Measures taken by foreign companies since the beginning of the outbreak

Remote work

95% of the surveyed companies set up remote work tools to ensure the continuity of their operations as soon as the Chinese New Year holidays ended, in early February 2020. However, they encountered several challenges like inability to work from home for employees of factories, workshops and construction sites. Furthermore, support functions working remotely also need the necessary IT tools. Thus, relative solutions are sending tools and components to assemble at home, providing VPN access, sending new computers through the IT team and adopting software to facilitate remote work. Moreover, during the pandemic, the top 3 used collaborative tools are WeChat, DingTalk and Zoom.

Flexible work and more flexible hours

49% of the companies surveyed decided to implement a staff turnover policy to reduce the risk of contamination at work, and it was used more often in medium-sized enterprises and large enterprises, whose payroll increased the risks significantly. For these companies, staff turnover took effect at the end of the remote work period, allowing a smoother and safer return to work. Hence, it generally started from the end of February until the end of March. Most chose a system of two teams (A and B), which shared a week each.

Source: daxue consulting, The impact of Covid-19 on the organization and HR of foreign companies in China.

In order to avoid peak hours in public transit, companies reorganized working hours. Employees had departure and arrival time slots, based on their preferences in a 3-hours slot. Furthermore, 5 companies mentioned the provision of rental cars and Didi 滴滴for employees who had to use public transit.

Specific measures to avoid the risk of contamination at work

100% of LEs, MSEs and SEs, and 75% of MEs implemented specific health measures by the end of the Chinese New Year holidays in early February. In factories, the sanitary measures became stricter: reorganization of the changing rooms, footbath at the entrance, more masks supplied per day, and a quicker pace of staff turnover. Additionally, in order to avoid physical contact as much as possible, canteens and meeting rooms were prohibited or fitted to respect the principle of social distancing.

The digital health passport (suishenma 随申码) has been deployed on the Alipay 支付宝 mobile payment app across China since late January. It tracks the movement history of individuals, coupled with the geographic data of the pandemic. Sequentially, it delivers its conclusions in three colors as illustrated below.

Employees’ temperature was regularly checked by digital infrared thermometer at the entrance of the buildings. Furthermore, nominative cards at the entrances were distributed to employees to enter the buildings, and employees were required to keep a physical distance of at least 1 meter in access lines. Beyond these, enterprises distributed masks and hydroalcoholic gel to employees in the office and implemented disinfection protocol every 2 hours.

Undoubtedly,  China’s measures to suppress the spread of the Covid-19 have achieved significant success. Meanwhile, these technological and organizational transformations enabled developments in working remotely, tracking population movements and establishing QR tracking

Operations resumption

The companies surveyed had largely resumed their operations by February 10^th. Authorizations to restart the activity were issued for 88% of small and micro enterprises, compared to 75% of large and medium-sized enterprises.

According to the company’s activity sector, the full recovery is very contrasted, mainly assessed on a case-by-case basis by local authorities. Thus, companies whose areas are considered strategic, such as health or chemicals, have not encountered any difficulty. On the contrary, business sectors based on physical stores suffered a slower recovery, especially those in physical retail.

Check out our pages about how China is recovering from the Coronavirus outbreak and the Coronavirus China economic impact report by Daxue Consulting.

Main HR challenges met by French-speaking companies in China after the outbreak of the Covid-19

Employee motivation and involvement

In early February, the motivation of employees was divided between the desire to resume normal work and the risk posed by contamination in the office. At the end of February, employees’ motivation was affected by the remote work, emphasing the importance of “social work ties” over time. However, the comments of the respondents remained appreciative towards the state of mind of their employees during the crisis and 80% of surveyed companies considered their employees motivated during the crisis.

Assuming that most of the respondents believed that their employees were motivated, the comments showed that it is more the respondent’s state of mind that prevailed in answering this question. Thus, a respondent who is somewhat optimistic about the evolution of the situation will tend to say that his employees were motivated.

To successfully identify the feelings of employees during the crisis and determine their needs, several companies conducted internal surveys at different times during the crisis.

Employee’s feelings

70% of companies surveyed find their employees concerned, especially during the month of February. Fears were mostly fueled by the following causes:

• Staff were worried about potential issues around salaries and job security.
• Fear of contamination during transportation to work and at work.
• Concerns about the return of other employees from high-risk areas.
• Fears on current activities and projects.

Additionally, employees were also curious about following questions:

• What was the financial impact for the company?
• What were the legal and economic repercussions on employment?
• How would the recovery be organized?

Thus, knowing how to assess the mental wellbeing of employees during Covid-19 disruption became nonnegligible for companies. It is notable that short- and medium-term business fears were not necessarily correlated with the size of the business on its pre-crisis financial health. Similarly, subsidiaries of large groups and midcaps in China were not spared from these concerns.

Crisis communication and leadership

While facing these different challenges, leaders and managers insisted on their role in the communication process to answer the questions concerning the business’s economic future, job security, and organizational changes. Regular crisis communication brought visibility and transparency to employees. These methods were necessary to reassure and reduce feelings of anxiety among the employees.

Some comments highlighted the importance of leadership in helping employees get through the crisis. Companies cited decision-making and responsibility as essential leverage for organizing remote work and resuming activities.

Many employees were stranded in high-risk areas and the bottlenecks were long-term since they were unable to reach their workplace from January to April. Some workers were denied entry to their dorms, or were no longer travelling between provinces, according to local regulations. As for the solutions to overcome these issues, remote work remained the leading one.

Source: daxue consulting, Covid-19 impact on the organization and HR of foreign companies in China. Many companies had employees stuck in high-risk regions like Wuhan.

With the global expansion of the pandemic in March that forced the Chinese authorities to close their borders, some expatriates were stranded outside of China. Thus, French-speaking companies in China expected difficulties, particularly for visa renewals and expatriate family life.

Work-life balance

Isolation impacted the work-life balance, which was becoming increasingly difficult to maintain, causing more fatigue and burn-out among employees. Concentration difficulties were sometimes linked to the lack of peace at home, the presence of young children, or the absence of a formal working environment. In fact, 45% of companies believed that children’s education from home has had an impact on the availability of employees. Hence, for some employees, the home work environment resulted in a lower level of productivity.

HR policies implemented by French-speaking companies in China to ride out the crisis

Salaries

Overall, there have been several cases of wage cuts or deferrals during the crisis. However, we observed a clear cap between companies of more than 5,000 employees in China and the rest of the landscape of French-speaking companies interviewed. 50% of LE s decided to act immediately on employee salaries, compared to 17% of SEs. Generally, the wage cuts targeted the executives and the companies’ highest wages. Otherwise, they were linked to a significant impact of Covid-19 on foreign company’s activity area.

35% of the companies surveyed were likely to freeze or cut wages in the short-term, no matter the size of their workforce. Besides, comments showed that future freezes or reductions would be subject to many uncertainties, and linked to the difficulty of anticipating a return to normal activity. Again, some comments indicated that these freezes or cuts would generally affect the highest salaries.

Source: daxue consulting, Covid-19 impact on the organization and HR of foreign companies in China. Large enterprises were more likely to reduce wages during COVID-19 in China.

Layoffs and recruitment freezing

9% of the companies surveyed carried out at least one layoff during the crisis. In the sample surveyed, theses layoffs affected small enterprises. With less financing than subsidiaries of medium-sized companies and large groups in China, small enterprises were hit hardest by the crisis, and were sometimes forced to fire employees. However, it was unclear whether the 9% of layoffs were all directly related to the crisis or not since several comments referred to restructuring plans implemented before the crisis to justify the layoffs.

On the other hand, recruitment was frozen. Overall, there were fewer recruitments during the crisis, except for strategic positions. Store sales, support of customer service positions, directly affected by the crisis, were impacted by the freeze. As for strategic positions maintained, were mainly digital ones, directly related to the good performance of online services during the crisis. Comments showed that IT and social media positions were strategic during the crisis. Here is more information on how the e-commerce industry in China is changing during Covid-19.

New recruitment methods and organizational adjustments

Several French-speaking companies in China added that they encountered difficulties in the process of recruiting new candidates in China during the epidemic. These challenges stemmed from the inability of recruiters to meet candidates in person. As a result, interviews by videoconference were mentioned to facilitate the process, as well as the use of psychometric tests as additional decision support.

Also, companies wondered about a potential change in the professional aspirations of candidates: “Will the epidemic push some candidates to look for work closer to their homes?” and thus never leave their province of origin…

As for organizational adjustments, a few companies reported using the “zero-based budgeting” method to adapt their HR policies during the crisis. The zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period to focus on cost containment. This budgeting method is contrary to incremental budgeting, which applies additions or deductions to the last period’s actuals.

Future prospects of French-speaking companies in China after the Covid-19

Forecasting the recovery

Most of the French-speaking companies in China do not forecast a full recovery until Q4 2020 or Q1 2021. Indeed, the epidemic still impacting Europe and North America and will affect the visibility of the companies whose operations are globalized. According to them, three indicators need to be closely monitored: order book, cash and the working capital requirement (WCR). Conversely, French-speaking companies in China whose operations are based exclusively on the Chinese domestic market have seen their activities restart at a quick, sometimes surprising pace.

An example of a respondent’s foresight of his operations’ recovery: From April to May, in the short term, slight impact of Q1 very easily absorb-able on Q2; From June to December, in the medium term, a possible violent reversal; On January 2021, in the long term, operation recovery will depend on the possible relocation of customers, the US election results and the international situation as a whole (political, economic and financial).

Some strategic changes and experience from the Chinese subsidiaries

To cope with the impact of the Covid-19 on foreign companies in China, decision makers are taking advantage of the momentum of online services to develop their digital activities. Others have made complete strategic changes to survive the crisis.

The French-speaking subsidiaries in China, whose headquarters are located abroad, transferred the experience in China. The questions are mainly related to the necessary protective measures to be taken for the work resumption and the end of isolation. Main tips are the followings:

• The Chinese team in support of the group’s crisis unit.
• Implementation of China’s best practices for the French headquarters.
• Toolbox for the crisis management experience sent to headquarters and global teams.
• Online webinar with the subsidiary: The impact of Coronavirus on the Chinese markets and its innovations.

We are still far from having drawn all the conclusions from the health crisis since the world has switched to an economic one. This study initiated by daxue consulting and Dragonfly Group provides a solid outline to understand the operational and organizational transformation in which the international companies have engaged in China. We are grateful to those companies which agreed to participate in this survey and their contributions are definitely significant. If you have any question, please feel free to contact us.

See how companies in China responded to the COVID-19 crisis in our Crisis Management Report

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This article The impact of the Covid-19 pandemic on the organization and HR of foreign companies in China is the first one to appear on Daxue Consulting - Market Research China.

With its emergence as a strong global economy, opportunities for mergers and acquisitions in China have increased in number and scale. However, financial, regulatory and cultural complexities surrounding Chinese transactions present unique challenges. Despite the overall global economic decline, M&A in certain sectors such as TMT and industrials remained active in 2019. The global factors impacting the future of the China’s M&A market are segmented into three scenarios.

These three scenarios include: The U.S. China trade tensions stabilizing through phased agreements. Second, China’s new foreign investment law and policy coming into play. Third, China’s planned new rules to open up certain heavily regulated industries such as automobiles and financial services. Therefore, the 2020 and 2021 the outlook for China’s M&A market be more active than in 2019, especially in those industries and particularly through inbound deals.

Looking deeper into 2020 and beyond, Chinese outbound transactions focused on strategic areas will continue to be a main driver for Chinese outbound M&A activity in the region. However, continued tensions between the U.S. and China in combination with the hurdles presented by national security reviews may dampen China’s interests in outbound activities to the U.S. and Europe. On the other hand, multinational companies in China will continue to review their domestic China market strategy and reevaluate their interests in forming partnerships with Chinese firms. As a result, this will drive support for steady deal activity. Furthermore, sponsors will remain active in Greater China with additional capital to deploy attractive valuations.

Legislation and Policy Changes in China’s M&A market

There is no single law or regulation specifically regulating M&A in China. An M&A deal may involve many laws and regulations. For example, PRC Company Law may be relevant when designing the corporate structure of the target company. PRC Securities Law and its supporting regulations may come into play in a public M&A transaction. Contract Law may govern when an asset purchase is part of the deal. Employment Law and Employment Contract Law may come into play when employees need to be transferred in the transaction. In addition, tax law is always relevant, and foreign exchange policy and regulation is important when payment of the deal needs to be made cross-border. Antitrust Law may be relevant if a deal meets a certain threshold triggering a regulatory requirement to make a filing.

The Foreign Investment Law, which took effect on January 1 2020, will replace a collection of decades old laws with a single, unified and streamlined legal and regulatory framework for foreign investment that is applicable nationwide. The Chinese national legislature passed the Foreign Investment Law with the aim of creating a better business environment for overseas investors. Inbound investment via M&A in China is expected to reach $1.5 trillion dollars over the next 10 years according to a report from Xinhua News.

The Foreign Investment Law seeks to protect the rights of foreign investors and their intellectual property, and clearly incentivizes them to invest in China. It also helps Chinese companies move up the value chain. The evolving nature of China’s consumer economy and the desire for Chinese industry to continue to move up the value chain are two particularly important drivers of economic opportunity. These factors are expected to boost inbound M&A transactions in the future.

Defining M&A: Types of Mergers and Deal Players

A merger is the process by which two or more companies merge together as one new company. Acquisition often refers to the process when a financially stronger company acquires over 50% of shares of another company and brings it into its own operation. Companies can also engage in a minority share, majority share, equal share and buyout scenario acquisition. The decision of which option to take is tied into a corporate’s strategy and growth plans. Additionally, it is important to consider acquisition structure, as each option offers varying degrees of control and various other trade offs. There are five types of mergers: horizontal, vertical, market-extension, product-extension, and conglomerate mergers.

Moreover, M&A acquirers fall under two broad categories. First are strategic investors, which are operating companies looking to buy other businesses in order to expand or defend market share and enhance profitability. The second are private equity investors (or financial buyers). Financial buyers are buyers that purchase minority stakes in start-ups, mid-growth enterprises and mature businesses using funds pooled from individual investors. Financial buyers typically aim to eventually sell out at a profit through exits such as initial public offerings (IPOs) or a sale to strategic investors.

Global M&A Market

Global M&A made a strong showing in 2019. This came as stock markets reached all-time highs, private equity firms raised record funds, and companies searched for growth and other ways to address technological and economic disruptions. This was impressive given the fears of a potential recession, stock pull-backs in certain markets, increasing trade disputes, as well as heightened national security and competition concerns.

However, global M&A value in 2019 lagged behind 2018 numbers for much of the year. But, a surge of deals in Q4 2019 drove total M&A value to $3.9 trillion dollars, just 3% lower than 2018. This made 2019 the fourth biggest year for M&A since 1980. In particular, M&A value rose for deals in the United States and Japan, but fell for deals in Europe and the rest of Asia. Healthcare, technology, and energy were the most active sectors, accounting for about half the overall volume.

[Source: IMAA analysis, Worldwide M&A and Chinese M&A statistics]

In 2019, M&A involving Chinese targets totaled roughly $170 billion dollars, but represented only 5% of all global M&A volume. This is a small share compared to M&A involving U.S. targets, which made up more than half of global M&A volume in 2019. This makes China vastly underrepresented in the global M&A market in consideration of and relation to the sheer size of the Chinese economy. GDP in China was $15 trillion in 2019 compared to $22 trillion in the U.S. Also, 2019’s volume for deals involving Chinese targets was the lowest since 2014, which has been part of a downward trend over recent years following a peak in 2015.

China’s M&A Market: Top Industries 2000-2016

From 2000-2016, China’s industry with the largest M&A activity in terms of transaction value has been the financial sector. Which has represented 16.8% of all deals with a total value of $753 billion dollars. The second most important industry by value is the materials sector with $558 billion dollars worth of transactions. The industrial industry reached the third rank with $527 billion of deals.

The industry with the largest number of transactions has been Industrials, which has represented 14.2% with a total number of over 9,737 transactions. The second most active acquirers are companies from Materials with more than 9,516 deals accounting for 13.8% of transactions. Lastly, Financials companies are the third most frequent industry in terms of consolidation with 13.8% of all deals.

[Source: IMAA analysis, Announced M&A in China and Hong Kong by Industries (2000-2016)]

At the micro level, in 2018, 2,584 takeovers with Chinese participation took place. The leading five sectors of company takeovers with Chinese involvement based on the total M&A transaction values were real estate, financial telecommunications with value-added services, energy, mineral deposits, and chemical processing. The M&A transaction value amounted to around 113 billion yuan in the real estate sector. In terms of volume, the sectors with the largest amount of M&A company takeover transactions in China were the IT, biotechnology/pharmaceuticals, mechanical engineering, finance, and electronics sectors.

[Source: Statista, PEdaily.cn, Value and number of M&A transactions with Chinese involvement by sector]

Assessing China’s M&A Market

To measure China’s M&A market in its entirety, any assessment must include the added values of 1) domestic strategic buyers, 2) foreign strategic buyers, 3) private equity deals, 4) Hong Kong outbound, and 5) China mainland outbound.

In recent years, the landscape of China’s M&A market has changed fundamentally. While the growth of inbound, outbound, and domestic M&A has been affected by global economic downswings and fluctuating Chinese growth, more and more Chinese companies will continue to seek opportunities through oversea Belt and Road M&A and domestic consolidation.  China’s leading sectors for M&A in Belt and Road countries are oil and gas, diversified industrial products, financial services, TMT, power and utilities, consumer products, mining and metals.

China’s M&A market experienced a slow start in the first half of 2019 but picked up considerably after June. Nonetheless, the market has slowed indefinitely. In particular, the principal drivers of the 14% decline in China’s M&A deal values were the domestic and outbound sectors. The drop in outbound M&A and private equity (PE) resulted in the lowest year for deal values since 2013. According to Dealogic, announced M&A deals in China amounted to $486 billion, as compared to $562 billion in 2018 and $661 billion in 2017. While inbound M&A remains stable ($30 billion in 2019, a slight decrease from $33 billion in 2018), both outbound deals ($53 billion in 2019 compared to $72 billion in 2018) and domestic deals ($368 billion in 2019 compared to $440 billion in 2018) saw a notable downturn.

[Source: JPMorgan, Dealogic, China M&A announced $ volume ($billion)]

Most M&A transactions of Chinese companies still take place in the domestic market. Roughly 80% of all Chinese M&A activity is domestic, involving both Chinese acquirers and Chinese targets. The expectation is that the bulk of M&A volume going forward will be accounted for by foreigners investing in, or acquiring, domestic companies. Also, by domestic companies merging with and acquiring each other. The key drivers here include rising purchasing power and private consumption, the government’s desire for foreign funds and expertise for SOEs as it fully opens sectors of the economy to foreign competition, and a more relaxed regulatory regime that, for example, has expanded the scope and geographical reach of wholly owned foreign enterprises (WOFEs).

