year. So was China Southern Power Grid which pledged to spend RMB 25.1 billion to build 380,000 charging piles over the next four years.
• This marks the first time the central government directly supports a countrywide expansion in charging networks. 
• China poured a staggering more than RMB 400 billion in electric vehicles over the ten years to 2018, according to estimates from think tank Center for Strategic and International Studies and official statistics. However, much of the spending was to subsidize EV purchases, while localities were left to plan on their own for charging buildout.

Much needed: A charging station buildout could help the struggling EV industry draw in customers.

• Inadequate access has been among the top barriers to EV purchase by customers for years, according to McKinsey & Company, which echoes “range anxiety,” a common fear among EV owners of their cars running out of power before finishing the duty.
• China published an ambitious plan in 2015 to build 4.8 million charging piles across the country by 2020, but later downgraded it after falling short. 
• Only 25% of that number are so far built, according to figures from China Electric Vehicle Charging Infrastructure Promotion Alliance (CEVCIPA).
• Now the buildout seems to be back in earnest. Charging and swapping infrastructure are the “key foundation” (our translation) for new energy vehicle development, Xin Guobin, a deputy head of China’s IT Ministry earlier this week.

A tough business: Charging infrastructure could use the help—experts warn that it’s hard for companies to succeed with it in market terms.

• Chinese charging operators have mostly been lossmaking due to single-digit utilization rates, and it was until 2018 that TGood, China’s top charging service platform broke even, wrote Ren Zeping, chief economist at the Evergrande Group in a report (in Chinese) earlier this month.
• It normally takes investors six to ten years to recover costs for charging infrastructure, and therefore investment without careful planning is “not recommended,” Chinese media Caixin reported citing Zhang Fan, director at CEVCIPA.

A big boost to the economy?

Unprecedented support from Beijing could drive a surge of capital flow into technology sectors, however, the impact to shore up the entire economy might be limited.

• Investments on new infrastructure only account for 10% at most in some local government funding plans this year, “not a pillar” to sustain a new round of economic growth, said Liu Shijin, former deputy director at the Development Research Center of the State Council at a conference last month (in Chinese).
• The impact from the renewed focus on new infrastructure should not be overestimated, wrote analysts at investment bank Guotai Junan. Local government spending plans will focus on airports, railways, roads, and urban utilities, they predicted.
• Also, China has long been criticized for significant waste and fraud in government spending, in light of years’ scandal in the country’s electric vehicle industry where local enterprises defrauded government money with various means to cook up figures. “We must choose investment projects well…. and also try to stimulate enthusiasm for private investment,” said Xi Jinping in a Politburo meeting early last month.

Luckin Coffee’s sudden admission of financial fraud has touched off a short-selling bonanza for US-listed Chinese stocks. In the weeks since it admitted to fabricating over half of its claimed revenue, a short-seller firm called Wolfpack Research made similar accusations against iQiyi, while TAL Education has admitted to smaller-scale inflated figures.

In US markets, e-commerce platforms are the heavyweights. Alibaba alone is eight times bigger than runner-up JD, and you don’t see anything but e-commerce until Netease at number four. You might notice the absence of Tencent—it’s listed in Hong Kong.

Share prices of e-commerce and edtech startups have boomed as more people are relying on online services during the Covid-19 pandemic.

Despite short-sellers’ fraud accusations, edtech startup GSX Education has almost doubled its market cap in the last year to $4.6 billion. TAL Education has also seen a 48% increase whilst streaming site Bilibili has gained 65% or $3.6 billion.

E-commerce has made strides, with second and third-tier city focused Pinduoduo leading the pack with a $25 billion increase, or 100% compared to last year. At 18% Alibaba’s growth might not seem so impressive in comparison, but it amounts to a staggering $85 billion.

Tencent Music lost $10 billion in market cap over the past year—a hefty hit, but at 37%, it is far less than Baidu’s eye-watering 41% $24 billion decline.

Of the firms that have released 2019 reports, Netease, JD, and Trip.com led the pack (Alibaba releases its annual reports in May). Leaving aside allegations of inflated revenue, iQiyi was the second-worst in the sample. The only bigger loser was Nio.

TechNode has identified nine US-listed Chinese companies whose stocks have fallen below their original issue price. Of them, 36Kr has fallen the most, losing 76% of its value. It is closely followed by Luckin Coffee with a 74% decrease.

Last week, iQiyi was trading below its $18 IPO price after accusations of fraud. It started a moderate rebound late on April 14.

Even as tensions between the two countries have grown, the US has attracted increasing numbers of Chinese IPOs. In 2018, 42 Chinese companies went public in the US, the most since 2006. The next year, a still-strong 38 firms listed in the US. 

But short selling frenzies may change this trend—a previous wave of Chinese short sales, starting with Muddy Waters’s famed 2010 attack on Orient Paper, helped tank the 2011 IPO count from 22 to five. It took until 2017 for the number to pass 20 again.

Chinese smartphone maker Xiaomi has spent $64.5 million on buying back its shares in the past two days, company filings show.

Why it matters: The buybacks come during a slump in Asian markets, with Hong Kong’s Hang Seng Index falling 1.9% on Wednesday and the Japanese market benchmark Nikkei 225 index down by 1.7%.

• Shares of Xiaomi have climbed 4.6% since Tuesday when the company announced the first buyback.
• The share repurchases are also part of measures taken by the company to boost investor confidence.
• The global smartphone market is expected to be severely hit by the coronavirus outbreak.
• Official data has shown a 36.4% dent in China’s handset sales in the first quarter.

Details: Xiaomi spent HKD 250 million (around $32.3 million) on a share buyback on Wednesday following a similar repurchase of HKD 249.6 million on Tuesday, according to company filings to the Hong Kong bourse.

• The buybacks are part of Xiaomi’s previous plan to repurchase up to HKD 12 billion worth of stock that they announced in September.
• The company said in a statement in September that the plan would “broadcast the company’s confidence in its own business outlook and prospects, and will benefit the company as well as its shareholders.”

Context: Shares of Xiaomi have dropped by nearly 20% since March, canceling out the company’s gain since its HKD 12 billion share repurchase announcement.

• The company said last month its revenue for the fourth quarter rose 27.1% year on year to RMB 56.5 billion (around $8 billion) while it booked net income of RMB 2.3 billion in the period, a year-on-year increase of 26.5%.
• Xiaomi’s cash reserve was RMB 66 billion (around $9.3 billion) as of the end of 2019, according to the company’s annual results released last month.

Watch: We got our hands on Xiaomi’s new super secret phone. Here’s our review.

Handset sales in China surged 241% in March compared with the previous month though were still down 23% from a year earlier, according to official data released Monday.

Why it matters: China’s handset consumption has started to recover from the Covid-19 pandemic but its aftershocks continued to weigh.

• The turnaround is partially because local smartphone makers refreshed their handset lineups in March, including Huawei’s P40 flagship and Xiaomi’s budget phone, the Redmi Note 9 Pro. In total, smartphone makers launched 34 new models in March, accounting for 87.2% of the new handsets launched in the first quarter, according to data released by China’s Ministry of Information Industry and Technology (MIIT).

Details: China’s handset sales in March were 21.8 million units including 6.2 million which are 5G compatible, according to the MIIT.

• Apple’s iPhones saw a surge in demand during the month as sales rose 406% from February to around 2.5 million units, according to MIIT data and TechNode’s calculations.
• Total handset sales in the country dropped 36.4% year on year to 49 million units in the first quarter, according to the data.

Context: Despite the rebound in monthly sales, observers were not optimistic about China’s smartphone market over the long term. According to a recent report by market research firm Strategy Analytics, 37% of Chinese consumers have delayed plans to upgrade their handsets.

• “The supply chain and full ecosystem may be back up to speed as we enter Q2, 2020 but it is clear that a significant portion of consumers are not yet ready to return to previous patterns and purchase intentions. Operators, vendors and retailers will have to work extra hard to persuade hesitant smartphone owners that new devices and new 5G services are worth making an investment in relative to other priorities,” Linda Sui, director of smartphone research at Strategy Analytics, said in the report.
• In a bid to boost sales, Huawei has teamed up with food delivery platform Meituan to allow consumers to order its smartphones and tablets and receive them within an hour from flagship stores.

After Luckin Coffee’s spectacular admission of fraud, more Chinese companies are finding themselves in the crosshairs of regulators and short sellers. Some are trying to get out in front of them.

TAL Education, an online tutoring platform, said last Tuesday that one of their employees may have inflated its sales figures. This has thrown a bombshell into capital markets by setting off the second accounting scandal in a week of US-listed Chinese companies.

The Beijing-based company has seen most of its share gains since the beginning of this year wiped out after the revelation. TAL shares traded down 6.74% to close at $52 per share on Wednesday.

Also on last Tuesday, Iqiyi, a Netflix-like Chinese video platform was accused of overstating sales. Muddy Waters, the short seller behind Luckin’s downfall, tweeted a link to a report by 11-month-old short-seller Wolfpack Research, alleging that iQiyi inflated its 2019 revenue by 27% to 44% and overstated user numbers by 42% to 60%. 

Bottom line: The reputation of Chinese tech firms on US markets is suffering as a fresh wave of accounting wrongdoings linked to Luckin. TAL Education revives investor concerns over corporate malpractice among US-listed Chinese firms. These simmering accounting fraud scandals create more uncertainty for Chinese companies seeking to raise funds on US markets and opportunities for short-sellers. But read each short report on its own merits.

What happened: TAL writes that, based upon a routine internal audit, the company suspects that an employee of the company’s “Light Class” segment may have “conspired with external vendors to inflate sales of the business by forging contracts and other documentations.”

Sales of “Light Class,” an after-school tutoring platform for primary school students, accounted for approximately 3% to 4% of the company’s total estimated revenues for the fiscal year 2020, which ended Feb. 29, 2020.

The company says the employee has been taken into custody by the local police while emphasizing a “zero tolerance” stance towards illegal acts.

Safe Luckin distancing: TAL’s decision to out its own accounting faults is among the signs that Chinese companies are readying themselves for post-Luckin impact. Although the two cases are both accounting fraud, TAL’s revelation appears to concern a smaller figure and could be a voluntary move from the company to minimize negative impact.

• TAL’s revenue for the fiscal year ended February 2020 is expected to be around $3.35 billion to  $3.37 billion. Based on the 3% to 4% estimation made by the company, Light Class accounts for $100 million to $135 million. The company did not say how much of this figure it attributes to fabricated sales.
• By comparison, Luckin’s falsified sales concern around 75% of the total revenues for the first three quarters of 2019, a whopping $310 million. This is a serious fraud accusation the company was probably forced to reveal under the pressure of independent directors.
• TAL likely feared that US regulators will undertake wider-scale investigations of US-listed Chinese firms, Shen Meng, executive chairman of Chanson Capital told local media. The same report observed that TAL’s situation would be worse if the issue had been first discovered by regulators or short-sellers.
• Muddy Waters, the short seller also involved in the Luckin case, also went short on TAL in 2018 for allegedly fabricating data as early as 2016. TAL denied the allegations at that time, but the company’s shares slumped before recovering over the following years.

When it rains it pours: Many of China’s fast-growing companies have come under scrutiny since the beginning of this year.

• February 2020: Short-seller Grizzly Reports releases a report, calling China’s Craigslist 58.com an “accounting house of cards with little economic substance.” The short seller says the company failed to disclose that its biggest acquisition Ganji, which the company acquired for $2.8 billion, has seen revenue plummet by over 95% since the acquisition by 58.com in 2015..
• That same month: Another Grizzly report says GSX, a Chinese e-learning company, has drastically overstated its profitability. GSX founder Chen Xiangdong calls the report “groundless” in an interview with local media.
• April 2020: Wolfpack Research releases a short-selling report accusing iQiyi of exaggerating revenue. iQiyi’s share prices fall 11.2% Tuesday morning before bouncing back to gain 3.2% by market close. 
• Shares of TAL competitor New Oriental Education & Technology Group also fell 2.4% on Wednesday.

Bad company: Luckin-related firms have also seen disturbing share fluctuations since last week.

• Car Inc., a Hong Kong-listed firm that shares the same funding network and whose executives went on to found Luckin, saw its shares halved since Luckin’s Friday announcement. 
• Luckin’s China mainboard-listed partners also come under fire. Shares of Focus Media, a major advertising partner of Luckin, took a hit after the data tracked by CTR Market Research showed that Luckin overstated its advertisement spends. Other companies related to Luckin include logistics partner SF Logistics, and cheesemaker Milk Ground. 

What’s next: China is no stranger to financial irregularities. Previous scandals have resulted in low valuations as well as low market liquidity of US-listed Chinese firms.

• All foreign companies that list in the US must have their financial statements audited by an independent firm. The fraud cases point to a particular weakness in audit procedures and raises questions to the credibility of reports from audit firms.
• Projected tightening regulation and weak investor confidence in the US might push Chinese companies to the Hong Kong stock market, which is already the largest IPO destination in 2019, or even mainland markets.
• Chinese tech giants like JD, Baidu, Trip.com are reportedly planning dual listings on the Hong Kong market, following Alibaba’s blockbuster $13 billion listing in November.

Past performance does not guarantee future results: However, corporate credit should be evaluated based on the individual companies, say analysts from online brokerage platform Tiger Brokers. “There’s no point to short on all US-listed Chinese firms,” the analysts said.

• Just because a bunch of short-sellers have been right doesn’t mean you should believe the next one. Short sellers sometimes place their bets wrong—even Muddy Waters has had whiffs, like its 2012 attack on New Oriental.
• At the same time, Luckin has created an opportunity for small-time shorts to get traction. Wolfpack, the short seller that gained attention after the iQiyi report, was less than one year old. The firm was founded by Dan David, a featured protagonist of finance documentary The China Hussle,  in May 2019. 
• Its previous reports on SMART Global Holdings, a provider of specialty memory, storage and hybrid solutions, communication and network service GTT Communications, and Chinese news aggregation app Qutoutiao, weren’t well received. 

Thousand-point stock market losses, extensive media coverage, and a steady increase of never-before-seen disease. You would be forgiven thinking this was a Hollywood movie. If it were, the next act might involve global calamity and dire, permanent consequences. 

First order impacts

As China enters its fifth month of confirmed cases of the novel coronavirus, the data has slowly begun to paint a more detailed picture of adjustments made by Chinese consumers. WPIC’s data show that purchases related to outdoor activities and recreation decreased significantly, to the tune of 40-50%. 

A reduction in consumption might be skewed by pre-virus efforts by the Chinese government to encourage physical activity, but the reality of a near country-wide dampening of time spent outdoors is notable—and will undoubtedly persist until China returns to full normalcy.

Brick-and-mortar retail has been even more affected by changes in consumer behavior and  caution about the virus. Until recently, the government has encouraged people to remain at home and avoid normal daily interactions. This means, unsurprisingly, a decrease in the foot-traffic that stores depend on. 

For a sector of the economy already under pressure from a paradigm shift towards online shopping, the impact of COVID-19 could deal a devastating blow.

That isn’t to suggest that consumers have altogether refrained from shopping—far from it. Certain everyday products on e-commerce platforms are even seeing modest increases from this time last year (WPIC data).

Why? Because many consumers have begun aggressively shopping online for products that might have been procured at physical storefronts if not for the outbreak. Meicai, a fresh food e-commerce platform, has announced it will recruit an additional 6,000 drivers and 4,000 food sorters from 40 cities across the country to help with the increase in consumer demand.

Medical supplies—such as protective masks, over-the-counter medications, and anything related to the virus—are doing particularly well. We are also seeing the broader “health” and “nutrition” product categories do exceptionally well. Vitamins and nutraceuticals, for example, have seen triple-digit increases in online searches and sales. 

So, while Chinese consumers might have been delaying the purchase of a new pair of running shoes, anything that is perceived to lead to a better chance of maintaining good health and staving off the virus are enjoying a clear boost. 

A similar spike in online activity is also occurring in food sales and fresh produce. On a week by week basis, the number of online searches for fresh produce on Baidu for the first two months of the year was up anywhere from 273% to 2800% YoY (data courtesy of Discripto, WPIC’s big data tool). 

Industrial-sized orders of fresh food (representing cooking ingredients and specialty ingredients for restaurants) completely stopped on e-commerce platforms, but individual and family sized fresh food orders from the platform have surged. This tells us that more and more consumers are turning to e-commerce as a means to stock their pantries and fridges. And as the threat of contagion dissipates, we are asking whether consumers will return to their old habits after experiencing the relative ease and convenience of shopping online?

As an example, data from WPIC shows that orders of instant noodles are up between 71% and 520% YoY (depending on the week). Furthermore, downloads of fresh produce apps like Hema Fresh, Dingdong Produce, JD Home, and others have surged in the App Store to unprecedented heights (entering the top five in some cases). Meicai.com, for instance, was hovering between the #120-#140 spots at the beginning of the year, and reached #4 at the height of the virus.

The auto industry in China is another sector facing massive disruption due to the effects of Covid-19. Aside from the fact that the sector’s supply chain is particularly vulnerable to the virus, Chinese consumers have also cut back on purchases of cars in automobile dealerships. Initially, this could be attributed to government mobility and travel restrictions, which meant no customers in auto malls and dealerships. However, now those same customers are behaving much more conservatively with their money, as a result of the economic uncertainty the virus presents, according to RIWI. Those who were thinking about walking into a dealership and purchasing a car are now having second thoughts.

Eventually, car buying will return, but what does this inability to access a dealership mean in the long run? At a minimum, it provides an opportunity for online shopping for cars (which had previously been one of the last bastions of brick-and-mortar retail) to take off. And as younger generations (Millennials, Gen-Z) grow in their economic power, they’re the very consumers who are going to be more comfortable with purchasing their cars online (as opposed to their parents and grandparents).

It should be noted that an increased proclivity towards online shopping is not only because of Covid-19. Part of the continued rise in the penetration of e-commerce in Chinese tier-3 and tier-4 cities is also driven by: middle-income earners having greater access to online retailers as a repository for their disposable income; rapid advancements in and adoption of mobile shopping; and Chinese retailers investing heavily in omnichannel capabilities. 

These factors have all conspired to create a reality where north of 25% of all retail shopping is done online. These factors were in play long before the first case of the novel coronavirus was diagnosed in Wuhan. 

That said, the situation on the ground in Hubei Province and throughout the PRC appears to have caused an acceleration of the trajectory towards digital sales. The outbreak could very well have prompted someone who might have previously visited a local store for vitamins, cars, and groceries to turn to online resources. And if the e-commerce experience proved fruitful, then there’s nothing stopping that person from continuing to leverage technology to acquire those necessities once more in the future—especially when Chinese platforms invest heavily in building out a pleasant online shopping experience designed to retain users. 

Second order effects

What will be particularly interesting to watch over the coming months and years will be second order effects of Covid-19 across the Chinese consumption spectrum. 

For instance, leading social e-commerce platform Pinduoduo has announced that condoms and birth control are among the most popular items for sale on its platform right now. What is clear is that while people may be having more sex than they were previous to the outbreak, what they evidently are not doing is procreating. People are unsure of how long this virus is going to last and are delaying having children for now. For an economy that relies on growth in population, this will have massive effects. 

