We also find that the smart and second-hand jewelry market has soared recently. China’s jewelry market can afford to approach a wider target market, men and children represent a flourishing consumer base. However, their demand have not been satisfied yet. In this fast-changing market, having insights on the latest trends would level up performance.

Jewelry sales are tied to GDP, so here is an overview of China’s GDP

The Chinese GDP has seen an upwards trend from 2010 to 2019, maintaining a stable growth rate at around 10% from 2017 to 2019. The number of the wealthy class and the upper middle class in China are expected to rise, which is a sign to promote the consumption of jewelry. From 2015 to 2020, the number of the wealthiest class (more than 24,000 RMB monthly disposable income) has the highest growth rate, with a CAGR of 16.9%.

Correspondingly, from 2009 to 2015, China’s jewelry market saw an upward trend. However, in 2015, the industry revenue dropped by 9.12%, ending the six-year continuous growth. The downward trend in 2016 has eased in 2017, following a stable growing trend onward.

China’s fundamentals, including the growth of the middle and upper classes, and urbanization, remain strong and the government’s new fiscal policies, such as 13th Five-Year Plan, are expected to improve jewelry market conditions in the next few years.

These 8 trends shape China’s jewelry market

1. The luxury jewelry market is dominated by foreign brands

Players in China’s jewelry market could be divided into mainland companies, Hongkong-invested companies and foreign companies. Generally, products of foreign brands, such as Cartier, Van Cleef & Arpels, and Swarovski are priced higher than domestic brands. These luxury brands often have a longer history, and customers are willing to know the story behind the brand and each product series.

Chinese domestic jewelry companies are younger. Most of them have no more than a hundred-year history, and the price is more affordable. In recent years, with the Chinese economy’s recovery from the global recession, more young players, such as KEER, I DO, and Zbird have joined the market and expanded quickly.

Big companies such as Chow Tai Fook Group implement a multi-brands strategy, building high-end jewelry brand image. Jewelria, for example, is a brand of Chow Tai Fook group, targets high-income people, and only has stores in a few tier I cities, products of which are not accessible on the online shops.

2. The geographic center of jewelry consumption is shifting downward

With demand in Tier 1 and Tier II cities reaching maturity, Tier III cities become a more important driver of growth and contributes the most value to China’s jewelry market.

The purchasing power of Tier II and III cities is increasing rapidly. Accordingly, the demand for jewelry is increasing, stimulating store expansion in lower-tier cities, especially for companies that implement both store franchising and self-operating models.

Source: China Industry Information

Lukfook and Chow Tai Fook are the two companies with the most stores in mainland China. In recent years, they focused more on expansion in Tier II, III and lower-tier cities in order to achieve a broader coverage, and accelerate authorizing franchise stores in these cities. These cities which experience higher economic growth are in general more resilient to global economic fluctuations and have seen rapid expansion in their jewelry markets. Cartier is also trying to expand carefully in Tier II cities, such as Chengdu and Nanjing.

However, the market in tier I cities is not shrinking, of course, so companies continued to upgrade the positioning and branding of Tier I and cities to cater to the sophisticated customers in these cities. Pandora, for example, retained all the operation of distributors in China to improve the purchase experience.

Demographically, population growth rate in tier III cities is higher than that in tier I and II and has doubled in recent 10 years. Population in tier III cities is 5 times more than that in Tier I. Because internet penetration rate of tier III and lower-tier cities is higher than before, people are more easily to be affected by KOLs when making a purchasing decision.

Source: Lukfook annual report, Chow Tai Fook annual report

3. Gold jewelry is the most popular, but tier I cities are reshaping the trend

China’s jewelry market can be segmented into three: gemstone jewelry, metal jewelry and other jewelry. Other jewelry could be made by Ceram, ivory, wood, etc. Although many jewelry companies have expanded their watch sectors, and watches are usually set diamond or other precious stones, watches are not considered a subcategory of jewelry.

In the whole jewelry industry, gold products are the most popular category and accounts for more than a half of industry revenue, followed by diamond, jade, and other precious metal such as platinum and silver.

Source: Gems & Jewelry Trade Association of China

The revenue contribution proportion is the same in some companies. Chow Tai Fook, for example, gold products contribute the highest revenue of 57.4%.

Chow Tai Fook divided bridal jewelry into Chinese bridal and western bridal. Chinese bridal jewelry is usually made of 24-K gold. In northern China, there is a tradition that the bridegroom has to buy “three gold (三金)” for the bride, which contains a gold ring, gold necklace, and gold earrings.
Image: Daxue Consulting

The Chinese market is dominated by plain, 24-carat products, which represent about 85% of the market by volume. This ‘pure gold’ jewelry (known as 足金 in Mandarin) is almost entirely sold by weight. Ships weigh the items chosen by their customers, multiply the fine weight in grams by the daily SGE spot price and then add a markup that incorporates the labor charge and a retail margin. The balance of the market is made up of 18 carat ( known as K金 in Mandarin) and gem-set products. A large share of the 18-carat market is for weddings bands, where ‘white gold’ provides strong competition for platinum.

