Time for “China to leverage capital,” not the other way around: Eric X. Li
Time for “China to leverage capital,” not the other way around: Eric X. Li
The venture capitalist asks his profession to look beyond consumer internet
The English-language China CDC Weekly published a research on Saturday, June 18, based on COVID-19 infections between March 22, 2022 and May 03, 2022 in Shanghai. One of the two corresponding authors is Dr. 张文宏 Zhang Wenhong.
What is added by this report?
In the Shanghai Omicron wave, the risk of developing severe illness was very low (0.065%, 22/33,816) in initially non-severe patients without unstable conditions. Older age, presence of comorbidities, initial symptoms, vaccination status, and several laboratory indicators were associated with prolonged viral shedding time, development of severe illness, and coronavirus disease 2019 (COVID-19) pneumonia.
What are the implications for public health practice?
This study provides evidence for refining COVID-19 public health strategies to minimize the risk of overwhelming of regional medical resources.
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We enrolled 33,816 SARS-CoV-2 positive participants…
In the entire study cohort, 22 patients developed severe/critical infection; all were in the risk group. Severity rates among all subjects and risk-group subjects were 0.065% and 0.238%, respectively…
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Shanghai-born, U.S.-educated venture capitalist 李世默 Eric X. Li is perhaps among the most ardent and sophiscated pro-Beijing voice in the West. Li is also a founder of 观察者网 Guancha. It’s unknown how much influence Li exerts on Guancha regularly, but the privately-run media site is hugely popular and influential in China, and at the same time has been decried as nationalist.
Li gave a TED talk in 2013. Over the years, he has written in the Foreign Affairs (2013, 2014, 2016, 2016 again, 2017), The New York Times (2011, 2012, 2016), the Washington Post (2018), Foreign Policy (2020), and most recently The Economist (2021). Li also had a lunch with the Financial Times in 2020.
No matter how persuasive those pieces turned out, his politics is well-known. But the founder and managing partner of 成为资本 Chengwei Capital’s investment strategy is perhaps not.
Earlier this month, Li gave a 13-minute speech via video at the 2022 Qingdao-Global Venture Capital Conference (GVCC) hosted by the eastern metropolis and port city of Qingdao, which was published today by Guancha.
Entitled 中国新经济的前后二十年, China’s New Economy: The First Twenty Years and The Second, Li argues 资本杠杆国家 capital leveraged China from 2000 to 2019, but now it’s time for 国家杠杆资本 China to leverage capital. Li also named three companies as examples for venture capital to look for in China now.
Li’s speech reminds me of the amazing 2021 letter by Dan Wang, of Gavekal Dragonomics:
Beijing recognizes that internet platforms make not only a great deal of money, but also many social problems…These companies may be profitable, but entrepreneurial dynamism here is not a good thing.
Where does Beijing prefer dynamism? Science-based industries that serve strategic needs. Beijing, in other words, is trying to make semiconductors sexy again…
If venture capitalists are mostly funding social networking companies, then they would be able to hire the best talent while denying them to chipmakers. That has arguably been the story in Silicon Valley over the last decade: Intel and Cisco were not quite able to compete for the best engineering talent with Facebook and Google. Beijing wants to change this calculation among domestic investors and students at Peking and Tsinghua.
Internet platforms aren’t the only industries under suspicion. Beijing is also falling out of love with finance. It looks unwilling to let the vagaries of the financial markets dictate the pace of technological investment, which in the US has favored the internet over chips. Beijing has regularly denounced the “disorderly expansion of capital,” and sometimes its “barbaric growth.”
The attitude of business-school types is to arbitrage everything that can be arbitraged no matter whether it serves social goals…
The Chinese leadership looks more longingly at Germany, with its high level of manufacturing backed by industry-leading Mittelstand firms. Thus Beijing prefers that the best talent in the country work in manufacturing sectors rather than consumer internet and finance.
China’s New Economy: The First Twenty Years and The Second
by 李世默 Eric X. Li in June 2022
China's new economy is going through a critical transition period. In the past two years, as VCs, our perception of industries, companies, technologies, and investment logic has undergone a dramatic shift.
We used to divide the history of the New China into the "first 30 years", and the "second 30 years" of reform and opening up. Today, I would like to borrow this concept and divide China's new economy into "the first two decades" and "the second two decades"”
The first two decades are, of course, from 2000 to 2019. During this period, China's GDP has doubled ninefold, creating the world's largest industrial chain and the world's second-largest consumer market. The mega-scale industry and market created the takeoff of China's new economy.