One that immediately comes to mind is the child-baby-mother sector in China, which annually accounts for roughly RMB 9.62 billion (as of 2018) and is growing. As a result of the virus, the sector is going to have a massive decline, six-nine months from now. From milk formula to toys, swaddling blankets to nursing bras, producers of those items should prepare for a cold Fall this year. 

In addition to the changes in the apparel sector in China, we expect the real estate sector to take a huge hit. With real estate sales at a standstill this past February, Chinese consumers are going to hold on to their money for the next few months, while the country’s economy fully returns to pre-virus levels.

At the end of February, 34% of Chinese survey respondents, said they could only survive one month on their current cash levels (33% said they could hold out for two months). This means that, just like auto’s, big ticket purchases like housing are going to face significant delays until consumers feel more economically secure.

And then there’s the psychological impact of Covid-19. As Chinese parents and students witness how seemingly disorganized the United States, the UK, and the EU appear to be with their respective Coronavirus responses (especially when compared to that of the PRC), more and more are going to hesitate taking up the opportunity to get educated abroad.

Additionally, with thousands of Chinese students abroad kicked out of their dorms as universities and colleges closed down across the United States, the interruption they’ve experienced to their degrees is only going to make it easier to drop out.

According to RIWI’s survey data, 39% of Chinese respondents already felt that domestic post-secondary education was the best option for them (followed by 26% in the US; 13% in Europe and 9% in Canada). We’re expecting that domestic number to increase over the coming months, as the rest of the world comes to an economic halt, while China gets back online. 

Just as the psychological impacts of the 2008 Financial Crisis permanently altered the behavior of North American and European millennials, so too, do we expect Covid-19 to have permanent effects on the psychology of Chinese parents and children.

Will online retail trend last?

The lasting impacts of Covid-19 on China and the world are yet to be revealed. But recent history offers some insight into what the globe can expect: SARS is one of the most obvious analogues for assessing the novel coronavirus’ impact. SARS also had its genesis in China and proceeded to spread to almost every continent. It infected around 8,000 people and claimed almost 800 lives worldwide, accounting for a 0.5-1.0% blow to the Chinese economy in 2003, and modestly impacting the global economy as a whole. However, its broader economic impact was arguably minimal.  

As of late March, the World Health Organization reported over 3,200 Covid-19 related deaths in China alone, and infections in more than 150 countries worldwide. This outbreak is clearly more widespread and impactful than anything before it. More dire and lasting consequences to China’s economy and its people would therefore be expected. And while the sale of certain products has benefited from adjustments made by Chinese consumers, China’s strategic position in the world economy and as a primary node in the supply chain are much different now than they were during the SARS outbreak. 

Quick and decisive action by Chinese health authorities have attempted to contain the spread of the virus and decrease the number of overall infections. The potential world health crisis posed by Covid-19 is rightfully being taken seriously by both national and international bodies around the world. 

But a return to normalcy in China and around the world is not imminent. When it comes to Chinese consumer habits, normalcy pre-and-post coronavirus will be different. Because if the news that e-commerce is often a more convenient and increasingly common way to shop hadn’t sunk in before the outbreak, those who have turned to the internet to buy products that help them live their lives might well consider it the new normal. 

Venture capital investments into China’s tech sector declined 31.3% year on year in the first quarter as a result of the Covid-19 outbreak hitting its already-shrinking venture market, according to a recent report.

Why it matters: The data indicates China’s venture capitalists are cautious because of the pandemic that is expected to further drag on the country’s economic growth.

• The dramatic decline in venture capital funding to tech companies is due to both a decrease in the number of new startups and a more cautious approach by venture capital (VC) firms amid the coronavirus outbreak, Xu Miaocheng, investment vice president at Beijing-based VC firm Unity Venture, told TechNode.
• “There is already a downturn in the number of new tech startups in the past two years, and the number is further declining in the first quarter because of the coronavirus outbreak. Under those circumstances, VC firms are continuing to stick to the conservative investing strategy that they had in the past one to two years,” (our translation) Xu said.

Details: Investment in China’s so-called new economy sector was RMB 119.1 billion (around $16.8 billion) in the first quarter, compared with RMB 173.6 billion in the same period last year, according to a recent report (in Chinese) by Itjuzi.com.

• The new economy sector includes technology-driven industries such as telecommunications, biotech, and internet-based services, according to the report. 
• The number of VC funding deals to new economy companies also fell to 634 in the quarter from 1,143 in the first quarter last year.
• The biotech sector has attracted the most VC funding with startups raising a total of RMB 11.7 billion in 40 deals.
• The number of newly founded startups in the tech sector was less than 100 in the first quarter, and most of them were founded in January, the report said.

Context: China’s tech startups have been experiencing a period of financing hardship known as a “capital winter”—a significant slowdown in investment and fundraising activities—over the past year.

• VC investment into Chinese companies from in 2019 through mid-November fell to $35.6 billion from $93.4 billion during the same period in 2018, according to a December report by Crunchbase News.

Huawei, the world’s largest maker of telecom equipment by revenue, released earnings for 2019, saying that it missed a target set internally by $12 billion due to a US trade ban. The company also warned of retaliation by the Chinese government.

Why it matters: After a year of “unprecedented challenges” brought by a US ban on sales of its gear to American companies, the marquee Chinese technology company reported significantly slower profit growth and revenues which missed its own goals by a wide margin.

• Despite the May ban, US suppliers continued to deal with Huawei. Eric Xu, Huawei’s chairman, said in an interview that in 2019 the company spent $18.7 billion with US companies. 
• Its annual earnings report also laid out future growth directions besides 5G: smart wearables and internet of things devices, cloud service platforms and artificial intelligence, and billion-dollar programs that support developers to add to its homegrown ecosystem, in an effort to pose a viable alternative to Android and Apple applications.

“The Chinese government will not just stand by and watch Huawei be slaughtered on the chopping board.”

—Eric Xu, Huawei rotating chairman, at a press event

Details: Huawei reported revenues of RMB 858.8 billion ($123 billion) for 2019, an increase of 19.1% year on year and maintaining consistent top line growth compared with a year ago when revenue rose 19.5% on an annual basis.

• It posted net profit of RMB 62.7 billion, slowing to 5.6% growth year on year compared with 25.1% year on year in 2018.
• Xu warned of retaliatory measures by the Chinese government during the annual report press event, saying “Why wouldn’t the Chinese government ban the use of 5G chips or 5G chip-powered base stations, smartphones and other smart devices provided by American companies, for cybersecurity reasons?”
• The carrier business grew 3.8% year on year to RMB 296.7 billion and accounted for 34.5% of the company’s total revenue, falling below 40% for the first time. Last year, it made up 40.8% of total revenue.
• Its consumer business earned RMB 467.3 billion during the year, making up more than half of total revenue (54.4%).
• Xu said that the US sanctions meant that its consumer business lost $10 billion in overseas markets. It remains the fastest growing of Huawei’s three major businesses. 
• Huawei shipped 240 million smartphone units globally, up 16.5% year on year compared with 35% year on year in 2018.

Context: The US banned its companies from doing business with Huawei in May but has since issued temporary licenses to allow Huawei to continue. It extended on March 10 this license again to May 15.

• Huawei said that its RuralStar base station solutions allow more than 40 million people living in remote areas to have mobile internet coverage. That includes a quarter of the smallest wireless carriers in the US on which many of the country’s farmers rely.   
• Huawei’s executives said that Covid-19 has affected its plans to build 5G infrastructure in Europe and China, though domestic construction may ramp up since the outbreak seems to be under control in China. 
• Much of Huawei’s manufacturing is based in southern China which means its supply chains are less affected by the Covid-19 lockdown in Hubei, central China.

Xiaomi said Tuesday it has resumed production capacity by 80% to 90%. However, they also warned that demand for smartphones in overseas markets would be hit by the spread of Covid-19 in March and April.

Why it matters: The Beijing-based smartphone maker has a strong presence in overseas markets such as India and Europe. It is likely to see a drop in sales in the first half of the year as the pandemic spreads around the world.

• The company is selling the idea that smartphones are necessary goods and demand will bounce back after the pandemic is over.
• “Smartphone is becoming a basic necessity and the demand for it should resume soon in India and Europe. We are optimistic about the growth in overseas markets,” Wang Xiang, president of Xiaomi, told reporters and analysts in an earnings call Tuesday.

Read more: Xiaomi wants to be exempted from an e-commerce ban in India

Details: Xiaomi’s production was severely impacted in February when the coronavirus outbreak intensified in China, but its production capacity has been resumed to 80% to 90% of the normal state, according to Wang.

• He said sales of smartphones in the domestic market have also bounced back to 80% to 90%.
• Wang expects that the demand for smartphones in India and Europe will see a drop in March and April, but expects a recovery to begin by May.
• The company said Tuesday its revenue for the fourth quarter rose 27.1% year on year to RMB 56.5 billion (around $8 billion), slightly higher than analysts’ average estimation of RMB 54.9 billion.
• The company booked a net income of RMB 2.3 billion in the period, a year-on-year increase of 26.5%.
• Revenues at Xiaomi’s smartphone business rose 22.8% year on year to RMB 30.8 billion in the quarter.
• The company said it sold 32.6 million smartphones in the quarter, a 30.5% rise compared with the same period of 2018. Its smartphone shipments for last year were 124.6 million units in total.

Context: Market research firm IDC estimated that smartphone sales in China may fall as much as 40% in the first quarter compared with the same period last year.

• Xiaomi’s share price has dropped more than 22% since the beginning of March.
• To avoid sales loss in India, Xiaomi’s biggest overseas market, the company has asked New Delhi to list smartphones as an essential commodity so that they can be sold on e-commerce platforms during the nationwide lockdown in India.

Meituan Dianping reported strong fourth quarter revenue, exceeding analyst consensus expectations, and booked profits for a third consecutive quarter but warned that adverse effects from the Covid-19 outbreak could last the entire year.

Why it matters: Impact to the Chinese local services super app from the Covid-19 outbreak will be “significant” because of the heavily offline nature of most of its business units.

• Like other Chinese tech companies including Alibaba and Tencent, Meituan categorized the Covid-19 hit as “short-term” and expects “long-term” growth as Chinese consumers increasingly shift to online transactions for the service industry.
• Grocery delivery remained one of the bright spots for Meituan during the outbreak.
• The Chinese O2O giant is facing intense competition from rival Alibaba which is reshaping its local lifestyle business around its popular payment app Alipay.

“We welcome the other players to join us to accelerate the digitization and development of this industry which will benefit all participants in the ecosystem.”

—Chen Shaohui, Meituan’s chief financial officer

Details: Meituan’s revenue for Q4 2019 reached RMB 28.2 billion ($3.9 billion), up 42.2% from the same period a year ago, beating the average estimate of RMB 26.7 billion for 12 analysts in a Refinitiv I/B/E/S poll, according to data cited by Reuters. The company reported profits of RMB 1.46 billion in Q4, its third consecutive quarter.

• The company warned that it was expecting negative year-over-year revenue growth and operating losses for the first quarter of 2020 as a result of the pandemic.
• The cost of revenues increased by 20.3% year over year to RMB 18.4 billion for Q4 from RMB15.3 billion in the same period of 2018, primarily due to an increase in food delivery rider costs resulted from rising orders.
• Share prices traded up 6.7% at HK$93.85 as of publication thanks to strong Q4 results and signs of a gradual food delivery recovery in March as indicated by the company in the earnings call.
• The company’s annual transacting user base reached 450.5 million as of end-2019, while the number of annual active merchants increased to 6.2 million. 
• Despite a gradual recovery for its food delivery unit, Meituan’s in-store, hotel, and travel businesses, which together accounted for 22.6% of the company’s revenue in Q4, has been harder hit. Active merchants for in-store services, nearly all of which were shut down in February, are still at a “very low” level as of late March and the company expects consumers will take more time to return to normal, said Chen Shaohui, Meituan’s chief financial officer, during the earnings call.
• When commenting on Alipay’s recent expansion to the local lifestyle market, Chen said the local service digitization market is big and still at a very early stage.

During the epidemic, every residential community, grocery store, and office building across the country has become a data collector, ordered to track the information of every person that entered or left to allow for swift ‘close-contact’ tracing, a key measure to contain the spread of COVID-19. With the epidemic appearing to be in its closing stage, questions are being asked: What will become of this data? Who will be responsible if a citizen’s personal information is leaked due to lax data privacy practices? Some citizens are already feeling the implications as phone scams are one on the rise again.

TechNode’s weekly translation column brings members a look at the conversation about tech in Chinese. This week, Dev Lewis looks at concerns about data privacy as the state collects information about people’s movements to control the virus. TechNode has not independently verified the claims in this article.

Store or delete? Who will be responsible for the aftermath of wide-spread data collection during the pandemic?

Journalist: Jianglin

Southern Metropolis Daily, March 20

‘If I had a mind to, I could leak everyone’s ID numbers’

Yingying (pseudonym) recently was the victim of attempted credit card fraud during which the scammer used her name and ID to identify her.

She reckons information she submitted during the epidemic has been leaked.

Yingying left Beijing for her hometown of Suizhou in Hubei before Chinese New Year, and she has been there the whole time since the outbreak. On March 8, she was added into a WeChat group of 100 “Workers unable to return to Beijing,” set up by her Beijing neighborhood committee to facilitate their eventual return.  On joining the group, everyone was asked to change their group alias to include their “name + phone + community name,” as well as regularly monitor and update their body temperature. A few days later, they were asked to submit detailed personal information, including ID numbers, addresses in Beijing, the names of others staying in the current address, and their relationship. “They say they were instructed by their superiors, but didn’t specify who exactly,” she says.

Individuals messages with this information were sent directly within the group visible to all other members. “If I had a mind to, I could leak the names, ID numbers, mobile phone numbers, and family members of everyone in the group,” she said.

Qingdao netizen Xiaofei (pseudonym) experienced even more bewildering demands for information. To return home, he had to fill out a form issued by his property management company, asking for ethnicity, party member status, education, height, blood type, marital status, WeChat ID, and a lot more. “How is the size of your house, your height, your blood type, your marriage, WeChat, etc. related to epidemic prevention?” asks a very puzzled Xiaofei.

What if they never delete the data?

Assume a simple daily itinerary like this: one leaves one’s apartment complex, takes the bus, enters an office building, goes to the supermarket to buy food, and then a pharmacy to buy medicine.  A person may need to register their personal information five times a day to different collectors—with how the data is treated up to each collector. Due to the real-name registration system that continues to be implemented, supermarkets, and pharmacies have also joined the ranks of “big fish” collecting personal information—and thus become potential sources for major data leaks.

Compared with paper registrations, the alternative is QR code-based registration, which is more convenient and makes it easier to secure data. If a government department is backed this system, it is naturally easier for it to gain trust. However, because the data processing rules are not transparent enough, even the Health Code (Jiankang Ma) launched by the National Government Service Platform, which asks for similar information to provide health verification to resume work, has been questioned by netizens.

What will happen to such sensitive personal information after the epidemic?

Southern Metropolis reporters sifted through the publicly available information and found that only Yunnan Province gave a clear answer.

As early as Feb. 12, Liu Yuewen, the leader of the Big Data Expert Group of the Yunnan Provincial Public Security Department, publicly stated that the information collected during the epidemic was to be used only for epidemic prevention and control, adding that at the end of the epidemic the data will be destroyed and not used for any other purpose.

The staff of a restaurant that Xiao Wei often visits, which uses a paper personal information registry, told this journalist that its data is only used for close contract tracing will not be given to any government department, and it may only be stored for a period of time after the epidemic. Staff in the community where Yingying is located said all the collected data will be archived in the computer of the local committee and submitted to the Municipal Prevention and Control Headquarters. There is a possibility it may not be deleted after the epidemic.

In fact, many people do not know who they are really giving their information to and how it will be processed after the epidemic. Several netizens have questioned the need for maximum data collection, the lack of clarity on data processing, as well as the measures in place to ensure personal information is not leaked.

These concerns are not groundless.

In late January, Southern Metropolis reported that the information of more than 7,000 Hubei returnees was circulated among various relatives, friends, and colleagues by Wechat. People received harassing phone calls and text messages as a result. In a case recently cracked by the Changxing police in Huzhou, Zhejiang, the manager of a fast-food chain restaurant took advantage of his position to collect the ID photos of 61 applicants and employees and deceive a pharmacy’s ID card identification system to purchase 30 rationed masks.

The privacy principles are there—but the key lies in implementation

On Feb. 9, the Central Cyberspace Office issued the “Notice on doing a good job in protecting personal information and using big data to support joint prevention and control” (the “Notice”), ordering that any agency or individual, other than agencies authorized by the State Council’s health departments, shall not use the grounds of epidemic prevention and control or disease prevention to collect and use personal information without the consent of the person whose data is being collected; they shall not use data for other purposes.

However, based on information in the public sphere, Southern Metropolis reporters find that almost no document clearly states how data will be processed after the epidemic.

According to a previous survey initiated by Southern Metropolis, 75.8% of netizens say their personal information was collected during the epidemic. Of them, 70% said they knew the purpose of collecting the information, and just 20% knew how their data would be processed after the outbreak.

Some believe that personal information could be turned to commercial ends by merchants, tied to the sale of financial, insurance or medical supplies, or even fraud. This is exactly what the public is worried about.

“The Notice has actually stated general requirements. All the information collection agencies need to do is implement what the document requires,” says Zuo Xiaodong, deputy director of the China Academy of Information Security, argues that local Prevention and Control Command Departments should mandate comprehensive personal information protection protocols when requesting the collection of information. “Data collection is not a trivial matter”

He said that the problem lies in the fact that many Prevention and Control Departments do not have any awareness about protecting personal information. He believes that in addition to biographic information, data through which a person’s location can be determined should in principle be destroyed. In the event of a leak, the local Prevention and Control Command should share responsibility with the collecting agency.

Fu Weigang, Executive Dean of the Shanghai Institute of Finance and Law, also argues that the most secure way to protect personal information privacy during the epidemic is to destroy it, but says that whether it can be done is another issue. “Logically, whoever requests collection is responsible for the processing.” He suggested that notices should be issued to collection agency requesting them to properly store or destroy the data.

In addition, the relevant departments that oversee personal information protection also have regulatory authority. For example, Zuo Xiaodong said that the market supervision department can supervise merchants: if it is collected through apps, it can be handled by the Internet Information Office and the Ministry of Industry and Information Technology; once a crime is suspected, the public security department will definitely strike.

Zuo said that in epidemic prevention and control, personal information collection lacks established protocols and past experience to follow, which inevitably leads to chaos. In the future, a top-level design should be planned in advance for any major public safety incidents and a coordination mechanism should be established, as well as unified command.

Chinese passenger drone maker Ehang has more than quadrupled its revenues and significantly narrowed its losses in the fourth quarter, the company said Wednesday, but it expects some short-term effects from Covid-19 in 2020.

Why it matters: In Ehang’s first quarterly financial results since listing on Nasdaq in December, the urban air mobility company recorded a surging top line as well as solid progress toward commercialization of its passenger drones.

• The Guangzhou-based startup expects revenues to double in 2020.
• The Covid-19 pandemic will bring some “short-term turbulence” to Ehang and the urban air mobility industry, CEO and co-founder Huazhi Hu said in a statement.

Details: “Absence and late return of front-line workers, delayed fulfillment across our supply chain, and the short-term disruption on some of our customers’ industries such as tourism” as a result of the Covid-19 outbreak might dampen Ehang’s results in 2020, the company said. But it is looking to explore new opportunities such as emergency response and search and rescue.