Source: Precious Metals Insights

In recent years, gold jewelry has faced stiff competition from gem-set or other jewelry products in tier I cities. Only 18% of women in tier I cities would choose to buy gold jewelry when given 5,000 RMB, compared with 14% and 15% who would buy diamond or platinum jewelry respectively. However, this competition is not as fierce in lower-tier cities. Consumers in tier III and IV flock to buy high carat, heavy gold jewelry for wealth preservation purpose. Also, in tier I cities, there is a healthy market for 18-carat fashion jewelry, much of the upper end of which is imported Italian product.

Source: World Gold Council

Tier I cities are changing the shape of consumerism in China. Trends that start amongst these groups eventually filter through the consumer landscape.

4. Self-purchasing of non-bridal diamond jewelry pieces is growing

Bridal diamond jewelry may not be the foundation of the diamond jewelry industry

Wedding jewelry is traditionally the biggest part of jewelry consumption occasions, which contributes 32.1% and 39.2% total revenue of Chow Tai Fook in 2014 and 2015. Brands such as I DO and Darry Ring have always targeted in the bridal market.

However, in 2016, only 11.43 million Chinese couples registered for marriage, making it the third consecutive year the number has declined. Much of the marriage decline results from China’s one-child policy. Ended formally in January after 35 years, the policy accelerated a decline in the country’s birthrate. As a consequence, people between 20 and 29 – prime marrying age- make up a declining share of the population compared with two decades ago. Because families often preferred male babies, China has a surplus of men, further complicating marriage prospects.

Source: Ministry of Civil Affairs of PRC

With the decrease in demand for wedding jewelry, brands need to adjust the product line. Danish fashion jewelry manufacturer Pandora seems to quit this market. It has kept away from ‘love’ based promotion in China. Its advertisement has never shown the image of couples, which is thought to be old-fashioned and would discourage it from potential customers such as single women.

The Tmall store of Pandora presented many pictures with young ladies wearing its products. This differentiates this young jewelry brand from other traditional brands.
Image: Pandora Tmall flagship store

Products popular with Millennials and for female self-purchase are helping to spur growth.

While women’s desire to be given diamonds is still strong, women in China are more likely to buy diamonds for themselves. This is due to the growing number of working women. 25% of women in China are already earning more than their spouses, which is higher than that in the US.

They often choose gifted jewelry themselves or have input into its selection. 26% of women receive diamonds for birthdays, with the exception of 18^th and 20^th birthdays when an even higher percentage of women receive diamonds. 27% of women buy diamond jewelry for no specific reason. Emotional drivers are particularly powerful in China, with the celebration of relationship and personal milestones topping the list, while this number in the US is among the last.

Source: De Beers Diamond Insight Report 2017

Millennials increasingly value everyday wear jewelry. Unlike wedding jewelry, jewelry for every day is a repeat purchasing opportunity. They also value experience over things, that’s why Pandora is so popular in China. Its Moment series bracelets provide over 600 different options in China for Chinese customers, launching new products in various celebrating days. Pandora remains a two-digit percent of annual revenue growth in mainland China since it entered China market officially in 2015.

Conventional domestic jewelry companies are also seeking to attract millennials. After-acquired Boston jewelry brand Hearts on Fire, Chow Tai Fook provides more products for young customers. Luk Fook provides gold jewelry in low purity, making the price more affordable.

People are trying jewelries on in Monologue shop, and most of them are young ladies. Monologue is another young brand of Chow Tai Fook, targeting millennials in a simple design and low price.
Image: Daxue Consulting

5. The digital market can’t be isolated from offline stores

Online shopping has effectively become a national pastime in China with approximately 77% of respondents picking it as their favorite leisure activity.

80% of consumers aged between 20 and 40 learned about gold and jewelry products through the internet and 60% of them had spent money on the internet. The proportion of spending on gold jewelry under RMB1,600 was 64%, while that on gold jewelry over 3,000RMB was 15% only. Currently, the products priced at around 1,000RMB are prevalent in the internet spending on gold jewelry, while the products priced under RMB2,000 are the major market for the internet spending on gem-set jewelry. Chow Tai Fook sets price range in their physical stores is 3,000-6,000RMB, whereas online it is 1,000-1,500RMB.

Almost all the main players in China have its own Tmall and JD stores. Besides, Wechat shop and Vip shop are the 2 platforms where people could reach jewelry products.

E-commerce player keeps rolling out offline stores

In the online market, jewelry companies’ biggest challenge is to inspire confidence in customers. Because of Chinese people purchasing preference, the business model of Blue Nile that provides diamond selections for customer online has no physical inventory and only procured from the supplier once a customer has made an online purchase will not succeed. Almost all the online shops of jewelry companies could locate the nearest offline shop for online visitors, inviting them to walk in and touch and feel jewelry. Even early e-commerce success players are rolling out offline shops these years.

One difference between e-commerce player and conventional players is the function of offline stores. For the former one, it has fewer offline stores: Kela (柯兰钻石) has 210 stores, and Zbird(钻石小鸟) has only 41 stores. These stores only have sample products and a few inventories. People can either place a digital order through in-store tablets or their own mobile device, or through the store directly, and they have to wait for products producing and shipping from Shenzhen, China’s biggest jewelry manufacturing and trading hub, where most jewelry manufactories are located in, including Kela and Zbird, for 5 to 20 days.