The economically better developed regions such as China’s largest cities Beijing and Shanghai still lead the market. In 2018, 299 M&A transactions were completed in Beijing with a transaction value of around 207 billion yuan. In line with China’s economic reforms, foreign buyers will increase their activity in China’s M&A market in those sectors and areas favorable to making deals.

In China, especially those MNCs in consumer/retail and enterprise service sectors continued to explore strategic reviews and partnered with local players. Some of which were structured as a divestiture of a controlling stake. High-profile transactions in this category include Metro China’s partnership with Wumart, Carrefour’s partnership with Suning, and DHL’s sale of its supply chain business to SF Express. This is a continuation of a theme that has gained strong momentum since 2017, as companies such as McDonald’s, Yum! China, Heineken, and Salesforce partner with Chinese companies to strengthen their competitiveness in a fast-changing local market.

Outbound and Inbound M&A

[Source: IMAA analysis, Dealogic, Announced M&A from China to abroad (outbound) and M&A by foreign acquirers into China (inbound)]

China was not a major player in global investment until the mid 2000s. Driven by policy loosening by Beijing and favorable global conditions, its outbound FDI (OFDI) grew from next to nothing to an average of almost $50 billion per year in the late 2000s. Easy money and loosening of Chinese policy in 2014 boosted flows to more than $200 billion in 2016, eliciting both enthusiasm about fresh capital and anxiety about economic and security risks.

Since 2016 China’s outbound investment has been on a downward trajectory. Outflows dropped precipitously in 2017 and 2018 after Beijing restricted “irrational” outflows. In addition to domestic regulators, Chinese investors also were confronted with greater regulatory and political scrutiny abroad, as economies tightened investment screening regimes due to concerns about China’s compatibility with their democratic market economies.

Global outbound direct investment dropped

In 2019 this downward trajectory continued with China’s global outbound foreign direct investment dropping back to 2014 levels. Official Chinese statistics show a modest decline in outbound FDI for the year: MOFCOM reports outbound FDI at $117 billion for January-December 2019, a decrease of 9.8% from the same period in 2018 in dollar terms. The global M&A component shows a deep drop, with newly announced 2019 deals at $50 billion, versus $80 billion in 2018, amounting to the lowest level in eight years.

Thus, China’s efforts to cut debt levels combined with the negative effects from the trade war have cut into outbound deal activity by Chinese firms. China’s outbound M&A fell back relatively to 2015 levels in value terms, with various factors combining to severely curtail large sized cross border transactions. However, there is still a good amount of smaller sized outbound transactions taking place with overall deal volumes holding up.

Chinese outbound M&A players are segmented by three categories: state owned enterprises (SOEs) , privately owned enterprises (POEs), and financial buyers.

POEs remained the most active overseas buyers in terms of volume although the overall value of those deals fell with considerably fewer mega deals. Mirroring the domestic scene, outbound deal values were strongest in the industrial and consumer sectors, but larger-sized high-tech deals took a significant hit due to the various sensitivities in this vertical. Furthermore, outbound M&A in the energy and power sectors, materials, and healthcare saw relative downturns in deal value.

Smaller outbound transactions less affected

However, in terms of deal volumes, outbound activity continues to be reasonably robust with smaller transactions being less affected. China’s strategy to acquire technology know how, IP, and brand strength to put to use in the Chinese market is continuing despite the headline declines in larger deals. Therefore, Chinese outbound M&A in the high technology, industrials, consumer, healthcare, financial, and materials sectors all carried out a high number of deal volumes.

Outbound M&A with Europe

In terms of geographies, the squeeze in outbound deal values is now evident in Europe with significant declines in the bigger markets of Germany ($6.5 billion in 2019 from $11 billion in 2018) and UK ($1.4 billion in 2019 from $4.5 billion in 2018). Chinese FDI in the European Union declined for a third straight year in 2019. The combined value of completed Chinese FDI transactions in the EU fell to EUR 11.7 billion, down 33% from 2018 levels (EUR 17.4 billion). This represents the lowest investment level since 2013 and a drop of 69% from the peak of EUR 37.3 billion in 2016.

But, this drop was not specific to the EU. Chinese global FDI fell in 2019 due largely to domestic variables which made it more difficult for Chinese firms to raise funding and get approval for overseas investments. The global decline also reflected a growing political and regulatory backlash against Chinese acquisitions, particularly in the U.S., but also in Europe.

Belt and Road countries and Latin America

Outbound activity to Belt and Road countries held up reasonably well in the context of the otherwise significant declines in deal values seen elsewhere. Furthermore, despite China’s outbound volume being down y-o-y, outbound activities remained active for investments into the Asia Pacific (outside China), Latin America, and EMEA. Consistent with China’s strategic needs, outbound investments in power and utilities, technology, and industrial sectors experienced strong momentum in 2019, with notable transactions including Three Gorges’ $3.6 billion cash acquisition of an 84% stake in Peruvian electric company Luz del Sur, Beijing Auto’s acquisition of a 5% stake in German automaker Daimler, and Jiangsu Shagang Steel Group’s $2.2 billion acquisition of London-based Global Switch Holdings.

In sum, the trade war between the U.S. and China along with a tightened CFIUS approval processes made Chinese buyers increasingly cautious when considering targets with significant business presence in the U.S. The expanded CFIUS jurisdiction that is expected to be implemented in 2020 will likely generate further headwinds for Chinese investment in the U.S., particularly for targets involved with advanced technologies, critical infrastructure, or sensitive personal data.

Added to the mix were national security reviews in Europe, which further drove the decline in outbound M&A from China. Thus, the uncertainty in M&A deals increasingly came from antitrust regulators across the globe. This trend makes early planning and engagement with the regulatory bodies in the cross-border deal making process a priority.

Concerning Chinese inbound M&A, while overall deal values and volumes posted marginal annual declines of 1% each, the M&A market avoided much deeper downtrends amid trade tensions with the U.S. and economic growth uncertainties domestically. Real estate, financial services and telecoms remain the sectors where M&A transactions with the largest deal values took place.

Dealmakers in the Chinese M&A market can expect to find opportunities in industries such as AI, advanced manufacturing, Fintech and healthcare. Particularly, the industrials and technology areas amongst other sectors are showing signs of robust growth. Moreover, on the regulatory front, China has begun a campaign to ease restrictions on foreign investment as it continues to open up the market. This could result in further inbound M&A, particularly from the U.S. should there be a thaw in trade negotiations currently taking place.

Important Considerations for Navigating China’s M&A Market

1. Magnitude of investment
2. How it varies across industries and locations
3. How it compares to levels of greenfield FDI over time
4. Horizontal (market access) versus vertical (integrating supply chains) transactions
5. Mode of financing
6. Diversifying transactions versus those in the same industry
7. Patterns of control acquisition
8. Strategic versus financially motivated transactions

Takeaway: What CEOs are saying?

According to the 2019 KPMP China CEO outlook survey results, 48% of CEOs in China believe that the most important strategy for achieving their growth objectives in the next three years are forming strategic alliances with third parties and conducting M&A transactions. In that same survey 56% of CEOs are reported to having a moderate M&A appetite, with 29% having a strong M&A appetite, and 15% having a low M&A appetite. Thus, in spite of the current global economic and investment climate, CEOs are still focusing on the opportunities in the Chinese M&A market.

The primary drivers for M&A among China’s CEOs ranked (in order) are: to reduce costs through synergies/economies of scale, to diversify the business, to transform the business model faster than organic growth, to increase market share, to on-board new digital technology/innovation, to take advantage of favorable valuations, to eliminate direct competitors, and to utilize cheap financing before interest rates rise.

Thus, in M&A consideration, it is important to assess the market value and proposition for each party in the deal, specifically what benefit a foreign stakeholder may bring to a Chinese enterprise. Concerning the benefits of M&A dealmaking with foreign MNCs, Chinese participant enterprises stated that expanding brand awareness, increasing market share, improving technology and productivity, increasing margins, and reducing costs were some of the benefits of engaging with oversea businesses in M&A deals. In addition, M&A benefits include: extending their upstream and downstream industrial chains, industrial transformation and upgrading, and cross-industry diversified operations. Thus, leading overseas businesses can reference these contributions from foreign MNCs to Chinese enterprises following the M&A deal to craft their own proposition.

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Come 2020, the Coronavirus crisis acted as a game-changer for the entire industry. Nurturing disruptive innovation, and highlighting the most promising startups, could this virus eventually stretch back fundraising activities in China?

A brief History of startup investments in China

The history of Venture Capital in China begins long before one could imagine for a state with communist underpinnings. Yet, the late 1980s already saw private investment take off, thanks to reforms and new programs launched together to stimulate the Chinese economy.

The ‘Torch Program’ has been the launchpad for China’s high-tech revolution

In 1988, the Ministry of Science and Technology (MOST) launched the ‘Torch Program’, aimed at developing high technology and achieving industrialization. The program established high-tech industrial development zones across the country, gathering scientific and technological resources, as well as talents and money. These high-tech zones include three major parts:

• Science and Technology Industrial Parks (STIPs) to develop the commercialization of emerging technologies and research. China set up 54 STIPs, which accounted for close to 50 percent of all of China’s R&D spending.
• Productivity Promotion Centers (PPCs), incubators designed at providing consulting and product testing services.
• Technology Business Incubators (TBIs) support the growth of Chinese startups by providing incubation services, such as free office spaces.

Torch truly enabled China’s high-tech revolution by being critical to the growth of large international tech companies such as Baidu, Lenovo, ZTE, Alibaba, and Huawei. According to Steve Blank, one of the first to write about the rise of China’s VC market, “of all the Chinese innovation programs, Torch is the one that was run like a startup – iterating and pivoting as it learned and discovered. This enabled Torch to evolve with China’s rapidly global economy.”

Output’s estimations of the Torch Program display the importance of Torch parks as an engine of Chinese technology in the economic growth of the country. Thus, the initiative is responsible for 11% of China’s GDP, and more than 10% of China’s industrial value.

[Source: LinkedIn, The ‘Innoway’ incubator of Zhongguancun Science Park, the first STIP to be established, in the suburbs of Beijing]

Seed funding in China brings capital for early-stage startups

Even if the Torch program enabled startups to access financial resources (by 1991, 70 percent of them received bank support), those were generally at a later stage of development. To bridge the financial gap for early-stage startups to access larger investments, the State Council launched the Innovation Fund, known as ‘Innofund’. This initiative provided small and medium tech companies with capital raised from local governments, banks, investors, and enterprises. By 2014, the found backed more than 30,000 Chinese tech startups, allocating over RMB 19 billion ($2.7 billion) to kickstart early-stage projects.

State-sponsored venture capital funding to support state-owned companies

Since the mid-1990s, the Chinese government extensively encourages investments in technology and IT infrastructure. Innovation became one of the only areas in which the government allows venture investments, with state-sponsored VC funds becoming a popular way for local authorities to finance projects. These government-backed funds were meant to invest primarily in state-owned companies with the goal of increasing quality standards to compete with international companies.

To attract even more capital into technology startups, the MOST launched the first of many state-owned ‘guidance funds,’ in 2007. The fund invests in VC funds in targeted sectors of interest, as well as co-investing alongside other VC firms. In 2018, there were more than 2,000 operating guidance funds, with total funding reaching RMB 5.3 trillion ($790 billion).

[Daxue Consulting – The history of the VC market in China]

Foreign investment in China represents a third of China’s venture capital investments

In 2018, foreign VC funds contributed to more than 30% of startup investments in China, most of them using USD to raise funds. Nonetheless, an increasing number of these foreign VC firms are now considering raising funds in China using its local currency, Renminbi (RMB). Since the 2010s, RMB funds are becoming increasingly attractive to foreign investment in China. Thus, non-RMB funds are not currently allowed to exit via IPO on domestic exchanges, an option only made available by RMB funds. Overall, local-currency funds benefit from less regulatory supervision and greater flexibility regarding the sector of investment.

[Data source: Pitchbook, 2018 Chinese VC deals by investor location]

How innovation and Chinese tech giants shape the Venture Capital market in China

China’s VC market has seen a dramatic rise over the past five years, heavily relying on robust financial infrastructures. A strong regulatory system, open market, and the diversification of ways of exiting build this financial pedestal. Aside from this trend, the distinctive growth story of the tech investments in China can be explained by the two following trends:

Entrepreneurship promotion and innovative ecosystem

In 2014, Premier Li Keqiang introduced the principle of “Mass Entrepreneurship and Innovation” to support the development of innovative startups. Since this announcement, the government has created favorable conditions for the development of micro-companies. Tax Incentives for Mass Entrepreneurship and Innovation cut the corporate income tax of small businesses by half, and days required to start a business in China have considerably fallen from close to 30 down to less than 9.

[Data source: World Bank, how long it takes to start a business around the world]

According to the Global Innovation Index (GII), China is gradually closing the gap with other highly innovation-skilled players such as Germany and the United States. The country leapfrogged from the 26^th place in 2016 to the 14^th in 2019. The index lists knowledge and technological output as the first area of capabilities of China to thrive into global innovation. With 7.4 million university graduates in 2017, China has boosted the number of students qualified for higher education. In 1997, only 5.5% of college-aged students were enrolled in universities, against 55% in 2017. This growing educated population represents a significant pool of knowledge to nurture research and technological outputs.

If capital such as R&D expenses is commonly regarded as the driving force behind scientific innovation, startups born from theses researches foster Venture Capital firms that seek return on investment from these highly promising new-born companies. From the 1980s, capital injected to promote entrepreneurial spirit and build an innovative ecosystem of incubators eventually enabled the Venture Capital market in China to bounce in recent years.

Unicorn startups in China

The intertwined links between the growth of an innovative technology ecosystem and the Venture Capital market in China can be assessed through the number of unicorn startups in China. These privately held startup companies with a value of over $1 billion represent an indicator of the degree of implication of both VC firms and tech startups in the Chinese innovation landscape.

[Data source: Deloitte, Location of Unicorn startups in 2019]

Baidu, Alibaba, and Tencent: Venture Capitalists gluttons

Chinese tech giants, known by the acronym BAT (Baidu, Alibaba, Tencent) dominate the Chinese consumer journey, providing an extensive range of services that cover every segment of daily-life activities. Initially, each of these companies started with a single business. Baidu provided an internet search engine, Alibaba was a B2B marketplace, and Tencent was a messaging application. As Chinese consumers quickly embraced mobile internet technologies, BATs rapidly expanded their strategies to meet consumer needs.

As BATs want to capture every minute of the day’s availability from Chinese consumers, they represent a significant investment force in startups in China. They invest through their corporate funds, a practice called Corporate Venture Capital (CVC). According to Pitchbook, the top three technology companies in China had made more than 920 Venture Capital investments by 2018. Importantly, the Minister of Science and Technology has publicly stated his strategy to use BATs to accelerate the country’s leadership in three strategic sectors: Baidu oversees accelerating autonomous driving, Alibaba the smart cities, and Tencent the computer vision.

The government’s involvement in BATs’ strategic axes and their investments echoes the multiple funds-of-funds that have accompanied tech investments in China since 2007. For example, BATs have invested in nearly a third of Chinese Unicorn startups. Recently, Baidu, Alibaba, and Tencent all invested in the rise of the short video apps lead by ByteDance.

[Daxue Consulting – The mechanisms behind the Venture Capital market in China]

The ‘capital winter’ was there before the Coronavirus

The venture capital investments of the past five years fostered a new generation of startups, from Tiktok’s parent company ByteDance, to the ride-hailing giant Didi Chuxing. 2018’s forecasts about the Venture Capital market in China were still predicting the trend to keep its growth pace towards more deals backing the Chinese startups. However, after five years of exponential growth, the trend is now reversing.

The second quarter of 2018 marks the peak of tech investments in China, with digital-payment giant Ant Financial closing a record US$14 billion deal. In the meantime, lifestyle-services giant Meituan-Dianping raised US$4 billion, while Q1 saw Didi Chuxing secure a US$4.6 billion investment. By comparison, 2019 Q2’s largest venture deal was a $1 billion investment in JD.com’s affiliate healthcare branch.

[Data source: Crunchbase, 2016-2019 Chinese VC deals, and dollar volume]

The tech investments in China plummeted from US$93.8 billion in 2018 to less than US$40 billion in 2019, evidencing the ‘capital winter’, which defines a significant slowdown in fundraising and investment activities. As China increasingly positions itself as the engine of global innovation, which factors precipitated the winter for the Venture Capital market in China?

Investors are becoming more cautious than ever

Alexandre Dorangeville, vice-president at Rochefort & Associés, a cross-border investment bank, told Daxue Consulting the VC market in China is likely to come at the end of a cycle.

“Some companies – Ofo, Luckin Coffee are the classic cases – displayed the ability to burn cash without showing any ability to become profitable.” 2018 set the expectations of the investors very high, and the results have not yet come up to the desired outcomes. Additionally, poor post-IPO performances of several Chinese tech companies, including electric car maker NIO and smartphone manufacturer Xiaomi achieved to undermine investor’s confidence.

However, the sector is far from depressed. Financial data provider company Preqin estimates the amount of capital waiting to be deployed of Asia-focused Venture Capital firms to be about $95 billion. It is not the shortage of money, but rather that investors are more critical and selective. As a sign that investors behave less risk-taking, Bruno Bensaid, angel investor at Shanghaivest, observed that early-stage startups have been hit the hardest.

Trade War worsens the general economic downturn

The trade war and the general slowdown in the Chinese economy also affected startup investments in China. In 2019, the U.S. government blacklisted a swath of Chinese tech companies, including telecommunication giant Huawei, and the Alibaba-backed AI startup Megvii. As the United-States remains a hot choice for Chinese startups to exit via IPOs, the trade war affects foreign investment in China, who have limited exit options. Another blacklisted company, the most valuated AI Chinese startup SenseTime, was reported scrambling to survive after losing access to U.S semiconductors, necessary for the continuity of its operations.

On the bigger picture, the development perspectives of Chinese startups are intrinsically linked to the country’s economy. However, it is showing clear signs of deceleration, with a historically low level of growth.

Assessing the Coronavirus impact on tech investments in China

While the Venture Capital market in China relies primarily on meetings between investors and co-founders, travel restrictions froze the entire industry. As a result, the number of deals during the Coronavirus drop-off to nearly zero during the last two weeks of January 2020. Instead of canceling its meeting with 30 startups, Sequoia Capital China decided to organize an online pitch contest during the quarantine.