In the first two decades, the most crucial result of China's new economy was the rise of consumer internet platforms. We VCs are familiar with the fact that, backed by such a large market in China, a platform can support its continued expansion with capital, eventually achieve monopoly status, aim for a future monopoly, discount it into a vast net present value (NPV) in the present, and then use this NPV as valuation to raise funding, which helps it achieve monopoly. This is the model of consumer Internet platforms, and as a result, we have given birth to some world-class Internet giants in China.
However, in terms of technology development, a foreign think tank scholar has studied to locate each country on the "smile curve"” According to her research, we can find that from 2000 to 2019, despite a big increase in scale, China's industry has stuck in the middle. That is, manufacturing, and assembly, compared to the two ends of the R&D and sales. The added value is relatively low.
[Pekingnology: The study that Li repeatedly quoted appears to be Supply Chain Diversification in Asia: Quitting China Is Hard by MacroPolo, the in-house think tank of the Paulson Institute. The author is Rita Rudnik.]
However, China has also achieved industrial upgrading in a few fields, such as high-speed rail, new energy, 5G, etc. But these hard technology industries with high R&D investment are led by government. The government is either their investor or their big customer.
So last year, General Secretary Xi Jinping mentioned in his speech (Interpret: China by CSIS) that the new round of technological revolution and industrial change has given a strong impetus to economic development and also brought profound impacts on employment and income distribution, including some negative effects, which need to be effectively addressed and resolved.
In my opinion, the first two decades of China's new economy were essentially that 资本杠杆国家 “capital leveraged China.” The consumer Internet platforms mainly relied on innovation of business models, and 技术含量并不高 there wasn’t a lot of technology in it.
For example, the QR code we usually scan, in fact, was invented in the 1990s. The consumer Internet platforms have developed so fast because they could draw maximum positive external benefits created by the country in the development process, such as the increase of disposable income of our residents, the improvement of logistics and transportation, and the popularization of information technology, which were all done by the state, not by us venture capitalists or entrepreneurs.
But the negative externalities of this capital-driven, winner-take-all development model are borne by the state, resulting in "Gilded Age" problems throughout society, such as the widening income gap, for example the lack of social security for take-away riders.
Therefore, the Communist Party of China Central Committee proposed "high-quality development" and "common prosperity" to promote healthy economic development, optimize the distribution of income, create opportunities for more people to get rich, and avoid 内卷 "involution" and 躺平 "lying flat"”
This is a significant turnaround in China's new economy. This is a significant turnaround and an essential opportunity for China's new economy and the beginning of the next 20 years of China's new economy.
In the next twenty years of China's new economy, it should be 国家杠杆资本 "China leverages capital." Under the leadership of the national strategy, China's economy will be able to transform from large-scale development to high-quality development through capital-driven industrial upgrading.
On the smile curve, China should not only be large-scale but also keep moving to the upper left. Moving up is to improve industrial value-added, which will lead to more high-skilled jobs and further increase per capita income while achieving cost reduction and efficiency gains with empowerment from technology, and maintain the global competitiveness of Chinese manufacturing. Moving to the left is to improve research and development capabilities so as to solve the problem of being chokenecked over key technologies.
In the new development stage, our investment should focus on "high-quality development + inclusion"”
Our company focuses on three main lines: First, the transformation and optimization of the supply chain. China has the world's largest industrial chain supply chain. However, it is still relatively fragmented. The industry generally lacks the ability to transform themselves through technology and information technology, so there is huge value to be unearth.
The second is the import substitution of hard technologies. For example, chips - China's most enormous annual import. Because of the shortage of chips and the falling oil prices after COVID-19, China imported $350 billion chips in 2020, more than double the value of crude oil, which is the second place.
Another example is medical equipment. Many drugs and medical devices in China are dependent on high-priced imports. The room for domestic substitution is vast, and once done it can significantly reduce the burden of the people to see a doctor.
The third is sustainable development. Now the world is trying to achieve carbon neutrality. China set out very early with the most investment. For example, in terms of solar photovoltaic power generation, in the early stages in foreign countries, cost per kilowatt hour of electricity was $100 dollars. Through the continuous development of Chinese enterprises, the price has now dropped to a few cents, enabling large-scale application.
Similarly, electric vehicle (EV) batteries made in China have significantly reduced the cost of EV production, which is why EVs have grown so quickly in recent years.