Zbird(钻石小鸟) successfully implements a B2C model into jewelry industry. Zbird is founded in 2002, before Alibaba had even launched Taobao, selling diamond rings and pendant on Eachnet, the first e-commerce platform in China, and only opened its first offline store in 2014.

Customers could select key components of diamond (i.e. Price, Cut, Color, Clarity, Carats)
Image: Zbird official website

However, for Zbird and Kela, most of their revenues come from offline stores: 80% for Zbird and 70% for Kela. Customers looking for engagement and wedding rings are more likely to actually buy the ring in the offline Store. Online customers tend to buy more personalized diamond jewelry like pendants, earrings, and other pieces that are less likely to require opinions from family members.

E-commerce and O2O interactions will continue to reshape the retail industry

Unlike e-commerce companies, conventional jewelry companies are trying to access customers as broad as possible. They focus on in-store experience and have more than one store in a city. Chow Tai Fook’s revenue from e-commerce platform accounts for 9.3% of the total. 11% for Lukfook, increased 97.4% from 2016, 77.7% of which comes from gold and platinum products

Chow Tai Fook levered on its extensive retail network paired with inventory unification system to collaborate with online platform partners and launched the online order distribution program in 2017, enabling its customers to enjoy jewelry deliveries directly from nearby POS in shorter delivery time.

WeChat is an efficient channel to communicate with customers

WeChat’s monthly active users sit at 1 billion as of Feb. 2018. Cartier was the first luxury jewelry brand to use WeChat moments ads. Relying on Tencent’s enormous database, the accurate delivery of the ads helped Cartier’s WeChat account gain a huge following.

From February sixth until Valentine’s Day of 2017, 150 limited editions “rose gold love bracelets” were available exclusively on Cartier’s WeChat online store. Each bracelet cost over RMB 30,000 and was on the more affordable end of its jewelry collection. The total 150 bracelets were sold out within a week on WeChat.

The purpose of this campaign was not to focus on the selling figures, but rather on showcasing Cartier’s premium-purchase experiences. Essentially, using hunger marketing resulted in raised brand awareness and increased desire from consumers.

Besides WeChat, Weibo and Douyin are also witness a joining of jewelry brands. Domestic jewelry brand I DO has 38 thousand fans on Douyin and is one of the most popular jewelry brands on it, compared with Chow Tai Fook’s mere 12 fans and KEER’s14 fans. The most popular videos of I DO are the promotional cuts off a group of celebrities, Nine Percent, that has presented its crossover perfume. The group member of this nine-member Chinses boy group formed by the survival show Idol Producer has at least 4 million fans on Weibo, 73 percent of which are young people aged under 23. Finally, this perfume contributes 4-million revenue to I DO. Recently, Chanel cooperated with Douyin, posting videos about its watch, gaining up to 73 thousand views.

Posters of I DO perfume presented by celebrities NINE PERCENT have covered the whole exit of Shanghai Xujiahui subway station.
Image: I DO Weibo account

Brands need an innovated form of advertising. The parent company of I DO, Hiersun Industrial Co., Ltd., founded its own film company, and plan to shoot a movie based on the idea of its I Do bridal jewelry. The same as Kela, whose parent company Gangtai Holding (Group) Co., Ltd has acquired an advertising company in 2015.

Without long history, domestic jewelry brands emphasize design and quality of raw material

Some high-end jewelry brands attract customers by telling brand stories, such as Cartier and Van Cleef & Arpels, and some young brand without such a long history could choose to endorse itself by strengthen its design, persist in social responsibility and others. Pandora strengthened its concern to Thailand workers, Shinning house (钻石世家) emphasizes donating to schools in rural areas.

Since Shanghai Diamond Exchange is the only transaction platform for import and export of diamonds in mainland China, most jewelry companies in China purchase processed diamond from it. However, some companies, such as Zbird, choose to sign purchase agreements with Antwerp Diamond Exchange and purchase processed diamonds from there.

Rather than purchasing processed and polished diamond, a few big players have ability to process diamond by themselves, vertically integrating their business model. Chow Tai Fook now purchases rough diamond from Alsora and Rio Tinto, and has 5 Jewelry Manufacturing Companies in mainland China, covering upstream raw material procurement, and rough diamond cutting and polishing, and midstream product development, manufacturing and quality assurance.

Cutting and polishing rough diamond allows Chow Tai Fook to secure the quality of diamond to be sold.
Image: GIA, Visit to Chow Tai Fook Diamond Cutting Factory in Foshan, China

6. There is still much room for jewelry for men and children

Limited male jewelry despite the strong demand, especially in tier I cities

China’s jewelry market consumption is dominated by females. 63% of jewelry products are purchased by females, and this number would go up with an increase in unit price.

While the traditional women’s market is fiercely competitive, the male jewelry market is still in the early stage of its development. As well as traditional jewelry items, such as rings, the men’s market also includes such solely masculine items as tie clips, cufflinks, and belt buckles. The interest of mainland male consumers in jewelry products stems mainly from their taste for diamonds. Among Chinese males in the 30-44 age group, 67% wish to own diamonds. Compared with the relentless growth in overall demand, though, the development of the mainland male jewelry market is relatively slow.