The Coronavirus impact on startup investments in China pushed  the ongoing trend towards further caution, said Dorangeville. According to him, assessing the impact of the crisis on the portfolio is the immediate task for investment funds to carry out. “The teams are currently focusing on existing assets and redirecting their cash to portfolio companies to ensure their survival, rather than investing in new deals.”

In the first quarter of 2020, we saw the first contraction of China’s economy in more than forty years. According to data published on April 17, 2020, by the National Bureau of Statistics, the GDP officially plunged by 6.8% compared to the first quarter of 2019.

Thus, the winter could be longer for tech investments in China.

Changes in consumption and tech advancements from the Coronavirus in China

During the epidemic, more than 20 province’s government worked with technology companies to build AI solutions to the Coronavirus in China to report epidemic related data and feedback, providing invaluable advice for public crisis management of priority populations. Part of the tech advancements from the Coronavirus in China, we reported the deployment of disinfection robots in hospitals, big data-powered QR codes and smart image reading systems.

Even if the Coronavirus created a fertile environment for AI, big data, and robotics developments in China, it is not likely to foster a new breed of highly promising startups. Indeed, tech advancements from the Coronavirus in China responded to a specific demand to contain the outbreak.

However, results from Daxue Consulting’s analysis during the Coronavirus show great changes in Chinese consumers’ habits. According to Daxue Consulting’s report, more than 70% of the Chinese tried at least one new service for the first time. The highest are online learning and working from home apps, followed by live streaming and online diagnosis. These online services are will likely keep a strong growth, with 73.6% of people saying they will continue to use it online after the epidemic.

[Data source: Daxue Consulting research, changes in Chinese consumer behavior after the Coronavirus outbreak]

As far as the Coronavirus created a boon for innovation in China and new habits of consumption, does it necessarily mean new opportunities for startup investments in China?

Could Startup investments in China eventually bounce back?

According to Pitchbook, there were 66 deals for the week ending on March 28, 2020. This is the most of any week so far this year and just below the figures from the same time last year. Online learning gaining the most traction from the Coronavirus, Chinese online education startup Yuanfudao managed to raise US$1 billion.

Dorangeville said the post Coronavirus impact on startup investments in China is likely to see Corporate Venture Capital –BATs’ funds being the largest ones on the Chinese VC market – taking the opportunity to close exclusive deals. CVCs in China have a longer-perspective in their investments and the cash available to look at current deals. They will therefore be better able to restart bargaining at low prices by being one of the only sources of financing for the Chinese startups.

“However, this will only be the immediate impact of the Coronavirus,” says Dorangeville, “On the long-run, I think that the 2019 trend will be reinforced after the Coronavirus crisis: investors in China will be even more cautious, taking distance with cash-burning business models and being more active in their post-investment portfolio management companies.”

Author: Maxime Bennehard

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This article The venture capital market in China: Could the Coronavirus eventually revive startup investments? is the first one to appear on Daxue Consulting - Market Research China.

The GDP of Wuhan reached RMB 1,484 billion in 2018 with a YOY increase of 10.7%, accounting for 1.6% of China’s total GDP in 2018. Ten years prior, the GDP of Wuhan was RMB 396 billion, accounting for 1.3% of China’s economy. With an overall GDP of almost RMB 1.5 trillion in 2018, Wuhan’s economy is the 9^th largest in mainland China. The economy of Wuhan increased nearly four-fold in ten years, due to special industrial zones, foreign investments and a pool of educated workers.

Why Wuhan is developing faster than other Chinese cities

With its perfectly centered location in Central China, Wuhan is sometimes referred to as the crossroads of China. Two major rivers (Yangtze & Hanjiang) flow through Wuhan, cutting the city into three distinct districts, Wuchang, Hankou and Hanyang. These large rivers connect Wuhan to other markets upstream and downstream. A web of highways and rail lines connect all three districts of the city to other cities major cities across China.

With more than ten million people living just in the three central districts, Wuhan is the largest city in central China. It is increasingly a regional hub for commerce, politics, industry and education. The area has grown from a collection of small commercial ports in the Qing Dynasty to a metropolitan area with a population of about 20 million.

[Graph showing the growth of Wuhan’s GDP between 2007 and 2017, which quadrupled during the period and still continues to grow faster than other large cities across China. Source – National Bureau of Statistics]

In addition, the city’s economic growth has been substantial over the past few decades. Between 2007 and 2017, the economy of Wuhan quadrupled in size, while its GDP per capita grew from RMB 35,000 in 2007 to 135,000 in 2017. Between 2017 and 2018, Wuhan’s economy outperformed other Chinese cities of similar size in growth rate, such as Hangzhou, Suzhou, Tianjin and Chongqing.

As it is growing faster economically than most of cities ranked above it, Wuhan offers companies a bright economic outlook. By illustrating Wuhan’s special industrial zones, high level of accessibility, foreign investment and advanced educational background, this report will show foreign companies what advantages Wuhan has to offer.

[Map showing the location of central business districts and Optics Valley within the Wuhan metropolitan area. Source – Savills Research]

The role of  Chinese special industrial zones in the development of Wuhan’s Economy

Due to its position at the confluence of two economic models, China is famous for creating special economic zones and special industry zones to cater to special markets in designated spaces. Special industry zones are areas that are designated by the national government to protect one certain industry from encroachment by others within its zone. These areas are increasingly promoted throughout mainland China to bolster GDP growth and target growth in certain sectors.

One example of Chinese special industry zones specific to Wuhan is the Donghu New Technology Development Zone. Also called Optics Valley, Donghu New Technology Development Zone was established in 1988 to promote the development of high-tech industry in China, especially in regards to fiber optics. Today, Optics Valley is home to both startups and large multinational corporations who were lured by the area’s financial incentives and talent base. A few notable companies that have a large presence in Optics Valley are Motorola, Huawei and Lenovo. According to statistics from the provincial government, only eight of the many companies invest RMB 40 billion in this special industry zone every year.

New special industrial zones in Wuhan

Another Chinese special industry zone that has been key to economic growth in Wuhan is the Wuhan Economic and Technological Development Zone. Located across the Yangtze in Hanyang District, this special industry zone caters mostly to automotive and electronics companies. Constructed in the early 1990s, the area was at the time located on a rural parcel of land to the southwest of the main urban area. Today however, the area is connected to the rest of the city by a vast network of boulevards, highways and metro. Over the years, Wuhan Economic and Technological Development Zone has attracted a few notable companies, such as

In September of 2019, the zone announced developmental contracts with a few more notable domestic companies, including Jingdong and Jingzi.

Two other special industry zones in Wuhan worth mentioning are the Wuhan Export Processing Zone and Biolake.  The former caters mostly to processing and manufacturing, trade logistics and producer services, attracting companies such as Dongfeng-Citroen with preferential tax and trade policies. The latter is located near Optics Valley in Wuchang and caters mostly to medical research. Since being established in 2008, Biolake has attracted companies such as Humanwell Healthcare and United Imaging Healthcare in addition to working with an array of local hospitals.

Chinese special industry zones in Wuhan mentioned in this article are just some of the zones making Wuhan’s economy more vibrant and robust. Foreign companies looking at Central China as a place to expand their business can look forward to a highly developed network of talent pools and increased supply-chain efficiency in conjunction with these zones.

[A view down a side street in the former concessions of Hankou District. Formerly split into concessions of various European nations, the city has now grown up quickly around the old central districts. Source – 睿睿]

How Foreign Investment in China has catapulted Wuhan’s economy

The relationship between France and Wuhan can be traced back to the Qing Dynasty, when Hankou was an important maritime trading center with European countries. During the late 19^th century, Hankou was one of a few areas in China that opened French concessions.

Nowadays, more than 100 French companies that have invested Wuhan’s economy. Companies that have been long established in the city have recently been announcing plans to expand their operations. One such company, Electricfil, has announced plans to invest in a second factory in the city at a cost of RMB 1 billion.

Many companies that have enjoyed access to Wuhan’s economy over the past few decades have been concentrated in the city’s automobile and technology sectors. More than 30 French companies have set up offices in the Wuhan Economic & Technological Development Zone, sinking some $5 billion worth of investment into the city’s economy.  

Incentives for foreign companies to contribute to Wuhan’s economy

In 2017, an industrial park in Wuhan announced incentives for French companies to set up in research and development facilities in the city. So far, Renault and Electricite de France, two French companies, have taken the industrial park up on their top offer of RMB 5 million.

Despite being the largest investor in Wuhan’s economy, French companies are just one group of companies investing in Wuhan. Wuhan’s increasing ability to attract investment is a testament to the advantages that the city’s economy possesses.

[Qing Dynasty map showing the middle reaches of the Yangtze River as it passes through Wuhan, which was at the time called Hankou. The concessions of various European nations can be seen in the foreground. Source – National Library of Australia]

How Wuhan’s position as a Chinese educational hub is shaping the economy of Wuhan

With some of the best universities in mainland China, Wuhan has been ranked as the 3^rd largest educational center in China. As an increasingly important education hub in China, Wuhan has attracted nearly 300,000 university students, one of the largest concentrations of college students in mainland China.

Wuhan’s position as a Chinese educational hub is mostly due to the presence of a few highly ranked schools, such as Wuhan University, Huazhong University of Science and Technology and China University of Geosciences. In addition to these leading universities, there are 17 other institutions of higher learning in the city.

In addition to an array of highly ranked universities, Wuhan has a number of high schools that have international departments aimed at foreign exchange with high schools in other countries. Notable high schools with such programs are Wuhan No. 1 High School and Hongshan High School.

One of most obvious benefits of expanding a business in one of China’s educational hubs is that the local population is highly educated in relation to other regions in China, even with other cities of a similar size. Wuhan’s status as a Chinese education hub helps the city to attract companies that need such highly skilled workers.

How accessibility within China has helped the economy of Wuhan

Part of what makes Wuhan’s economy so successful is its centralized location in the middle of China’s populated eastern half. The city however also benefits from high levels of accessibility and mobility. With this highly developed infrastructure, Wuhan’s economy has been able to benefit from the city’s infrastructure initiatives, whether it be maritime, air, rail or metro.

Ideally positioned for maritime trade

Situated on the banks of the Yangtze River about halfway between Shanghai and Chongqing, Wuhan has always enjoyed economic benefits from the commerce that the river brings. With direct access to maritime trade, the economy of Wuhan has held an advantage over other inland Chinese cities. Today, Wuhan has the largest inland port in mainland China, handling more than 40 million tons of cargo in 2013, making it busier than some naval ports.

Heavy investment in air transport

In addition to maritime trade links, Wuhan is also increasingly invested in air transport with one of the largest and busiest airports in central China. Wuhan’s Tianhe International Airport has direct flights not only to most major cities in East Asia, but also to European capitals, such as Paris, Rome, London and Moscow. In addition, there are direct flights between Wuhan and New York, San Francisco, Sydney and Istanbul. Upgraded in 2017, the airport allows travelers entering mainland China to transit visa-free through the airport for up to 144 hours.

Rail lines link Wuhan to the whole middle kingdom

Nicknamed the hub of China, Wuhan is crisscrossed by a dense network of rail lines and expressways that link it to the rest of the nation. Direct high-speed train services can get passengers to Beijing, Guangzhou and Shanghai in the same time a flight can. A local network of intercity high-speed railways also act as a high-speed metro system, connecting other large cities in the province to Wuhan. In addition, a dense network of freight railways connects the city and it’s ports to all corners of China. 

Metro with 21 lines

Finally, the development of the Wuhan Metro has provided further benefits to mobility within the city. Opened only in 2004 with one line, the system has grown rapidly over the last 15 years and especially in the last five. Hailed as one of the most successful metro systems in China due to its rapid expansion, the metro system now has nine lines and 340 kilometers of track. The city’s metro system shows no signs of slowing down its growth of expansion either, with eight lines currently under construction.

[Map of completed, under construction and approved lines in the Wuhan Metro. Opened in 2004, the system has grown from one line to encompass more than 340 kilometers of track today. The system has been hailed as one of the most successful and comprehensive in mainland China.   ]

Wuhan’s increased accessibility within China has provided it with a leading edge over other cities in terms of economic growth. With a highly developed maritime, air, rail and subway network, the city is better able to cater to business that seek these services. Foreign companies that are looking at Central China can rest assured that the city is well connected to their other branches across China and their home offices.

What Wuhan’s economy has to offer foreign companies

For foreign companies looking to expand in China, the temptation to set up shop in coastal cities is strong. However, many cities farther inland offer strong potential for economic benefit.

As shown, Wuhan’s economy offers strong incentives to foreign companies as it due to the city’s rapidly growing economy, its establishment of various Chinese special industrial zones, its role as a Chinese educational hub, the city’s highly accessible location and its willingness to cater to foreign companies looking to expand in China.

With an economy that is growing red hot with plenty of room to catch up to cities farther east, Wuhan offers great potential to companies in the short and long term. In addition, the city’s various special industry zones and its growing importance as a Chinese education hub also offer their respective benefits to companies keen on tapping into China’s vast talent pool.

On top of all this, the city is increasingly welcoming to foreign companies looking to set up in the city. In 2018, Wuhan’s mayor Wan Yong expressed a warm welcome to companies looking to expand into Central China. A city with all these traits and the ability to woo investors so well is a city worthy of a second glance.

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This article The economy of Wuhan: A hub of commerce, education, industry and politics is the first one to appear on Daxue Consulting - Market Research China.

David Matthieu: Hello everyone, I’m Matthieu David the founder of daxue consulting & its podcast China Paradigm. And today I am with someone I’ve been very impressed by when I read the biography & he is Geoffrey Handley. You are  the one who develops a serial entrepreneurs community in China, your career started late of the last century in Hong Kong & you started first with the company doing intranet – if I’m not mistaken called Pacific Connections.

That’s something you have to explain to us what is intranet? We talk about the internet, but you’re also first company doing intranet & it was in Hong Kong, in 1997; you sold the company and started another firm called Hyper factory. And now we feel this was the experience, you brought Hyper factory to new highs. You worked with BlackBerry, Coca-Cola to engage consumers with smarter screens and at that time in 2001 it was pre-iPhone, pre smartphone, generally speaking – so it would be interesting to know more about what you did at that time. But you have invested in Airbnb, Palantir, Shop Snap and you are now managing a fund called Haitao capital. And that’s also something we talked a lot about because the specificity of Haitao Capital is to invest in China-macro driven early-stage ventures. So, China-macro meaning surfing on megatrends as far I understand which are led by China but still investing in early-stage company. So, what you do now – many questions for you. Thanks for being with us today. Could you tell us more about what you do now with Haitao, in terms of size, number investments an idea of where do you stand?

Geoffrey Handley:  Absolutely, thanks so much for having me today. It’s been a little bit of a mission for us to connect. So, I’m really glad I’m here.

Haitao capital was really the culmination of about two years out of my last exit as you mentioned – I obviously started a number of companies. I took about 18 months off to write thesis to figure out what we’re looking at and what the China macro investment environemnt was at the time andnd the net result that we ended up with was. As you pointed out, we’ve caught up the global China-macro investment environment and these megatrends. But in a way that we believe they have never really been seen before in terms of size, scale how one company’s domestic policy is impacting not only global foreign policy but also the domestic policy in countries around the world.

So typically, being on the receiving end of venture fund investment – as a founder, a number of things kind of apparent to myself & to my pilot, my other partners. One – there was mismatch between typical VC’s & a founder’s day-to-day struggle. A lot of funds call themselves founder-friendly; founder focused that kind of thing, and so we knew that we were neither of those things. We were just founders; we were founders that were now backing other founders. So that’s a core part of Haitao. All of our GP’s are serial entrepreneurs with multiple exits, we all have a deep connection with China and Southeast Asia. So that was the key to us to be bringing to the table.

 The second thing is I guess that global macro lens – most VC funds again from being from the receiving end they are sector-driven, technology-driven or geographic. Looking back to what we’re witnessing over the last 10 – 15 years there was neither sector, geography or industry or technology. So much was happening but there was one thing that was driving it that we didn’t see in any other country or market in the world & it was something we hadn’t witnessed previous cycles of. Which was the notion of central planning basically. How the government has a very comprehensive view of their own business, as in the business of China Inc and they knew where their business was today, where it needed to go tomorrow and where it was going to be 5-10-15-20-25-30 years in the future.

So, it’s something that is obvious to you, to me, to people in China even without it being too apparent, for some people haven’t thought it through you see it every day, but that is not obvious to people outside China. They don’t understand Chinese macro investment environment – I think a little bit more these days but there was a lack of awareness and understanding of just exactly what the role of government’s was here.

A lot of the view, the vision on China has been really negative from 50s and 60s and it’s just continued and generally outdated. For us – we looked at this and said Chinese macro investment environment is not negative, it’s not outdated – it’s very real, very tangible and has a very direct and forced multiplying exponential impact on success of companies. So, for us we had to send then say – if we acknowledge that – where are we looking at? What are looking at? As a filter.

And so, our lenses have been guided by investment principles of Chinese founders, that is what we called the four C’s essentially – Culture, Consumption, Creation & Care. So, what do they mean? If we look at care for example; care for us is anything from health care to insurance to elder care – to child care & everything in between it can be hardware, it can be software, it can be services as a priority, but investing in leading Chinese technology will be at core.

Why was that obvious to us? Well in any developing market and any cycle that we’re seeing with technology impacting FinTech plays a major role right, so we knew that going from a state provider of insurance if you will to the Chinese government making it very clear that that was no longer continuing to be the case and they would pull back. That was going to disrupt, change, impact all of those things that I mentioned from children to elderly people from hospitals to services to afterlife etc. and insurance, Insuretech etc. would be at the heart of the driving of this change, but it would impact all of those things and it would have a massive determining factor in terms of what companies would be created, where they would be created and how they would grow.

Another element of that care box is especially in insurance directly, the western world has 400 years close to an actuarial science from the first insurance policy till today. China at that point had less than I think even today less than 15-16 years. China, as we know, is very pragmatic. So whereas a country we look and say we’re missing ingredients & we need them from outside, we’ll get them from outside.

So for us we knew not only was this an area that we’d look at, we also knew that it was an area that someone like myself who is half Chinese and half  Western would also be able to add value and bring strength because we would need to look towards the west and western insurance companies to provide initial experience, initial capital, initial risk modelling etc. For the Chinese economy in order to create and drive and build around this new thing and that’s exactly what played out right. It’s one of the most open regulated areas in China and all the major global insurance players are here essentially and they’re forming key components of that industry.

The next box that we look at is culture, obviously, – our thesis, our view is – China’s changing culture is not internal but it’s also an external Chinese macro investment environment. It’s being changed by internal forces and external forces and the changing culture of China is changing a global culture and for us that was really interesting. As you earlier mentioned on the word China paradigm is a really interesting box to look at because it meant that almost all bets were off. Not only were Chinese people going to start to figure out who they were as a culture, who they wanted to be as a culture tomorrow both here and abroad etc. but also we had very clear indications from the government that as the West & the U.S in particular was stepping back from being essentially cultural guardians of  the planet, China was stepping forward.

