'Heavy' versus 'Light' business philosophies in Chinese tech
with Mike Tian of WCM Investment Management
This is the very first sponsored post of Chinese Characteristics. Before you stop reading, hear me out. I would never write something to you that I didn’t want to read myself. After all, that was why I started this newsletter.
Last month, longtime subscriber and WCM Investment Management’s China mutual fund portfolio manager Mike Tian came to me with a proposal. The under-the-radar $90bn AUM fund was looking for a general China analyst, he said, and he wondered whether that person might be reading Chinese Characteristics. I told him they might be, but he should give share some compelling insights with my readers in return.
Mike’s thoughts on ‘Heavy’ versus ‘Light’ Chinese tech business are fascinating, especially given the new announcements that Alibaba, Tencent and Pinduoduo are looking to invest in more capital investive areas.
So tell me about WCM
We are a $90bn AUM asset manager based in Laguna Beach, California. Our mission is to find high-quality growth companies globally that can compound shareholder value for years or even decades. We don’t just invest in great businesses. Rather, we want to invest in businesses that are becoming better as they grow bigger. We also care deeply about corporate culture and want to partner with great management teams with strong and aligned cultures for the long haul. We owe our success both to our investment framework and our own culture.
We want to create a world-beating investment culture based on employee ownership, collaboration, curiosity, humility, and the desire to always get better. If you’d like to hear more about our firm and culture here’s a few podcasts interviews with our founder, partner and portfolio manager.
What are you doing in China?
We have invested in China for 15+ years. However, our involvement has grown significantly in the last five. From a business standpoint, investor interest in the asset class is growing rapidly. With China becoming more accessible to global investors and a larger portion of benchmarks, we think this trend will continue. At the same time, with our long experience in China and differentiated investment framework, we believe we have some unique viewpoints to offer. We have been incubating a China strategy since 2018 and launched a mutual fund in March 2020 (WCMCX). We intend to invest aggressively in our China capabilities in the next few years.
What's a unique take you and your team have about the Chinese tech giants?
Something I’ve been turning over in my mind is that a typical way to look at companies is on the following axis:
Most Chinese internet/tech companies want to be 'Light': asset-light, people light, outsource all the ‘grunt work’ to the ecosystem, focus on ‘platform’, earn high margins and high returns on capital.
I think this might be a mistake.
There is a tremendous amount of under-tapped potential in the 'Heavy' end of the axis. Heavy businesses may also have much wider moats than 'Light’ businesses. As an investor, I’d rather earn 15% ROIC for a very long time, versus 100% ROIC that disappears in a few years.
Heavy businesses not only refer to assets but also important elements such as people and operational details. Although mundane, these details are the difference between success and failure and are a powerful competitive weapon.
Examples of this include:
Douyin: A huge reason for Douyin’s success is its heavy on the ground team to cultivate influencers, designing viral dance moves, etc. These capabilities sound easy, but Tencent/Kuaishou is still not up to snuff. This DNA is also heavily responsible for TikTok’s phenomenal global success.
Meituan: Famed for their field execution, heavy on-the-ground teams and infrastructure. This is one huge reason that they were able to fight off Ele.me while using a fraction of the subsidies offered by Ele.me.
Beike: The real estate platform is probably the ultimate ‘heavy’ business. They have their own directly managed stores. But there are also 30-40K operational people all over the country cultivating and maintaining the Agent Cooperation Network (ACN), doing things like training, policing 3rd party franchisees, maintaining customer experience, recruiting agents or franchisees, etc. This is a very difficult capability to copy.
As all the big internet businesses turn into cross-vertical ecosystems, it’s a lot easier to use existing traffic to jump-start a ‘Light’ business vs a ‘Heavy’ business. For example, livestreaming which is the ultimate ‘Light’ business has now gone from a standalone product to a mere feature in a wider product offering. In fact, almost all light businesses suffer from this risk. The competitive landscape can change very quickly. However, barring technology disruption or significant regulatory change, I am not concerned about anybody using their traffic to cut into food delivery or home brokerage as these are heavy business areas where mere traffic isn’t enough.
The major shortcoming with 'Heavy' businesses is that they earn much lower margins and returns. The usual playbook is to use 'Heavy' businesses as a loss leader wedge to cut into 'Light' businesses that offer better margins. Meituan does this with O2O ads / traffic generation. This is pragmatic, but there will always be more competition in these ‘Light’ businesses and different ways to skin the cat. For example, Douyin and Wechat are direct competitors there. 'Heavy' businesses should not lose sight of their competitive advantages in pursuit of 'Light' businesses. The 'Light' margins are a byproduct of the 'Heavy' business units. In fact, going from 'Heavy' to another 'Heavy' vertical might be a smart way to further build the moat. For this reason, I applaud Meituan’s investments in Community Group Buying (CGB). This segment levers on Meituan’s core strengths.