Although jewelry brands more or less have some male jewelry products, the design is lack of innovation, and most of them are gold rings or bracelets. Diamond jewelry brands have only a couple of diamond rings for men.

Source: Data from brands’ Tmall flagship stores

Most male consumers bought jade and K-gold products, but the diversity of jewelry purchased would increase with the income of male. For high-income male consumers, they prefer amber, diamond, color stone and crystal, and are less interest in conventional jewelry such as jade and K-gold. Males in tier I and II cities contribute most of the revenues of jewelry for men.

Jewelry for children

In accordance with Chinese traditions, people give longevity locks, bracelets, and necklaces to children as goodwill tokes and as a way of wishing them a healthy and happy life. In particular, the kinds of gold jewelry items can be worn, but which also has an inflation-proof value, are the top choices among those parents who are skilled at managing finances.

In December 2015, the two-child policy allowing Chinese couples to have two children was passed, and effective from January 2016.

Source: National Health and Family Planning Commission of the People’s Republic of China

In response to the implementation of this policy, many companies have introduced a variety of kids’ products. Lukfook, for example, launched an array of jewelry accessories featuring the Rilakkuma, a popular fictional character produced by a Japanese company, and the baby gift sets that came with the accessories invoking blessings for peace, safety and health as well as the exquisitely designed gift boxes. Chow Tai Fook also cooperated with Disney, Line, and Marvel, attracting parents to buy for their children.

Chow Tai Fook launched Minions series products, most of which are priced relatively low, compared with others, from 756 RMB to 948 RMB
Image: Chow Tai Fook e-shop

Besides images of cartoons, the twelve Chinese zodiac animals is also a theme of children jewelry. Parents believe that give children a gold or silver bracelet of their zodiac animal would keep bad luck away from their children.

7. Smart jewelry may be an opportunity

Totwoo, the first domestic smart jewelry company, has got 20-million series A round investment in 2016, used for developing new products and launching offline stores. It launched smart jewelry “We Bloom”, “We Bold”, and “Time Memory” in 2015. It has necklaces and bracelets, priced from 1,098 to 2,389RMB, and made of crystal set on silver or gold. The featured function is that two connected users can share their “virtual emotions” in real-time through the Totwoo APP to vibrate and light up, according to the reporter-turned Internet entrepreneur. Users can store their secret memories and receive alerts: “Take a break,” “Fitness Tracker” and “Incoming call.”

Conventional jewelry company Chow Tai Fook also invested in smart jewelry “Linklove”. It has vibrating, selfie shooting, and step tracking recording functions.

8. The second-hand jewelry market is at a beginning stage

Although the second-hand market is growing fast in China, especially for second-hand car, having over 10 e-platforms exclusively for the second-hand car business, second-hand jewelry seems to just at a beginning stage. Second-hand jewelry products could be traded in second-hand platforms that allows users sell things in various categories, such Xianyu, developed by Alibaba group, and Zhuanzhuan; or in platforms exclusively for luxury products, such as Zhier (只二) and Secoo (寺库).

Daxue Consulting can strategize your entry into China’s jewelry market

As a business intelligence authority in China, Daxue Consulting has a thorough understanding of China’s jewelry market and millennial spending habits and can help your company strategize a China market entry.

If you want to know more about China market strategy, do not hesitate to contact us at dx@daxueconsulting.com

Listen to 100 China entrepreneur stories on China Paradigms, the China business podcast

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This article How millenials and low-tier cities are shaping China’s jewelry market is the first one to appear on Daxue Consulting - Market Research China.

In this episode, Nicolas Coster, a business lawyer, shares his legal knowledge and gives an insight into the implications of the coronavirus outbreak on logistics, taxes and visa applications.

Jump to the questions:

• 0:39 What new rules and tax benefits should be expected after the virus outbreak?
• 1:29 What is the virus’ impact on logistics from a legal point of view?
• 2:56 What effect does the current outbreak have on visas?

Daxue Talks is a show powered by daxue consulting, a china-based strategic market research company founded in 2010! With Daxue Talks, you will stay up to date with all the latest business updates in China.

The ultimate Coronavirus economic impact in China report

This article Daxue Talks 38: The legal impact of the coronavirus on logistics, taxes and visa applications is the first one to appear on Daxue Consulting - Market Research China.

Full transcript below:

I am Nicolas Coster, I’m a French business lawyer. I’ve been in China for 16 years and specialized in foreign direct investment. So, basically, I set up companies in China.

What should seriously affected sectors such as restaurants, hotels, travel agencies know during the outbreak?

Now, most hotels, restaurants and, industries are closed but it depends where you are. For example, if you are in Jinchang district, all the restaurants are closed. If you go to Waitan, it is close too. In some other places, you are allowed to open but need to take special measures. You need to make sure that people who come to your place give their name, their mobile phone number so you are able to check the clients. If one of them gets sick, you can say when this person came to your restaurant.

For businesses that closed during the outbreak such as restaurants, hotels, travel agencies, what are the options to lower labor and rental costs during the shutdown?

The first choice is to negotiate with your employees. You can have a collective negotiation or an individual negotiation but in general, it is better to go to each employee and say that it is a special situation and try to negotiate. You can try to ask them to take holidays or to stay home or even lower their salary and reimburse them when the situation gets better. So, negotiation is what the Chinese government is pushing. Because, if you don’t negotiate, you’ll have to go to court, and it might take time. So, I think that all Chinese employees are able to understand that it is a special situation. You can also apply to the Labor Office to get flexible working hours for the employees during the period and the office often gives the right to do so.