So, we started to see China really take center stage in things like Davos, climate change whether it’s G20, whether it was being involved in buying up artwork, both our own Chinese artwork buying it back and also global masterpieces getting involved in purchasing football teams in Europe and baseball teams and basketball teams in the States. Being the largest owner of IMAX cinemas in the world, now having a fairly influential voice in Hollywood and so we knew that that box was going to be something that China was going to actively play and so then again for us being here and also being of our DNA – Western & Chinese we were best suited, we feel best suited to be able to guide and be a role-play a role in there going forward identifying companies that would have an opportunity for success not only locally but abroad, globally.

So very interesting culture box there, so what do we look at in Chinese macro investment environment? Anything from language learning through to education and educational services for example; there is 3 million or two and half million foreign students as per the government strategy being driven to China for higher education, for university but also another 1.5 that are being driven out every year Chinese to study overseas. So, there was areas there through to as I said anything in the area from art, sports, entertainment, food, how we are interacting with each other, social engagement so it’s a lot of things under that cultural lens

Consumption is a no-brainer, again it’s a no-brainer to us here. When I mentioned the word consumption or consumption upgrade, so most people outside, they’re not really sure what we’re talking about. We have to kind of change terminology. Right here we’re very familiar with these policies in Chinese macro investment environment because they’re very visible policies from the government. So in the consumption box anything really in those kinds of three areas which is enabling next-generation commerce, social commerce, driving that incremental extra values of analytical platforms through tools and services AD Tech, Mar Tech that kind of thing through to which is one of my personal favorites, but also one of our personal goals for investing in leading Chinese technology is to be really involved in trying to find one or perhaps more of the next global brands that we believe will be started here or started by here but made global from day one.

The closest we have to that right now I think are brands like DJI they’re most visible. We have a lot of brands that are very close, DJI is the most visible I think in that sense where if you do a quick informal survey of people around the world, they all know drones, they all know DJI. You ask them where it comes from, you’ll get answers from Italy to the States to Germany. Very rarely you’ll get an answer that says it’s from China. So again, that’s what we see there.

The last box creation. Isn’t a catch-all, it’s where we believe that two things for investing in leading Chinese technology – one is either that China is creating brand new models or brand new technologies or brand new processes that haven’t been created before & at scale or where we believe that they may not have created them here but where China has absolute indisputable competitive advantages & will win in that sector.

So, examples there on both sides; if you look at anything from a blockchain, AI, facial recognition, image recognition, those things weren’t created in China but you feel very strongly that essentially unless there is a really unique situation in a particular business or sector, China is going to win that space for a whole lot of reasons & that’s very contentious I think especially at the moment.

But it’s not very contentious when you & I look around at the cameras that we see everywhere in China for example, and the software that’s powering either from cents time or face time or face plus. So those are things again that we have a unique advantage being in China that we can see these things when investing in leading Chinese technology that most people have a negative dystopian view of what’s going on & we see real first-hand where we’re creating or just have secured absolute dominance in those areas & there’s no point in being involved or playing or backing the company that is in Chinese or operating in China.

So those kinds of four boxes but firmly driven by that global China-macro that we see. The founder lens is absolutely key to us. We only invest in the companies that we can actually be involved in because at the end of the day we’re not a top-tier blue-chip fund. We don’t have billions of dollars in multiple funds – we’re founders, not finance.

It is a mantra that we have internally and so we know where our strengths are. Our strengths are in fact we’ve built serial entrepreneurs community in China amongst our crew – we built close to 20 companies from the beginning of the internet in 96 through to now. And so that’s the value that we have and it’s very clear tangible value that our portfolio companies are very quick to say that we provide them – we sit on the same side with them at the boardroom. We’re lucky enough to understand Chinese macro investment environment- even though our check sizes are smaller we’re on the boards of I’d say 9 out of 10 investments and that’s a testament I think to the value that is brought by team. So macro, understanding the government policy is very clear – the four boxes, a China to world, a view and this founder lens kind of sums up how we’ve approached our view of venture investing.

Matthieu David: Have you exited one of them so far?

Geoffrey Handley: We have had exits via acquisitions in the most recent funds & so we’re continuing to hold positions, that’s an interesting point as well. We’ve led and driven and actually rolled up sleeves and done the work. Newest acquisitions and spin-off for us – for the portfolio companies at stages and phases of their life where they wouldn’t have dreamed of doing acquisitions. As an example; one of our portfolio companies was in an incubator – within a China accelerator.

I think that team within less than 6 weeks of graduating and coming out of demo day, we led them through their first acquisition so yeah that’s not something that a typical venture investor – VC or the company themselves would really be able to do. That’s not saying that we’re smart or better whatever it’s just that’s one of  our strengths as founders and so we were able to within 6 weeks of them standing on stage and pitching for the first time in front of 300 investors lead them through an acquisition of a competitor double their size – both the top line and bottom line, and strengthen their crew – that their founding team. So those kinds of things – are testament and evidence to think of different approaches and so far, so good.

Matthieu David: To come back to how Haitao is working – you raised money andyou used this money? Or are you creating rounds of investment based on opportunities? How does it work?

Geoffrey Handley: Again, take them at the founder mentality. It’s pragmatic right, so we initially obviously all the GP’s, our exits are our own exits – rather than a typical 1% or 2% of GP capital, we said we need to have more so we put in 5% – our commitment is 5. Obviously, in the front loading of the fund it’s very high. We’ve raised money from LP’s – we have LP’ both in China & outside China. A large number of LP’S or proportion of those LP’S are founders as well that have exited both in China and outside. So again, that’s adding bench strength to us and we’re able to put those guys as advisors into the companies.

We also syndicate allocations in rounds, so primarily we started that I guess from – we were all very early on Angel List, I think we’ve signed up within the first 6 months of Angel List going live and when I was based in the States. So, it was a lot of work, it was really smart. It made sense because you had additional firepower through the guys that were putting small checks which then pulled together a syndicated larger check. And so, we in partnership with China accelerator we launched the first China Syndicate on AngelList and so we were able to drive some out there. That’s more for I think for profile – not for us but for profile of China. It’s kind of annoying that there were no Chinese companies, there were no companies that were growing at an exponential rate in China on something like that. So, we said – how do we solve this? So that’s an angle that we took. On that end I think we had one of the companies would be syndicating within the next kind of two weeks on AngelList. We don’t get the chance to do a lot because it is China or Hong Kong-registered companies & AngelList is still a little bit wary. So, we’ve gone through a lot more DD before we can load up deals and so we’re to pick & choose them very carefully.

Matthieu David: You mentioned Care, Creation, Culture & Consumption as investment principles of Chinese founders and investor – sectors you would invest in China. I remember William Bao you know very well who is from China accelerators saying that very few foreigners can do successful foreign business in China & you have to pick your new industry carefully because you cannot beat Chinese competition if as a foreigner you may have an advantage. He was mentioning education, he was mentioning importing goods or products or food’s – What’s your opinion on foreign business in China? Where do foreigners or oversea entrepreneur could be successful in China & where they cannot? Or they shouldn’t compete?

Geoffrey Handley: Oh, it’s a tricky one. I think if we take a step back, the answer is evolving. What the answer was 3 years ago or 5 years ago is a different answer today. As the industry’s evolving as the markets things change. I think the other thing that’s important is to clarify especially for the audience, not so much in China but overseas is – what’s our definition of a foreigner in terms of foreign business in China? Yeah yes, they’re not born here, they’re not Chinese ethnically 100% etc. But the foreign founders that we back like myself have been in China for 20 plus years, either I have blood in us or have created the next generation of global Chinese citizens through marriage & speak Chinese, read Chinese, write Chinese. So, there’s that type of foreign founder & there’s another type of foreign founder which has great intentions but has just got off the plane. So again, it’s not so much the what if, how & why behind it. But there’re still sectors I think that are obvious entry points where the either of these barriers are lower or the chances of success are higher. So, I mentioned earlier on – insurance. Now when I talk about insurance & foreigners & foreign business in China & backing foreign start-ups in insurance, people are like – Are you crazy! It’s regulated, it’s government control, we’ve got capital controls & we need licenses & you can rattle of the list there & it is quite a daunting list. However, I think as I said if we start first principles on that one, the west has 400 plus years of actuarial law, actuarial science & experience. And insurances based on a data & modelling. So you can’t – no matter how much money you have, no matter how fast you want to run if you don’t have that – you’re not going to be as strong as the person that does combine with a pragmatic nature of China’s government that knows the areas that they’re weaker on or missing on. And they’re very clear – they’re like we’ll backfill that with Western talent or backfill that with global talent.

And so that’s what played out in insurance & so we knew that was the sector 2 – 3 of our best performing portfolio companies are in that space and have done very well, and two of those three are foreign founder-led, so it’s an interesting one.

 I think the other places that we would look might be slightly different from Williams. I have an intimate knowledge & very close relationship with William & China Accelerator I served as EIR at CA, so I spent a lot of time giving back & trying to mentoring & helping those companies, so I understand his lens & the companies that he is filling in his portfolio & so he is looking for slightly different things.

For us we’re looking for guys that are building things here, or building things outside here that might never come here because that Chinese macro investment environment, we talked about in the beginning where China’s domestic policy is changing domestic policy oversea means that I don’t need to invest in a Chinese company with Chinese founders based in China. Because our lens are wider than that. So, for example; let’s just pick a government policy – One Belt one Road, 77 countries. Largest infrastructure & capital expenditure known to mankind. In that are 77 countries, you can build amazing fast-growing companies there that are dominating sectors that will never set foot in China. But those companies only exist because of China. So that’s the question we often ask as a team – we use it as a sanity checks, one of the sanity check is would this business exist if China didn’t exist? & if the answer is “No” then we’re going to look at it, because that’s the connection to that global macro.

So again, it depends on how you cut it and I think – yes if you point out there are sectors that you’d probably benefit if you were Chinese in China. But if your lens is wide like ours, I think there are spaces that we’re looking at that are absolutely China-driven. But being Chinese isn’t going to give you any benefit.

I mentioned you before we started the call, I think what’s interesting is some of the stuff that’s happened in the last few weeks so, with all this noise & animosity that’s going on. One of the sectors that China’s never been strong has been AD Tech & Mar Tech. it’s understandable, China’s got 20 years of advertising compared to rest of the world. Advertising as a science was pretty much written, created & academically crafted & grown in the West. So I think we gained pragmatism, most Chinese companies and most companies based in China use tools – AD Tech tools, Mar Tech tools for companies from the west because they’re best in breed, they’re just great products, they might not be absolutely 100%  localized & perfect but they’re great products & there aren’t really any local alternatives that’s changing them. Because of late there’s been situations where Chinese companies are no longer welcome to sell their products to western companies & so I think push back on that is well, you’re starting to see this very clearly now there’s been a sector that’s been identified, and said – well hang on a second. We used these products because they were the best in the world and out efforts were best spent elsewhere. But the dynamics have changed now. So, with that change in dynamics, we’re now seeing from the top down, so government and some of the larger enterprises of the Ali’s of the world and TenCent’s of the world and then smaller companies saying hang on! This isn’t right, we should be backing belt-road, we haven’t got any, we’ll create it. And the venture money is also going behind it. So now we’re going to create – and this is – haven’t had enough time to digest and figure out what it means, especially for some of those companies in the States that they filed for IPO, or getting ready to file for IPO. Anything from Slack through to Twilio through to Mail Chimp. Those guys have seen significant growth from Chinese companies not only in China but also Chinese companies overseas, and all of that’s going to stop. So that’s just going to be chunks of revenue that would disappear and come home in that sense and then these would be created overnight. No one doubts the speed at which we create things here, so it’s not going to be without possibility, it’s definitely going to have a negative impact on those guys, the market leaders right now – and I don’t think that they’re paying attention, I don’t think that they know what to expect, I don’t even think they question it like that. Especially those guys that are lining up for IPO’s. So that’s a space that I think is really interesting and for that space – yeah, the founders are probably going to have to benefit from being Chinese, but at the same time I think mixed teams are getting much stronger because you have to have that western lens as well. That’s a space to watch.

Matthieu David: I see, you remind me of research we did on export advertising, Facebook is doing 5 billion US in China and actually maybe impacted by the tariffs that it will be more difficult to export. I understand Chinese macro investment environment, I understand the four sectors, but so many things can happen in a startup. The founders cannot be the right founders, the business model could be not the right business model, etc. – so many details. How do you select beyond those Chinese macro investment environment, those macro view? What are your investment principles of Chinese founders? How do you assess?

Geoffrey Handley: I think going to take a step back – all the GP’s and founders – we are serial entrepreneurs community in China; we’ve built companies, grown companies, sold companies, listed companies. So, our internal DNA is about building successful companies. So, we took a lot of those learning’s, those experiences, the other thing we have in common is we’re all driven by data, so we use a lot of data. In building our own business as previously in our previous life – we build those business and we’re able to be successful for a number of reasons, but one of those reasons was the use of data. And so, there’s no difference, we’ve created this fund much like how we’ve created our businesses and said – what are the investment principles of Chinese founders we need to look for.

So, in terms of selecting beyond – as you said the top rank stuff, the first thing that’s most important to us is the human, the person right- and it’s not lip service, because every VC will say that. Every investor will say – the teams are really important, the founder is really important – yeah but I’ve also seen VC’s remove founders off boards, kick CEO’s off and do all these things that may or may not have been needed to be done, but obviously wasn’t as important as you thought it was. So, for us, it’s absolutely paramount, cause as I said – we’re founders first right – we’re not finance first. So, for us it’s about knowing and getting to know the founders, for who they are themselves.

We’re very principle based, we’re also very contrarian, we’re also very vocal. I write a lot on LinkedIn about what we see – how we see. We share our investment principles of Chinese founders openly. Some of our principles are very contentious, but as founders we have to be clear. And so, we look for these things. We look for an understanding of the founders as a human. Why? Two reasons – one – because we have to understand how that persons is going to behave and act regardless of the things that you pointed out. The business model could be flawed, the market could be flawed, legislation could change – so I need to understand the person right – for that business.

Secondly, I think that’s even more important than that – and again investment principles of Chinese investors is based on our own experience as founders. People that invested in our businesses didn’t invest in our businesses. They invested in us. At five startups myself and my investors – the majority of the guys back from the first, all the way to the fifth. So, we want to do the same – we want to find people that we can back successful founders, not so much the business. Obviously, we want the eggs out of the business, but more important than that is the human behind it. That’s the single most important thing for us – what does it look like in reality and the fact – the evidence is in the eating, right. When you talk to the portfolio companies – we spend a significant amount of time with these guys. As part of our TD but also past – we’re inside their businesses. Inside them – so much so that at the moment, we’re actually building API’s to run things on block chain with smart contracts, to manage and monitor specific things.

Now, tell me how many founders would let a VC have an API into their business? I can tell you – none. But we do!

So, there’s a deep element of trust in there, with that trust comes clarity of data, cause as founders we know, we try to make a polishing beautiful picture to provide to the investors. We see past a lot of that and we ask different questions. We have very straight forward modeling based as I said on the data. What data points we want to collect. There are certain things we look for in investment principles of Chinese founders. Unfair advantage, a certain number of founders in the team, co-founders in the team, so the types or makeup of the founders, through even to the age of the founders.

We look for growth patterns, we do trajectory comms of that business versus whatever else is best in breed around the world, and does this model make sense and work and is that growth pattern the same? Fairly standard stuff that I’d like to think that the best VC’s do because they did them on us too.

Yeah, there is a large element that goes into it. The other thing is that we give back a lot. As I said earlier on – I’m in the RICA, our other GP’s – they’re mentors, they’re advisors at various other incubators, accelerators, universities. We all lecture at universities. So that element of our life allows us direct access and first hand inside a different realm of those businesses. A different lens, a different perspective to those businesses and offers us a different view. So it’s a rounded approach, firmly grounded in data, firmly based from a founders lens first and I think it allows us, it gives us the unfair advantage that we need because we don’t have unfair advantage in those other areas, where other VC’s, other investors will have an advantage over us.

Matthieu David: Would you like to share one story of investment you did illustrate what you said about micro trend, about – as a team, you just talked about an investment that you did after Demo Day and getting acquired six weeks after, could be this one or someone which has not been acquired yet, but to be more specific, to understand with a specific case how you actually put that into action.

Geoffrey Handley: Absolutely yeah. A couple of big ones – one is the leader in – it’s a B2B play, they’re a leader in employee insurance, for employee wellness, an employee benefit that kind of thing in the workplace, the Care voice –

Matthieu David: We interviewed Sebastian.

Geoffrey Handley: You know a lot about Sebastian then and his business. Foreign founders running a foreign business in China, leading in the insurance space – right. Well on their way to success. Their international expansion is going ahead of schedule, their numbers are fantastic, they’re highly sought after, as not any partner company or supplier to clients, to their corporate clients, but also as an investment. We led their last route, we were there from pretty early on, we sit on the board. Very close to the team. Not just myself – myself, my team has very close relationships with various people on their team so we have hands-on involvement in there.

One of the things that we did with them – sure you mentioned Startup care, which is the spin-off business, so we helped initiate the thinking of that. Right. The initiation of – hey this makes sense to look at like this – reasons why – additional value, tap, all that stuff and then we helped drive and support the spin-off of that. And it is great right.

So, as a founder for him, and the founders themselves, hopefully they’re going to get two eggs instead of one. Right. That’s very rare. I know first-hand, my last one was two eggs instead of one, so I’m very passionate about trying to get that for the founders that we back. So, it’s a personal goal for me and it’s not something that’s normal. Most founders don’t even know that exists and most investors and advisors also haven’t been through that experience as an early stage.

Another example – the one I mentioned – the Demo Day one that came out of CA is 247. So, 247 is the largest non-native ticketing platform for travel experiences and entertainment. An amazing foreign business in China. When they came out of Demo Day, we led them through their first acquisition of a travel company, with licenses and everything. Of course, it tripled their size overnight, added fire power to their founding team. Added cash flow and added cash reserves. So, it meant they didn’t have to a round straight-away. No one had to get diluted. Again, things that most founders are taught –they are taught to – go and do a round quickly – go and raise some money.

There are ways to skin the cat that make better sense for everyone.

That was then, where are they now?

I actually just had Greg the founder of 247 – he flew to Hong Kong where I’m now, to spend two days with me, two full days with him and myself locked in a room breaking up their business to see what the specific areas are that we’re looking at and modeling, building models for the next phase of growth, which they’re on a great growth spurt as well.

