An FYI for the next year of Chinese Characteristics
Bonus: Excerpt from premium deep-dive on Chinese DTC
In my Chinese Characteristics: One Year In post, I remarked that I wanted to plan the next five years of this newsletter. Today I want to share my intentions for the following year (also give an excerpt to my recent Chinese DTC piece at the end).
I had started writing out of a desire to see it exist in the world; it was also a forcing mechanism for me to learn about Chinese tech. My competitive advantage wasn't that I was a Chinese tech expert, but that I was seeing many things for the first time. I knew what water was. Chinese Characteristics’ first year was about learning the governing behaviour and product strategy developed in this unique ecosystem.
After a year, I've absorbed about 80% of the learning. The following 20% will take much longer than a year to master. I know that from experience. I will be spending more time talking to industry folks and delving deeper into new technology areas. Getting to the cutting edge requires effort. But the good thing is that you, dear readers, are coming along with me.
In terms of themes for the coming year:
Deep tech - Semiconductors (you should read Jordan's fantastic Part I and II if you haven't done so already) kicks off a series of other deep-tech topics, including but not limited to those covered in the Five-Year Plan.
Current tech trends - As I spend more time speaking to industry folks, I want to keep you updated on the Chinese tech scene’s vibe (for lack of a better word).
Chinese governance and economic structure's impact on tech - In the aftermath of the slew of regulations this year, it has become apparent to the Chinese startup community and domestic and foreign investors that Chinese governance is an unavoidable part of Chinese tech life.
As always, I intend to analyse and give context first and foremost; I do not intend for Chinese Characteristics to become an overt opinion column. Chinese characteristics will not always keep pace with the current news cycle. My pieces aim to give insight into my mental frameworks about Chinese tech. I see it as an accumulative body of work. While there is a half-life to all insights, I write with the aim that the pieces should be referenceable in at least a year or three. (See about page for a roadmap of themes). If a reader kindly subscribes to a premium subscription, please go through my archives to better understand the Chinese Characteristics' body of context.
While I can write more, I choose not to because I know the quality of my work will suffer. I have delivered hundreds plus pages of presentations and memos during sleepless weeks in my time, and I can say they were mostly trash. There can be no quality output without quality input and reflection. I maintain that stance going forward.
In terms of housekeeping, everything else stays the same. I’m always happy to get emails from readers who ask thoughtful questions, reply to this email to reach me.
I'm off to Beijing tomorrow to give a talk about product-led growth to the startup community. Drop me a note if you're Chinese tech and want to chat. I'm also working on an emerging view of Chinese data governance for premium readers coming out later this week (also office hours! ).
Out earlier this week was a deep-dive on “State of play for Chinese Direct-To-Consumer products (alongside with a list of 250 DTC brands and major tech platforms' DTC support)”.
An excerpt from the piece:
It's a tough life being a VC these days in China. It was already hard two years back with the diminishing yield of the mobile era. These days with the carrot of the Five-Year Plan and the stick of platform regulations, finding good companies to invest in has never been more challenging. Most experienced VCs1 undertaken one drastic soul search per quarter. Those without an investment track record silently leave to join portfolio companies, start a company or find retirement in the form of 996 at a big tech company. Those that stay have pivoted to become new experts in consumer, B2B, semiconductors, EV, life-sciences or low carbon categories. (Education has been newly stricken from that list).
Consumer investment, Direct-To-Consumer (DTC) or New retail (these are not strictly different categories) has seen a rise in investment appetite since 2018. As we stand in 2021, we’re about to enter the trough of disillusionment for many, but not before a bumper crop of new China-focused brands has emerged. (Note: this piece will not talk about the physical new retailers like Hey Tea or Manner, which while tech-enabled are not technology business in my mind).
In H1 of 2021, ITJuzi reported RMB 813m (an increase of 244% YoY) was invested into retail brands2; the big categories are food, new dining, make-up and lifestyle misc. Ali Research reports the number of new DTC brands has increased 17.9x since 2016.