Are travel agencies, hotels and restaurants obliged to reimburse expenses to clients who cannot travel due to quarantine, travel ban or rules?

There is no obligation according to the law. Most of the time when you go through a travel agency you sign a paper with terms and conditions. As a client, you need to check the terms and conditions and see what is stated for the “force majeure”. The current situation is clearly a case of force majeure according to Chinese law. So, once you have read it, you’ll often see that you’ll get payback 50%. So, it is a contractual issue. Some hotels and travel agencies have also a term for annulation. So, it really depends on each case. Of course, you can try to negotiate with them.

You mentioned that one of the first things to do to reduce cost is to negotiate with your employees. First, what options do you have? Second, how to renegotiate? What can employers do with the rental cost?

Options are very simple. You can ask the employees to take their normal holidays, you can ask them to take unpaid leaves, you can ask them to reduce their salary and ask them to work part-time and to reduce their income accordingly. What you cannot do, is to pay under the minimum monthly salary. You can also ask them to resign. It is really up to the employer.

For the lease contract, it depends on the landlord. If you have a state-owned company landlord, you have regulations that say that the state-owned landlord has to give you one-month free rent. The state advises landlords to reduce the rent and help the tenants during the crisis. Some of my clients have a 30% discount for 3 months, other tenants have renegotiated their contract.

The best way is to meet with your landlord and try to negotiate. What is sure is that because of the crisis there can be a real-estate crash at least for commercial buildings.

Daxue Talks is a show powered by daxue consulting, a china-based strategic market research company founded in 2010! With Daxue Talks, you will stay up to date with all the latest business updates in China.

The ultimate Coronavirus economic impact in China report

This article Daxue Talks transcript #35: Coronavirus outbreak and Chinese law: Minimizing the financial impact for entrepreneurs in China is the first one to appear on Daxue Consulting - Market Research China.

Find here Daxue Talks episode 33. In today’s Daxue talk, Matthieu David, the founder and CEO of daxue consulting, discusses the system of corporate taxes in China. You will discover what an entrepreneur should expect in terms of the profit tax and VAT system in China. At what rate is profit taxed? What is the difference between the VAT on products f and services?

Full transcript below:

Matthieu David:

Hello, I am Matthieu David the founder of Daxue Consulting, a strategic market research company based in China – in Beijing, Shanghai and Hong Kong. We have been working with more than 400 clients over the last 10 years since 2010.

What are the basics you need to know about taxes in China to manage your business? The first thing is corporate taxes. The tax on profit is 25%. Without going too much into detail, most companies need to pay 25% of their profit as taxes. There are a couple of elements you need to know and check with your accountant or your lawyer at least every year. Usually, there is a bracket, under which you have to pay a lower corporate tax. For instance, if my memory serves me right, in 2018, businesses with less than 1 million Renminbi of profit have to pay half the tax, meaning 12.5%. When you are exceeding this limit, you were taxed at a 25% rate on the entire profit. So, there is no step and as soon as you break this 1 million you were taxed at 25%. For 2017, the limit was much lower and in 2019 it is much higher. It changes every year, so you have to double-check with your accountant and your lawyer and ask them if you have a question of whether you need to pay taxes and at which level you can have a reduced tax rate. Corporate tax is one thing. You can have reduced taxes if you have a tech company and only in some very specific cases. Actually, for most of the cases, tax reduction does not apply. The cases when it applies are only when you are in a tech park with very specific synergies and when you have a 5-year plan, but this has to be decided with a local government, provincial government or national government and it is not an easy way. So, don’t rely too much on a reduced tax because this happens only rarely.

What do you need to know as an entrepreneur about VAT in China? First thing is that there is a VAT for products and there is a VAT for services. For many years, VAT on services was not deductible. So, you could not deduct the VAT on the VAT you actually had to pay on your costs. This has changed, following one of the biggest reforms in China a few years ago. Still, you need to understand that some VATs are not deductible. For instance, small taxpayer VAT. Let’s go back to the different VAT rates: 15% for products, 6% for services. What you also need to know is that on top of these two types of VAT you have an additional tax of about 10%. Again, it is important that you check with your accountant and lawyer. So, the framework is the following: you have VAT for products, VAT for services and also small taxpayers specific VAT which are not deductible. So those people with few VAT invoices with small taxpayer rate, let’s say 3.5%, then it is not deductible. In services, it can range from around 6% – which is usually the case for most businesses – up to a much higher rate. So, check with your lawyer and accountant. We have now seen the basics and this video will help you to ask the right questions to your accountant or lawyer.

Daxue Talks is a show powered by daxue consulting, a china-based strategic market research company founded in 2010! With Daxue Talks, you will stay up to date with all the latest business updates in China.

This article Daxue Talks transcript #33: Corporate taxes in China: how is profit taxed and what are the different VAT rates is the first one to appear on Daxue Consulting - Market Research China.

AI in China 2020

A re-occurring question is what China’s place is in the global realm of AI development. We are often bombarded with headlines pitting China against the US in competition. But after reviewing the AI developments that have happened in recent years, it is apparent that Chinese AI developers are eager for collaboration.