And so –very hands-on. Very involved, not just from financial return of investment, it’s almost a personal undertaking as well, as founders we all had mentors, we all had people that we looked up to, that helped us navigate this really difficult world, right – where everyone is either telling you you’re amazing and you’re fantastic and yeah, isn’t this space amazing and everything’s great and it’s very hard to get the truth, or the people that are around you, haven’t walked these shoes themselves either. So, the advice you’re getting is kind of useless in that respect.

We developed personal relationships and bonds with these guys over and above what we’ve ever seen with other investors. Yeah, those are two examples of companies. 247 is interesting. Now, as I mentioned – they’re the largest non-native, right – now – 75% of their customer base – Chinese. So, they’ve gone from a 100% foreign business in China, owning the foreign market in China, to now 75% Chinese and their growth is insane. And hitting those Tier 2, Tier 3, Tier 4 cities and being the face of that thing there. And they had a shot. They had an angle, they had a lens that was not available to the guy, the bigger guys like Damai who are 10 – 15 – 20 times the size of 247, but margins are 1/3^rd – ¼ of 247 and growth is less than half the growth that these guys have. Average tickets purchased per person per session is half 247’s. So, when you add all those together, I know exactly where 247 is going to be in a year and it’s going to be pretty significant.

Matthieu David: I feel you’re jumping from one opportunity to the other with a lot of freedom, a lot of things in your hand, how do you organize your week, your month, your year with so many activities and so many directions you are going to.

Geoffrey Handley: Again, going back to how we were as founders. The appearance is nimble and flexible. The reality – and I tell this to a lot of our founders, the reality is quite the opposite. The reality is quite structured, very disciplined and based on the first principles, investment principles of Chinese founders and a base foundation to start from. So, we very rarely deviate from those things. It allows us to make decisions a lot quicker. We don’t chase trains. We’re not after the next hot trend is – it’s not important to us because we’ve got four pillars, we’ve also got China’s 5 – 10 – 15 – 25- 30 – 40- 50 year view of Chinese macro investment environment, which guides us.

How do we structure our days? Pretty much like everyone else. A lot of its spent either sourcing deal flow and going through what’s available and what’s out there. A lot of its through active thought leadership. So, we encourage all of our guys in the team to write, because we believe that writing long-form, is a direct correlation to thinking, and there isn’t a lot of long-form writing these days. There’s a lot of posts, a lot of tweets a lot of this a lot of that, but to be able to write long-form that comes back to a thesis or back to a point of view, firmly backed by data – that process itself is a force belt of fire, right. It does a number of different things. It helps with the flow, it helps with LP’s, it helps with the actual problems that hang in guiding startups.

Third, the box we spend our time on is on the portfolio companies. Much more time than any other investor. So, where other investors might go to one board meeting a quarter, we’re probably spending 3 or 4 hours a week with portfolio companies.

I’m lucky I’ve got a great team around us, that has the trust and respect and buy-in of the portfolio companies that we’re able to portion that time out across the team. But that’s probably the biggest area where we spend our time, again just goes back to we’ve identified that as one of our force multipliers or one of our unfair advantages, so that we can provide that return to our LP’s, it’s going to be from a founder perspective and activating that founder lens and activating that knowledge, that experience, and that guidance. We’re lucky, we’ve earned that trust from the founders. We sit on the boards; we take this responsibility very seriously and so we’re inside. We’re inside there helping, it gives us deep understanding of their business and the problems that they’re facing and it allows us to help quickly, resolve things with them and for them.

Matthieu David: If entrepreneurs would like to raise money, would you be able to share a bit of the size of the investment you can do at an early stage. The size of the ticket?

Geoffrey Handley: Absolutely yeah. We’re writing cheques anywhere between – from very early guys at $25,000 a piece, all the way up to – a million is the cap. From the stage we’re looking at anything from that kind of post-seed place, through to max pre-B if they’re an existing company, but nothing there.

The sweet spot really is that period when they come out of an incubator, accelerator, they’ve found their legs, they’ve found their feet, or they’ve received their beatings and through the kind of – before the A, that’s the sweet spot there and we’ll follow them through to where we feel we’re no longer adding value. I think that’s important cause that’s an interesting thing we’re seeing at the moment is the dramatic increase in fund sizes being raised, for early-stage funds, but there’re even incubators, accelerators, seed funds, pre seed funds and it’s an interesting area because I don’t really know how to deploy, how someone would be able to deploy that much money – the sizes that we’re seeing in cheques sizes that are 50 – 25, under a 100, even with follow up. It literally perplexes me at the moment, and the only solution I think I can see is – those guys are going to be deploying more capital at later stage. So, then it needs this hole. The hole doesn’t exist yet. There are markings of it but I think that hole is going to get bigger.

So if we just do what we do as founders, which is stick to what you’re good at and what your strength is, then that’s our space, and that’s naturally where the value that we add, to these companies, be it way beyond capital, that’s where the value is most realized anyway, is in that pre A – pre B phase where we can really force multiply their growth.

Matthieu David: We talked a lot about successful ventures, successful startups you created and you invested in. Would you mind sharing a failure? Something where you got it wrong as an investment.

Geoffrey Handley: Yeah there are many, I mean we’re supposed to – this is not an easy space and as founders more than anyone we know that. Our own ventures are pot marked with failure. So, I think that’s a given and so it’s that risk minimization.

One of the – I think one of the ones in my mind that stands out – the reason why they failed I guess was because they – a lot of the advice that they took, a lot of the decisions that they made were not their own and they were doing things that were reactive as opposed to investment principles of Chinese founders and they didn’t understand the motivations of the people and giving them the advice. So, they were really – I don’t want this to get into a big session but I have a pet peeve at the moment which is this whole – what I believe is this misinterpretation of the lean startup movement.

What I think it’s become, and I don’t think – I don’t know because I don’t know the guys who created it, but I think it’s become basically this disdain for planning and hard work. There is very little hard work that’s being done by founders these days in terms of strategic planning, cause this overemphasis on – oh just try things and be nimble and do this and do that ­and figure it out as you go, is completely wrong and I don’t believe that that’s the actual intention of Lean Startup in its original format.

But that’s where it’s gone to today and that company – the one I’m thinking of as an example of failure, was a prime example of that. This misinterpretation. And so, at the end of the day, they didn’t have firm set principals or they changed what they had as principals because of the encouragement all around them. An ecosystem, investors, advisors and everything to just chop and change, be flexible, figure things out, and if they had stayed the course, if they had doubled down on what they were supposed to and what they originally had, they’d be around today. They would still be here. It’s sad in that sense.

I think another example of where the investment failed is not so much that we got it wrong but it went wrong in a very sad fashion as well and it’s a good lesson, it’s one that we’ve seen both ourselves as founders. This particular company had progressed to double-digit US million dollars revenue, had just broken even, had raised 30 million in funding from top tier VC’s already.

So, there’s a lot of ways to do good things, but they got to a place where there was misalignment between the investors and the future of the company and essentially where a lot of founders don’t understand the motivation and how VC’s make their decisions, are not generally aligned to the survival and the betterment of the company. It’s not right, it’s not wrong, it’s just different. VC’s are driven by fund returns, so anything that drops a fund return isn’t going to happen. So, in this situation, this company needed an injection of cash. We had secured the injection of cash from existing shareholders – a small group of existing shareholders, we included – based on a condition that the board needed to change. As in pay to play, if you aren’t going to pay in this round, removed off the board. First.

Second – liquidation preferences. There were VC’s on the cap table with 2x, 3x, one even had 4x liquidation preference, which is crazy. Right. So, it was inherited, it’s there – okay – but the only way that the cash is going to go into the business so it can survive, is if those liquidation preferences are given up.

Now, most people would say its common sense. They’re not paying so they’re not playing. Would you rather see this company have a shot at success finances secured already or would you rather shut it down now?

The answer was very clear – it was shut down. There and then, cause it’s easier to shut it down and not have an impact on a fund return, rather than put more money in and drop my returns down to points – which I think it was a big eye-opening lesson for those particular founders, they didn’t understand what was happening on the day – they couldn’t see how this could happen, they just hit profitability and yeah – it was a sad, sad day in that particular company, but those are two examples I think which are – again there – they are lessons, they are humbling.

Matthieu David: When you use the word principles, are you using it the way Ray Dalio was using it, like to get guiding principles for your life and work, or is it more a vision? Could you help us define more what investment principles of Chinese founders are in your own words?

Geoffrey Handley: Sure, yeah, the way Ray Dalio is using them, it’s a very important book, it’s a book that we buy every founder that we invest in and every co-founder. It’s also a book that we provide not only to our team but also our LP’s too, and some of our partners, to get some alignment, some clarity.

The way that we try to get people encouraged to have their set of investment principles of Chinese founders for the company and for the founders themselves, is to try to encourage them to understand they also need to have truths that are contentious. Things that they might believe in that other people won’t believe in. And it’s okay. You don’t have to have all these fuzzy soft, nice, happy things and say – we believe in fairness and this and – cause at the end of the day, that’s not going to help you. But things that will guide you and really guide the company are generally going to be hard truths.

So again, it’s about helping those guys get to that point as well.

Matthieu David: You mentioned three times that you need to understand the government in China, how do you understand what the government wants and is seeing for Chinese macro investment environment? Are you reading yourselves Chinese and reading the basics to the plan, are you reading the press? Specifically, and precisely how do you know what the government wants for China and the world?

Geoffrey Handley: I think firstly, the Chinese government is extremely transparent. It’s kind of strange when you say that right, most people are like – what are you talking about. Aren’t they this – whatever they have in their mind of China – it’s the most transparent government in the world? Like there isn’t a plan or a policy that isn’t available on the internet. Within 25 minutes of it being announced, the whole thing is there already. So, for a start, the government themselves are a great source of their information. It makes sense – stability and unity are very important – they’re the topmost paramount importance in Chinese macro investment environment and to have that happen in alignment across every sector and every geography, so they need to make sure that their message is out there.

The Chinese government is also great at selling every strategy – every government strategy has a brand attached to it. One belt one Road, 10,000 Talents, Made in China 2025– so there’s no shortage of awareness around you compared to if you go back to your home country or if I look back to New Zealand or the States, half the time I don’t know what the governments are doing. Right. I have no real idea of what they’re doing and when I do know what they’re doing, they’re going to change their mind anyway in four years.

So, we have that added benefit here of stability in the Chinese macro investment environment, it’s the single most important driver from the government’s perspective but it also means that it reduces risk for us.

So, with that acceptance, or that understanding as a base – yeah, where do we get our information from? From the government. From the government media. From people like yourself, from local media, from foreign perspectives, from think tanks – we also get it from founders. We talk to our network of guys that have created good Unicorns. The guys that are doing this stuff – that generation that’s already there, because they’re getting guidance from the government. Against an area that the West doesn’t understand are this relationship and the role that the government plays in business here or in the economy.

Where else in the world would founders be talking to government and adhering to government policy or following or informing? But here it’s extremely important. So there is that transparency, there is that shared knowledge, cause at the end of the day, the success of that policy – or of the direction or of this government strategy is paramount, and for that success to happen the government is encouraging this awareness and encouraging the spreading of the information – to get people in line, to say this is what we’re betting on – we’re betting on this box here, we need as much firepower behind it and drive it.

And so – It’s such a great Chinese macro investment environment for that, there are so many – the ecosystem is so varied – from formal think tanks, CCP, youth party league through the more informal networks, there’s no shortage of it and that’s a big part of our information. Of our sourcing and also a big part of our direction. We take from there because no one walks into a casino and bets against the house and expects to win. Whereas the West – it just disrupts stuff and screws the legislation, screws the rules, we’re just going to do this. That’s now how stuff happens here. It’s not how things work here. The biggest whale is the government, if you’re using casino parts – they’re the biggest whales, they’re setting the rules, they’re setting the odds and they’re setting the play and we’re just lining up behind and then doing what we do underneath that. So, having that information is absolutely key to us.

Matthieu David: Specifically, more specifically – you talk about Made in China 2025, you talked about Northern Belt – what do you deduct, could you give one government policy you could deduct direction from, you could deduct investment strategies from.

Geoffrey Handley: Sure. Here’s an easy one – Belt and Road is an easy one, Belt and Road – 77 countries, those countries are huge Capex going in, huge Chinese workforce going in, huge equipment flows going in to build things, so what do we take from there? Okay – I take that there’s going to be 77 pockets of Chinese population in all those countries. So Chinese language is going to start there, but also the reverse – they’re going to need to learn the local languages, or they’ll start to look – so there’s education place straight-away. There’s language learning things there.

Okay, what else can you take from there? There’s probably going to be ecosystems built in those 77 countries around food. Around entertainment. So those services are going to need to be created, so does that mean ITU is going to win straightaway everywhere? No. Probably what’s going to happen is in some of those countries there will be local companies that will be built to take advantage of those things. We’ve already seen it 2 -3 years ago, as WeChat started growing overseas, we saw companies in the States and companies in Europe being setup just to implement WeChat. WeChat wallets and services and just to help those foreign companies to implement these services and understand these services in the offering markets. So those are again the early indicators of what’s going to happen.

Through to a much more complex or much more subjective things, one of the companies that I remember I worked with very closely that came out of CA – they’re not in our portfolio but they were in the convention and expo space, providing services to and from database management, tools setup, turnkey solution through payment and the bulk to their revenue growth and their strategy, was driven in one belt, one road countries.

Because each one of those countries it’s not just about building some stuff, its bout direct ties, and so the government has been very clear. There are conferences on both sides all year. There are a trade expo and a government affairs thing – so these guys did model their business and said – right, first year 15 countries out of those 77 – second year – 30 countries, and they’ve executed on that strategy. So that’s their real business in Chinese macro investment environment, just single-handedly belt on one roat, one road. And very little of their growth was inside China, but it was a direct result of China’s policies and actions outside of China.

Matthieu David: I see. Soon we’ll be at one hour – we still have like five minutes – when I look at what you did, there are so many things we could talk about, but there’s this one very shiny one is that you inventing Airbnb Palantir shops now. Can you explain to us how you have been able to invest in Airbnb?

Geoffrey Handley: It’s not as shiny as it seems – I’ll be transparent. It was more a case of right place right time and being pragmatic. So, in the middle of my China experience, when I was the founder, I moved to the States to sell my last company, and I was based there for close to five years in New York and that time was the beginning of the rise of the East Coast, the tech scene which had been previously pretty much dominated in the valley.

So, it was a fairly tight small circle of people, the space I was in with my own company was mobile – we were one of the leading mobile-related companies, the largest mobile agency in the world that powered a lot of these things that we take from granted today. And so, as a part of that I was able to be a founding LP of a mobile only fund, back in 2008 and so that allowed me access to certain things and to see the scene being created. Palantir – that’s a secondary market purchase and the clear reason behind it – we’ve co-invested with Peter Field previously in a personal angel investment company called Book Track out of New Zealand, that was kind of how my awareness of what was going on, what he was building – the Palantir and I was desperate to get involved and get a piece of it somehow and the only way was to pick it up off the secondary market but that was many years ago, so hopefully its appreciated in its value.

Matthieu David: Thank you very much for your time. It was very inspiring, very instructive as well. Very interesting to see how you see investment in China – looking at Chinese macro investment environment, macro trends, and also government guidelines. Thank you very much, it was very instructive, hope you enjoyed it and hope everyone enjoyed the show.

Geoffrey Handley: Thank you so much, I really appreciate being invited on here, hope everyone enjoyed it. Cheers.

Matthieu David: Thanks, bye everyone.

China paradigm is a China business podcast sponsored by Daxue Consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.

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This article Podcast transcript #64: Explore Chinese macro investment environment with an experienced serial entrepreneur is the first one to appear on Daxue Consulting - Market Research China.

The growing prominence of the Chinese economy at the international level has gradually gained the attention of international media. In particular, the opening up of the Chinese stock market has attracted the interest of international investors that saw China as an untapped investment opportunity. However, for many of these international investors, the question “How to invest in Chinese stocks?” remains unanswered. For this reason, Daxue Consulting decided to shed some light on the unique history of the Chinese stock market. The last three decades have been of particular relevance for the development of the Chinese financial system, due to new and more transparent regulations, sustained economic growth and the increasing integration of China into the global economy, which created the right conditions for the internationalisation of the Chinese stock market. But how did the modern Chinese financial system became what it is now?

How to Invest in Chinese Stocks

The Chinese financial system went a long way from the one-bank system under Mao to the four-bank system under Deng. Today, the banking sector in China, which is still largely controlled by the state, accounts for over $30 trillion in assets. The modern Chinese stock market was established only in 1990, primarily to privatise state-owned enterprises (SOEs). Until 2005, around 30% of equity shares were tradable, with the remaining 70% held by the state or state-backed entities. Its total market capitalisation surpassed $1 trillion in 2006. The modern Chinese stock market was established in Shanghai (Shanghai stock exchange) and Shenzhen (Shenzhen stock exchange) in 1990, during the final years of Deng Xiaoping’s leadership. One of the primary goals of this “experimental stock market” was to provide, as already mentioned, a platform that would primarily allow Chinese SOEs to receive more fundings from private actors.

A brief history of IPOs in China: the record-breaking IPOs of  Chinese companies and banks

IPOs with Chinese characteristics

Going back to the question “how to invest in Chinese stocks?” First of all, one of the most important features of stock markets is the initial public offering (IPO). An (IPO) is the process of offering shares of a private or state-owned corporation to the public via a new stock issuance. The issuing company manages to raise capital from public investors thanks to a public share issuance. The transition from private to a public company is an important opportunity for private investors to fully realise gains from their investment, as it typically includes share premiums for current private investors. Typical of the Chinese stock market is the issuance of different types of shares: A-shares, which are issued in Chinese Yuan (RMB); B-shares, which are issued in US Dollars (USD) and H-shares, which are issued in Hong Kong Dollars (HKD). These different types of shares are regulated by the China Securities Regulatory Commission (CSRC).

How Chinese businesses are defining IPOs in China and around the world

As noted by the journal Financial Times in December of 2011, before 2009, the United States was the leading issuer of IPOs by aggregate value. Since then, however, China, with Shanghai, Shenzhen and Hong Kong, emerged as the leading issuer, raising $73 billion—almost twice the amount of capital raised on the NASDAQ and New York Stock Exchange (NYSE) combined. In 2011, the Hong Kong Stock Exchange alone raised $30.9 billion—thus becoming the leading course, while New York raised $30.7 billion.