This piece will focus predominately on online DTC brands and will look at the following :
The enabling factors for DTC’s rise
Leading Chinese DTC brands trends
Playbook of a DTC brands
Where is the sector going?
Enabling factors for the rise of DTC
The demand for a brand over others in their category rests on two broad attributes:
Willingness to pay - the desire for a particular brand, based on a combination of ease of substitution, perception of quality, external signalling capabilities and (both of which are brand associations.)
Ability to pay - the level of discretionary income for a consumer, constrained ultimately by their overall budget and access to credit.
Historically, low levels of ability and willingness to pay have hampered the growth of Chinese brands. The ability to pay has been the key stumbling block; the median household income for much of the 1990s and 2000s hovered around low thousands. As budgetary constraints capped product price, brands focused on producing cost-effective goods with a definite price ceiling (earlier brands did not possess the technology for higher quality goods). Brands focused on cutting costs and had limited margin for storytelling and product R&D. Consumer desires were also unsophisticated; as a communist country entering their first capitalist rodeo, Chinese consumers' initial demands could be satisfied by the mass market output.
For the first generation of Chinese brands, brand associations focused on utilitarian values such as value for money rather than aspirational values of individuality. Being a nation of manufacturers, Chinese brands excel in making a product for 80% of the quality at 60% of the price. Brand storytelling was not a priority.
A consumer could not signal their individuality, sophistication or wealth by purchasing domestic Chinese brands. In the meantime, foreign brands were ready to take the mantle. Many Chinese brands could make a perfect living just by being fast and cheap followers. Examples of Metersbonwe, Li Ning and Nanjiren all fall into this mode. As foreign brands capture premium and mid-market positions, this reinforced the perception that Chinese brands were of lower quality and made it harder for them to move upmarket. The perception is especially pronounced among the older populations who were born during the 60s to 80s.
A myriad of other factors also keeps Chinese brands down. The rampant copy culture that drives Chinese tech originated from consumer goods. Every time a producer made abnormal profits, new entrants flooded the market to equalise overall profit levels. Under intense competition, many domestic Chinese brands had no incentive or capacity to invest in brands. Barriers to entry in the offline world were established with cornering distribution channels, with the correct prediction that the new entrants would require significant capital to access precious self space or TV advertising.
Triggers of change
The rising level of disposable income - Similar to the US and Japan in the 1970s and 1980s, respectively, GDP per capita in China rose to surpass $10,000 in 2019. Analysts see a repeat of the book in domestic brands that marked the 1970s in the US and 1980s in Japan. The Chinese population’s increased ability to pay has unlocked a new virtuous cycle from Chinese brands.
New demographic dividend used to credit - The post-90s and 00s populous are open to experimentation and self-expression with little bias against domestic brands (post-Covid, often biased towards domestic brands ). Aside from increased income, this was a generation that was comfortable with purchasing with credit. The holiest concept of not accruing debt (because credit was scarce) is lost among Gen Zs. Like their western counterparts, they spend in service of pursuing an image of the life they want.3
In short, the ability to pay has increased, and in turn, it has set off a series of cascading changes on the demand side. The new demographic also has different innate willingness to pay for domestic brands, as I wrote in Perfect Diary:
The economic rise of Gen Z has been a boon to Yatsen (Perfect Diary). They are a generation who's open to experimentation and self-expression, not to mention the ability to access both their parents and grandparents' savings. Unlike the older generation who grew up under numerous scandals involving unsafe domestic brands, they have no preconceived notions against domestic brands. They are the ideal generation for Perfect Diary to tap into. 70% of their consumers are age 30 and under, and 50% are aged 20 and under.
Willingness to pay is also an endogenous variable influenced by the quality and selection of the available goods. The more consumers feel that there are premium domestic brands, the more they are willing to pay for them.
To see the rest, pay me? Thanks.