China’s high level of AI adoption and citizens’ positive perception towards AI sets it apart from other nations. China has the advantages of a massive data pool and a high level of adoption. The areas where China can improve are in talent, hardware and research quality.

AI Talent in China

Whereas the US and EU get a lot of AI talent from foreign countries, China is finding talent within its borders. Between 1998 and 2017 the US gained 1,283 foreign AI academic researchers while China only gained 53. However, China has a larger population to work with, and it is a population that is becoming increasingly more educated.

China is already working on more initiatives to increase AI-related education at the University level. In 2018, China’s ministry of education announced a plan to promote AI education, and several top universities have already added AI departments and majors. Due to China’s AI having a shorter history, AI researchers in China, on average, have less experience. 25% of Chinese AI workers have more than 10 years of experience compared to 50% of the US AI workers.

Highest quantity of AI research

China has published the highest quantity of AI research globally. Though Chinese papers are cited significantly less than US and EU papers, the quality of research has been increasing. Each year more and more AI papers globally cite Chinese research.

China is investing in improving the quality of AI research, three initiatives are:

1) China’s New Generation AI Development Plan, which calls for China to have made significant breakthroughs in AI theory by 2025

2) The Chinese government has created research centers, including the Artificial Intelligence Research Center, which has more than 100 employees.

3) The Chinese Ministry of Industry and Information Technology plans to allocate $950 million annually to fund strategic AI projects.

China’s AI influence is expanding globally

The amount of collaboration between American and Chinese AI researchers peaked in 2017, but is still much higher than it was five years ago. One thing that has been holding Chinese researchers back from collaborating with the US is visa rejections. Meanwhile, Chinese AI research collaborations with the EU have gone up since 2018.

One example of US-China AI collaboration happening in the medical industry, notably, a team of American and Chinese medical scientists made technology that can automatically diagnose common childhood diseases, thanks to the high volume of easily available data in China.

Microsoft, Intel, and Tencent even participated in a cucumber-growing competition to operate autonomous greenhouses to explore artificial intelligence applications in indoor farming.

Baidu, Alibaba, Tencent internationalizing their AI operations

Despite the US and China being pitted as AI enemies, companies have been reaching cross-border for collaborations and mutual gain.  Baidu has been reaching across borders for AI collaboration, Alibaba is entering foreign markets through B2B e-commerce, and Tencent is spreading it’s influence through investments in gaming companies.

Baidu

Baidu has joined a consortium led by US companies advancing the understanding of AI globally. Baidu has also been developing ad tech in Silicon Valley and has launched a DU Ad platform with a goal to help developers in China and elsewhere increase their mobile profits in overseas countries.

Baidu has entered foreign markets through utility apps. These are apps that are not exciting to neither create nor download, but they are useful and sticky, think phone battery savers, spam call filters, screen capture apps.

Alibaba

Alibaba is taking a path of B2B cross-border e-commerce, for example it recently partnered with US’s Office Depot for a B2B campaign targeting America’s small to medium sized businesses. This B2B path avoids direct competition with Amazon for the time being.

Tencent

Tencent has been investing in video game companies around the world. Tencent has purchased 100% of Riot Games, an American game developer most famous for League of Legends. Tencent has purchased 40% of Riot Games, famous for Fortnite, has 5% stake in Activision Blizzard. In addition to these two American gaming companies, Tencent also has stake in South Korea’s Bluehole and France’s Ubisoft, and many more game companies around the world.

AI investment between the west and China

The amount of cross-border AI-focused investment between the US and China is increasing, but there are more Chinese investments in AI startups in the US than vice-versa. Chinese AI investment in the US and US AI investment in China both peaked in 2017.

According to CB Insights’ data, between 2014 and 2018 there were almost as much BAT-backed equity deal shares in the US as there was in China. Some BAT-backed investments in the US include Atomwise, Lightintelligence, ZestFinance and ObEN. The US facial recognition startup CloudWalk even received a $301M grant from the Guangzhou Municipal Government.

On the flip side, Microsoft is an example of a western country with a strong AI presence in China. With a research lab that has been present in China since 1999, Microsoft has hired and trained thousands of Chinese AI developers.

The main sectors covered by AI in China

Delving into the AI market in China, we see that this technology already covers a wide range of segments. Some of the most dynamic areas include what Daxue Consulting defines as the basic layer—the basic parts and algorithms of AI products; the technology layer—technology which support AI products—and applications, which are the AI products in the different industries. In the graph below, we have clustered Chinese companies which make use of AI technology into four groups, depending on which specific segment the companies focus on: Applications, Technology, Basic, and Comprehensive, which refers to those companies that are working in all three areas.

China’s Artificial Intelligence companies

Market size of AI technology in China

China’s artificial intelligence industry is becoming one of the most important markets in the nation. However, the market of AI in China is not mature yet, there is still a large space for development. In 2018, the size of China’s artificial intelligence market reached 33.9 billion RMB and the compound annual growth rate (CAGR) was more than 44% between 2015 and 2018. By 2020, the market size is expected to reach 71 billion RMB.