How IPOs in China actually work and how to invest in Chinese stocks

Understanding how the rather convoluted Chinese stock market works is fundamental to avoid fatal value judgements. In fact, as noted in the paper “The Development of China’s Stock Market and Stakes for the Global Economy” published on June 1, 2017 by the academics Jennifer N. Carpenter and Robert F. Whitelaw from New York University, a key challenge for everyone that is trying to gain familiarity with China’s peculiar financial system is that of avoiding the over-application of research paradigms developed in the US. This fallacious approach projects an ill-fitting range of norms and behaviours on the Chinese financial system that do a disservice to every would-be investor approaching the Chinese stock market.

In fact, as noted earlier in this article, the existence of different types of stock shares, which are differently accessible to investors, adds a further variable to the equation of the Chinese labyrinthine stock market. On their part, Chinese firms have access to a range of choices for potential incorporations and listings, which make China a uniquely rich setting for investment and corporate listing choice. Chinese firms incorporated in mainland China can apply to list A-shares and B-shares on the Shanghai (SSE) or Shenzhen (SZSE) Exchanges, or H-shares on the stock Exchange of Hong Kong (SEHK). The SSE and SZSE each have mainboards, where larger, more mature companies list, including most SOEs. Furthermore, the SZSE has the SME and ChiNext Boards, with more relaxed listing standards, designed to accommodate smaller and more entrepreneurial firms, as Carpenter and Whitelaw pointed out in their paper.

Shanghai Stock Exchange and the Chinese financial system

The Shanghai Stock Exchange is one of the two stock exchanges operating independently in the People’s Republic of China—the other being the Shenzhen Stock Exchange. The foundation of the Shanghai stock exchange was the result of the Treaty of Nanking in 1842—which followed the First Opium War—and other agreements involving the Chinese imperial government and the colonial powers of the day. These agreements played a crucial role in the development of foreign trade in China and the influx of foreign communities in Shanghai. The securities trading market in Shanghai did not begin until the late 1860s. The first shares list was issued in June 1866, and by then the Shanghai’s International Settlement had developed the necessary sophistication—a legal framework for joint-stock companies, several banks, and an interest in diversification among the established trading houses, even though the trading houses themselves remained partnerships—for the emergence of a proper stock market.

By the early 1930s, Shanghai had emerged as the premier financial centre of East Asia, where both Chinese and foreign investors could trade government bonds, stocks, debentures and futures. However, the operation of the Shanghai Stock Exchange was abruptly interrupted by the occupation of Japanese troops on December 8, 1941. In 1946, the Shanghai Stock Exchange resumed its operations only to be closed again in 1949 by dint of the newly established Communist government. After the end of the Cultural Revolution and the ascension to power of Deng Xiaoping, in 1978, China opened up again to the outside world. During the 1980s, the securities market in China developed in lockstep with the country’s economic reform and opening up. On November 26, 1990, The Shanghai Stock Exchange was re-established, and operations began a few weeks later on 19 December. At $4.78 trillion as of March 2019, the Shanghai Stock Exchange is the world’s 4th largest stock market by market capitalisation. However, unlike the Hong Kong Stock Exchange, the Shanghai Stock Exchange is not entirely open to foreign investors yet, because it is still influenced by the decisions of the central government.

Hongkong Stock Exchange and the Chinese financial system

The unique history of Hongkong played a crucial role in setting the city aside from the other financial and economic centres of mainland China. Hong Kong is a Special Administrative Region—officially known as Hong Kong Special Administrative Region of the People’s Republic of China—which has been a British protectorate from 1842 to 1997. Because of its history, Hong Kong developed more free-market-oriented financial institutions, which is why it soon became the financial bridge between mainland China and the international markets. The Stock Exchange of Hong Kong was formally set up in 1891 when the Association of Stockbrokers in Hong Kong was established, but the securities market can be traced back to 1866. In 1914, it was renamed The Hong Kong Stock Exchange. The automated exchange ordering was introduced in 1993, which was followed by stock options trading in 1995. The Hongkong Stock Exchange merged with the Hong Kong Futures Exchange and the Hong Kong Securities Clearing Company in 2000 to form the publicly-traded company Hong Kong Exchanges and Clearing Ltd. Because of the growing dominance of electronic trading, the physical trading floor of the Hongkong Kong Stock Exchange was closed down in 2017. As of March 2019, the Hong Kong Stock Exchange is valued at $4.19 Trillion, which makes it the 6th largest stock market by market capitalisation.

Shenzhen Stock Exchange and the Chinese financial system

It is one of the two stock exchanges operating independently in the People’s Republic of China, the other being the larger Shanghai Stock Exchange. It is situated in the Futian district of Shenzhen. With a market capitalization of its listed companies around US$2.285 trillion in 2015, it is the 8th largest stock exchange in the world, and 4th largest in East Asia and Asia. Most impressively, the Shenzhen Stock Exchange was established on December 1, 1990, which makes its rise among the world’s top ten stock exchanges by market capitalization even more remarkable. The SZSE has trading sessions four hours a day, five days a week from 9:30 a.m. – 11:30 a.m. and 1 p.m. – 3 p.m. Its products include A-shares, B-shares, indices, mutual funds, fixed income products and diversified derivative financial products. The SZSE supports China’s multi-tiered capital market system with three boards: the Main Board, the SME Board (launched in May 2004) and the ChiNext Market (launched in October 2009).

The evolution of the Chinese stock market and its integration with the global market

Though China’s stock market has grown to over $7 trillion, of which over 75% is tradable, its markets for equity mutual funds and derivatives are still very small and new. The equity mutual fund market began in 1998 but still has only $500 billion under management. By contrast, ICI (2016) reports that US domestic equity mutual funds have over $7 trillion under management, representing over 30% of US stockmarket capitalization. Derivatives markets are at an even earlier stage of development. The market for stock index futures opened in 2010 and index options began trading in 2015. (Carpenter Whitelaw – The Development of China’s Stock Market and Stakes for the Global Economy) Chinese businesses in the stock markets, their ever-growing relevance.

The importance of publicly listed Chinese companies: how to invest in China while respecting Chinese law

While much of the development of China’s stock markets over their almost 30 year history has been driven by domestic concerns, global investors are now becoming increasingly influential. As China has made initial steps towards relaxing capital controls and Chinese investors have viewed international investments as increasingly attractive, in part due to fear of depreciation  of China’s currency, capital outflows have become an increasing concern. One fix for these outflows would be to replace them with offsetting inflows from global investors, with the stock market being a natural destination. The presence of sophisticated international institutional investors might also increase the informativeness of prices and reduce the cost of capital as argued in Carpenter et al. (2017).  Klicken oder tippen Sie hier, um Text einzugeben.

What information do you need to invest wisely in Chinese companies?

The recent trends of IPOs in China

Finally, while there are a host of interesting and unanswered research questions about China’s developing stock market, from a domestic and global economic perspective the key issue is the role of this market in sustaining China’s economic growth going forward. China is at a pivotal point in its development as it attempts to transition from a state-controlled, investment-driven economy to one that is more market-oriented and consumption-driven. It is also at a critical point in its path to integration in global financial markets, as highlighted by the debate over the potential inclusion of China’s A shares in the indexes of the global financial provider MSCI.

Understanding  Chinese companies and IPOs in China

The development of the Chinese financial system, in general, and the stock market in particular, will likely play an instrumental role in both of these transitions. However, there are two key questions left. First, can the stock market improve the efficiency of capital allocation and support broader financial stability? Second, can the stock market serve as a platform for greater global diversification, thus improving risk sharing and potentially lowering the cost of capital for Chinese companies? We will probably know the answers to these questions in the coming years.

Author: Abebe Gasparini

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This article A brief history of the Chinese financial system: how did Chinese companies conquer the international stock markets? | Daxue Consulting is the first one to appear on Daxue Consulting - Market Research China.

Full transcript below:

Matthieu David: Hello everyone, I am Matthieu David, the founder of Daxue Consulting, a strategic market research company in China and its China marketing podcast, China Paradigm. Today I am with Lucas Rondez, the founder of Nihub Innovation Centre based in Hangzhou. You have been in Hangzhou since 2005. You are also an Honorary Citizen of Hangzhou. I am very impressed by this and would like to know more about how to become an honorary citizen. You have received a lot of awards like the Qianjiang Friendship Award by the city of Hangzhou again. Before starting Nihub, you had started another company called Nihao app to make it easier for foreigners living in China. Thank you very much for being here. Could you tell us about your story in China?

Lucas Rondez: I came to China in 2007, so it’s been 12 years. Previously, I have worked for the banking industry all my life. I started in Switzerland, working at Union Bank of Switzerland for six and a half years. Then I decided to quit and try to go east to see what was going on over here. In the beginning, I asked my bank to send me to China, but they refused. So, I quitted and came here. It was challenging, but I love challenges. I decided to come without any background, language skills, and job offers. By chance, I found an opportunity here to work for a very local bank, Bank of Zhangzhou for six years. It was amazing. When I arrived at the bank because I had a private banking background, they had many customers that fit this category, but they don’t have private banking. They asked me if I could build one for them. I did that for 6 years and then moved to another bank called Ping An Bank under the Ping An Insurance. I spent one year there.

I knew I always wanted to become an entrepreneur in China and be close to my friends to see how trustful they really were with me. So, I switched into sales. In 2015, I had plans to open a startup in China, and I had to raise some money. I wanted to see if all the people who were talking to me would back me as soon as I embark my entrepreneurship in China. That’s what they did, and I was really happy and lucky to have these people around me to open my first startup in China in 2015.

Matthieu David: Which was Nihao app at that time.

Lucas Rondez: What we did is that we started with an online application. The goal was to resolve all the issues that we had experienced by ourselves in China. We did an online application to resolve some personal and life problems of foreigners living in China. We did that for one and a half year. It got on very good traction with many users. The only issue we had is that we made so many mistakes. The biggest mistake was that we didn’t spend much time seeking at the beginning of the business model around it. After one and a half year, we realized that most people were more interested in our own story than our services. Because they were interested in hearing how we opened this startup in China, how we raised money in China, how to build government relationships in China, and how we created this business ecosystem in China. We realized that the need was more on that part. At the same time, the government was very active in attracting more talent and startups like us. We saw that there were needs from both sides, so we worked more on a B2B model. For that, we created Nihub to help other foreign entrepreneurs in China get access to the resources we have.

Matthieu David: You are managing two co-working spaces, one in Hangzhou and one in Qingdao. The one in Hangzhou is about 600 square meters with 65 desks and the one in Qingdao is of a similar size. But I was surprised that it’s free rent in Qingdao, whereas in Hangzhou, it’s a business where people have to pay for the rent. You have raised 280 million RMB. I believe it’s not for you, but your clients at your co-working space. Could you share more numbers about the story, in terms of the revenues, the size of your team, number of clients, the money you have raised, to give an idea about where you stand?

Lucas Rondez: We started Nihub in the middle of June in 2017. Since then, we already had a few projects talking to us and got much more on the road. For that, we created this NiHub. With NiHao, we helped startups in China land and scale in China. We developed a platform of services, including co-working space. But this is just helping them land and set up the structure of the company, most of it is to create this business ecosystem in China.

First, we must create a business ecosystem in China that is very close to the local Chinese ecosystem to help startups in China get access to opportunities. We work with early-stage companies mostly, Around and before. Most of our companies are pre-A round, which means that they have developed some product and overseas businesses and want to build relationships in China. That’s why we work with all these European companies because the European market is just too small for them to become big. We help them get access to China.

We help many companies from different points of view. We are not an incubator or an accelerator platform in China. We provide solutions based on the marketing strategies we could help. Till today, we helped more than 60 companies, for 40 of which we had created their strategies in China. We helped some of them only with the funding strategy, some of them with everything.  280 million is, of course, not for us. We raised ourselves more than 10 million RMB between two businesses that we did. We had to get access to all of the VCs in China. But this was back in 2016, 2015 and 2017. Since 2017, we have only helped other startups in China raise the money. 280 million was for some of our portfolio companies.

Matthieu David: You mentioned some cases in your portfolio, Dashmote and SCMC Accelerator, more corporation with an accelerator from Israel. But Dashmote raised money in China. Could you tell us more about the story of Dashmote with you?

Lucas Rondez: In general, for any startup in China that we work with, we will spend different phases. The first phase is to look at the opportunity that they have or may not have in China. It’s an analysis of the risk and opportunity for the first few weeks and months until the founder of the company decides that China could be their growth strategy. We help them get into the business ecosystem in China. We have to create a future for the company. We work with all the operations like accounting, taxes, design for the products. The reason why we emphasize the funding strategy strongly is to raise money in China from investors. It’s not only helping the startup in China have funds, trade the team in China, and develop the business. It’s also to get access to the resource of the funds because all of the funds that we work with are Chinese locals, and they have access to the market. To accelerate the process of landing and growing in China, it’s very important to put all business relationships in China together. That’s why we offer these funds. The 280 million was not for the 60 companies, just a few of which actually got access to money. Some of them are still not yet ready to raise money in China, so it has been their incubation process. The 280 is not for an early-stage company, but for those that are profitable with very good technology and R&D and had some projects with us like researching for the past six, seven years. They are already mature and close to the commercialization strategy. That’s why we help them raise money in China, build the team, get access to the market, and of course, build business relationships.

Matthieu David: How much does it take for a startup in China to join the Nihub?

Lucas Rondez: First, we don’t have any restrictions on that stuff. We really focus on looking at which company and technology have good long-term growth potential. We focus a lot on the team background of these startups in China and what they are building. We focus mostly on working with the B2B strategy because that’s where the technology advantage could be different in China. We have services for all kinds of company. As long as it is a B2B startup in China, we can help it with coaching to build the business ecosystem in China. It’s very affordable for a very early stage company. But for the funding strategy, we will start to work with companies who are already in the growth strategy. We can serve all kind of companies in different setups. The only thing that we focus on clearly is foreign entrepreneurs in China. We only work with companies with Chinese strategy. If a company is based abroad, for example, my country, Switzerland, and wants to scale in the US, I don’t see any values we could bring to it.

Matthieu David: Could you tell us the minimum budget in order to enter your hub like $10,000 in one year?

Lucas Rondez: Because we do many things, if you look at just the soft things that we do like events, they are open for everyone with a cheap cost to join our events to build business relationships in China. Now people who want to work closely with us may get a desk in our office. So, this depends on the locations. Everything we do is trying to reduce the cost. Most of the startup in China need to control their costs. For example, in the new office that we just opened in Qingdao, the rent is free for every startup in China to get access to the area. We charge in Hangzhou, but it’s very funny.

Because we get a lot of government support, one desk in Hangzhou is only for 750 RMB a month for a startup in China, and they can get exactly the same amount from the government. For us, the goal is to reduce the cost of these entrepreneurs in China. Our main business model is not different from these startups in China, because we just set up our own firms, and our goal is to invest in companies. That’s why if we don’t invest in the company, we will not take shares in that company. Now we have raised money in China. The goal is to invest and grow with the company. At the same time, when you are investors, especially early-stage investors, many people do badly is to support the entrepreneurs in China at an early stage, because many startups in China are new for their entrepreneurs. When you are a CEO of startups in China, you are not only leading a business, but also leading a team and everything, but you don’t have all the knowledge. Our goal is on raising money in China. We also care a lot about pre-and-after-investment service and support. Of course, our growth will come with the growth of the valuation of these startups in China. 

Matthieu David: So, the cost of one of your desks is $100 –110 USD per month, but you can also be reimbursed by the government. You mentioned the government several times. Why is it so important to build government relationships in China, and how did you do that?

Lucas Rondez: First of all, I don’t think it’s only Hangzhou, because every government within China is very supportive. For us, it’s important when you bring a company and technology somewhere; you need to be close to the business ecosystem in China that you need. The reason why we chose Hangzhou to start is that the whole business ecosystem is amazing here. The premises are so much cheaper than in Shanghai, and the other side is because, for a business ecosystem in China, you need many things like a very good market that is not only big but also is open to new technologies. Hangzhou has been very innovative on that point. If you look at the mobile payments, for example, I am sure the populations in Hangzhou were the first one to adopt this new technology. Apart from the market, you also need a good talent pool. Hangzhou has very strong universities and also good people who have been trained by all the big companies like Alibaba and other big tech companies that train and make strong talents. Finally, you also need a lot of funding. Here, we have money available due to a lot of entrepreneurs in China that make a lot of money and support the innovations. Of course, you need government support. The government relationships in China that we are looking for is more about the mindset. The government in Hangzhou says that we are a big incubator. What we want is not a big company, but small startups in China that can become big. When they have this mentality, they know and understand that you need to support each stage of the company with different policies. They know that many of them will fail, but the government will still support them because it creates this mindset and also a very big unicorn. If you look at the number of unicorns in this city, the number has been growing in the past 2-3 years. It’s the general mindset of this business ecosystem in China. This is also what we see from many different cities around China like Beijing, Shanghai, Shenzhen that have been there already for many years. But I think today, Hangzhou is definitely starting to be very competitive in those terms, the same as Chengdu and Shenzhen. There is another business ecosystem in China, for example, Qingdao. The reason why we chose Qingdao is that Qingdao has the potential to create a very strong business ecosystem in China, in terms of market and everything. It’s not in the first 3-5 position, but it has to develop because it needs to be more innovative and transform the current technologies that they have. That’s what is amazing to be in China because there are opportunities everywhere, and it is important to help startups in China be close to the industry that they are working on.

Matthieu David: I’d like to understand better your government relationships in China and how you build them? The government of Hangzhou and Quindao, all the cities, have they organized with one central desk to talk to entrepreneurs in China and foreign investments? Is it because you have been in the city for long, so you know some people who are not specifically working on investment and foreign entrepreneurs? Could you make it more visual and clearer? What do government relationships in China mean?

Lucas Rondez: Government in China is actually the same as a company. You have the manager and C-level of the government. It’s always good to know the leaders. What you need to understand is that each level of the government is an institute, from nation to province to city to district. Every single level is the same as an institute, but they are all different. You need support from each level, high level like provincial, but everything is also created at the district level. It’s very important to be close to the district level. That’s also why when you register a company in China; you need to register on the district level. When you work with government relationships in China, there are a few key departments you need to work on, such as the talent department. People should focus on attracting talent, and they need a lot of support to do that. The second one, which is also important for us, is the technology department, which focuses on incubators or creating this business ecosystem in China for innovations. You have others, which are more specific for foreigners like foreign expert department, focusing on the visa, attracting talent and a working permit especially. You have many, many other departments. But I think it’s really the same as a department of a company. It’s very easy to talk to them and show them how we can cooperate, especially for us, because they understand that what we are doing is actually helping them with their jobs. It’s a win-win situation for the government, for us, and the startups in China.