• Ehang’s Q4 revenue rocketed 421% year on year to RMB 54.7 million ($7.9 million) from RMB 10.4 million.
• Despite these gains, Ehang’s net losses per share were RMB 0.22 ($0.03) or RMB 15.5 million ($2.2 million) in the quarter ended December, 43% lower than the RMB 27.1 million in Q4 2018.
• In 2019, Ehang sold 61 of its Ehang 216 passenger drone, 26 of which were sold in the fourth quarter and 18 in the third quarter, the startup said. In 2018 it sold no drones.

Context: The drone maker’s initial public offering raised $46 million, less than half of its initial goal of $100 million.

• Ehang drones have received flight permission from the US Federal Aviation Authority as well as Norway’s regulator. The drone maker has conducted test flights, including some for passenger drones, in 15 cities in China and Europe. It has signed agreements to cooperate on urban air mobility with Guangzhou in southern China and Linz, the third-largest city in Austria.
• The startup outlined its vision for the future of urban air mobility a month after it went public. Ehang wants to create bus-like infrastructure for drones, compared to the taxi visions of other companies.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

In this episode, the guys welcome professor Jeffrey Towson to discuss the ongoing battle over the digital services sector in China, as Alibaba, Meituan, Baidu, and others fight on a rapidly-changing battlefield. James and Elliott also chat about the “COVID recession,” investment strategies, and go over the quarterly earnings of Tencent, Pinduoduo, and JD. 

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Links:

• Jeff’s Asia Tech Class podcast

Guest:

• Jeffrey Towson – Jefftowson.com

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Editor

• Peter Isachenko

Podcast information:

• iTunes
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• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

This week, our friends at Ran Caijing bring you an eye-opening look into the effects of the Covid-19 outbreak on Chinese tech stocks. Turns out the hardest hits were to US-listed companies, while the few firms listed at home on China’s STAR Board rose during the virus period.

From the data: Chinese tech firms are in a sorry state as stock markets plummet

Li Ming, (edited by A Lun)

Ran Caijing, March 17

Global stock markets have suffered historic losses, with US shares sliding twice in a week. Stock guru Warren Buffett himself has never seen anything like such carnage. 

China’s new and rising sectors have not been spared. Since the coronavirus outbreak began in late January, share prices have dropped by an average of 20%, and as much as 64%. If you invested in China shares in mid January, you have likely lost capital. 

A few examples: Fashion platform Mogujie and social media platform Renren have both dropped 55%, credit provider Qudian has lost 40% of its value, Luckin Coffee 34%, and Meituan 20%. Even Alibaba fell by 15%.

The first wave was the week when the epidemic began to spread in China at the end of January, and the second wave was the week when the epidemic spread overseas in early March. Between the two, we saw share price recovery. In the second wave, US stock markets melted down.

This means Chinese tech stocks listed in the US have been burnt twice by this epidemic.

Stock speculators got cold feet, and non-speculators ran from their chance to witness history on the stock exchange. The only comfort is that against the backdrop of a collective global plunge, Chinese A-shares have performed better than US shares, which have fallen by 20 points; and Hong Kong stocks, which have fallen 17 points. At a drop of just 7 points, they really stand out. 

At this historic juncture, how much of the crash is down to China’s new economy companies themselves? We let the data speak.

• More than 80% of China stocks have fallen 
• For 60% of newly listed companies, shares have dropped below issue price

We have selected the timeframe of Jan. 21 to March 13. Although Wuhan’s lockdown was put in place on Jan. 23, share prices had begun to fall two days earlier on Jan. 21, following epidemiologist Zhong Nanshan’s statement on CCTV that there was “human-to-human transmission” of the new coronavirus. The Hang Seng Index fell 2.8% the next day. Our data comes from eastmoney.com.

Look at US-listed stocks first: Overall, of 100 new economy companies listed in the US, 85% of stocks lost value, 15% rose, and the average fall was 20%. These 20 new economy companies tumbled hardest.

From the data, it can be seen that the stock prices of seven companies have fallen by more than 50%, and their market capitalization has been cut. Among them, 3 are from Internet finance. In addition, the ninth city, Mushroom Street, and Renren.com are all companies that were once brilliant and well-known, but now they have fallen or faded out of the media’s vision, and they are easily affected by the fluctuations in the environment.

Although education has been relatively untouched by the epidemic, there are three education companies on the list, Rise Center, Puxin Education, and Liulishuo for which shares fell more than 39%.

In general terms, the new economy stock market rout has been led by small cap companies valued at under USD 600 million, out of reach of unicorn status.

In Hong Kong, these have been the biggest losers to date:

US shares have fallen far harder than Hong Kong shares. Only six new economy firms listed in Hong Kong have fallen more than 30%, while of the 30 US stocks with the biggest losses, none have lost less than 30%. At the top of the Hong Kong list is 51 Credit Card, losing 40%. Software publisher iDreamSky saw its stock price fall by just 11%.

In Hong Kong, even the giants have not avoided calamity. Apart from Tencent, which fell by only 8 points, Alibaba, Meituan Dianping, and Xiaomi, worth over USD 10 billion, are all in the top 20. Lenovo, Alibaba Pictures, and China Literature also make the list.

Since the start of 2019, a total of 28 new economy companies have listed on US and Hong Kong stock markets. As of last Friday’s closing, 18 (64%) of these have seen their value fall below issue price, and eight have fallen more than 50%. Ruhnn Holding, So Young, and Douyu are among them. 

Online education bucks the trend

Online education was a breakaway success during the outbreak. Of the 20 companies with rising stock prices, six are in the online education industry. 51talk rose 56%, leading the way. NetEase Youdao, Tedu Education, Genshuixue, and New Oriental Online all rose by 20%.

ToB services have also done fairly well since the epidemic began. These include Borqs Technologies, 21Vianet, iClick, and Youzan. Due to specific industry and business characteristics, these companies also did well during the epidemic.

The rise and fall of stock prices has led to some changes in China’s internet landscape. Let’s take a look at the 20 internet companies that now have the highest market capitalization in China.

China’s top five internet companies are now Alibaba, Tencent, Meituan, JD.com, and NetEase. Pinduoduo ranks sixth, while Baidu ranks seventh. Alibaba is China’s top US-listed internet company and Hong Kong-listed internet company, with Alibaba Health also in the top 20 in China.

Finally, let’s take a look at how large domestic listings performed against the background of the outbreak and the meltdown in US stocks.

Because China’s new economy companies are mostly listed on US and Hong Kong stock markets, and A-share [translator: in essence, domestically-listed] companies are few, we can present the data of all A-share companies:

Star Semiconductor, which led the rise among domestic-listed companies, saw its stock price rocket by a factor of 10 during the course of the outbreak. Going public on Feb. 4, it hit 23 daily upper price limits, rising from its list price of RMB 12.74 ($1.8) to RMB 163, before falling back to RMB 142. However, the company’s auditors—Lixin Certified Public Accountants—have already received five letters warning of alleged violations.

Rockchip, second highest on the list, saw its stock price increase by a factor of six since listing on Feb. 7, hitting 14 consecutive daily upper price limits. Bestore went public on Feb. 24, hitting 15 consecutive upper price limits to reach 4.5 times its issue price.

32 companies doubled their value in the period examined. The company losing out most saw its shares fall by only 49.6%. 

Compared with tech companies listed in China, new economy companies listed in the US and Hong Kong lost far more during this time. 

1. New economy companies listed in the US have been hit twice, first from Jan. 21, followed by a correction, and then from Feb. 24. 
2. Hong Kong stocks were also shook from Jan. 21 onwards, but did not experience the same plunge US stocks did.
3. A-shares have followed their own path, and throughout the epidemic to date, have not been hit hard.

US-listed Chinese new economy firms have fallen as much as 60%, while among Hong Kong shares the biggest losses are around 40%. The 20% gap is explained by a plunge in the US stock market. From Feb. 24 to March 13, the S&P 500 fell by 20%.

Investors have seen a major evaporation of their wealth. If you had bought any of the top 30 stocks listed on the worst performing Chinese shares list a few days before the outbreak, you would have lost at least 34% on your investment principal. Even if you had expanded your investment to all China stocks, you would have probably lost at least 20%.

All fundamental company analysis has failed. Everything is down to broader market conditions. And those who chose to increase their positions during the correction between late February and early March have been hit twice.

This roller coaster-like experience has frightened many investors. As one investor said, “The market will definitely rebound, but the key is that you do not know when all this will end.” 

In short, in this wave of plunging prices, China’s new economy companies fell sharply. As for when stock prices will return to pre-epidemic levels, it is still unknown. We should maintain that investing based on company value is not wrong. All bull markets come to an end, but they do return. 

Nio founder William Li predicted that the company will achieve long-awaited per-car profits by mid-year as it reported disappointing earnings for the fourth quarter of 2019 on its Wednesday earnings call.

Nio shares tumbled 16% to $2.43 on Wednesday after it reported a 21% year-on-year decrease in vehicle sales and a worse-than-expected net loss of RMB 2.9 billion ($411.5 million) in its fourth quarter financial results. The electric vehicle maker earned RMB 7.82 billion in full year revenue, also below market expectations of RMB 7.95 billion, while posting another annual loss of RMB 11.3 billion, although that number has more than halved compared with the year prior.

Things look desperate for the high-end electric auto maker, as the disruption to the global auto supply chain brought by the Covid-19 outbreak will probably linger for months. Meanwhile, it is facing tough competition from Tesla, which swept 30% of the country’s EV market last month with a production ramp-up at its Shanghai facility.

To the evident surprise of analysts on the call, Li made big promises to hit a positive vehicle gross margin from the current 9.9% loss and double-digit profit margins by the end of this year. “Gross margin improvement is one of the top objectives for Nio in 2020,” Li said during the call.

With the company’s cash reserves having fallen further according to Q4 filings, it’s on a clock to convince increasingly skeptical investors that its largely unproven business model can be profitable. But a pending deal with the government of Hefei to inject a reported RMB 10 billion could buy it time to fulfill Li’s promises.

Cost efficiency becomes a top priority

Nio’s sales continued to bounce back from the withdrawal of government subsidies which began in June. After reporting a record output of 8,224 cars in Q4, Shanghai-based Nio deserves the title as a top Chinese EV maker with aggregate deliveries of 31,913 cars nationwide over an 18-month period as of last year, the highest in the premium EV segment.

Nio’s sales bottomed out in the second half of last year after July, when it reported its second-lowest monthly sales figure of just 837 cars, an immediate result of the Chinese government cutting EV purchase subsidies by more than half. It later posted double-digit sequential increases in the third and fourth quarters, bucking a broader slowdown in overall car sales.

Investors have long been skeptical about Nio due to its stunning cash burn amid an extended market slump. Losing more than RMB 17.2 billion over three years ending in 2018, the company has only RMB 1.05 billion in cash and equivalents as of December, down from RMB 1.96 billion in Q3. The company said its cash reserves were inadequate for “continuous operation in the next 12 months,” repeating a warning made three months ago.

Li declined to share an annual sales target or to lay out specifics on how the company will achieve double-digit gross profit margin by year-end, but said a monthly output of 4,000 cars would “basically support its operational target.” He added that the company has secured more than 2,100 non-refundable orders over the past month or so, with manufacturing to fully resume after pandemic-related disruptions by the end of April. In late February, Nio also began production of the compact crossover EC6, set for release in September.

Nio cited a variety of favorable trends that support its gross profit goals, including a substantial reduction in cost of production with supply chain optimization, falling battery costs, and economies of scale as it ramps up production. Nio financial chief Feng Wei said a 10% decrease in the cost of raw materials and car parts other than batteries would also be “reasonable” according to the company’s estimates.

Reducing sales and a cutback in marketing will also help cut costs as the company fights to stabilize its cash position. 

Nio is reining in a costly marketing strategy that’s included everything from star-studded press events joined by popular singers to the company’s unique club-style showrooms. Known as “Nio Houses,” the 22 elegant showrooms are mostly located in prime urban locations, with footprints of at least 1,000 square meters. The clubhouses offer cafés, meeting rooms, event spaces, and even daycare centers available only to car owners. 

Li confirmed that “basically” no new Nio Houses will open this year, while the company will continue plans to open around 200 “Nio Spaces,” a type of smaller and more capital-efficient franchise store by the end of this year. Closure of some “less efficient Houses” is also expected, Chinese media reported earlier this year citing Zhu Jiang, vice president of user development.

Another 30% drop in manufacturing costs may also be achievable by year-end, since the company will pay less to manufacturing partner JAC for operating losses, a result of lower-than-anticipated sales volume.

But these cuts are not enough to keep the company afloat without more cash from investors.  Its lifeline is an expected investment from the government of Hefei, the capital of eastern Anhui province. Li confirmed plans to sign the deal by the end of April. The major financing project is “necessary if Nio is to remain solvent,” wrote analysts at Bernstein led by Robin Zhu.

Chinese online travel giant Trip.com warned that its first-quarter revenue could fall by as much as half as a result of travel suspensions brought on by Covid-19 in its fourth quarter financial earnings release.

Why it matters: Trip.com is the latest of a series of technology companies around the globe which have issued stark performance warnings as a result of the coronavirus pandemic.

• While the outbreak has weighed on the financial performance for all Chinese tech majors from Alibaba to Baidu, travel-oriented platforms were among the worst-hit.
• Work resumption since Feb. 10 has driven business travel demand up while leisure travelers remain cautious about trips, though pent-up demand is high.
• China Tourism Academy expects full-year 2020 revenue from tourism to drop by RMB 1.18 trillion (around $167.72 billion)—a 21% decline.

“During the recent novel coronavirus outbreak, we took immediate actions to take care of our customers and partners, while taking on necessary financial impact in the near term. We firmly believe it was the right thing to do for us as the industry leader, and look forward to coming back even stronger after the outbreak is contained.”

—James Liang, Trip.com executive chairman

Details: As a result of the coronavirus outbreak, the company said that it expects net revenue to decrease by approximately 45% to 50% year over year in Q1.

• Trip.com, formerly known as Ctrip, recorded solid Q4 results prior to the warning, with net revenue rising 10% year on year to RMB 8.3 billion to the average analyst estimate of RMB 8.27 billion compiled by Yahoo Finance.
• The company’s business in international markets and China’s lower-tier cities drove growth, the company said, amid fierce competition from rivals like service platform Meituan and Alibaba’s Fliggy online travel platform.
• The company’s shares traded 6.4% lower to close at $21.63 each on Wednesday, falling 43.7% from a six-month peak in mid-January.

Context: Arriving ahead of China’s busiest travel season before the Chinese New Year Festival, the Covid-19 lockdown forced China’s major travel booking platforms, including Trip.com, Qunar, Fliggy, and Mafengwo, to revise policies, offering free rescheduling and cancellation services to users who booked their services before the holiday.

• To help offset revenue losses, Trip.com chairman James Liang and chief executive officer Jane Sun stopped receiving salaries beginning in March to last until the travel industry recovers, while members of senior management will take pay cuts of up to half.
• Trip.com is reportedly looking to raise $1.2 billion loan from domestic and international banks to refinance and fund working capital, according to Bloomberg.

Chinese gaming and entertainment giant Tencent reported fourth quarter revenues which exceeded expectations though profits fell short, and it categorized the hit that Covid-19 has dealt to its businesses as “short-term.”

Why it matters: Tencent renewed its commitment to broadening revenue streams beyond gaming and content to cloud services, digital lifestyle, remote work, and online healthcare in the report.

• It promised “a multi-year investment into short form video,” a territory dominated by Kuaishou and Bytedance’s Douyin.
• A strong performance in mini programs shows it will continue to compete with Alibaba and Meituan on digital lifestyle services.

Details: Tencent reported on Wednesday net income during the fourth quarter of RMB 21.6 billion ($3.1 billion) on revenue of RMB 105.8 billion, which rose 25% year on year. Profits, however, fell below consensus estimates. Cost of revenues increased by 23% compared with the same period a year earlier, a jump which Tencent attributes to higher content, fintech, and channel costs.

• Online game business grew 25% year on year to RMB 30.29 billion, driven by revenue growth in mobile games including “Peacekeeper Elite” and its overseas version, “PUBG Mobile.”
• International gaming revenue more than doubled on an annual basis, accounting for 23% of total gaming revenue. 
• Tencent is gaining traction in enterprise services. Fintech and Business Services revenues jumped 39% year on year to RMB 29.92 billion in Q4.
• Tencent Meeting, a video conferencing tool, exceeded 10 million DAUs within two months of its launch in December. James Mitchell, Tencent’s chief strategic officer said in an earnings call, “we’re very focused on market coverage and we’re not worried about the monetization yet.”
• Mini programs generated more than RMB 800 billion in transaction volume during 2019. Fresh fruit and vegetable providers saw a steep uptake in users. 
• Covid-19 has given Tencent an opportunity to burnish its corporate social responsibility credentials. It touted its health codes as the most used during the period, with 8 billion visits.
• During the outbreak, WeChat Pay’s revenue has taken a hit with Chinese consumers remaining at home and the shuttering of brick-and-mortar business. 

Context: Tencent took part in 108 deals last year, and its president Martin Lau said to a gathering of more than 500 Tencent-backed companies that the company would step up investment overseas and into smart retail and payment platforms.

• The company acknowledged that it faces a tougher macro environment amid uncertainties caused by the trade war between Beijing and Washington.
• During Q4, Bytedance and the NBA spat cut into its advertising revenue.
• Covid-19 has brought many businesses to a halt, but Tencent’s online offerings help it weather the fallout.

Tencent Music Entertainment (TME) announced better-than-expected fourth quarter results on Monday, showing solid growth in paid user subscriptions across its apps.

Why it matters: Tencent Music is one of the few Chinese music-streaming services that have made progress in converting the country’s massive number of online music listeners into paying users.

• There were around 750 million online music users in China in 2019, but those who pay to listen only accounted for an estimated 6.3%, according to a report (in Chinese) by market research firm Iresearch.
• The strong earnings sent Tencent Music’s shares up 3% in US extended trading on Monday. The gain came as many US-listed Chinese tech companies saw their share prices plunge during market open, with e-commerce giant Alibaba down 7.8% and search engine Baidu down 10.6%.

Details: Paid subscribers jumped 47.8% year on year to 39.9 million in the fourth quarter, the company said in a statement on Monday.

• The company booked RMB 7.3 billion (around $1.05 billion) in revenue in the quarter, the company said, beating analyst estimates of $1.01 billion.
• Gross profit increased by 35.5% to RMB 2.49 billion compared with the fourth quarter of 2018.
• Despite the growth in paid subscribers for music streaming, the company’s biggest revenue drivers are social entertainment services, which include livestreams and online karaoke. The segment contributed 70.7% of the company’s Q4 revenue.
• Chief Strategy Officer Tony Yip told analysts during a call on Tuesday morning that the company expects Q1 year-on-year revenue growth from online music services to be lower than the fourth quarter, citing the impact from the Covid-19 outbreak on ad revenue. However, he said that subscription revenue will “accelerate in Q1” on an annual basis.

Context: Tencent Music has stepped up efforts to license music to boost paid subscription users. In December, a consortium led by TME and its parent Tencent Holdings bought 10% of Universal Music Group, the world’s biggest music label.