China’s Artificial intelligence by market size

Distribution of AI companies by industries

The AI-related companies established in 2018 mainly belong to the security, speech interaction and healthcare industries. These areas have strong market demand and mature technology applications. A large portion of China’s AI market share is from speech, computer vision and natural language processing technology.

Distribution of AI startups by region

AI companies in China are mainly concentrated in the economically developed first and second-tier cities and coastal areas. Inland provinces are trying to grasp the development boom as well. In addition, Beijing, Shanghai, Shenzhen and Hangzhou are ranked among the Top20 in the world for the quantity and industrial output of AI companies. As a result of its large and talented workforce, industrial resources and capital, which were superior to other regions and cities, Beijing recorded the highest number of AI companies in China.

Investments in AI technology in China

In 2018, the investment value in China’s AI industry reached 131.1 billion RMB, which is an increase of about 67.7 billion RMB compared to 2017. The scale of this investments granted China the first position in the world ranking. Although the growth of AI financing events slowed down in 2018, the total investment value still increased significantly. Large financing events occurred frequently, and capital was more concentrated in leading companies.

The value of China’s AI industry

Why AI technology is developing so fast in China?

TECH PARKS

In order to promote AI’s development, the Chinese government launched a series of AI industrial parks in the eastern and southern parts of the country. In 2018, China had more than 60 AI tech parks. Industrial parks usually have preferential policies to attract AI companies, such as rental subsidies and tax concessions.

Chinese perceptions of AI

An important element in the development of AI technology is the potential perception that consumers have of AI based products. More often than not, the cocktail of information that has been surrounding AI research and its applications has created confusion among lay readers. In fact, catastrophist Hollywood movies like Terminator, or the nefarious predictions of famous entrepreneurs like Elon Musk come to the mind of many people, whenever they hear or read about artificial intelligence.

In order to get an idea of what Chinese netizens think of AI, the statistical Daxue Consulting conducted a sentiment analysis on the platform Zhihu. Zhihu is the first Q&A website in China and has transitioned to a social media sharing platform, gathering more than 100 million answers on various topics. The platform is especially relevant for inquiries regarding higher- and well-educated social classes.

Netizen’s perception of AI

In addition to the sentiment analysis conducted on Zhihu, the statistical department of Daxue consulting has conducted online analyses of other popular online platforms like WeChat and Weibo. In particular, we focused our research on the reasons netizens give for perceiving AI as having a positive or negative impact on their lives and the society in general.

Positive perception of AI

According to internet users, AI can play a very important role in facilitating the daily life of citizens. Some of the reasons that are most frequently cited on Weibo and Wechat for embracing the introduction of AI technology in the society are the following:

• AI can help to improve traffic conditions and reduce the occurrence of road accidents
• AI can improve the diagnosis and treatment efficiency in the healthcare industry
• AI can promote the innovation of teaching methods

WeChat is the first instant messaging platform in China by number of users and an absolute must-have for any company seriously interested in market entry promotion. As of 2019, it accounts for over 1 billion active users and as more and more non-Chinese users adopt WeChat as a medium of communication this figure is poised to grow in the future.

Sina Weibo, or simply referred to as Weibo, is the name of the largest microblogging platform in China. The website was launched on the 14^th of August, 2009 by Sina Corporation, which among others manages the internet portal Sina.com. The term Weibo is the literal translation of the Chinese word 微博 (Wēibó), which means microblog.

In 2014, before its listing on the NASDAQ stock market, the company changed the name of the platform from the original “Sina Weibo” to “Weibo”. This decision was taken as a way for Sina Corporation to differentiate its product from competitors like Tencent Weibo, which is best known as QQ. The Functionalities available on Weibo persuaded many to define it as the Chinese equivalent of Twitter.

Fears of AI on Weibo & WeChat

Despite the many positive opinions on AI that internet users share, some reservations regarding the more nefarious side of AI have emerged all social groups. The following are some of the more common that we have come across:

• AI could cause social problems, such as mass unemployment in some industries.
• AI brings challenges to personal information protection.
• Autonomous driving technology cannot deal with emergencies with the same urgency as humans.

The future of China’s artificial intelligence

China’s artificial intelligence developed exponentially in the last years as a result of an ideal technological, institutional and economic environment. Firstly, the expansion AI technology was made possible strong cooperation between research institutes, the local and the central governments as well as companies interested in investing in China’s AI industry. Secondly, the rapid expansion of China’s AI market is functioning as a catalyst for the many start-ups eager to develop AI products in other enter the lucrative club of AI companies.

At the same time, our research suggests that there is great awareness among netizens about the potential threats of AI technology. For this reason, many internet users believe that China’s AI industries as well as China’s AI market should undergo regular scrutiny to avoid AI companies becoming tempted to use their technology in questionable ways.

Want to learn more about AI in China? Check out our AI in China White Paper.

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This article China Paradigm 82: Going from digital agency to SaaS business in China with Daphne Tuijn is the first one to appear on Daxue Consulting - Market Research China.

Matthieu David: Hello everyone today I am happy to work with Peng Li, founder of Merger Link, an investment company in China, on the show China Paradigm, our China business podcast where we interview entrepreneurs in China. Hello Peng Li.

Peng Li: Hi Matthieu, thank you very much for inviting me to this China podcast.