Each of the department is the same. There is another department like the propaganda department, which is strong because it can also bring us close to the media. This department has the same structure on the district, the city, the provincial level, and even the national level. So, a part of that is just to connect with them. This government relationships in China are not as difficult as it seems. It’s just that you go to meet with them and explain what we are doing. What is amazing in Hangzhou is actually the mind-set, because I never had to find them. They came to us, and when they came to us, it was funny because they were very open-minded, especially when you don’t know how to build government relationships in China, you made it a bit formal. They told us, “Don’t be too formal. Go straight to the point. Be more straightforward.” After I introduced what I was doing, they had only one simple question, “How can we help you?”, to show this open mind and the point that they understand that the economy is made by companies, so they need to support us. If they support us, it’s a win-win situation for everyone.

Matthieu David: I also had a similar experience in Beijing  10 years ago with one district, which was a bit far from the center, when an official was helping us start a business. He was very, very active, and helpful. I would like to know which district you are in Hangzhou?

Lucas Rondez:  It’s called Binjiang District, the national high-tech zone of Hangzhou. We are even more close to the district level, which is IoT Valley. We are very close to the big and strong companies like Hikvision, JD, many other A-listed companies as well, which focus on innovation. We are also very close to NetEase and Alibaba, so it’s a very high-tech zone.

Matthieu David: You are close to JD’s office, right? Is it in the same district?

Lucas Rondez: JD is just 100 meters from us. I can see it from here.

Mathieu David:  Taking about the companies you are working with, could you mention some cases or at least some industries where they are in? I saw on your presentation that there are 5G, AI, lifestyle, money structuring, IoT, semiconductors. It’s very fashionable because a lot of people talking about those industries like 5G. Could you mention some cases to make it more accessible and visual?

Lucas Rondez: This is actually a choice we did because we really focus on the technology and I think it’s important for us to realize that to get access to the business ecosystem in China is still challenging. If you try to compete in a business model, it’s quite difficult. But if you compete on technology, there are so many advantages if you bring very strong technologies, so that’s a choice and a personal interest as well that we focus on technology. We work closely with the business ecosystem in China, which is made on very high-tech. We focus on two parts, hard technology, and life science, where we are also the strongest, especially in Europe in terms of research and development. For example, we work a lot with IoT, which is very important to develop hardware, because everything about IoT is also about the question of the power consumption that the device has. When they try to develop, these startups in China always try to reduce the power consumptions. For that, if you work on the current situation in terms of software, there’s a Green One company doing semiconductors and developing a chip for IoT, so it can use very low power to make the device. It also has a strong AI capability, which means the AI is not only on the cloud but also on the hardware that changes a lot. If you bring the AI machine learning on the cloud, all of the transactions and data transfer will consume a lot of energy. To develop things into the hardware is the key. That’s one of our cases, and we have many cases that are not as high-tech as this one, but we really focus on the technology.

We also work a lot with new material. For example, there is one working for the cement industry, a very traditional industry that has not changed for 100 years. Cement is a natural resource for everyone after the water. Today, there’s a huge problem of pollution in China, so it developed a new material with the nanotechnology that creates new material to implement in the cement industry. If you look at the cement industry, 50% of the world’s cement industry is in China. What they are developing is made for China, and there are so many opportunities like that. We work a lot with this research and development type of company, so that’s why a lot of company that we work with are spinning around universities abroad. They have been working for many years, doing their Ph.D. and researches on such technology and now they are ready for commercialisations, and the business ecosystem in China is definitely a very strong opportunity and the market for them. 

Matthieu David: You were talking about Hangzhou as a good place to start. Could you mention a couple of cases that would not have been able to make it, if they were outside of Hangzhou? Could you share some examples of companies that succeeded specifically because Hangzhou was the right business ecosystem in China for them to be?

Lucas Rondez: The only reason why I still believe Hangzhou and another business ecosystem in China that we work with are important is because of the cost. I cannot say that a lot of cases are very strong because it’s just the beginning. But I’ve met so many startups in China, which I believe what they are doing is amazing, but the only mistake they made is to localize in Shanghai. Because everything in Shanghai is not made for startups, in my opinion, because of the costs. I have seen many startups in China going very slowly because they chose the wrong business ecosystem in China to start. I think Shanghai is a good ecosystem to scale, but maybe not the one for startups in China. 

Matthieu David: About the cost in Hangzhou, Alibaba is in Hangzhou, and you have so many high-tech companies and unicorns that value more than 1 billion USD. The cost of hiring should not be low anymore with all those high-tech companies. Do you still think that hiring developers is lower in Hangzhou than in Shanghai?

Lucas Rondez: The price of people is definitely not low, but I think when you come to China, it’s not a problem anymore, because you try to find cheap labor. You want to hire very strong and talented people. But the thing in Hangzhou is that we have many very strong people and they are not cheap to hire. Even if you put the money, they will not come to your company, because they have so many choices and they will pick the big ones. But it’s still why I am very interesting to be here because these big companies attract a lot of people. A lot of cities like Wuhan, one of the biggest cities for university in China, have a problem of keeping the talent. These people will be attracted to cities like Hangzhou. There are always new fresh people coming to this business ecosystem in China that is good to work with. The life standard here and the cost of an apartment or food for these people is also lower. The level to start here would be still quite competitive. 

Matthieu David: You mentioned that you have a lot of partners, including WeWork and DealMatrix. I am really surprised to see WeWork because I feel that you two are providing something very similar. Could you explain what you do with those partners?

Lucas Rondez: Many people ask us if we have competitors. The word “competitor” doesn’t exist in my vocabulary, because we create this business ecosystem in China together, and this ecosystem cannot be made only with one company. Everyone needs to work with each other because it’s actually to share the resources that are available in the business ecosystem in China. For example, if we work with WeWork, we can have access to the startups in China who need our business ecosystem in China to do great stuff together. How we work specifically with WeWork is that it is also trying to bring much more services to startups in China that are implemented at WeWork, and it also wants to work with the community. We do a lot of training by handling, teaching, sharing knowledge, and resources with startups in China located at WeWork. That’s what we have been doing with them, and it has been a very great opportunity for everyone to create this trust business ecosystem in China.  

Matthieu David: How do your clients find you? There are many places where they can find a desk. I understand that’s not the only thing you provide, but also services of raising money in China and so on. But you can have different places like XNode, WeWork as well. How do your clients get in touch with you? Is it through media and the Internet, or referred by the Hangzhou government?

Lucas Rondez: First, mostly, it’s still from a referral from other startups in China that we worked with like our partners and the government as well. We work a lot with the consulates, innovation centers, and local government, but mostly with universities abroad and other incubators abroad. We work a lot with is with funds abroad. If a company is investing in a company abroad, it is the best one to know which one is ready to scale. We have strong business relationships in China with them, not on the funding, but more on helping their portfolio company enter into China. Coworking space business is not what we are looking for. The only reason we have that is to create a business ecosystem in China, where people can be close to each other. On the operation side, when you open a company, you need to have an office address and here to a co-working space, which means that we can deliver 100 addresses to create startups in China. It’s a very pure operational reason, plus to build business relationships in China with each other. But we are not trying to scale this co-working business, and it’s also not where we try to make money from, because our goal is to provide the resources that these startups in China need to grow.

Matthieu David: Its very interesting that funds are actually reaching out to you. We have worked with rich private equities in China, and I saw how active they are in China to support their investment in B2B. I feel this the trend that the funds are more and more active in supporting their investments, and they can reach out to you as a support for their China expansion or understanding.

You said that co-working is not the way for you to make money. You focus on raising money in China and helping startups in China understand the business ecosystem in China. Could you tell us more about your business model? Is it on the service side like helping them register, the accounting, or hiring people?

Lucas Rondez: We decided to lower our costs as low as possible to help startups in China, but in this strategy, we need to control our cost. For us, the service that we provide still charge, even if it’s not a lot. We still need to charge to cover our costs, even if it’s a little bit of margin on all of these operation services like creating a company, helping with the visa, the co-working service, PR and marketing service that helps startups in China brand themselves through WeChat content creation. All of these services help us cover our costs and make us profitable a little bit. But it is not where we are looking to make money from. Making money is still from the investment point. The goal is to invest in the company and grow with them, and we are not different from the funds. We charge management fees from our LPs and looking for an exit. When we are looking for an exit, we need to put all the support we have in hands to help startups in China scale, grow and make stronger businesses. By doing that, we still need to have our team working for these startups in China, so we need to cover our costs to make sure that we are sustainable as well. 

Matthieu David: LPs, which stands for limited partners, actually give money to people who manage this money to make their investment. That’s what you have to manage some of your investment or direct investments to some of the startups in China you are working with.

Lucas Rondez: Like many types of companies, they will choose to get shares from the beginning and provide services to get shares. I think it’s a very interesting model, but for me, as an entrepreneur in China, when you start, you think it’s fine. But when your company grows much bigger, you start to realize that the shares that you gave at the beginning are much more valuable than the services you get from that. We give a choice on that point. I would say, “It’s your advantage to pay for the services because it’s cheap. If you cannot afford it, we can still find a way to take some shares.” But we are planning to get shares from these startups in China and grow with them. We only invest in the company, and I think it’s very important from that point of view because, in the long term, it is more viable.

Matthieu David: When you take shares of these startups in China or Asia, are they within the WFOE or the Chinese company?

Lucas Rondez:  We still have some startups in China that we helped them raise money in China and they still didn’t have the Chinese structure yet. They get investments from their main holding company abroad. But we create a Chinese structure for most of them because I think it’s important for the operation to have a structure here, so we help them create their WFOE or joint ventures so that they may find Chinese investors. We help them with all of the legal issues and understanding the structure.

We always have close business relationships with entrepreneurs. Even if we work closely with the government and funds, we don’t work for them. We work for startups. We have this mindset of entrepreneurship in China to help startups get the best deal from all of that.

Matthieu David: Would you mind sharing your process of raising money in China? You had been working with the UBS for 8 years. You must be quiet familiar with the process of raising money in the West like Europe. Could you also tell us the differences in raising money in China and in Europe?

Lucas Rondez: To be honest, my banking experience didn’t bring me too much knowledge of the venture capitalists. I learned VC’s in China. I am not familiar with how to raise money abroad, because I never did that, but I am very strong in the process about how to raise money in China. The way to raise money in China is actually quiet and not as difficult as it seems, because it’s just to meet the right people. To make sure that we raise money in China, we need to find the resourceful investors, who understand the industry that they are investing and can provide not only money but also business relationships in China. It should be very strong matchmaking between the stage of the company and the stage that the investor thinks best, to create this business relationship in China. What we do is challenging, because it is difficult to create a trustful business relationship in China when you even can’t communicate with each other because many Chinese firms cannot speak English. That’s why we focus a lot on the technology side because we need to spend more time in due diligence to look at the technology and make sure that your team can handle the scalability in China. The process is quite simple. Startups in China just need to send some very simple pitched for us to know the overview of the company, what they are doing and where they want to go. We help them adapt that or discuss adapting the strategies for China. As soon as this is ready, we start to connect through our networks in China and our business relationships in China with the investors that we have in our hand. That’s why we have a very low profile. We are not the one that are creating roadshows every day or going to the conferences, because what we are doing is still through business relationships in China and contacts directly to make a match.

Matthieu David: How many meetings do you need to get an answer to raising money in China? Could you share a bit more about some experience in raising money in China? Do you go to the same VCs or find your VC depending on the startup in China and its technology to better match them? Could you explain more about how intense and heavy it can be to raise money In China or how easy it can be?

Lucas Rondez:  It depends on the businesses. You need to establish as many business relationships in China as you can because raising money in China is a slow process. If the investors listen to one project for the first time, they will not have the same feeling from other peers about the same project. They will move more quickly. I think raising money in China is more about the speed and the strategies of getting invested. The strategies are very simple, which is to make sure we connect with the right business relationship in China and to be very aggressive in contacts in order to make it quick and efficient. We spent more than 10 years in China creating all of these business relationships in China. My goal is very simple. I don’t want my startups in China to spend 10 years to have the chance of one meeting with investors. Because we already have these business relationships in China, I want to give them the opportunity to meet tomorrow. We help them through the initial networking in China with them and then we help them pitch their companies to the investors. If we see interests, we arrange meetings or conference calls. If there is good traction, the deal will follow very quickly.

Matthieu David: Why would raising money in China be more sensitive to Chinese investors? Would it because they feel that the technologies that can scale in China can have an impact in China? Is it because it is disruptive or because of the innovation simply? What are the key factors to convince a Chinese VC? 

I am more interested in the technology that can scale in China because they know the business ecosystem in China. They see their values here or they are a bit agnostic of the location, for example, the Silicon Valley VC would say we are targeting the world. Do they have this worldwide vision? Do they focus on the technology that they can plug with other investments? What are the key factors if you want to convince a Chinese VC to put money in your startup in China?

Lucas Rondez: VCs in China are the same as everywhere in the world. They just want to see the growth value and the potential of each startup in China. It depends on what you’re targeting. If you look at the technology that you are bringing, obviously you need to see what’s the potential. Today, many Chinese investors are convinced that foreign entrepreneurs in China cannot get into this business ecosystem in China, which from my point of view, most of them are correct. That’s also why we have the responsibility to help them establish business relationships in China. But if you have a very strong competitive advantage, you can get access to the business ecosystem in China. The switch that we have recently seen from the past one and two years is that Chinese investors today are also looking more at opportunities abroad because they are looking for globalization and are more and more interested in understanding the overseas market. Especially when you see all of this business model concept that has been created in China over the past years, there are a lot of opportunities being brought to South East Asia, Africa, and other markets to grow and scale the Chinese company abroad. But on the other side, I think it is because the business ecosystem in China itself is already very big, so it’s just looking at other opportunities. 

Matthieu Rondez: How did you become the Honorary Citizen of Hangzhou and all those awards like Qianjiang Friendship Award?

Lucas Rondez: Two reasons. The first reason is that I speak Chinese fluently and the government still also needs to communicate with expats here. I am one of the first foreign entrepreneurs in China, in Hangzhou speaking Chinese, so it’s very simple for them to build a business relationship in China with me. The second reason is that they are also looking for the win-win strategy. What I am doing is helping the economy of the city with its international development strategies.

From a more operational point of view, there are some key departments that are important for building strong government relationships in China. When they do the provincial award, they also have also the Qianjiang Award, which is the city level award in Hangzhou. To get the first one, you need to get the city level, which is very simple. They said,  “We have 20 awards for this year.” They put that on the district and 3 to 4 for each district. The district knew me, so they asked me to apply and I got it. It was very simple. When you get the city level award, they will recommend you next year for the provincial award. This year, they recommended me for the national award. It’s basically like that. But I think in the end, it is because they understand that the strategies I am using areas similar to what they are looking for. It’s a win-win. They support me and I support them.

I got two things from them, which I think are amazing. The first one is that I got the PR residence, the green card of China, just because I got the award. You know the working visa system and this ABC criterion for foreigners, A being the most talented one and C being the low-skilled one. If I rate myself I will become a C, because I have never been to the university. But even by being a C, I still get access to the green card is, because I got all these awards. The other thing I got from that is much more important for me. In China, there is a Communist Youth League. Inside the Youth League, we are actually the associations of entrepreneurs in China. They elected me to be the Vice President of the Hangzhou Young Entrepreneur Associations, which is very important for me because it helps us build business relationships in China for ourselves with the local entrepreneurs in China. It is very important to work with everyone, not only bringing and thinking for foreigners. We need to build business relationships in China with the local ecosystem. You mentioned about unicorns. We actually know all of them, because, in the associations, we are on a board of around 10 people, among which there are 4 unicorns and 3 listed companies. They are all very strong people to build business relationships in China with. 

Matthieu David: You said that you raised 10 million RMB for Nihub. What are these 10 million for, because I do not see a lot of costs of R&D on your side? Do you invest the 10 million in startups in China as well?

Lucas Rondez: We got most of them for the Nihao App because it was more burning. I had a staff of 30 developers working on the applications. Most of the funds were for that. But when we raised money in China for NiHub, my previous investors backed me up for the second venture. In total, we got around this 10 million RMB.

Matthieu David: So, it’s really an investment into your company, not investment to reallocate into the startups in China within your business ecosystem in China. Thank you very much for your time. Congratulations on everything you have achieved. I guess you are the person to build business relationships in China within Hangzhou. Thank you again for talking to us it was very instructive. Hangzhou is a really good place to consider before moving to China, at least to consider it. When I started my first business, I was considering Yantai and Qingdao. Ultimately, I started in Beijing but I have considered all of them, so it’s a very good exercise to do. Thanks again, I hope you enjoyed it and I hope everyone like the interview too. Thanks, Bye, bye everyone. 

Lucas Rondez: Thank you. 

China paradigm is a China business podcast sponsored by Daxue Consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.

Do not hesitate to reach out our project managers at dx@daxue-consulting.com to get all answers to your questions

This article Podcast transcript #48: Building business relationships in China is the first one to appear on Daxue Consulting - Market Research China.

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Full transcript below:

Matthieu David: Hi everyone, I’m Matthieu David, the founder of Daxue consulting and the China marketing podcast China paradigm and today I’m with Carlo Dragonetti. You are in charge of e-commerce and communications, especially online communications at the Italian Trade Agency, and you have been famous before being viewed 20 million times after a speech you gave for graduation. And I believe that’s how you were initiated with social media, with how to leverage social media and videos and so on, and I’d like to talk more about this. And also, about Italian companies in China, how to communicate online? How to be an ambassador of Italy on TMall, that’s what you do currently. But, thank you very much for being with us, Carlo.

Carlo Dragonetti: Good morning, good morning to everybody. Thank you for inviting me.

Matthieu David: Could you tell us more about your story in China first, so the audience understands where you come from and what you currently do?

Carlo Dragonetti: Definitely, yes. My approach to China started a couple of – well more than a couple of years ago. I came to China because I started studying Chinese back in my university in Italy, and then I realized that my Chinese approach was not enough. So, I decided to go to Beijing to study. The first approach there – was very, very nice and after that, I went back to Italy to finish all my studies, and I felt like I really had to go back to China.

That’s what I did. Before I went back to China, I went to Vancouver, which is the second biggest community of Chinese, from China Mainland and not out of China. So, the feeling I had, to go back to China was higher and higher because my experience with them was growing. I got two scholarships from the Chinese government, for studying in Shanghai and I have been studying here for three years. Around three years. I did my masters and then – you were right Matthieu, at the end of my student career, I had sort of exploré – that’s what you’d say in French. It was interesting. It was my first approach to the communication world from the inside, not from outside. This is how I started to enter the world of e-commerce too. E-commerce and communication are very related, and that’s how today, I’m the ambassador of Italy on TMall Global.

The reason why in this world of e-commerce there are so many KOL’s, so many influencers, it’s because you have to communicate for selling. And that’s why sometimes, it’s very complicated to explain that there is a different process of communication in this part of the world, compared to the other part, where we come from, and that’s the job that we are trying to do, to support the Italian trade agency to support Italian companies in China that are not only willing to enter the Chinese market in the traditional way – offline, but also online. So that’s one of the challenges we are facing lately.