• It is also facing challenges from emerging social media giant Bytedance, which poached a former TME executive to lead its music-related operations for its short video app Douyin.
• Earlier this month, Bytedance launched a music-streaming app in India and Indonesia.

When life changes, people buy different things. And we are seeing some interesting trends in what people are buying online during the extended quarantined. From private and publicly accessible databases, such as Shengyi Canmou, a platform that tracks sales data from Alibaba’s Tmall, Meituan, and installment sales outlet Fenqile, we are able to take a more granular look at China retail trends by product category, identifying some bright spots.

Sales from these businesses dropped by 52.4%, around RMB 264 billion (about $38 billion). For online sales, Alibaba’s CEO Daniel Zhang said during Alibaba’s earnings call that apparel and consumer electronics were not doing well during the epidemic period.

The Covid-19 outbreak has resembled a very long holiday. Even now, life is not totally back to normal. Local governments extended the Chinese New Year public holiday. What would normally have been an eight-day holiday from Jan. 24 to Jan. 31, became a 10-day holiday which ended Feb. 2. At the same time, cities such as Wuhan were closed down, over 70 airlines suspended or reduced flights to and from China, and local authorities imposed quarantines and advised people not to go to public places. Furthermore, schools extended winter breaks and have moved to remote lessons indefinitely, and companies are encouraging remote work even though the Lunar New Year holiday has officially ended. In short, most of China has been at home for more than a month.

Grocery and cooking products

Across China, people have been cooking at home rather than venturing into public to dine out. In fact, most restaurants had already closed during the Spring Festival holiday, but as the outbreak spread, fears of contagion kept food and beverage venues from reopening, prompting a surge of interest in both recipes and kitchenware from home cooks. For the online group-buying platform Pinduoduo, egg poachers were included in the “Top Ten Best Selling Product List” for the period of Jan. 24 to Feb. 14.

According to Meituan, China’s largest local services platform, online searches for baking goods jumped a hundredfold during the Lunar New Year holiday. Sales of condiments also increased more than eight times during the same period. Instant noodles were the most popular food on Meituan among consumers born after 1990, with a sales volume of 15.9 million. 

Between Jan. 24 and Feb. 2, sales of vegetables on JD.com increased by 215% over the same period a year ago. Data from JD.com also shows that the vegetables category saw the highest sales growth during the Chinese New Year holiday, with sales increasing by nearly 450% compared with the same period in 2019.

Home cleaning products

Likely encouraged by the Chinese government’s advice to clean frequently touched surfaces and objects regularly to prevent the spread of the coronavirus, demand for home cleaning products has surged dramatically. Data from Shengyi Canmou shows that January sales of home cleaning products have jumped 210% year-on-year, as shown below.

Between Jan. 25 and Feb. 23, Tmall’s most popular store by sales value in the home cleaning category was Weica, a Chinese brand that sells antibacterial sprays. Total sales from the Weica Tmall store reached RMB 33.6 million during that period.

Personal care products

The Covid-19 outbreak has also boosted sales of personal hygiene products. On JD.com, 1.8 million bottles of disinfectant solution and 3 million bottles of liquid soap were sold during the Chinese New Year holiday. According to data from Shengyi Canmou, the total sales value of the body wash category increased by 96.9% to RMB 438 million in January 2020, compared to January 2019.

While TMall defines the category includes bath soap, bath cream, shower gel, handwash, bathing herbs, and intimate wash, this growth appears to have been on the medical side of the category. Shengyi Canmou’s data also shows that between Jan. 25 and Feb. 23, total sales from the Tmall flagship store of antibacterial brand Dettol reached RMB 22.7 million, making it the top store by sales in the body wash product category.

Medicine

Before the coronavirus outbreak, most people in China got medicine from public hospitals. According to online pharmaceutical platform Menet, sales revenue (in Chinese) for medicine in China was RMB 171.3 bilion in 2018, of which, RMB 115.4, or 67.4% of total sales revenue, came from public hospitals, while RMB 9.9 billion, or 1% of total sales revenue, came from online stores.

During the Covid-19 epidemic, many people in China have turned to online retailers to buy medicine as more consumers are looking for medicine and supplements which they believe will help them to battle the virus and consumers’ attempts to reduce person-to-person contact have cut down on visits to brick-and-mortar pharmacies. Meituan’s data shows that 200,000 packs of Chinese herbal granules (a remedy for colds) and 200,000 vitamin C supplement products were sold during the 10-day’s Chinese New Year holiday. Many elderly consumers are also choosing to shop via online medical services in order to have medicine delivered directly to their homes. Sales of prescribed drugs for chronic diseases, such as hypertension and diabetes, rose by 237% on Meituan during the holiday. 

Read more: For China’s online medicine, regulation just as important as demand

Electronics

Electronics are a mixed picture. Alibaba, which presented a broadly pessimistic picture of online sales during its recent earnings call, picked out electronics as down during the virus period. But Fenqile, a smaller player that focuses on installment sales and is the only company to release numbers for the category, saw substantially increased sales in its published data.

Schools have been closed indefinitely pending the progress of the coronavirus outbreak, which has led to a flurry of experimentation with online education. Many adults also accessed online education during the prolonged holiday, as well as working remotely rather than returning to their offices. These changing behaviors may have driven sales of computer-related products, such as laptops and keyboards.

According to Fenqile, sales of laptops on its platform increased by 50% between Feb. 6 and 20, compared to the same period last year; sales of peripherals such as earphones, keyboards, and mice also saw an increase of 30–50% during the same period. Fenqile also noted that the average daily sales of used iPads increased by 40% in February compared with January.

Conclusion

Social distancing, voluntary isolation mandated by authorities and increasing awareness on wellness and health during the Covid-19 outbreak have driven demands for products such as grocery and cooking products, handwash and soap, medicine and laptops and computer-related products. At the same, sales of non-essentials from offline retailers are seeing a big drop during the holiday season. For example, Adidas has seen its business activity tumble around 85% since the first day of Lunar New Year. Alibaba said during its most recent earnings call that apparel and consumer electronics were not performing well.

As people’s life in China will eventually move back to normal, we expect demand for groceries and electronics from online stores will gradually move back to pre-virus levels. Offline grocery stores, restaurants, and offline electronics stores offer better selections, experiences not available online, or a chance to try products before buying. At the same time, demand for disinfection and home cleaning products from online stores might remain strong, as we expect many consumers to maintain healthier habits and an interest in wellness beyond the outbreak period, and offline stores have no real advantages in these products.

Chinese e-commerce platform Pinduoudo posted on Wednesday weaker-than-expected revenue for the fourth quarter of 2019, sending the company’s shares 7.0% lower on Wednesday.

Why it matters: This is the second consecutive quarter that the Chinese e-commerce upstart has fallen short of expectations, and fallout from the Covid-19 outbreak is expected to further weigh on first quarter results.

“The disruption caused by the outbreak will have negative impact on our results for the first quarter of 2020, but our expectations for the long run remain unchanged and even more positive.”

—Pinduoduo founder and CEO Colin Huang during the Q4 earnings call

Details: The company’s total revenues nearly doubled to RMB 10.79 billion ($1 billion) in Q4 last year from RMB 5.65 billion the same quarter a year earlier. However, it fell short of average consensus estimates of RMB 10.93 billion compiled by Yahoo Finance.

• The company’s annual gross merchandise volume for the first time exceeded the one trillion RMB mark in 2019, an annual increase of 113%.
• Total cost of revenues for 2019 more than doubled from a year ago to RMB 6.34 billion, which the company attributed to higher costs for cloud services, call center, and merchant support services.
• Net loss narrowed 38% to RMB 1.75 billion in Q4 compared with RMB 2.42 billion in the same quarter of 2018.
• Buyer growth is still robust. Monthly active users (MAU) jumped 76.6% year on year to 481.5 million in Q4, though it falls well short of Alibaba’s 824 million total MAU as of the end of the quarter. 
• The company attributed growth to a better understanding of user needs based on its interactive business model, which constantly adapts to user preferences.
• The platform’s merchant operation and logistics have resumed and are gradually returning to normal.
• CEO Colin Huang was upbeat about the company’s prospects, citing broader adoption of digital services by consumers during the outbreak, which bodes well for the future of e-commerce in China. 

Context: Pinduoduo added a new social shopping feature in February to combat counterfeit protective products such as face masks during the coronavirus outbreak.

• Along with local peers, Pinduoduo rolled out support plans to help merchants get through the economically challenging time.

Chinese online shoppers watching livestream e-commerce sessions purchased more expensive items compared with conventional e-commerce buyers, according to a recent report which assessed data during the Covid-19 outbreak. 

Why it matters: Livestream online buying is becoming an obsession for the quarantined millions in China, where sellers are finding real-time engagement an efficient, effective tool to push products.

• China’s online live-streaming industry boasted a user base of 504 million in 2019, a 10.6% year-on-year increase from a year earlier. It is estimated that the figure will reach 526 million in 2020, data (in Chinese) from Iimedia Research showed.
• For big-ticket purchases like real estate and cars, the offline experience is still essential. However, livestreams may prove useful as a channel to maintain ties with potential buyers.

Details: Buyers who purchase via livestreams on online marketplaces like Taobao and video platforms like Douyin are more likely to purchase higher-ticket items, particularly those priced higher than RMB 1,000, according to a Quest Mobile report published on Tuesday.

• A substantial 60% to 80% of the purchases made through livestreams on video platforms Douyin, Kuaishou, and Bilibili exceeded RMB 200 ($28) during the week of Feb. 17 to 23. More than 40% of these orders fell between RMB 200 to RMB 1,000 and an average between platforms of more than 20% exceeded RMB 1,000 in the same period, the report showed.
• Nearly 50% of orders through Alibaba’s livestreaming unit Taobao Live during the same time period fell between RMB 200 to RMB 1,000, while 37% of the orders exceeded RMB 1,000.
• The conversion rate for Taobao Live users was around 56% during the same week, higher than the 50% seen with regular buyers.
• Livestream business accounted for 28% of Douyin’s total traffic during the same week, up from 24% during the week of Jan. 6 to 12. Meanwhile, the proportion of livestream traffic on Kuaishou has remained stable at around 50% since the beginning of this year.
• Livestream user time spent on major platforms Douyin, Kuaishou, and Bilibili ranged from 120 to 190 minutes per day during the week of Feb. 17 to 23, far longer than 52 to 109 minutes for viewers of other video content.
• Unsurprisingly, Chinese netizens spent far more time in cyberspace while sequestered indoors. The average time spend online per day surged to 446 minutes during the week of Feb 17 to 23 from 367 minutes during Jan. 6 to 12, a 21.5% jump.

Context: Driven by the outbreak, livestreaming is rapidly expanding from standard categories such as cosmetics to new areas like cars, real estate, and more.

• Alibaba doubled down on livestream e-commerce in 2019 when it launched support plans for merchants and livestreamers.

Updated: added chart.

The Covid-19 outbreak suppressed already weak demand in China for electric vehicles and created a scarcity of auto parts which drove a record 77% year-on-year drop in sales for February, according to the latest figures from a Chinese auto industry association.

Why it matters: February marks the eighth consecutive month of decline in the world’s largest EV market since the central government announced a more than 50% cut in purchase subsidies beginning in June.

• Beijing later suspended its plan to completely phase out EV subsidies. Local governments from Guangzhou and Hunan last week announced the resumption of regional-level incentives to boost sales.

Details: Sales of new energy vehicles (NEV) in February plunged 77% compared with the same month a year earlier to around 11,000 units due to the Covid-19 outbreak, the China Passenger Car Association (CPCA) said on Monday.

• The general passenger vehicle market also sank, falling 82% to around 217,900 units last month, according to CPCA, which records sales from manufacturers to dealerships.
• Accordingly, February sales for China’s two biggest EV makers, BYD and BJEV, had more than halved. Warren Buffet-backed BYD sold 2,803 units last month, down by four-fifths compared with the same period a year earlier, while BJEV reported monthly sales of only 1,002 units, around one-third the number sold in February 2019.
• CPCA said automakers in China were digesting the work backlog over the past few days while struggling to resume operations at full capacity given the length of the auto supply chains.
• Only a third of 183 car manufacturing bases in China had reopened as of Feb. 12. An updated number from earlier in March showed the number had shot up to 84%, according to the Ministry of Industry and Information Technology.
• CPCA expects the February drop to be the biggest for the year and that the market is on its way to recovery as China’s workforce begins returning to work, it said in a weekly report released last week, although it cut its forecast for annual auto sales growth from 1% to -8% on Monday.

Context: After the government began slashing purchase subsidies in June, China’s NEV sales decreased in 4.7% year on year in July to 80,000, falling for the first time in more than two years. This was followed by a double-digit drop each month for the seven months since.

• The central government is planning to unveil fresh support measures to boost NEV sales, China’s state-owned Securities Times reported last week without revealing further details, including all-electric cars, plug-in hybrids, and fuel cell vehicles.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

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In this episode, the guys welcome back guest co-host Michael Norris from Agency China. The three of them discuss markets’ sudden and dramatic correction and strategies for coping with such dramatically negative market sentiment. They also go over the recently-reported Q4 earnings reports from Alibaba, Baidu, and iQiyi.

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Chinese online retailer JD.com posted on Monday robust top-line growth for the fourth quarter of 2019, sending shares up 12% by market close.

Why it matters: The Chinese e-commerce giant has gradually been winning back investor confidence. The company’s shares hit a historical low in late 2018 after founder Richard Liu faced rape allegations in the US, compounded by other factors including intensifying competition from rivals like Alibaba and Pinduoduo and a management reshuffle.

• JD.com’s share price more than doubled in 2019, up from a low point of around $20 in the beginning of 2019 to the $43.30 per share value as of market close on Monday.

Details: JD.com’s total net revenue rose 26.6% year on year to RMB 170.7 billion ($24.51 billion) in the December quarter from RMB 134.8 billion the same period a year earlier, the company said in a statement on Monday. The revenue beat the high end of analyst estimates compiled by Yahoo Finance.

• The company’s net income attributable to ordinary shareholders was RMB 3.6 billion in the quarter ended December compared with net losses of RMB 4.8 billion for the same period a year earlier.
• Cost of revenues rose in line with revenue growth, increasing 26.8% year on year to RMB 146.7 billion in Q4, driven by the company’s online direct sales business and third party logistics services.
• Liu attributed strong customer growth to ongoing penetration of lower-tier cities. Annual active customer accounts increased 18.6% to 362.0 million in 2019, while monthly active users on mobile soared 41% compared with December 2018.
• The company expects to record at least a 10% annual growth in net revenue for the first quarter of 2020, down from a 20.9% growth in the same period of last year.
• JD warned that the 2020 Q1 estimate is subject to change in light of uncertainties related to Covid-19.
• Separately, the company’s chief financial officer Sidney Huang will retire in September. JD Retail’s finance chief  Sandy Xu will take over Huang’s role.

Context: Chinese tech firms like JD.com and Alibaba have been contributing to efforts to battle the epidemic by making donations and offering support to small and medium-sized companies.

• JD.com founder Richard Liu began handing over his management roles at a number of JD subsidiaries in 2019.

Search giant Baidu’s profits ballooned in the fourth quarter but the company warned of flagging revenue during the first three months of 2020 as a result of economic uncertainty from the novel coronavirus outbreak.

Why it matters: Baidu has seen mounting competition from companies like Bytedance and Tencent which have been enticing advertisers and Chinese consumers with their short video and social apps.

• Baidu reported its first quarterly loss since listing in 2005 during the first quarter of last year.
• The company’s share price plunged by nearly 30% last year. Gaming and internet giant Netease and lifestyle services company Meituan have surpassed Baidu in market value.

Details: Baidu’s Q4 revenue reached RMB 28.9 billion, up 6% year on year, the company said in a statement on Thursday, beating analysts’ expectations of RMB 28.4 billion.

• However, the search giant forecast a 5% to 13% year-on-year decline in its top-line figures to between RMB 21 billion and RMB 22.9 billion in the first quarter of this year, below the midpoint of analyst estimates.
• “The Coronavirus situation in China is evolving, and business visibility is very limited,” the company said of its guidance.
• The expected plunge casts a shadow on Baidu’s better-than-expected Q4 results. The company’s profits soared to RMB 6.35 billion in the December quarter, up more than 200% year on year.
• Baidu attributed the positive results to growth in its cloud unit, smart devices, and video-streaming business, iQiyi.
• The company continues to face stiff competition, as companies like Bytedance, which runs content aggregator Jinri Toutiao and short video platform Douyin, eat away at the company’s advertising revenue, which fell 2% year on year to RMB 20.8 billion.
• While the short-term impact of the coronavirus on Baidu’s businesses has been negative, a side effect is that people are staying at home more and getting to know the company’s products, Baidu CEO Robin Li said during an earnings call on Friday morning.

Context: A deadly new coronavirus, dubbed Covid-19, has had a profound impact on most businesses in China, as the government prolonged the Lunar New year holiday to prevent the spread of the disease and consumers slash spending.

• Baidu is the latest company to warn the Covid-19 outbreak will affect its business.
• The outbreak doesn’t only affect firms from China. Companies around the world have brought up the possible fallout from the coronavirus during recent earnings calls.

Chinese internet and gaming giant Netease said Thursday its revenue for the fourth quarter increased 9.2% year on year to $2.26 billion, beating analyst estimates.

Why it matters: Netease’s strategy of focusing on its gaming business by spinning off its other units has started to pay off.

• The Hangzhou-based company’s robust performance in recent months has sent its market cap to a $44.7 billion high, outpacing search engine Baidu in August and e-commerce platform Pinduoduo, and making it the fifth-largest publicly traded Chinese technology firm.
• CEO William Ding expressed optimism about the company’s gaming and online education businesses in the first quarter during the call with analysts. Ding said that the self-quarantine across much of China due to Covid-19 meant that more people were playing games, a addition boon during a normally favorable season due to the Spring Festival holiday.

Details: Net revenues for the fourth quarter increased 9.2% year on year to $2.26 billion, the company said in a statement on Thursday, beating analysts’ average estimate of $2.18 billion.

• Revenue growth, however, was significantly lower than the 36% annual growth seen in the same quarter a year earlier. 
• Gross profit in the quarter grew 9% year on year to $1.2 billion. The company said the increase is primarily driven by increased net revenues from its music-streaming service Netease Cloud Music.
• Net revenues from online gaming services, its largest source of revenue, were $1.7 billion, an increase of 5.3% year on year. The growth was primarily driven by increased revenue contribution from mobile games including “Life-After,” “Invincible,” and “Identity V,” the company said.
•  Mobile games accounted for 70.4% of net revenues from online games during the quarter, the company said.
• The company recorded $8.5 billion in revenue in the fiscal year 2019, 15.6% more than that of 2018.

“Our online game services net revenues continued to grow, propelled by the sustained and growing popularity of our existing titles, again demonstrating the longevity of our game franchises… We will continue to bring more masterpieces to both domestic and global players in 2020.”

— Willian Ding, founder and CEO of Netease, in the statement

Context: Netease narrowed its focus on its gaming and entertainment businesses last year by spinning off its e-commerce and online education units.

• Youdao, Netease’s online education unit, went public on the New York Stock Exchange in October, raising more than $100 million.
• The company sold cross-border e-commerce unit Kaola to Chinese e-commerce behemoth Alibaba in September for approximately $2 billion.