Being a 'Heavy' business isn’t just a strategy or a willingness to commit resources. It’s also a mindset and corporate culture. The latter is far more difficult to create. Some businesses simply don’t have the cultural DNA to be 'Heavy'. Alibaba is one example. They historically have shied away from being 'Heavy', and their forays into 'Heavy' verticals like O2O and Ele.me have been very mixed. CGB is the test case for whether Alibaba can change and adapt. Tencent suffers from the same problem, but Wechat is just so powerful they haven’t felt any adverse impact.
The Chinese internet is becoming 'Heavier'. You see this in almost every vertical. My advice to internet companies would be 'Embrace heaviness. Use it to create better customer experiences and competitive differentiation. As Paul Graham would say - Embrace the Schlep'
When you say 'mindset and corporate culture.' as being conducive to creating heavy business, how does that manifest out of curiosity?
Here’s what I mean about the mindset of 'Heavy' v 'Light' businesses:
A lot of tech companies talk about having an ‘engineering first’ culture. The unspoken assumption is that customer value is primarily created through engineering and technology. Their worldview is software-centric and most problems are software problems. Operations on the other hand are messy and low value-added. To the founder/management, running a huge ops team of thousands of ‘grunts’ is not a pleasant thought or particularly interesting. Having thousands of operations, logistics, business dev, field sales, customer service, etc folks is a sort of necessary evil for running a big business. These people deliver the value created by product teams to customers but don’t really create much differentiation themselves. If anything, a big team takes up a lot of management bandwidth, creates organizational overhead, and makes the entire company less nimble. If these functions can be outsourced at a reasonable cost or left to ecosystem partners, so much the better.
There are companies though that embrace the ‘burden’ of an operationally complex organization. They might still be engineering-focused, but they also realize that customer value depends on controlling the entire ‘end to end experience’. Operational expertise is a source of competitive differentiation and a source of value creation in its own right. Management tends to spend a lot more time thinking about these things, and operational/field roles often have more decision-making power and influence within the organization. You are never going to see Jack Ma delivering packages on a scooter or worrying about whether riders have gloves in winter. Not that CEOs should be delivering packages – the point is to signal what the company values and what it could become.
This is a very subtle distinction, but it shows up in the internal values of the company, the prestige of certain roles or departments, compensation, career progressions, how decisions are made, channels of communications, and many other small things. And yet, execution is often the sum of a lot of small things.
In China internet, this 'Heavy' mindset is prominent in companies like Meituan, JD, and Beike. Sometimes, the culture is not created deliberately, but rather because of past experience and history.
Meituan operates with a level of nimbleness and aggressiveness not matched by competitors. If they want to run a joint promotion with a restaurant, the campaign can be activated in a couple of days. With Ele.me, you have to jump through multiple hoops of approval. Much more trust is placed in field teams who communicate more effectively with headquarters, allowing for better decision making. Meituan’s scrappiness and agility enabled them to survive the 'War of Thousand Groupons' and that influences them to this day.
Beike, with its history of running home brokerage stores, has a deep customer-centric and service-oriented culture. In a commoditized and hypercompetitive industry, they were able to build commanding market shares in various cities through sheer execution. When they created the Beike ACN platform, Beike/Lianjia sent tens of thousands of Lianjia veterans to different cities. These folks are deeply steeped in the culture and can effectively instil that in the broader Beike network, including 3rd party brands. More than sourcing housing inventory or creating a good app, these operations teams enable the Beike platform to function.
Success for Heavy platforms comes from consistently executing on small things. None of it is really rocket science, but it’s not easy to create that consistency across thousands of supplier and customer touchpoints. Do this consistently over a long time though, one can build brand reputation and hard moat sources around customer acquisition costs, customer loyalty, supplier network, scale efficiency, etc. Heavy businesses don’t think of business as simply a ‘software problem’ that can be solved with good UX, algorithms and plenty of traffic. They realise it’s more complicated than that.
And I hear you’re hiring?
Yes! Here’s the link to the job description with full details but in short, we are looking for a generalist analyst to support our growing efforts in China. Here’s a bit more about what we’ll be looking for:
'While we have a global generalist approach, your will be spending 80%+ of your time supporting our investment research process in China. The remaining 20% may be more global in nature. The role includes generating differentiated insights, investment ideas, and maintaining coverage on Chinese (and some global) companies. Moreover, you will add value to the global generalist team by surfacing insights from China that can be read across our global coverage universe. At the same time, you should take insights from across the world and apply them to China as appropriate. Teamwork and collaboration will be required across the research team. You will also travel to China for on-the-ground diligence.
Our process is collaborative and team-based, but people are given the freedom to do their job as they see fit, with the understanding that we’re all ultimately accountable for our performance. There are no investment superstars in the firm, and everyone’s doors are always open. Analysts are expected to source new ideas, look for inflexions (along the key vectors of our investment process) on our coverage lists, discover and drive investment process improvements, and help those around them make good decisions. The latter cannot be overstated. We’re not looking for people that want to make a mark on WCM, rather we want people focused on making those around them better.'
To apply: Please email your resume as well as the answers to the following questions to: firstname.lastname@example.org and let us know that you found us through Chinese Characteristics!
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