Matthieu David: I see. I’d like to go back to the origin of your presence online, especially with this video. So, this video was – how was it made? Was it someone making the video and then posting it on Weibo? And then after that, once you had been seen millions of times, have you been able to leverage these followers? Have you been able to continue to get views or it was a one-shot? Can you explain to us more about how it happened and how you could leverage it?

Carlo Dragonetti: Right, so I wasn’t looking for that, I have to admit that. I even invited my parents coming all the way from Italy because it was an experience being a Victorian, going on stage and speaking in front of 8000 students. It was interesting, but I wasn’t looking for saying something that would have made me famous – At least for a while, and what happened was that a girl, at the end of the speech – well the speech itself was at 7 in the morning in Meehang, which is a place a little bit far from the city center, so it was the end of June and it was very hot. I was very nervous because I had to speak in front of 8000 people, all in Chinese. I was a bit stressed.

So, as soon as I finished, I was so relieved that when a girl came to me and told me, hello – Wang Xiaolong, which is my Chinese name. May I post your video on Weibo? And I was like; you don’t even have to ask me, of course, you can. Well, that might have been one of the biggest mistakes of my life, because if I only knew that the girl that came to me was the owner of the account of Peer Video, which basically is an account with 50 – 60 million followers, well that might have changed my – I wouldn’t say my life, but at least the following base. My account on Weibo might have been so hot that I would still be commenting and chatting with all my fans.

That’s something that didn’t happen. Why? Because I didn’t at the time have an account on Weibo. Which is fine, because I managed somehow to leverage the story to come up with good results out of it.

First of all, all the Italian media started coming to me. It’s not common to have a young Italian speaking Chinese, who managed to become famous in China, and apart from – well I tried to divide what is – one shop communication to what might have been useful for my future. So, I started understanding whether this could have brought me something useful for my life, or it was just a one-time only famousness online? And I managed to enter in a contract with different Italian companies in China, both for the two reasons.

The reason why I decided to keep using my image to – what I decided was to keep using my image to meet new people or to leverage all the connection and contact I had in China, rather than building a career on that. Now it’s funny because in the end, I’m actually doing things for my KOL career, as a foreign KOL in China, but my interests, my main interests are not in the communication to be considered a foreign KOL in China, but are mostly in the communication to be considered as one that organizes the campaign for the KOL’s.

So, let’s say this is something that is living the experience as a foreign KOL in China from inside, does help me a lot in what we’re doing, for example for the Italian Trade Agency. So, it has been very interesting. I have been in contact with the Chinese televisions, Chinese radios, Italian televisions, Italian radios, newspapers. It was a very interesting moment, and then I realized that the story of my speech went all around the world. I read articles in Polish, I read articles in Indian, and it was a fun story.

Matthieu David: I see, so the lesson we can learn from that is that, when you are in China, get your social media ready, so that if there is a video, if there is some content about you, you can leverage it and get followers and keep them, because that’s not what you had at that time. You didn’t have a Weibo account.

Carlo Dragonetti: Come on, that’s somehow a very general – it’s not common that you make a video that goes viral like that. From a general point of view, I would say yes, you’re right. But in the end, you need to feed your fans, so no matter you make something viral and it goes viral and wow! It was beautiful, it was fun, it was interesting, it was whatever – but then you have to feed your fans. So, you have to keep posting; you have to interact, you have to make stories, you have to share what you think and then try to have a strategy for that. It’s not just that ‘oh I saw a funny thing and then I post it.’

The most interesting part of having had the chance to be famous for a long while has been that I had the chance to get in contact with important people in the sector in China and Italy. One of the most important KOL in Italy at the moment wanted to meet me because his interest in China was growing more and more and he wanted to have a chat with me; I was very happy to meet him. And what he told me was that it’s very common in this time, to become famous just for something and then how do you have to leverage it? He told me, if you like glasses, you can become a foreign KOL in China for glasses, because there might be a group of people that are very interested in glasses, but you cannot be a KOL of glasses and pens together, because of the people that like pens, do not like glasses.

And this is a very bad example; these were the first things I had in front of me, to say that, there is a group of people that can be a lifestyle KOL. Let’s say Cristiano Ronaldo or Kim Kardashian, all these big, big names – but not people that start their career as influencers or foreign KOL in China. You have to start feeding your fans with pen information, or glasses information or what you see on – you know, just trying to have one single focus. Otherwise it’s going to be very complicated to keep feeding your fan and having a pool of things. So, lifestyle KOL’s or influencers, it’s a bit complicated.

At the time, I didn’t really know what I have to do. I had some agency that told me, listen, you’re Italian, you can be a KOL of Italy. That might work. I wasn’t very convinced. I decided to start working for the Italian Trade Agency, and then – the focus came to me. I didn’t go to the focus. Because I started having contacts with TMall, we were working a lot with – well, we are starting working with XiaoHongShu, with Red and then the guys from TMall Global told me – well we are starting a new content platform, content platform which is the national treasure and we would like to invite you as a representative of Italy and foreign KOL in China. That was very interesting. So, let’s say, the process of becoming a KOL now for me is a bit different.

But as I told you, this question was, how to leverage your video, right? I tried to build a path to leverage it, so to gain on it, in terms of connections, in terms of contacts, in terms of possibilities for the future. That’s what I did.

Matthieu David: What do you do at the agency to support Italian companies in China? What did you do specifically for yourself and the agency generally speaking?

Carlo Dragonetti: Okay, the main stakeholders of the agencies, the ministry of economic development. So, the goal of the agency is to support made in Italy in China. There are four offices, they’ve had a trade agency in China, plus one in Taiwan, in Hong Kong and what I am specifically doing, well the agency does support Made in Italy, organizing roadshow for a Chinese company to Italy, in Italy – or organizing groups of Italian companies in China coming to fairs. There are many different things. Many different promotional activities that the state organized for Italian companies in China.

What I am in charge of is all the communication and e-commerce relations with the main Chinese e-commerce platform. What I like to do is to communicate what the promotional activities do and specifically in China. For example – now we’re working a lot with the food and beverage sector, and that’s a big challenge because we have to face some bad strategy of Italian companies in China in the past year, for example for the wine sector. As you know, the French own the highest part of the market in terms of wine. They came to China 40 – 50 years ago saying this red liquid is called Bordeaux, and so from now on, that’s what you have to call it. And, so we created a campaign, a whole campaign investing an important amount of money – of public money, to support all the business of Italian wines in China.

Matthieu David: I understand the agency, the government agency. So, you have to promote all the Italian products in China? You cannot promote specific products, bring specific Italian companies in China, and you are doing e-commerce, so how did you do eCommerce and promote all the Italian products in China? Can you explain more about what you do in your promotion? Is it to sell products directly, with your own shop? With an Italian shop? I know Alibaba, TMall had a shop with the country at some point, but I’m not sure it got the leverage and the momentum that was expected. So, I don’t know how it is now. Could you explain more?

Carlo Dragonetti: Right. We do represent Italy; it means that we have – the goal of the agency is to promote all the possible business, all the possible Italian companies in China. No matter if they are big or if they are small. Of course, the bigger they are, the more it is complicated to represent them.

Let me make a very bad example. Ferrari would never come to us and say, support my campaign in communicating how fast can a Ferrari drive. So, what we do is, support the small and medium enterprises to enter the Chinese market. The interesting part of this is understanding how can we support the made in Italy, and what happens when we go to talk with e-commerce platforms? They are very happy to get to know us because we represent for them the possibility to enter in contact with all Italian – small and medium enterprises. Which by the way, represent the 96% of Italian companies in China?

Matthieu David: How much?

Carlo Dragonetti: 96% of Italian companies in China. So that’s pretty interesting for them. You spoke about the online promotion – that’s the brand hub. There’s a content marketing tool on Alibaba, which is called Brand Hub and there is another page that we can call it that way, where all the companies that have a store on TMall, could open their own Brand Hub. This platform is not sale driven, but its content is driven. It means that I am Nike, for example, and not only I want to sell my Italian products in China, but I also want to explain to all my beloved clients how and why my Nike shoes are so good, or my sweater is cooler than Adidas. Right. So that’s the tool. The tool is communication. It’s very useful to communicate what you are doing.

We decided to go on Brand Hub, towards also a long and strategic partnership and talks with Alibaba Italy, which is the base for Alibaba in Southern Europe, and we decided to come up with the Brand Hub because the Italian Trade Agency cannot sell products. So, we couldn’t have created a platform – let’s say, a page on Alibaba under our name to sell Italian products in China. That could have never happened.

So, what we decided to do was to invest in a communicational campaign to rope it all together in Alibaba, the Italian company that we’re already in TMall Global.

So, now we have under the helloITA name, we have more than 100 brands. If I’m not wrong, 103 at the moment. In three different categories. We go from lifestyle to food and beverage to fashion (like import Italian food in China). We have big names and smaller names, but still smaller names that are making money, because as we all might know, it is a little bit expensive to invest in Alibaba. Especially to go on TMall global. So, we have both brands that are in TMall global, and we have brands also in cross border, directly from Italy.

So, this is what we have, what we are doing now, and we organize campaigns, based on content. So not only we have a contract with Alibaba, we have a contract with Alimama, which is a company from Alibaba that sells all the advertisements. So, we are doing a media buy to try to get more and more clients to get to know our platform. And now, this is quite interesting – all the efforts of the past six months – we managed to get all this effort paid back, because in this period we had more than 70,000 followers and more than 20 million impressions between comments, between interactions, between viewers of our screenings on Alibaba, etc.

So, it is quite a challenging activity because it’s not sales driven. So, you cannot really compare if it’s going well or if it’s not going well. We have to compare these as if we were KOL’s ourselves. So, we’re trying to communicate with China about what Italy does. Why go to Italy? What to do in Italy? If they like Italian food, where to buy Italian food in China? How to buy Italian food in China? How to dress like an Italian? And not trying to do it in a way in which we’re trying to say that we are better than our Chinese friends, which is not even true, but we’re trying to do it. We’re trying to make that understanding that if they want to buy Italian, they can have a whole pavilion of where to find a lot of Italian products in China, certified and with a lot of promotion. Which is the key to having a good strategy and possibly a successful strategy on this type of e-commerce platform?

Matthieu David: Which tools work best for you? You talked about live streaming, you talked about creating content, so the cost, where does this seem like the biggest leverage, and could you be more specific on it?

Carlo Dragonetti: As I told you, we are content driven so our interest is always to increase the number of followers, which means people that can often go to see you, they receive a notification when we post something, etc., etc.

So, we have thought that in order to have a better result, we had to increase a lot the number of followers. The Italian Trade Agency organizes a lot of other promotional offline campaigns, and we realized that the interaction between offline and online is the key of enhancing and increasing the number of followers and the engagement that the followers had with our platform. So apart from all these offline activities which are working very well, usually our call to action, so you scan my QR code, I give you the gelato cup, or you want the bag, you have to scan the QR code etc., etc. – apart from this all offline to online activities, we have tools online inside the Alibaba ecosystem.

The pop-up notification that comes up when you open Alibaba – well to be more specific, when you open Taobao. The specific pop up notification that comes out can be linked to our Brand Hub. Then we have all the tools that Alibaba provides for the media by campaigns. So we get to know some data that we try to analyze and we understand what has been going well, and what has not been going well, in terms of banners, in terms of content, in terms of articles, in terms of the color of the banner, the pictures in the banner and even the topic we decided to analyze in certain campaigns, etc.

So, as I told you, we have three different factors, so every month or every important month in the Chinese online calendar, we try to shape our communication in that direction. The tools are actually very, very good to make a good campaign. At the beginning for us, it was very complicated to get to know the tools, because working with Alibaba is very challenging and it’s very interesting. It’s a Yang generation of – the average in the CC Campus, the average age is 28 years old, so they’re all very young, very willing to work and to create more. But sometimes it’s very complicated because they use their own language, they use their own communicational app, its challenging.

Now we are – We as organizers are satisfied, but the best part of this is that also the companies that have been joining so far – HelloITA, are satisfied.

Matthieu David: So, where you see the biggest leverage is offline to online. Offline events where you can use, scan the QR code and you get followers from offline to online, that’s what you are saying right?

Carlo Dragonetti: Not only in leveraging followers, but the interaction of online to offline is very important. So, let me go back again to the food and beverage promotion that we are holding at the moment, about Italian food in China. We have been working with Hema, Alibaba’s family again. We are promoting more than – if I’m not wrong, more than 100 Italian brands with even two or three untraded SKU’s, in different areas of China.

This promotion is called “we are together,” and we were together with Hema in promoting Italian products in China right. What we were doing there is not only being present in GDO and in supermarkets with our tables where there were Italian chefs doing cooking shows, or we had MC’s going to talk about the stories of Italian products in China, etc., etc. – we invited KOL’s, but we were also online on the Hema App. And that was very powerful and very interesting. So, no matter you scan QR codes to become a follower, but you have to think of a promotion that can be brought together online and offline to get the best out of it. So, interactions – that’s a very good tool. Interactions – the easiest way to interact is a call to action, so I ask you to do something, and I get back something else. That’s the base that’s – there are so many different marketing tools that can enter this discussion to make the best interaction between online to offline, or vice versa, but it’s all about – how much do you want to invest? That’s very important.

Matthieu David: Yeah. Yeah. The investment online actually is always bigger than what you think, most people think that it can be a random – as you did actually with 20 million views. It can be by chance or it can be random, to get all the views, but if you want to do it in a specific time, with a specific message, then you want something very, very specific decided to work on. My final question, as we are going to have soon to end the interview, but my final question is about the identity of a nation online, the identity of a country online, I give you one concern that the French identity – it’s very difficult to promote French food, because there is no specific dish from the French food. Compared to Italy, where there are two specific Italian dishes which are pizza and pasta, for instance, which can be clearly identified with Italy.

So, the identity of a country online, when you promote it in China. How do you evaluate when you have so much identity and when it’s not sometimes very easy to promote the identity? Moreover, when you need to be fair with all the sectors. What’s your thinking about that?        

Carlo Dragonetti: That’s actually a fun fact, funny stories. You are right in saying that sometimes it’s complicated when you don’t have an identity or a mascot that you can use to enter a stadium.

We have pasta; we have pizza, we have gelato, right. We have Italian products in China that can be sold but what we are trying to do is – not only we have these Trojan horses to enter China, which is the most famous things. The most commercial Italian products in China, but as I told you before, Italy has 96% of small or medium enterprises that sometimes cannot make numbers to feed on China. So, we also have to balance all of this, so the campaign we’re trying to organize is more about the quality of Italian food in China, no matter it’s a Trojan, no matter its pasta, pizza or gelato or its very good balsamic vinegar, or its very good milk, or its very good whatever – it’s very good water, which any other country might have, but what we have to do is increase the awareness of Italian products in China.

That’s the biggest challenge and to do that it’s even more complicated because you have to fight Ananas pizza, pineapple pizza, you have to fight things that are not real Italian or really high quality. The high quality that you want to communicate.

So, pineapple pizza is always a big deal between Italians and international friends. That was just an example to say that you have to fight what sounds Italian and what is Italian. The parmesan from Kraft is not Italian, because we have the Parmigianino, and how to explain it to a person that never used cheese in his food culture.

So, it’s a big challenge. It’s part of a bigger process.

In closing, I wanted to analyze another aspect. We are now working a lot with Slow Food, which is a very important company – well it’s an association actually that promotes a certain type of values in terms of food. So, the fair food, the clean food that protects not only the person that has the food, but also the producer of the food, and that are a new idea of facing the fast food growing culture of food.

Why we have decided to cooperate with them is because we would like to have more training and more activities that can help Chinese consumers or international community in China, to get to know more and more about what is Italian food and how Italian ingredients can match the Chinese cuisine, what can be Italian food in China.

Matthieu David: I understand, so you’re trying to do what a lot of countries have a hard time doing, that is how to match their products which are very cultural to Chinese food.

Carlo Dragonetti: Sorry I can’t hear you again very clearly. Can you start again?

Matthieu David: You can’t at all or can’t clear?

Carlo Dragonetti: Okay, now I can hear. Can you say it again?

Matthieu David: Yeah, so when you said that you try to match Italian food in China and ingredients with typical Chinese dishes, which is what some countries have tried to do as well. If I take the case of France, for instance, the wine which is coming from France, don’t always fit with the Chinese food where you have a lot of different dishes – which dish? Which cuisines and so on. At the same point, a wine like Bordeaux with very spicy food may not work very well, but still, it’s very famous. So, it’s not easy actually to match, so you were saying that you work with Slow Food association?

Carlo Dragonetti: Right. That’s correct. It’s also quite a matter of perception of the consumer that the customer might have of an ingredient or, let’s say about wine. There’s a funny story about wine. I was in one of these promotions with a big number of producers of wine; we were talking with a lot of wine importers in a very big restaurant in Beijing. We were having one of the best Beijing duck, and they served the food, and there were a couple of Chinese friends and wine importers there, and they told me – look what they’re going to do. This guy was an Italian man. And I was very curious because I thought I knew more about China than he did. So, they finished eating their Beijing duck, and instead of drinking a glass of wine, they drank a sip of coconut water.

So, it’s more about the culture; it’s more about what you have been doing so far rather than what you expect the market to do. So, that’s true – so far maybe we as a bigger Italian community might not have been doing the right thing, so far for example in communicating wine – but the reason why we decided to start cooperating with Slow Food, is because we want to train Chinese chefs, we want to train Chinese foodies, we want to train more and more about what we have been realizing is that the Chinese interests in Italian cuisine are growing more and more. Italian restaurants are popping out a lot in the first year in Shanghai; the interest in Italian food in China is growing a lot; the interest for Italian ingredients is increasing incredibly on e-commerce platforms.

So, based on this wave, we are trying to give our support. Although we have always been facing, and we had always been facing the challenges of what this Chinese market is, which is a very, very complicated world.

Matthieu David: Thanks Carlo for your time, thanks for talking to us this early at 8 a.m. China time. Hope you enjoyed this episode of our China podcast, China Paradigm, sorry for the technical issues. That happens sometimes; I don’t know why. It’s always perfect with Zoom, and sometimes there are some technical issues, I don’t know why. It could be the occasion actually to continue in another episode, about specific cases could be interesting or specific cases you’ve worked on, specific segments of the Italian industry and economy. Thank you very much again and I hope you enjoyed this.

Carlo Dragonetti: Thank you very much for having me in this episode of your China business podcast. I wish you a beautiful day and keep in touch. Bye.

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This article Podcast transcript #44: The challenges of promoting Italian products in China is the first one to appear on Daxue Consulting - Market Research China.