Chinese short video apps added nearly 150 million new daily active users (DAU) during the extended Spring Festival holiday compared with a year ago as residents search for ways to stay entertained during the Covid-19 outbreak, according to a recent data analytics report. 

Why it matters: The Covid-19 outbreak is pushing China’s already tech-savvy population further online for entertainment, daily necessities, and even health care. Consumption habits formed during the crisis may be helping to reshape a new normal for Chinese consumers. 

• The impact has varied across industries. Verticals with an offline business core such as online travel and mobility has cratered, while online entertainment and online sales of daily necessities saw a spike. 
• Social media growth is still robust, but was outpaced by short video.

Details: DAU for Chinese short video apps combined reached 574 million during this year’s extended Spring Festival, which ran 10 days from Jan. 24 to Feb. 2. Short video apps had a combined DAU of 426 million during last year’s week-long holiday, and prior to the holiday on Jan. 2 to Jan. 8 this year, the DAU count was 492 million, according to a Quest Mobile report published on Feb 12.

• Douyin led the pack, with DAU surging 39% year on year to 318 million during the holiday, while Kuaishou followed in second place with 227 million DAU, up 35% from the holiday period a year ago. Both of the apps recorded a peak in DAU peak on Jan. 24, the eve of the Spring Festival day, largely driven by red packet cash prizes for various holiday galas.
• The percentage of total time users spent online jumped to 17.3% for short video apps during the 2020 holiday from 11.8% during the holiday last year, a 47% increase.
• Users spent 139 minutes on social media apps during the 2020 holiday period compared with 121 minutes in the holiday period a year earlier, growing 14.9%. Users spent 105 minutes on short video apps during the 2020 holiday compared with 78 minutes during the 2019 holiday period, a 34.6% surge.
• Fresh produce e-commerce platforms nearly doubled DAU to 10.1 million in during this Spring Festival holiday from 5.3 million during the holiday a year ago.
• The gaming sector has seen a surge of engagement with average time spent on mobile games increasing to 159 minutes during this year’s holiday from 113 minutes during Spring Festival 2019.
• Covid-19 concerns sparked user growth of online healthcare apps led by Ping’an Good Doctor and DXY.
• Online travel platforms were hit the hardest, recording a 40% drop in traffic during the holiday.

Context: The shift in user attention to short videos is reflected in the migration of brand ad budgets, a major source of revenue for tech firms.

• Kuaishou handed out RMB 1.1 billion (about $143 million) worth of cash giveaways to users during the Spring Festival Gala, an annual event held by the state-backed China Central Television.

Chinese consumers have made few e-commerce purchases during the first three weeks of China’s battle with Covid-19, Alibaba officials said during its quarterly earnings call on Feb. 13, during which it forecasted slower or negative growth in its China retail and local services businesses during the current quarter as a result. With takeout food orders also affected, the only exception is grocery deliveries.

Alibaba was the first major e-commerce platform to describe trends in online consumption during the virus period. Rivals JD and Pinduoduo are likely facing similar challenges. Their difficulties, however, pale compared to much brick and mortar retail. Nearly all non-essential physical stores are closed indefinitely. 

Millions of people confined to their homes might seem like a golden opportunity for online platforms to make sales. But in fact, the crisis has upended the momentum of China’s digital economy, depressing sales and sending many consumers back to local markets.

Supply-side difficulties

Alibaba said that supply-side disruptions accounted for much of the decline, as many merchants on its online marketplaces were not able to do business under quarantine conditions. Disruptions to logistics further affected business, the company said, observing that “significant numbers of packages were not able to be delivered on time.” Company executives added, “The demand is there, but the means of production have been affected.”

However, customers were not interested in buying nonessentials such as clothing and electronics during the height of the epidemic, the company said, normally among the top-selling categories on its marketplaces. It predicted a slow return to normal business, noting that many workers across China are still in their hometowns and face difficulty returning. 

E-commerce marketplaces have been dysfunctional during the quarantine period. Many listed products warn halfway through a product description that the seller will not ship orders for weeks, while orders that are shipped can get stuck in logistics company warehouses. A bag of coffee bought on Tmall on Feb. 6 has spent eight days in two Hangzhou warehouses, according to the app’s tracking information. 

Deliveries have had to contend not only with short-staffed companies, but a patchwork of quarantine regulations and checkpoints which greatly limit inter-city travel. Many cities, towns, and villages have declared themselves closed to outsiders. E-commerce platform Pinduoduo allowed merchants to delay delivery of goods ordered as early as Jan. 17 until Feb. 12, a three-week wait that reflects the limits of China’s logistics sector during this crisis.

In a statement, Alibaba competitor JD claimed that its in-house logistics network gave it a competitive advantage in fulfilling orders, but conceded that “delays are expected.” 

Consumers stock up on basics

What people have been buying are household necessities. Both data and on the ground observations suggest that consumers stuck at home have been doing a lot more cooking, and buying weeks’ worth of vegetables and other household supplies at once. Online services appear to have won some of this traffic, but brick and mortar vegetable markets have also played a major role. 

Both Alibaba and JD described robust growth in orders for groceries and other essentials compared with the same holiday period last year. JD said that orders for food products on its platform grew 154% compared with a similar period following last Chinese New Year (which follows the lunar calendar), with rice and wheat products selling a respective 5.4 and 4.7 times more. 

Alibaba CEO Daniel Zhang said on the call that the crisis is bringing in new customers for food and household supplies. “We’re seeing this epidemic cause many newly-online users in lower-tier cities and less-developed cities to begin to purchase daily necessities, which is a very good sign for the future,” he said.

Zhang described “fairly rapid growth” in these categories, noting that part of the growth was driven by deliveries from nearby shops. New retail grocery market Hema, also known as Freshippo, he said, saw increases in orders but also had difficulty making deliveries because of staffing issues. 

However, the crisis has also demonstrated the resilience and popularity of local vegetable markets. TechNode reporters in smaller cities saw people rush to these markets during the early days of quarantine to stock up. Even as quarantine measures intensified and people avoided, or were banned from, leaving their homes, they continued to buy vegetables from these markets. 

In Zhangjiagang, a modestly sized city of 1.3 million in eastern Jiangsu province, local merchants organized deliveries using WeChat groups populated by residents of neighborhoods and housing compounds. A vegetable seller at the Zhangjiagang East Wet Market told TechNode that her retail business was better than usual, although the gains were offset by the loss of restaurant trade. “I think now is the time we can really serve the people,” said another. While Shanghai has ordered most stores to remain closed, vegetable markets and supermarkets are exempt, along with pharmacies and other medical services. 

In a small city in eastern Zhejiang province where local authorities banned residents from leaving their homes, they made an exception for visits to the vegetable markets. Initially, the system relied on paper ration tickets, but on Feb. 13 these were replaced with a WeChat mini app. Residents are required to apply for approval to go outside based on a risk factors survey and to scan a QR code to report each trip to the market.

A Meituan delivery driver in the Zhangjiagang market told TechNode that he was seeing fewer overall orders than usual during the period despite the uptick in grocery deliveries.

Perfect storm

E-commerce platforms face a larger challenge than getting parcels through: keeping their merchants in business.

The timing of the quarantine measures maximized their effect on the economy: beginning as China celebrated its most important annual holiday, they caught many businesses while they were closed for a long holiday. In US terms, it’s as though Christmas Day lasted through the middle of January—only the bare minimum of businesses are open.

While e-commerce platforms have experienced disruptions, many of the merchants who populate online marketplaces have been completely closed for weeks. Without revenue, many small merchants are struggling to survive. In the face of merchant mass extinction, e-commerce marketplaces will not be able to recover supply for a long time.

They appear to be prioritizing medium-term measures to help merchants stay afloat, including subsidized loans.

E-commerce has taken a big hit from the crisis, but it could still be a long-term winner. The operational difficulties of the past few weeks give them a head start over brick and mortar rivals, who are in most cases still closed. If e-commerce can recover faster—or if an extended crisis drives alternatives into bankruptcy—they could have a clear field for rapid growth ahead.

China reported a double-digit decrease in electric vehicle (EV) sales for a sixth consecutive month in January, and warned that the Covid-19 outbreak was weighing on automakers already under significant pressure.

Why it matters: Already struggling amid a broader downturn which began in late 2018, EV companies in China are more vulnerable than traditional automakers during the crisis surrounding Covid-19, a flu-like virus which has sickened 55,649 and killed more than 1,300 in China as of writing.

Details: January sales of new energy vehicle (NEVs), which include all-electric and plug-in hybrid cars, plunged 54.4% from a year earlier to 44,000 units, the China Association of Automobile Manufacturers (CAAM) said Thursday (in Chinese).

• NEV sales dropped more sharply compared with overall auto sales in China, which fell 18% year on year to 1.94 million during the same period.
• The association mainly attributed the sales decline to the week-long Spring Festival holiday, which began earlier than usual this year. The number of working days in January was five days fewer than the last year.
• The outbreak had a limited impact on the market in January as Spring Festival historically produces a lull in sales, though CAAM warned that it would have a bigger near-term effect on the country’s auto industry than the 2003 SARS (Severe Acute Respiratory Syndrome) outbreak.
• Experts worry that reduced individual income will restrain both trade-in and new car sales across the country in the coming months, since discretionary spending on tourism, dining, and other consumption has cratered.
• The outbreak has also brought the entire auto supply chain to a halt, triggering widespread part shortages, as local manufacturers were forced to extend downtime during an extended holiday.
• Only 59 car manufacturing facilities, less than a third of the industry total, resumed production as of Wednesday, CAAM said.
• Figures from China Passenger Car Association (CPCA) showed a more than 50% year-on-year drop in NEV sales last month, and February is expected to fall 30%.
• CPCA expects a significant decline in EV demand from both individuals and businesses in February, compounded by low oil prices.
• The EV enterprise sales may also get hit by a shrinking demand in ride hailing, as people mostly stay indoors for weeks as part of government control measures. EVs are popular in ride-hailing fleets.

Context: China reported an annual decline in NEV sales for the first time in 2019 to 1.2 million units, declining 4% from the previous year.

• NEV sales sank by more than 40% year on year for two months in October and November. The decline narrowed to 27.4% in December.

China NEV sales decline extends in November

Bytedance, creator of viral short video apps Douyin and TikTok as well as news aggregation app Toutiao, is continuing to take ad revenue share from China’s top tech firms Baidu, Alibaba, and Tencent, according to a report from Chinese social media agency Totem Media.

Why it matters: Chinese tech giants hold a significant chunk of online traffic in China as well as its marketing landscape, which has become increasingly digital in recent years, particularly social media. The shift in user attention to short videos is reflected in the migration of ad budgets from brands, a major source of revenue for tech firms.

• Digital ad spending in China is expected to rise 22% year on year in 2019 to $79.82 billion and continue to expand at a double digit growth rate until 2022, according to data from eMarketer.
• China is overwhelmingly biased toward digital ad spending. Depending on the source and structure of calculations, eMarketer estimates digital represents 60% to 70% of all advertising spend in China, as of 2019 to 2020. The global average was around 50% in 2019.

Details: Baidu, Alibaba, Tencent, and Bytedance (BATB) are among China’s most valuable tech companies and account for a combined 86% of all digital advertising revenue in the country, according to Totem Media.

• The wide range of assets means that BATB’s dominance in China’s online marketing industry to continue for some time. “There is [no] next big player looming on the horizon to unseat these big four players,” the report said.
• Alibaba, with its dominance in e-commerce in China, remains a clear leader in overall share of advertising spend for China, but its hold continues to narrow.
• Bytedance has seen phenomenal growth with its share of ad spend nearly doubling from 2018 to 2019 (estimated) after more than doubling from 2017 to 2018. It is taking share from all of its BATB peers.
• Alibaba and Tencent are targeting e-commerce revenues as the primary long-term goal. By contrast, Bytedance is much more focused on ad revenue and holding audience interest with entertainment, news, and content.
• Tencent’s ubiquitous messaging app, WeChat, may be hitting a ceiling as some data show a decline in user base and user time spent statistics. Official brand accounts are making little headway in gaining users and attention, cannibalized by WeChat’s own mini app offerings and short video platforms.
• Concentrated traffic is pushing costs up. Brands looking to reduce costs and improve audience targeting are increasingly “defecting” to smaller, more niche, vertical channels such as entertainment platform Bilibili and audio streaming platform Ximalaya FM. This dynamic opens up opportunities for services on these platforms.

Context: Tech giants like Tencent and Alibaba have been launching new products and features in an effort to fend off competition from Bytedance.

• ByteDance has overtaken search giant Baidu to hold the second-largest share of China’s digital ad market during the first half of 2019, according to CNBC.
• Tencent invested $1.5 billion to Douyin rival Kuaishou in August 2019.
• Tencent’s low-profile CEO and chairman, Pony Ma, was involved in a spat with Bytedance founder Zhang Yiming in 2018 after Zhang posted news that Douyin topped the most-downloaded chat app rankings.

Bytedance overtakes Baidu, Tencent in H1 digital ad revenue

A version of this post by Thomas Graziani first appeared on WalktheChat, which specializes in helping foreign organizations access the Chinese market through WeChat, the largest social network on the mainland.

Fear over the spread of a new coronavirus has led millions of Chinese people to remain at home, shortly after the end of Chinese lunar new year.

The situation is putting a strain on most retail, restaurants, services, tourism industry, and other offline businesses. But is everyone negatively impacted by the virus outbreak?

A blessing for the gaming industry

As people in China are now confined at home, one industry has been benefiting: gaming.

The Baidu Index (reflecting search volume) for the word “gaming” (youxi) has reached an all-time high since the beginning of the crisis. Searched volume peaked 60% above the previous weekly maximum.

Top-grossing apps include Tencent’s “Game for Peace” and “Honor of Kings.”

Some games got special attention due to the recent health crisis. The game “Plague Inc.” which lets players “spread and evolve a deadly plague to bring about the end of the human race” was one of the winners. Although this game might seem morbid and insensitive in current times, it has skyrocketed to the top of the Chinese App Store, ranking as the top paid app for the last 10 days.

Gaming influencers also saw a big uptake in traffic. Most of them have seen exponential growth of their followers and engagement numbers over the last couple of weeks.

MaoQi, a leading gaming influencer saw an increase of almost 1 million followers over the last month (a 20% growth month-over-month). The growth clearly became exponential following the outbreak.

Fitness apps are booming

One of the first measures taking by local authorities in order to prevent contagion was the closure of gyms across the country. Fitness addicts are left with only one choice to keep their body moving: fitness apps.

Keep is the number one fitness app in China. Keep was ranking around the 260th position of the China iOS app store before Chinese New Year. It has now climbed all the way up to number 79, and keeps rising every day.

Although all of Keep’s offline gyms are closed down until further notice, Keep has used Douyin live streaming features to move classes online.

Keep hosts three livestreaming classes per day, first announcing them via its hundreds of WeChat groups. Although the classes are free to watch, the Keep instructor asks the audience to follow the account, comment and like the live-streaming. This engagement is picked up by Douyin’s algorithm which exposes Keep to an even larger audience.

With the live-streaming campaigns, Keep boosted its followers by 18% in the first five days of the virus outbreak to 258,000 followers.

The fitness ring from the Nintendo Switch is another prized item as people are getting stuck home.

The fitness ring sells for a price of around RMB 550. But resellers are now selling it for more than RMB 800, sometimes even more than RMB 1,500, and still collecting thousands of orders.

Online health services are seeing a surge of activity

Naturally, one of the positively impacted segments is online health services. WeChat recently added a new “Health” segment to its WeChat Wallet menu.

The “Health” section includes the ability to track in real-time the epidemic data of every district in every province. It also enables, among other things, to book online consultations with doctors.

The most in-demand doctors for online consultations are working in virology.

According to TechNode, the telemedicine services from Ping’an, JD, and Alibaba have also seen a peak in usage.

Enterprise collaboration apps are becoming essential

Fun is not all there is… the Chinese New Year holiday is drawing to an end, and some of us have to get back to work. However, most companies have set up remote work policies in order to avoid contamination of their workers.

This is an amazing opportunity for enterprise collaboration apps to facilitate remote working. Alibaba’s DingTalk skyrocketed to the very top of the App Store in a few days.

WeChat Work, the enterprise communication app from Tencent just released a set of new features specifically aimed at facilitating remote work during this critical period:

1. Online meetings up to 300 people
2. Live streaming
3. Upgraded forms to collect information about staff during the epidemic
4. Specific “epidemic” section in the WeChat Work third party app Store, with relevant apps and special discounts

A new breed of influencers

The epidemic has also created a wave of support for Wuhan and China. Some influencers who have been actively supporting the anti-virus efforts saw a boost in their engagement and follower growth.

Many of the top-trending influencers on Douyin are sharing news about the outbreak. The #1 trending influencer as of Feb. 3 is Tu Lei. Tu Lei has been sharing daily news, commentaries, and inspirational videos about the virus during the last couple of weeks. His growth of followers boomed as a result.

Tu Lei gained up to 3 million followers daily as a result of his messages related to the Wuhan epidemic.

Cross-border e-commerce peaking up

The “Shopping” category ranking of App Annie shows that two of the top-five apps are cross-border e-commerce apps (Feb. 3 data).

The two cross-border Apps in this list, Omall, and Haitun, have seen a clear rise in engagement and skyrocketed to the top of the App Store.

Omall jumped from #161 to #2 on the iOS China App store shopping category. It did so in less than two weeks.

Haitunjia saw a less explosive but still significant rise from #23 to #5 on the App Store in just 12 days.

One of the reasons for this boom in cross-border e-commerce is that many Chinese residents are looking for supplies such as face masks which are now unavailable in China. Such products saw hundreds of thousands of orders on these cross-border platforms over the last weeks.

Conclusion

The coronavirus has changed the way of life of many people in China over the last few weeks. This change in consumption patterns is also boosting some industries.

As the old Chinese saying goes, a crisis is a combination of risk and opportunity. And a lot of tech companies are seizing this opportunity for growth.

Chinese video-sharing app Kuaishou generated RMB 50 billion (around $7.2 billion) in revenue in 2019, with live-streaming revenue accounting for the largest share, Chinese media Jiemian reported on Monday.

Why it matters: Kuaishou is one of China’s most popular short-video apps and a major rival of Bytedance’s Douyin, the domestic version of TikTok.

• The app has more than 200 million daily active users (DAUs), dwarfed by Douyin’s 400 million users.
• It also holds an 8% share of the live-streaming e-commerce market in China following Alibaba’s Taobao Live with 79% and Douyin with 13%.

Details: Kuaishou’s revenue from livestreaming reached RMB 30 billion in 2019 and its earnings from gaming and e-commerce were several billions of RMB, Jiemian reported on Monday, citing people familiar with the matter.

• Revenue from online advertisements exceeded RMB 10 billion.
• The report quoted an analyst as saying that the company’s revenue from livestreaming has little room to grow in 2020, and overall revenue growth will be powered by its advertising and e-commerce businesses.
• Kuaishou did not respond to requests for comment on Monday.
• Tencent News, a subsidiary of Chinese internet giant Tencent, which holds a nearly 20% stake in Kuaishou, reported on Monday that the app generated RMB 13 billion in revenue from advertisements in 2019, which the company denied that same day.

Context: Kuaishou has stepped up efforts to monetize its services such as e-commerce and gaming in recent years.