What kind of companies will make the next two decades of China's new economy? Let me share three cases with you.
The first is 百布 Baibu, which is the most significant intelligent supply chain platform for textile fabric in China. Textile is a trillion-dollar market, and 90% of the world's textiles are made in China. However, China's textile supply chain is at a very primitive stage, with manufacturers scattered in the Yangtze River Delta and Pearl River Delta, numbering tens of thousands.
So Baibu is applying the industrial Internet in the textile industry, linking the upstream and downstream of information asymmetry, allocating efficiently, turning the physical factory into a cloud-based factory, connecting hundreds of thousands of looms. It optimize production, reduces costs, and increases efficiency.
The second is 大熊星座 UMA Intelligent Group. Welding is a traditional manufacturing industry and a huge one. Almost all industries involve welding, such as building bridges, shipbuilding, building cars, and building houses. The market size is hundreds of billions.
But welding is a very traditional industry, very dependent on the skills and experience of the operator. Now there are fewer and fewer good welders, and young people are not willing to do it, so we are facing the shortage of welders in the post-80s and post-90s groups. UMA Intelligent Group uses AI to train welding robots, which can solve the shortage of welders at once, fast and well.
The third is called 百奥恒 Baiaoheng, which is also doing an obscure industry - cement. Many years ago, a Frenchman invented a cementitious material technology that could make concrete with similar properties to cement from the slag of the smelting industry. This technology was developed in the laboratory for many years, and then the Australians went on to engage, but finally did not put it into practical application. That’s because first of all these countries do not have many smelters so they couldn’t not find so much slag as raw materials; secondly, these countries do not have much demand for cement.
Finally, several Chinese people found that this is an ample business opportunity because China has the world's largest smelting industry and that a large number of slag cannot be easily disposed of, creating a big headache. On the other hand, China's infrastructure mania means it needs a lot of cement.
Cement production is a significant carbon emitter because of calcined limestone, which accounts for about 20% of the total national emission. The State Council has very strict requirements because of China’s promise on the carbon peak, so the state strictly limits the cement production capacity.
This geopolymer material of 百奥恒 does not use limestone in the production process and does not need to be calcined, so the carbon emission is minimal, only 30% of that of traditional cement production, so it can kill three birds with one stone, and it has been rapidly landing in all provinces.
The companies mentioned above have one common feature: they are all entrepreneurial, but through a critical technology, they have leveraged a large-scale industry. They have quickly grown into leaders in their respective segments.
Such a phenomenon is also found in developed countries, where hundreds of "hidden champions" are found a large-scale industrial chain. China is the world's largest goods producer, and there must also be hundreds of "hidden champions"”
Therefore, in the latter two decades of the new economy with high-quality development, investors should not blindly pursue the financing-driven scale-up as before but should focus on the quality and build a deeper understanding of the industrial chain and supply chain.
These are some of my understanding of China's new economy and thoughts on the future high-quality development. Finally, I would like to share with you the speech of the General Secretary, 《正确认识和把握我国发展重大理论和实践问题》 The Correct Understanding of Major Theoretical and Practical Problems of China’s Development (Interpret: China by CSIS) published in the magazine Qiushi/Seeking Truth last month, in which two points particularly struck me, and I would like to share them with you as guidelines we should always keep in mind in our future investments.
The first point is to focus on the direction of common prosperity. Common prosperity is the essential requirement of socialism with Chinese characteristics, and we should look for entrepreneurial opportunities that create inclusive value in our investments.
The second point is the General Secretary's discussion of capital. Marx and Engels did not encounter the problem of capital on a large scale back then, and the establishment of a socialist market economy resulted from the Communist Party of China leading the country to "cross the river by feeling the stones" and figuring it out. The essential characteristic of capital is the pursuit of profit, which is engraved in the DNA of capital.
However, in China, capital must grasp two principles: first, it must closely combine its return on investment with national interests and actively play its function as a factor of production; second, it must not pursue its interests in a way that runs counter to the long-term interests of the country and the well-being of the people.
Therefore, the next twenty years of China's new economy will also bring an era full of opportunities for our investment industry. If we can grasp the prospects of the times and bring value to the big picture of high-quality development, we can make a difference in the new era and contribute to the healthy development of the socialist market economy.
As investors, let's roll up our sleeves and do our best to play in the "second half" of China's high-quality economic development.
Again, a recommendation for the 2021 letter by Dan Wang, of Gavekal Dragonomics.
And the link to the China CDC Weekly study, in English.
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