• The company suspended in December an e-commerce referral feature for Taobao products. The feature previously allowed listings from the e-commerce marketplace to display in the short video app. The move was seen as indication that the firm is looking to expand its own e-commerce capabilities.
• It also launched in December 2018 a “mini game” feature which allows users to play video games within its app.
• Su Hua, the company’s co-founder and CEO, set a target of reaching 300 million DAUs in 2019 in an internal letter sent to employees in June.

US tech giant Apple handed over more user account data to authorities in China than any other country in the first half of 2019, according to the company’s biannual transparency report.

Why it matters: Apple’s report details the number of times governments around the world request information about the company’s users.

• While the report does not include detailed information about the kinds of information that is released to authorities, it provides insights into the relationship between big tech and governments around the world.

“Account-based requests generally seek details of customers’ iTunes or iCloud accounts, such as a name and address; and in certain instances customers’ iCloud content, such as stored photos, email, iOS device backups, contacts or calendars.”

—Apple’s transparency report

Details: Between Jan. 1 and June 30 last year China’s government petitioned for information relating to nearly 15,700 user accounts in 25 separate requests. Due to US regulations, Apple can only release transparency data six months after a reporting period.

• Apple said that it complied with 96% of China’s petitions for account information.
• The company did not specify the number of accounts in each of the 25 requests, only that it complied with the majority of them.
• Only one request related to content from user accounts, the company said. It is unclear how many accounts were included in this request.
• Meanwhile, authorities in the US, Apple’s home market, requested access to data from 15,300 accounts.
• Apple’s legal team reviews requests to determine whether they have a valid basis, according to the company. If no basis is found, the request is challenged or rejected.
• During the same period, Apple removed 194 apps from its App Store for legal reasons following requests from Chinese authorities, accounting for 90% of removals worldwide.
• The majority of China’s requests related to apps with “pornography and illegal content,” the company said.

Context: The number of accounts included in China’s requests has more than doubled compared with the second half of 2018, while compliance rates have fallen by 2 percentage points from 98%.

• Apple in October pulled from its Hong Kong App Store a crowd-sourced police-tracking map app after state-owned media People’s Daily blasted the company for “assisting rioters.”

Tencent’s mobile battle royale title “PUBG Mobile” was the most profitable Chinese mobile game outside of China in 2019, according to a report from analytics firm Sensor Tower.

Why it matters: Mobile games have been the main growth driver for Tencent’s gaming business for the past few years, with overseas markets playing an increasingly important role.

• Smartphone game revenue rose 25% year on year and accounted for 85% of the company’s online games revenue in the third quarter of 2019.
• International markets contributed “a teens percentage” of Tencent’s gaming revenue in Q3 2019.

Details: PUBG Mobile grossed more than $776 million from player spending across Apple’s App Store and Google Play in 2019.

• The Tencent title ranked first of the top 30 most-profitable Chinese mobile games for 11 months in 2019.
• US players contributed the most to PUBG Mobile’s overseas revenue in 2019, accounting for 33.5% of all user spending, followed by players from Japan, who contributed 11.7%.
• Runners up on the list include strategy title “Rise of Kingdoms” from Lilith Games, “Knives Out” from NetEase, and “Lords Mobile” from IGG.
• Monthly revenue on the top 30 list rose 39% during the year to $7.6 million seen in December compared with $5.5 million average in January 2019.

Context: Tencent started beta testing PUBG Mobile in China in February 2018 but was unable to acquire a license for the title due to a nine-month, country-wide game approval freeze, leaving the company unable to monetize the game.

• In May 2019, Tencent rebranded PUBG Mobile as patriotic-themed “Peacekeeper Elite,” which was approved in April.
• Total revenues from PUBG Mobile and Peacekeeper Elite surpassed $1.5 billion in December 2019.

Blockchain-related financing was most active in China and the US in 2019, which together accounted for roughly 60% of total deals in the industry according to a report published Thursday.

Why it matters: Global blockchain financing trends last year were heavily influenced by major events in China and a shift in sentiment from the country’s regulators.

Details: Globally, 653 blockchain-related financing deals took place last year, with approximately $4.7 billion flowing into the nascent yet volatile market, according to the report by media and consultancy firm PANews.

• There were a total of 191 financing deals in China accounting for more than $1.15 billion of investment into blockchain-related businesses. The Bohai Sea region surrounding Chinese capital Beijing in particular attracted the most funding with 96 deals completed last year. Beijing topped the chart with the highest number of deals and overall financing size.
• The US followed closely behind China with 181 deals during the year.
• In Singapore there were 47, in India there were 19, nine in Korea, and Japan saw three blockchain-related deals in 2019.
• After October, however, Chinese regulators tightened scrutiny of the industry, specifically targeting digital currency exchanges. This curbed the surge of capital into the sector and created a financing freeze in the fourth quarter of 2019, according to the report.
• Exchanges had been considered a money magnet, and the companies running them gained momentum once the Chinese central bank indicated that it was ramping up the development of its own planned digital currency in the second half of 2019.

Context: Chinese President Xi Jinping remarked on the significance of blockchain development in October, which immediately prompted a slew of companies to enter the space, and boosted bitcoin. However, the flurry of activity led to a crackdown on blockchain-related illegal and fraud activities.

• The Chinese government has been rolling out favorable policies to attract businesses and talent to hubs across the country. A recent study named the circum-Bohai Sea region, Yangtze Delta region, the Hunan-Guizhou-Chongqing zone, and Pearl River Delta region as the four main blockchain hubs.

Updated: included the number of US deals during the year.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts.

In this episode, the guys welcome veteran China tech journalist Wang Boyuan to the show. They make some bold and not-so-bold predictions for China’s digital economy in 2020, including what we can expect from Xiaomi, Bilibili, Bytedance, JD, and the continued rollout of 5G. James and Elliott also talk about surging Chinese tech stocks at the moment, and strategies for managing your portfolio amidst a bull market.

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Guest:

• Wang Boyuan – @thisboyuan

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Editor

• Peter Isachenko

Podcast information:

• iTunes
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• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

TikTok and Chinese version Douyin grossed nearly $177 million in user spending in 2019, more than five times the revenue it earned in 2018, according to analytics firm Sensor Tower.

Why it matters: The controversies around TikTok raised in the past year have had very limited impact on its overall growth. The Bytedance app was the second most-downloaded mobile application in 2019, led only by Facebook’s WhatsApp.

• In addition to being banned in India in April for pornographic content, US lawmakers began scrutinizing the app near the end of the year for risks to user data privacy and national security.

Details: TikTok and Douyin’s user spending in 2019 accounted for 71% of the all-time total of $247.6 million earned by the two versions of the app.

• The fourth quarter was its best quarter yet, with user spending during the period amounting to $88.5 million, a 500% year-on-year increase.
• Douyin users from China contributed 69% of revenue earned on the two versions during the year, spending more than $122.9 million on iOS alone in 2019. TikTok users in the US came second with $36 million, which accounted for 20% of the total user spending during the year.

Context: Bytedance has made a number of moves to assure US lawmakers that the platform does not pose a threat to data security or privacy for users in the country.

• Bytedance has been moving to separate TikTok from its Chinese operations since as early as the third quarter of 2019, moves which included hiring more US engineers for the app and setting up a California-based data management team.
• Alex Zhu, the head of TikTok, originally planned to meet with several Republican senators in the week of Dec. 9 but postponed the meeting to fall after the holidays.
• TikTok released its first transparency report on Dec. 30 to display the number of information and removal requests it received from government bodies and law enforcement agencies in 2019. The Indian government topped the list of such requests, while none came from China, the report said.

TikTok and Chinese version Douyin were the second most-downloaded app across Apple’s App Store and Google Play in the fourth quarter and full year of 2019, according to a report from analytics firm Sensor Tower.

Why it matters: Despite rising controversy in 2019, it remained one of the world’s most popular apps, led only by Facebook’s WhatsApp.

• TikTok was banned for two weeks in India in April for spreading pornography and encouraging predatory behaviors. The ban cost the app more than 15 million first-time users.
• Since October, TikTok has been facing scrutiny in the US for potential data security and privacy risks it poses to users in the country.

Details: TikTok and Douyin recorded more than 738 million downloads in 2019 across Apple’s App Store and Google Play, with the latter contributing around 600 million installs.

• Downloads for the Bytedance app reached an all-time high in the fourth quarter of 2019 with close to 220 million installs, growing 24% sequentially and 6% year on year.
• In comparison, WhatsApp was downloaded around 849 million times in 2019.
• Downloads for TikTok and Douyin in 2019 surpassed those of Facebook and Facebook Messenger, which were the second and third most-downloaded apps in 2018, respectively.
• The app’s performance also propelled Bytedance to be ranked the world’s third most-popular publisher in terms of downloads in 2019, led only by Facebook and Google.

TikTok says no user data requests from Chinese authorities in H1 2019

Context: TikTok released its first-ever transparency report on Dec. 30 to allay fears that the platform hands user information to the Chinese government or censors content at its request.

• According to the report, the app did not receive any request for user information from the Chinese government in the first half of 2019. The highest number of such requests came from the Indian government.
• TikTok has also moved to clean up “misleading information” on the platform, banning content “meant to incite fear, hate, or prejudice,” according to a Reuters report.

Editor’s note: This post about Tencent investments originally appeared in our members’ only weekly newsletter, accompanied by a graphical take on Tencent’s global investments published here. Sign up and read it first.

This China-based company is one of the most valuable technology firms in the world. They control massive amounts of personal data for billions of the world’s internet users. They also have a widespread global presence in nearly every major corner of the digital economy, and it seems unlikely that a user of the mobile internet anywhere in the world could go through a week—or even a day—without using a product or service backed by this company.

This company is not Huawei, not Alibaba, but Tencent. And in a world where geopolitical tripwires seem to be everywhere for Chinese tech firms, their approach to global expansion may be one that others will emulate.

Tencent flies under the radar, but it’s quietly succeeded in establishing a nearly-unparalleled global business footprint. Crunchbase lists about 150 investments made by the Shenzhen-based gaming and media company outside of mainland China, not including acquisitions. They’ve taken stakes in household names such as Tesla, Uber, Lyft, and Snapchat, as well as Spotify, Reddit, Ubisoft, Activision Blizzard, and 100 percent of Riot Games. They back southeast Asia delivery and mobility giant Gojek and Singapore gaming and e-commerce giant Sea. In India, they own a minority piece of Walmart’s Flipkart, as well as ride-hailing company Ola, among others. Tencent is one of China’s most globally expansive firms and has become so while experiencing very few of the headaches of its peers.   

Risky acquisitions

Over the past few years, global Chinese tech firms have found themselves in the minefield of international affairs. While Huawei’s high-profile battle with the US government has drawn the most headlines, it is simply the highest-profile case. 

Nations are completely changing their views of the relationship between telecommunications, the digital economy, and their own sovereignty and security. In May of 2019, the Committee on Foreign Investment in the United States (CFIUS) “requested” Chinese gaming company Beijing Kunlun Tech Co Ltd to divest the popular gay dating app Grindr, citing concerns over sensitive personal data of US users. In early 2018, the US government blocked a $1.2 billion acquisition of payments provider Moneygram by Alibaba’s Ant Financial. In 2020, the fortunes of Bytedance’s likely IPO will hinge heavily on how skillfully it manages scrutiny from US authorities and the public, a task it appears to have bungled thus far. 

US regulators aren’t the only ones skeptical of Chinese tech firms. As India seeks to create room for its own tech giants to grow, the administrative playing field may be tilting against both US and Chinese firms in a number of ways, limiting their potential for success in what will soon be the world’s most populous nation. As if Bytedance’s hands weren’t already full with its troubles in the US, it spent much of 2019 dealing with Indian courts and regulators in an attempt to prevent its super-popular Tiktok app from being banned throughout the country.

Loose grasp

Perhaps the most striking contrast between Tencent’s overseas strategy and those of its domestic peers is the same thing that has set it apart in China’s domestic market: it appears comfortable with decentralized ambiguity, and limited direct control of its own technology ecosystem and financial holdings. Broadly speaking, Tencent prefers to invest and advise, rather than acquire and control.

This approach is a sharp contrast to Alibaba, which is known to take over firms in their entirety and impose its culture and management from the top down. Compare Ele.me, which Alibaba acquired outright in 2018, with rival Meituan-Dianping, in which Tencent held a 20% stake before investing $400 million in the company’s 2018 IPO. As the two giants have expanded their presences into Southeast Asia, Alibaba’s biggest splash was through a takeover of e-commerce firm Lazada, while Tencent has taken minority stakes of Singaporean gaming and e-commerce company Sea, as well as super-app Go-Jek.

According to Matthew Brennan, founder of research consultancy China Channel and co-host of Technode’s China Tech Talk podcast, Tencent’s relatively hands-off approach can be attributed to the experience and personalities of two of the company’s top decision-makers: Executive Director and President Martin Lau, and Chief Strategy Officer James Mitchell. “Both Martin and James think more like investment bankers than operations-focused managers,” explains Brennan. “Much of Tencent’s profit generation still lies in gaming, a sector in which they are known to take more controlling and larger stakes. Yet for the rest of their investments, they seem comfortable trusting existing management and taking a much less active role.”

As of the end of Q2 2019, Tencent reported an investment portfolio amounting to over RMB 417 billion (about $59 billion), including China and overseas.

The two sides of the silo

This has certainly not been without its downsides. In some cases, the firm’s tendency to invest capital liberally, often without taking controlling stakes, has meant that it has fostered its own competition. Domestically, Meituan now challenges Tencent’s own WeChat as China’s most versatile super-app. Internationally, Tencent has a habit of buying into firms that compete with its allies—such as Sea, whose Shopee competes with Tencent-linked JD as it tries to push into Southeast Asia. Sea is also part of Tencent’s vast portfolio of gaming companies, many of whom are rivals not only with each other, but in some cases, even Tencent itself. 

Even for parts of the business fully owned by Tencent Holdings, lack of cohesion has proved to be a challenge. In late 2018, the company’s top executives announced dramatic organizational restructuring in an attempt to reform the firm’s “silo culture,” in which small teams competed fiercely internally, while collaboration was notoriously poor. Management believed that this culture, which fostered the development of wildly successful consumer-facing apps like WeChat and QQ, would be less conducive to Tencent’s future goals, centered around cloud services, AI, and enterprise solutions.  

Yet when it comes to doing business outside of the PRC, it is precisely those “downsides” which offer an advantage in the current geopolitical climate. Huawei’s top-down control, poor localization, and organizational opacity have led to trust issues, as even their overseas offices are notorious for a lack of local management or control. As India looks to develop national tech champions to compete with those of China and the US, Tencent’s approach of acquiring minority stakes can be seen as a helping hand in achieving that goal, while Alibaba’s strategy of outright takeover will likely see pushback from authorities and the public. As the US government worries about the personal data of American Tiktok users being stored and exploited in China, Bytedance now ponders how it can best de-couple the video app from its China-based organization. 

While silo culture may be a downside domestically, the reality of today’s multipolar world is that for global tech giants, creating effective silos is a strategic competency. And that is something at which Tencent has proven to be quite effective.

Read more

Where does Tencent make its overseas plays? TechNode digs into the data to find out in a companion article to this story.

Editor’s note: This post about Tencent investments originally appeared in our members’ only weekly newsletter, accompanying Elliot Zaagman’s analysis of Tencent’s global investment strategy published here. Sign up and read it first.

Tencent has an interesting investment strategy. In every sector except gaming, they spread their bets, usually taking only a 20% stake. However, as we discovered, that strategy still has room for variation. In preparation for Elliott Zaagman’s analysis of their investment strategy, we collected, cleaned, and visualized the publicly available data on how the tech major deploys its money.

One pattern was very clear: in relatively mature markets (US and India) they prefer to make a lot of small bets at the early stage. In immature markets (Southeast Asia and Africa), they go with larger players at later stages.

Our hypothesis: mature markets have already been won so it makes more sense to invest in smaller, but potentially disruptive companies. In immature markets, where they have less expertise and the market is still rapidly developing, it makes more sense to invest in companies who have already won or are about to. No matter which market, however, Tencent only likes making acquisitions in the gaming space, where it still garners the biggest proportion of revenue.

The data present is incomplete, though. We only included investments with publicly available funding data. Even then, we still don’t have exact figures on how much Tencent invested, no matter if they were led or followed-on. In addition, we don’t include the value of acquisitions, mostly of gaming companies (for gaming acquisitions, PC Gamer has a helpful overview). Elliott’s piece, the data he gathered and that we present below, is just one way of interpreting the data. If you have other interpretations, we’d be glad to hear them.

—John Artman, Editor in Chief

Venture capital funding for Chinese technology startups dropped by 51.5% year on year in the fourth quarter, according to a report by government institute released on Friday.

Why it matters: The decline affirms the so-called “capital winter“ which affected companies and investors in China’s tech sector over the course of 2019. The term refers to a significant slowdown in investment and fundraising activities.

Details: Chinese tech startups closed 403 funding rounds and raised a total of around $6.8 billion from venture capital investors in the fourth quarter, according to a report (in Chinese) by the China Academy of Information and Communications Technology, a research institute under China’s Ministry of Industry and Information Technology.

• To compare, there were 564 rounds which raised $14.1 billion in the same period in 2018.
• Early-stage investments, including seed and Series A funding rounds, accounted for 73% of all investment activities in the quarter.
• More than half of the money raised in the quarter went to Shenzhen-based Tenglong Holding Group, a data center service provider which closed a Series A worth RMB 26 billion (around $3.7 billion). Participating investors included Morgan Stanley Asia and China Nanshan Development Group, a real estate developer.
• Tenglong’s lion’s share of total funds raised also means that funds raised by other Chinese startups were significantly lower than the same period in 2018.
• The dramatic drop is attributable to “a cautious investment climate” and “limited investment returns,” according to the authors of the report.

Context: Some 336 startups in China were forced to cease operations in 2019, according to the Financial Times. These companies collectively raised RMB 17.4 billion from investors.

• Shanghai’s Nasdaq-style high-tech board opened in July in a bid to facilitate improved capital flow into the tech sector. However, more Chinese tech companies chose to list on overseas markets.

Bytedance blocked 550 million fake likes and follows on Douyin and banned more than 2 million accounts associated with these misbehaviors in a three-month cleanup campaign in 2019, the company said in an announcement Thursday.

Why it matters: Fake likes and follows have plagued China’s content platforms for years. They’re bought by would-be influencers to simulate a large following, allowing them to charge inflated prices for ads and to trick recommendation algorithms into thinking they have popular content. As the most popular short video app in the country, Douyin is no exception.

• Little Red Book, a platform where users share product reviews, said it banned a total of 21.3 million accounts for posting fake reviews in 2019.

Details: Named “Woodpecker 2019,” the campaign ran from October to December and targeted the malicious batch registering of accounts, fake likes and follows, and fake influencers on Douyin.

• Bytedance Security Center blocked close to 92 million “malicious” requests to register accounts during the three-month period.
• The center also suspended 293 Douyin accounts with more than 1 million followers and 4,638 accounts with over 100,000 followers for cheating.
• One of the banned influencers, “Miss Mei from Tianmu Mountain,” had 3 million followers, reports TechWeb.
• Also banned were 17,089 accounts that use fake likes and follows to attract customers to stores. The company reported 113 websites associated with these illicit activities to authorities.
• Bytedance said it would routinize such cleanup campaigns to guard against the fake like industry.

Context: Short video platforms such as Douyin and Kuaishou have been conducting stricter self-regulation under threat of costly suspensions from regulators, who have been scrutinizing all kinds of content platforms for inappropriate content and market-disrupting activity.

• In September, Kuaishou banned 39 popular content creators for posting clickbait videos and “malicious hype” videos, such as fabricated sob stories and content that exaggerates the circumstances of disadvantaged groups.
• Both platforms launched a “youth mode” in March last year, which can limit underage users to feeds consisting of educational and informational videos. Neither platform has made the mode mandatory.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts.

Happy New Year! In this episode, the guys look over their watch list and discuss the biggest winners and losers of 2019. They also make a few bold predictions about what to expect in 2020 for the biggest names in China tech.

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Editor

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

Bytedance’s short video app Douyin has surpassed 400 million daily active users (DAU), according to its 2019 annual report released on Sunday.

Why it matters: Douyin has been facing fierce competition from rival short video platform Kuaishou, which entered “battle mode” in June in an effort to boost its DAU to 300 million by the end of January.

• The number of overlapping users on Douyin and Kuaishou in June 2019 more than doubled year on year to 158.8 million, according to a report from research firm Quest Mobile.

Details: Douyin’s DAU surged more than 25% from the 320 million figure announced in July, according to the release.

• The annual report also highlighted Douyin’s original music push amid Bytedance’s stalemate with major global music labels, which have been seeking higher royalties. The top nine out of the 10 most frequently used songs on Douyin in 2019 were created by independent Chinese musicians.
• The report also includes statistics about educational content on Douyin. Content creators made close to 14.9 million educational short videos last year, each reaching an average of 100,000 users.

Context: Despite being locked in an intense rivalry with Tencent-backed Kuaishou, Bytedance has managed to maintain solid user base growth.

• Bytedance’s total DAU across its apps grew 16.7% year on year in the first six months of 2019 to 700 million, the company said in July.
• According to a report from media outlet LatePost, Kuaishou was close to completing a $3 billion Series F led by Tencent in December 2019.
• In October, Kuaishou broke its goal into two parts: reaching a “peak” DAU of 300 million before the Spring Festival, which falls on Jan. 24 this year, and achieving average DAU of 300 million for the three months after the holiday.
• In order to achieve this goal, Kuaishou will give away RMB 1.1 billion worth of cash rewards to create hype for the upcoming Spring Festival Gala, an annual TV event held by China Central Television. Kuaishou is the exclusive interactive partner for the event.

Game approvals in China have failed to recover to levels seen in early 2018 prior to the nine-month regulatory freeze on new titles. Some 1,570 titles received the go-ahead in 2019, bringing the monthly average down to around one-fifth of the comparable figure for the first three months of 2018.

Why it matters: China rolled out stricter requirements for video games in April to reduce the number of titles allowed to monetize and boost the overall quality of products on the market.

Details: The State Administration of Press and Publication (SAPP) approved an average of 131 games per month last year. The monthly average before the licensing freeze, which lasted from March to December 2018, was 641.

• More than half of licenses in 2019 were given in the first three months of the year when the SAPP cleared up a backlog of applications from the suspension.
• Of the 1,570 approvals, 1,385 were for domestic titles and 185 were for overseas publishers, according to industry outlet GameGrape.
• The vast majority (93.1%) of all approved games in 2019 were for mobile.
• Tencent and NetEase received most monetization licenses among all publishers in 2019, with 32 and 31 of their titles approved, respectively.
• The drop has a limited impact on earnings in the market, with overall revenue growing 7.7% year on year to RMB 230.0 billion (around $33.1 billion), according to a report (in Chinese)  from China Audio-video and Digital Publishing Association.
• Publishers are still feeling the bite of stricter regulations, however. The number of firms that deregistered and exited the market nearly doubled last year to 18,710, according to a report from The Beijing News

Context: The SAPP, under the jurisdiction of the Communist Party’s propaganda department, replaced the State Administration of Press, Publication, Radio, Film, and Television as the overseer of game approvals in December 2018.

• Game approvals resumed in the same month that the SAPP took on this role, ending the nine-month suspension.
• The SAPP issued a notice in February 2019 requesting local authorities to stop submitting monetization applications due to the heavy backlog.
• In April 2019, the SAPP set higher standards for titles to gain approvals, freezing out those that “lack cultural value” or “blindly imitate others.”

Nio shares swelled by over 50% overnight after the embattled NEV maker posted a surprise bump in revenue to beat Wall Street estimates for the third quarter, thanks to recovering sales and lower spending. 

Why it matters: The latest results suggest Nio has hit a financial turnaround of sorts. Still, the company has yet to reveal new investment plans, and some on Wall Street remain skeptical over whether the rebound is sustainable.

• The company has made “significant positive progress” on several financing projects, recently installed Chief Financial Officer Feng Wei said during the earnings call without revealing details.
• A person close to the company told TechNode earlier this month that several domestic companies, including Chinese property developer Evergrande, were interested in buying Nio. Founder William Li was quick to reject these claims.

Details: Nio shocked Wall Street with a 25% year-on-year increase in total revenue to RMB 1.8 billion ($257 million) for the third quarter on strong vehicle sales, beating analyst expectations by more than $23 million.

• Shares touched a high of $4.87 in Monday’s trade before closing up 53% at $3.72.
• Net losses narrowed 10% annually to hit RMB 2.5 billion for the quarter.
• The company delivered 4,799 ES6 and ES8 sports utility vehicles in the three months ended Sep. 30, 35% higher quarter on quarter. Vehicle margins improved to -6.8% compared with -24.1% from the last quarter, but remain 2.5 percentage points lower than last year.
• Aggressive cost-cutting has helped with a 25.3% sequential decrease in losses from operations to RMB 2.4 billion.
• CEO William Li said Nio has received over 100 non-refundable orders on average each day over the past two months and expects record deliveries above 8,000 vehicles in the fourth quarter.
• Li attributed the sales growth to the competitiveness of products and a “vibrant” user community. More than 45% of new orders in 2019 came from existing owner referrals, he added.
• The Chinese Tesla challenger aims to hit a positive gross margin next year by scaling up deliveries in 100 domestic cities with over 200 capital-efficient sales offices called Nio Spaces.
• Cash flow continues to be tight with only $274.3 million in cash and equivalents as of September, of which $100 million came from major shareholder Tencent as part of a $200 million convertible bond deal announced earlier this year.
• The company admits cash balance is inadequate to provide the required working capital and liquidity for continuous operations for the next 12 months.
• Nio investor Anthony Lin told TechNode that he was not concerned about the company’s cash flow, adding around $400 million revenue from vehicle sales and services is expected for the fourth quarter.

Context: China’s new energy vehicle sales have slid for five consecutive months following subsidy cuts, with November sales falling 37.5% to 95,000 units compared with June, figures from the China Association of Automobile Manufacturers (CAAM) show.

• Sales growth at Nio indicates the company has been wrestling market share away from competitors in a general slump, Tu T. Le, managing director of Sino Auto Insights, told TechNode on Tuesday.
• Profits in China’s auto industry for January to November this year dropped 13.9%, according to data from the National Bureau of Statistics.

Nio gets mixed reactions with new battery promising longer range

Huawei said Tuesday the company’s revenue in 2019 is expected to jump 18% year on year despite a series of campaigns led by the Trump administration against the telecommunications gear maker this year.

Why it matters: The growth rate is slightly lower than last year. In 2018, the company’s revenue grew 19.5% year on year.

• The company also predicted that the coming year would be a “difficult year,” and that it would not be removed from the US “Entity List,” which bars American companies from supplying to Huawei without government approvals.

Details: In a New Year’s message to employees, rotating Chairman Eric Xu said they expected revenue in the year to reach a record RMB 850 billion (around $121.7 billion). He added that the figures failed to meet the company’s predictions earlier this year.

• The Shenzhen-based company, also the world’s second-largest smartphone vendor, said handset shipments had exceeded 240 million units and the business is in “robust growth.”
• Huawei will “go all out” to build the Huawei Mobile Services (HMS) ecosystem to ensure it can keep selling smartphones in overseas markets, said Xu. HMS is an alternative to Google Mobile Services (GMS), which pre-installs popular Google apps and services on Android phones. Huawei is not authorized to use GMS due to the US export ban.
• “Our predictions every year are very radical, that’s why we said the figures failed to meet expectations,” said a Huawei spokesman to TechNode on Tuesday.“But the 18% [annual growth rate] is good enough, and it is also pretty good compared to other companies,” he said.

“Survival will be our first priority…We will focus on the following four areas: sustaining growth, improving our capability, optimizing our organization, and controlling risks.”

—Eric Xu, in his New Year’s message to employees.

Context: Huawei said in October that its revenue for the first three quarters grew 24.4% year on year to RMB 610.8 billion. It announced in July that revenue in the first half of the year grew 23.2% year on year to RMB 401.3 billion.

• The company doesn’t reveal quarterly earnings before this year.
• In June, Huawei founder and CEO Ren Zhengfei said he expected the US trade blacklist will reduce production output by $30 billion over the next two years.
• Huawei, which reported revenue of RMB 721.2 billion last year, re-evaluated its revenue targets to around $100 billion this year and the next, according to Ren. It had initially forecasted revenue growth in 2019 of between $125 billion and $130 billion depending on foreign exchange fluctuations.

If there were an equivalent of cult entrepreneurship guide “Lean Startup” for Chinese internet entrepreneurs, the CliffsNotes version would look something like this:

• Step 1: Get investment
• Step 2: Get users
• Step 3: ???
• Step 4: Profit!

Trouble is, having plentiful users doesn’t always translate into a clear path to profit.

Just ask Little Red Book. Rumors abound that the “social e-commerce” platform gutted its e-commerce division’s staff by as much as half last year. Or ask Quora-like Zhihu, or travel review platform Mafengwo. Together, these three have raised more than $1.8 billion from investors, according to Crunchbase. The return on investment? A combined 220 million active monthly users, and no profits.

Each of these apps is content-driven, but without a successful, scalable monetization model. That spells trouble when trying to convert users and venture capital into profit.

Content castles

Let’s start with each platform’s content and scale.

Little Red Book is a platform to share and read product reviews and lifestyle tips across a gaggle of product categories. Think a hybrid of Instagram, Pinterest, and Net-a-Porter. It cracked 85 million monthly active users in the first half of 2019, of which a high proportion are women from China’s first and second-tier cities.

Zhihu, China’s equivalent of Quora, features Q&A that ranges from the asinine to the profound. Third party sources estimate the app has 35 million monthly active users, reading and adding to the site’s 28 million questions and 130 million answers.

Mafengwo is a travel experience sharing platform, focused on long-form content. The company claims over 100 monthly million users, but it has previously been embroiled in scandals for funny business with its numbers. I’d take that monthly active user figure with some skepticism.

Castles without moats

The trouble with freely available written content is, it doesn’t lend itself to making platforms meaningful returns. For individuals, it might be a way to make a living. But for large businesses, platforms, or portals, freely available written content is typically a loss-leader that aggregates demand and drives sales across other areas of the business.

Consider Meituan’s review platform, Dianping. This Yelp equivalent is the Meituan ecosystem’s most frequently-used function, but generates chump change compared to Meituan’s food delivery and travel units.

For content platforms that aren’t part of the Alibaba, Tencent, Bytedance, or Meituan universes, the trick is building compelling products or services that can cross-subsidize the cost of building and nurturing a large-scale content platform. This is where Little Red Book, Zhihu, and Mafengwo have struggled.

Little Red Book has had a crack at almost everything to make bank. It’s gone into cross-border e-commerce, physical stores, influencer monetization, and in-platform advertising. None of these appear to have gone according to plan.

More alarmingly, monetization efforts through overt in-platform advertising may be driving away users. According to analysis of Quest Mobile data (Chinese), Little Red Book’s monthly active users have declined from 98 to 72 million between August and October 2019. That’s a stinging setback, and the company will need to show meaningful improvement before they can confidently go to investors again.

Zhihu has been down a number of monetization paths in its eight-year history, with similarly displeasing results. It has tried monetizing experts, adding paid content featurettes, and incorporating Q&A livestreams. However, this multi-pronged effort wasn’t enough to stop Zhihu letting go of around 20% of its workforce (Chinese) in late 2018.

The stakes are now even higher. In August 2019, Zhihu raised a $434 million Series F. That’s the largest fundraise in China’s online content and entertainment segment for the past two years, and takes the company’s valuation ($3.5 billion) beyond Quora ($2 billion) and Reddit ($3 billion). All three cornucopias of information are valuation-rich, but none have turned a profit.

Mafengwo’s monetization should have been relatively straightforward: connect passionate travelers who read the platform’s reviews with relevant travel packages and take a cut of the proceeds. This would require pinching share from Trip (formerly Ctrip), which made $549 million from package sales and commission in 2018. And it hasn’t happened: the company recently announced plans to lay off 40% of its staff. Sources inform me that, without a fresh capital injection, things look bleak.

Content + scale still not enough

The internet’s widespread adoption gave rise to a particularly awful cliché: “Content is King.” This cliché has inspired a number of companies that aggregate content, of which a fair chunk have received generous investment. In investing in content-based companies like Little Red Book, Zhihu and Mafengwo, investors like Tencent (which has bet the trifecta) make some justifiable assumptions:

1. High-quality written content attracts audiences
2. High-quality written content across multiple themes or categories gives access to multiple high-value audience segments

But also some iffy ones:

3. Advertisers will pay to access these audience segments
4. Content platforms can provide advertising solutions which are attractive enough to advertisers to redirect spend from news websites and social media
5. Audiences won’t leave as the platform attracts more advertisers and incorporates more advertising formats

You’ve probably spotted that why the third, fourth and fifth assumptions represent some very big “ifs.” Zhihu, Reddit, and Quora—each independent of the digital advertising magnets that are the digital giants—have found out how difficult it is to nab advertising spend.

If I’m honest, I don’t think very much of these companies’ ability to build sustainable businesses and their future prospects as independent entities. However, I commend Little Red Book, Zhihu, and Mafengwo for exploring non-advertising revenue streams. They have recognized the limits of advertising revenue and have been nimble enough to try different commercialization models. Facing uncertain futures and a poor monetization track record, they’ll need to continue iterating while being paragons of frugality.

Eventually, however, we may have to accept that China’s written content platforms need deep-pocketed patrons—whether investors or integration with one of China’s internet giants—to eke out a continued existence.

The latest funding round of each company suggests where things might go: Alibaba’s sizing up Little Red Book as a content extension for Taobao, Kuaishou and Baidu are looking to wrestle over Zhihu’s question-based foothold in search, and Tencent is adding to its small tourism portfolio.

User retention and inroads into commercialization will decide each company’s fate.

Apple’s iPhone shipments in China dropped by more than 35% in November compared with the same period last year, Reuters reported, citing a report by Credit Suisse.

Why it matters: The November figures are the iPhone’s second consecutive double-digit decline despite Apple’s efforts to lure more Chinese consumers by significantly lowering the price of its newly released iPhone 11 series.

• Apple priced the iPhone 11 at $50 less than the preceding model following a year of heavily discounting older iPhone models in a bid to offset aggressive competition from Chinese competitors such as Huawei and Oppo.
• The overall Chinese smartphone market declined by 1.5% year on year in November, a modest recovery from the 6.7% year-on-year dip in October, according to a report by the China Academy of Information and Communications Technology.

Details: Total iPhone shipments in China in the September-November period dropped 7.4%, said Credit Suisse analyst Matthew Cabral in the report, citing data from China’s Ministry of Industry and Information Technology.

• Total iPhone shipments in China are down 7.4% year on year in the period from September—when iPhone 11 hit the market—through November, according to the report.
• The analyst also said Apple expects more tariffs imposed on its products sold in the US if the 15% tariffs on billions in Chinese-made goods come into effect on Dec. 15.
• However, Apple could avert the duties after US President Donald Trump signed off on an initial trade agreement with China on Thursday, according to Bloomberg.

Huawei widens lead in China smartphone market after US ban: report

Context: Apple has had a tough time in China this year. The company’s smartphone shipments in China fell 28% year on year in the third quarter, while unit shipments for Huawei, its biggest rival in China, surged 66% in the same period, according to data from market research firm Canalys.

• Apple held 5.2% of China’s smartphone market share in the third quarter, ranking fifth behind Chinese handset makers Huawei, Vivo, Oppo, and Xiaomi.

Tencent’s mobile battle royale titles “PlayerUnknown’s Battlegrounds Mobile” (PUBG Mobile) and its Chinese rebrand “Peacekeeper Elite” have raked in more than $1.50 billion since launch, according to analytics firm Sensor Tower.

Why it matters: Smartphone games continue to power growth for Tencent’s gaming business, which started to recover in the third quarter, growing 11% year on year.

• Revenue from mobile games in the third quarter grew 25% year on year, accounting for 85% of the company’s online games revenue.

Tencent scraps ‘PUBG Mobile,’ replaces it with more compliant ‘Game for Peace’

Details: The two titles, which are seen as the same game adapted for different markets, generated more than $1.3 billion, or 88% of its lifetime revenue in 2019 to date.

• Launched in China in May, Peacekeeper Elite, also known as “Game for Peace,” grossed a total of $614 million on Apple’s China App Store so far, accounting for close to 41% of the total revenue from the two titles.
• The US market contributed $293 million across Apple’s App Store and Google Play, or about 20% of the total revenue. Japan ranked third with $117 million.
• Player spending across the two titles has grown sequentially in every quarter this year, reaching a fresh high of $496 million in the third quarter.
• PUBG Mobile and Peacekeeper Elite together racked up nearly 555 million downloads worldwide, with 21% coming from India and 19% from China. PUBG Mobile’s official Twitter account, however, said in December that PUBG Mobile alone surpassed 600 million downloads.
• The revenue figure makes the two titles the highest-grossing shooter game on mobile. In comparison, NetEase’s battle royale title “Knives Out” earned $915 million across iOS and Google Play since its November 2017 launch, whereas Epic Games’ “Fortnite” grossed $838 million from just the App Store to date since its March 2018 launch.

Context: PUBG Mobile started beta testing in China in February 2018 but had been unable to acquire a license due to a country-wide game approval freeze and tightened regulations implemented in April, leaving the company unable to monetize the game.

• In May, Tencent scrapped PUBG Mobile and relaunched it as patriotic-themed Peacekeeper Elite, which was approved in April. The new version of the game raked in $14 million within 72 hours of launch.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts.

In this episode, the guys discuss Alibaba’s blockbuster listing in Hong Kong, and why this could impact the future of Meituan Dianping, who posted their second-straight profitable quarter. James and Elliott also dig into what has made Meituan so special in 2019 and look into Xiaomi’s Q3 earnings as well.

Please note, the hosts may have an interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Editor

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

This week, China Voices brings TechNode Squared members a timely report VIPKID’s early promise and current troubles, translated by courtesy of LatePost. TechNode has not independently verified the claims made below. Additional reporting by Emma Lee.

VIPKID, an online English language teaching platform, occupies a unique place in US-China tech relations. Since its founding in 2013, CEO Wendy Mi has grown the company to the point where tens of thousands of Americans daily teach hundreds of thousands of Chinese. LatePost charts the growth of the firm, outlining how strategic decisions to focus on upmarket customers, create a strong sales culture, and prioritize growth over all else gave VIPKID an early advantage as the market for online education mushroomed. Yet of late, the technology backend and managerial shortcomings have hampered VIPKID’s progress. The firm has also struggled to create a product as appealing as its core offering of one on one online classes.   

This core offering, however, struggles to make money. This past June, founder Wendy Mi set the goal of making RMB 1 (about 14 cents) per class. In this week’s translation, LatePost reports that the company has bought size at a high price, reporting operational numbers based on an anonymous “former mid-level manager.” In a statement to TechNode, factoring in VIPKID’s extensive marketing, LatePost reports, customer acquisition costs are as high as RMB 6,000. Since profit per unit is about RMB 42, and the average customer takes seven classes per month, a customer has to spend two years on the VIPKIDS platform just for the company to break even on sales and marketing costs. Recent layoffs, moving employees to tier-two cities, and the disappearance of afternoon snacks speak to the firm’s efforts to aggressively cut costs as investors lose patience with companies that sacrifice profits for size. 

The following is an abridged translation of a long form article by Chen Jing and Song Wei, first published on November 15 in LatePost, Caijing’s new magazine outlet.

The story of VIPKID: growth and bumps on the road

Chen Jing and Song Wei, LatePost

Nov. 15

As a fast-growing company enjoying an industry halo, VIPKID simultaneously faces four of the most difficult problems of entrepreneurship: fundamental growth, creating new business lines, turning a profit and upgrading internal management.

Growth is one hell of a road

VIPKID is a Chinese start-up company valued at $4.5 billion. Starting from “One-on-one English classes with North America foreign teachers”, it has attracted 700,000 students. In merely four years, VIPKID has reached an annual revenue turnover of RMB 5 billion (about $700 million)—it took 19 years to New Oriental Education to gain as much.

VIPKID Founder, Mi Wenjuan, didn’t graduate from an elite college, but has extensive experience in teaching and recruiting. Co-founder Zhang Yuejia, who joined in 2015, is business-focused and more goal-oriented. 

In 2014, the company’s primary goal was to establish a business model. Mi did two things: unlike other online education platforms that hired teachers from Southeast Asia countries, VIPKID recruited North American teachers. Her familiarity with the market proved handy: she knew American and Canadian teachers were underpaid. In doing so, she quickly gained market share. 

Furthermore, instead of simply introducing foreign English textbooks, the company took their time to make self-developed learning materials better suited to Chinese students.

In 2015, the company focused more on building a sales and marketing system. Zhang Yuejia put RMB 40 million into brand advertising, while other companies spent their money strictly on customer acquisition. In October that year, VIPKID’s iconic orange advertisement, “American elementary school at home,” began popping up on subway and bus billboards in Beijing. As it turned out, they got it right again. It was the perfect time to build brand awareness before the market ballooned in size—these brand advertisements improved user recognition and penetration.

The difference between educational products and Internet products is that the former has a higher unit price and a longer decision-making cycle for users, thus customers will inevitably compare prices. In this process, brand recognition plays a decisive role. Internet products instead, often adopt a strategy of low price or even free of use since, when it comes to early-stage customer acquisition, traffic that reaches customers is more vital.

Zhang Yuejia transformed VIPKID from a teaching-oriented education company to an internet-oriented one, with growth becoming the most critical goal. As an advocate of quantitative indicators, he brought a team of corporate planners from zhaopin.com [trans: a Chinese recruiting website] to lay down detailed indicators for every part of the company’s business. In 2015, VIPKID’s sales revenue grew at a rate of 30% per month, and in 2016, the cash flow turned positive.

VIPKID’s extreme focus on sales is reflected in its 8% commission for salespeople—the highest in the industry. With the market taking off, the company’s number and quality of user leads were excellent—most salespeople who joined in around 2016 saw VIPKID as the easiest company to make money in the industry.

Under such strong sales orientation, the growth rate exceeded everyone’s expectations. When Mi was raising a B round in 2016, she promised investors RMB 150 million revenue; eventually, it reached RMB 1 billion. Revenue rose to RMB 5 billion in 2017 and RMB 7 billion in 2018.

 It was the right time for VIPKID since highly educated Chinese parents were more willing to pay for high quality education through the internet for their kids. 

In 2015, there were 3,000 students enrolled, and two years later, under Zhang’s leadership, the number exceeded 200,000. On customer side, VIPKID spent up to RMB 10 million on brand advertising. To improve the referral ratio, they created a promotion in which a user would get 25% of their class hours free if they posted links on a WeChat page. In 2016, the referral ratio doubled. 

Meanwhile, the foreign teacher team led by Mi Wenjuan and Chen Yuan grew from 5,000 to 20,000 at the end of 2016. It was also in 2016 that VIPKID far surpassed Da-Da in terms of revenue, ranking first in the industry. 

Speed or quality?

It is difficult to keep up with the most advanced technology in a rapidly changing business, especially under pressure to scale. VIPKID chose to prioritize growing its business over technology upgrades. So naturally, when business lines expand, product quality will drop, even if only temporarily.

Growth masks problems, and starting in 2016, those issues grew ever more glaring. 

“When a plane’s engine is on fire, is it better to bring the plane down to change the engine, or try to fight the fire while still flying? VIPKID always chose the latter,” a VIPKID investor told LatePost.

 As the founder’s managerial reach expanded, managerial skills did not. In the early days, the most obvious weaknesses were in technology and products, in which the two leaders found themselves incompetent. In 2016, the low conversion rate was caused by backward technology, and 10 out of 100 courses were lost due to technical reasons. 

Most employees described VIPKID’s company culture as a sales-oriented one and, even though Wendy Mi wanted everyone to love education as much as she does, the truth was taht most people’s passion came from hitting sales goals. 

However, the high growth rate covered up deeper problems. “VIPKID didn’t even have a sound budget management system and strategic plan”, a former executive told reporters. Strategy existed mainly in discussions among the three founders, and most so-called strategic meetings turned into discussing small business details.

How to diversify

In June 2019, at a management conference, Mi Wenjuan said their goal would be to earn one yuan per class by 2020.

A former mid-level manager gave a LatePost reporter a window into the numbers: the unit price of one-on-one classes is RMB 14,000 for 72 classes. During a heavy promotion period, users can get 23 classes for free if they successfully refer a new customer, which would bring down the unit price of each class to around RMB 140.

Meanwhile, for each class, the teaching cost is RMB 70 [trans: at about $10 for a standard 25-minute class, this lines up with the company’s advertised $20/hour pay]. Service costs, including supervision, customer service, teaching assistants, etc, total about RMB 24, and network costs are about 4 RMB. 

Under large-scale deployment, the customer acquisition cost is about RMB 6,000 per student, and the gross profit per unit is RMB 42. According to internal data, the average customer takes seven classes per month, so a customer has to spend two years learning to cover the cost of customer acquisition. 

If VIPKIDS lowers spending on large-scale advertisement and reduces the number of free classes, the process can be shortened to one year. 

VIPKID has started to reduce labor costs after putting forward the idea of earning 1 RMB per order. Some teaching and research teams have been relocated to second-tier cities such as Dalian, Wuhan, and Chengdu. Instead of 200, one head teacher now needs to monitor 500 students. The company also no longer serves afternoon snacks to its employees. 

At the same time, they have increased the importance of the renewal rate target. At present, VIPKID is trying to reduce acquisition costs by raising renewal rate and conversion rate. The goal is to achieve 70% renewal rate and new customer conversion rate next year.

According to the Financial Times, VIPKID reported a net profit loss of RMB 2.2 billion on revenue of RMB 3 billion in the first ten months of 2018.

But investors are divided on the trade-off between market size and profitability. Internally, VIPKID believes that its growth rate has reached a ceiling in first and second-tier cities—the annual income of VIPKID’s target family is between RMB 150,000 and 200,000. Currently, the market of first-tier and second-tier cities is limited, accounting for 70% of total revenue. 

With a relatively high price, it’s hard to attract customers in lower tier cities. In 2018, 40-50% of VIPKID’s total revenue came from first-tier cities, and only 5-10% from third-tier and fourth-tier cities. 

Diversification is probably a more practical option.

VIPKID began to test diversification options in 2017, expanding its user base from primary and middle school kids to preschoolers and the elderly, and offering subjects ranging from English to mathematics and Chinese. The mentality at the time was to prevent competitors from overtaking in other models. However, none of these offerings has generated a reliable product with high growth. 

Concentrating on large classes has become an industry norm. In March 2019, Bee School [an online group class product taught jointly by Chinese and foreign teachers which employed AI to correct errors] was established for more than one year before it became officially independent and focused on English and math classes. 

Compared to other competitors, Bee School keeps a low profile. Its main strategy is to rely on the pool of users generated from one-on-one classes. VIPKID expects Bee School to be its second source of growth, so it still has a lot of growing to do. 

Wendy Mi is bold enough to realize on her own ambitions, but she now has two co-founders, more than a dozen investors, 10,000 company employees, 700,000 parents, not to mention competitors with similar business models. Now she needs to be tougher, faster, and more confident than ever.

Chinese electric car maker Nio reported November delivery data figures that were flat to disappointing October numbers, spurring a more than 6% drop in its share price on Thursday.

Why it matters: The November delivery numbers highlight weak sales for the company’s lower-priced five-seat SUV, the ES6, which was expected to be a key sales driver.

• However, Nio beat out rivals WM Motor and Xpeng Motors in new energy vehicle (NEV) sales amid slumping overall auto sales for the first 10 months of the year, according to data recently released by China Banking and Insurance Regulation Commission.

Details: Nio delivered 2,528 electric vehicles (EVs) in November, almost flat sequentially to October, when it delivered 2,526 cars. November marked the fourth consecutive month of delivery growth, the company said in an announcement released Thursday.

• ES6 deliveries decreased 7% month-over-month to 2,067 units in November, with ES8s making up the balance. Nio did not address the decline in ES6s.
• Still, Nio’s delivery results contrasted with falling overall NEV sales in the country, which accelerated to 45.6% year on year in October, the fourth consecutive month of decline.
• Nio has delivered a cumulative total of 28,743 vehicles as of end-November since it began delivering cars in June 2018, with the ES6 making up about 30% of the total sales. The company began delivering the ES6 in June.
• Nio founder and CEO William Li Bin attributed the “solid” delivery results to an expanded sales network, adding that it has opened 37 Nio Spaces, touted as “more cost-efficient” than its clubhouse-style Nio Houses, of which there are 21.
• ES6 was the world’s top-selling all-electric car in the high-end luxury SUV segment in October, Li said in a public event late last month.
• Nio’s share price rose more than 5% after market opened on Thursday, but pared the gains and fell 6.2% to $2.27 by market close.

“Our strong sales performance was also attributable to the competitiveness of our ES6 among all premium electric SUVs and the passionate endorsement by our existing users… As we continue to build more cost-effective NIO Spaces and improve the performance of the existing ones, we are confident in our deliveries going forward.” 

—William Li Bin

Context: Nio last month announced it will hold this year’s Nio Day, its annual press event, on Dec. 28 in Shenzhen, without revealing further details.

• Chinese media reported that the company is planning to launch its third mass market model, an updated ES6 coupe, roughly equal in price to the current ES6, which starts at RMB 358,000 ($53,000).

Chinese drone maker Ehang seeks to raise up to $46.4 million in its US listing, according to company filings, less than half of the $100 million placeholder used when it filed its application in late October.

Why it matters: Founded in 2014, the Guangzhou-based company specializes in commercial and aerial photography drones, and was the first to receive a license to test unmanned aerial passenger vehicles in China.

• In consumer drones, it is dwarfed by Shenzhen-based DJI, which is the world’s largest civilian drone maker and plans to go public in either Hong Kong or mainland China, according to Reuters.

Details: Ehang’s market capitalization could reach $742 million through its initial public offering (IPO) of 3.2 million American depositary shares (ADS) at a price range of $12.5 to $14.5 offered on Nasdaq, according to its renewed Form F-1 filed with the Securities and Exchange Commission on Thursday.

• Insiders including company CEO Hu Zhihua and co-founder Xiao Shangwen intend to purchase up to a total of $7 million worth of ADS in the offering.
• The company plans to trade under the ticket of “EH” on Nasdaq.
• In a previous version of the filing, Ehang set a placeholder of $100 million, more than double the size of the new target raise. An Ehang representative declined to comment, citing the company’s quiet period ahead of the IPO.

Context: The company filed its IPO application on Oct. 31, joining a wave of Chinese IPOs on US markets during the month.

• The company delayed its listing plans in April after lukewarm investor interest, according to Reuters.
• Ehang was valued at $420 million in its latest fundraise, a Series B backed by GGV Capital, Zhen Fund, and others in August 2015.
• Chinese drones are facing fierce criticism from US authorities, who introduced in September a bill barring federal agencies from buying drones with China-made equipment.

Content aggregator Qutoutiao’s significant user base growth in the third quarter powered solid but markedly slower revenue growth beating the mid-range of analyst consensus estimates while net losses narrowed.

Why it matters: Qutoutiao’s ability to monetize its lower-tier city-focused content services helped the company post a solid increase in advertising revenue for the quarter in a slowing economy that has significantly crimped growth for some of China’s biggest internet companies.

“We believe the lower-tier cities remain the most attractive space today with unmatched structural potential for growth and monetization. During the Double 11 Shopping Festival, GMVs generated by Qutoutiao users on e-commerce platforms increased more than 10-fold in comparison to last year.”

—Tan Siliang, Qutoutiao chairman and CEO

Details: Qutoutiao’s net revenues for the third quarter grew 44.0% year on year to RMB 1.41 billion ($197 million), a significant slowdown from 187.9% annual growth it saw in Q2 and a steep drop from 520.3% year-on-year growth it earned in the same quarter a year ago.

• Revenues from advertising and marketing increased 54.1% year on year to RMB 1.38 billion, driven primarily by increases in the platform’s user base, user time spent, and ability to monetize traffic.
• Combined average monthly active users (MAUs) more than doubled compared with the same period last year, reaching 134 million. The figure includes users from Qutoutiao, the company’s online reading app Midu Novels, and lightweight version Midu Lite.
• Combined average daily active users (DAUs) also jumped 98% year on year to 42 million.
• User engagement expenses rose 11.5% year on year driven by the increase in user base size, but spending per DAU per day for the two apps dropped 43.6% year on year.
• The company shrank its net loss 14.0% year on year to RMB 888.2 million, with net loss margin improving to 63% from 106% in the third quarter of 2018.

Context: Qutoutiao’s online reading unit Midu, which includes Midu Novels and Midu Lite, closed a $100 million Series B in October.

• Midu said it would use the proceeds for acquiring content, constructing a content creator ecosystem, and marketing purposes.
• Midu Novels was suspended in July along with two other heavyweight reading apps for not removing lowbrow and sexually suggestive content.

Game live-streaming platform Douyu reported strong revenue growth and reduced net losses for the third quarter as the company improved its monetization and benefited from economies of scale, while user growth on the platform slowed.

Why it matters: As the two largest live-streaming platforms in China, Douyu and rival app Huya have been locked in a battle for user attention. While Douyu has taken the lead in monthly active users (MAUs), it has been trailing Huya in terms of monetization.

• Both platforms are backed by Chinese gaming giant Tencent.

“During the quarter, we continued to cultivate the vibrancy of our game-centric live streaming content ecosystem, while expanding our content coverage across all segments of the platform. Notably, our game live-streaming segment accounted for more than 80% of the total viewership in the quarter.”

—CEO and Director Chen Shaojie, during the earnings call

Details: Douyu’s net revenues for the third quarter surged 81% year on year to RMB 1.86 billion ($261 million), driven primarily by a jump in live-streaming revenues, hitting the high end of analyst consensus estimates compiled by Yahoo Finance.

• Live-streaming revenues surged 83% year on year to RMB 1.66 billion during the quarter, powered by increases in both the number of paying users, which increased 66% year on year to 7 million, as well as improved average revenue per paying user (ARPPU).
• Chen also cited the summer high season, a growing e-sports industry, blockbuster game title launches, and several game-focused mobile game smartphone models as growth drivers during the quarter.
• Despite having 1.7 million more paying users in the third quarter than rival Huya, Douyu’s live-streaming revenues still trailed Huya’s Q3 figures of RMB 2.16 billion.
• Gross profit rocketed 450% year on year to RMB 317 million, with gross margin also improving to 17% compared with 6% in the same period last year. During a call with analysts, the company attributed the growth to monetization improvements and economies of scale.
• Douyu’s average MAUs in the third quarter grew 15% year on year to 164 million, leading Huya’s 146 million.
• Douyu also significantly reduced its net loss in the third quarter 33% year on year to RMB 164.6 million, or RMB 5.88 ($0.83) per ordinary share from RMB 27.34 in the same year-ago period.
• During the earnings call, CEO Chen Shaojie said that Douyu is actively exploring overseas monetization potential in countries such as Vietnam and Japan.
• Douyu expects its net revenues in the fourth quarter to rise between 69% and 75% on an annual basis to fall within a range of RMB 1.96 billion and RMB 2.03 billion.

Context: Douyu listed on the Nasdaq stock exchange in July, raising $775 million, but its shares have stayed consistently under the $11.50 IPO price since its debut. Its shares closed up 2.5% on Wednesday at $7.84.

Chinese smartphone maker Xiaomi reported 5.5% year-on-year growth in third quarter revenue on Wednesday, in the company’s slowest-ever growth since its July 2018 listing in Hong Kong.

Why it matters: The underwhelming earnings report reflects the mounting pressure on Xiaomi as it faces aggressive competition from rival Huawei in China’s saturated smartphone market in the past few quarters.

• The Beijing-based company has seen its smartphone shipments in China drop by 33% on an annual basis in the third quarter while those of Huawei expanded 66% year on year for the same time period.
• Overall smartphone sales in China shrank 3% year on year in Q3.
• Xiaomi has looked to European markets, where Huawei phones are restrained by its blocked access to Android as a result of a US trade ban, to make up for weak sales at home.
• The company’s Q3 smartphone shipments in Europe surged 73% year on year to reach 5.5 million units, though still dwarfed by Huawei’s 11.6 million units sold in the region during the same time period.

Details: The company’s revenue in the third quarter rose to RMB 53.66 billion (around $7.6 billion) from RMB 50.85 billion the same period a year earlier, a 5.5% year-on-year increase.

• It generated RMB 3.5 billion in profit during the quarter, a 20.3% increase compared with the same period last year.
• Revenue from smartphones, which accounted for most of Xiaomi’s total revenue, fell 8% year on year to RMB 32.3 billion in the quarter.
• Xiaomi chief finance officer Shou Zi Chew attributed the smartphone sales drop to the bleak smartphone market where wireless operators are upgrading their networks from the current 4G to 5G at an earnings call with analysts on Wednesday.

“We are in a transitional period from 4G to 5G and the smartphone market is under great pressure… We are very confident about the 5G era because we are good at bringing new technologies to consumers” (our translation).

—Shou Zi Chew, at the earnings call on Wednesday

Context: Xiaomi in September launched the country’s cheapest 5G-compatible smartphone, the Mi 9 Pro, at a starting price of RMB 3,699.

• Company chairman Lei Jun announced last week that Xiaomi is building a “smart plant” in Beijing to manufacture its flagship handsets.
• In a further global push, Xiaomi is planning to enter the Japanese smartphone market next year, according to Nikkei.