Matthieu David: Should I call you Peng.

Peng Li: Yes of course.

Matthieu David: It’s okay. Good. So, I am very happy to work with you because I knew you, I thought 4 or 5 years ago, and you were introduced to me as a person who sold a business 140 million dollars and each restaurant being valued at 2 or 3 million dollars and I was amazed by how you could do that.

You were working in finance at that time, 13 years you are working in finance in China, so you have a lot of insights on how to work in finance in China and how to value companies in China, and you have been now in another business, in a SaaS in China, providing information about non-companies to investors. So, it could be private equity companies it could be corporations wanting to buy in China, and I look at your platform, you showed to me, it’s only Chinese, so I couldn’t read everything, but I looked at one company I saw everywhere, actually the coffee shop chain and I was amazed by the information you provided.

I didn’t know they were so small actually, and I saw they very big I saw them everywhere. So, it gave me a very good understanding of the brand equities they had and how powerful they were. So, at the same time I would be interested in the audience to understand your software how it works, also the situation of MNA and so on. Thank you very much. Should we hear!

Peng Li:           Thank you, Matthieu, for the very detailed introduction. Just to make it short my name is Peng Li to all the audience. I am a Chinese native and a French national. You are very flattering in your introduction saying that I sold a company. Actually, that was when I was working as an investment banker at my previous firm called William Blaire which is a US American investment bank. That’s when we sold a retail restaurant chain to another cross-border buyer. So, I am a little bit familiar enough with this type of transactions. So, after 10 years of doing investment banking in London and then investment in China, I moved to the buy side and worked for a large Chinese investment company called Fosun, and then I also worked for as a strategy and business development person in Yum China which is large… I mean you probably you are client yourself. They own brands such as KFC and Pizza Hut.

So now I am on my own, I am starting to work as a managing director and a partner for a business intelligence firm called Merger-Link, and we are not similar to… we are a little bit similar to investment banks in China, but we are more a business intelligence provider. So, it is in the form of a SaaS but the essence of our business and the value that we create is to basically generate and collect and structure proprietary information and intelligence, and we sell that information to private equity funds and investment banks and other MNCs who are doing investments in China. 

Matthieu David:         So, for everyone listening to us, SaaS is a service, a software, so it is basically providing service on a monthly repeat bill, and you can access to it by basically paying every month for the service. Could you give us an idea of the size? It could be client; it could be revenues, it could be a number of people in your team… just an idea.

Peng Li:           Sure. As you just mentioned we charge our clients, not every month but an annual basis, and we have our own over 50 clients… institutional clients. So, most of them are private equity funds they are global USD private equity funds or Chinese venture capital funds. We also have MNCs etc. So, we are on 50 right now, so we only launched our SaaS platform for over a year, the momentum has been pretty good, and in terms of staffing, we are around 20 people by now. 

Matthieu David:         So good progress!

Peng Li:           Thank you very much, we try to continue to grow and it’s actually… we have a very, very unique service offering and because… I think no one else, to my knowledge no one else in China is doing this type of business. So, in terms of size, we are still small, but we hope that we can change this industry by basically providing the services to all the private equity funds and all the investment banks in China and hopefully most of the companies who are trying to invest in China in the future.

Matthieu David:         What’s the difference between you, the solution you are offering like Wind  Bloomberg, Capital IQ all those companies of business intelligence in China and the world because I feel there are… not a ton but several software, several companies are providing financial information so could you explain to us why those 50 clients chose your solution.

Peng Li:           Absolutely, a very good question. I think all the names you mentioned are great names in the industry. They are business information or sort of database provider for all the companies or investors in China etc., but I think Wind and Bloomberg they are mainly providing information on the secondary market, so stock market so if you… yourself you want to invest in some companies or if you are an asset manager in an asset management company investing in the secondary market than I think Bloomberg and Wind are great platforms. Capital IQ is more of a tool you can check and search potential private companies etc.

The main difference between us and all those types of businesses, all those other types of names is that we are only focusing on the Chinese market and secondly, we are only focusing on proprietary intelligence.

So, what it means is that we gather the intelligence we have on our platform you cannot find it anywhere else on Bloomberg, on Baidu, on Google, on Wind or Capital IQ. It’s every type, every single piece of information is proprietary so, and that information is actionable by our client… 

Matthieu:        That means on your solution, I cannot get listed companies’ information, and I will get the basically more medium size to small size companies that people don’t cover in Wind Bloomberg Capital IQ or even in the press. Am I correct?

Peng Li:           You are partly correct. I think exactly we only provide information that is not anywhere else, but we also have information about some listed companies. For example, we talk to them, we talk to the CEO of certain listed companies, and they will tell us what type of assets you would like to acquire in China. So that information is proprietary because it’s in his head or the policy of the company. So, we get that information.

Matthieu David:         Okay, I saw you were as buy side, but literally, you can be used as sell side as well.

Peng Li:           Exactly, we can be used a sell side and buy side. So right now, our entry point, our focus is on the investment in China. But we see more and more clients, actually demands from companies from abroad asking us to sign business partners or licenses for their brands or distributors for their brands, etc.… so I think in 5 years, I think our business we can evolve into a more of a business finder sort of, because we have access to the companies and we have a lot of those… they’re information if they want to sell if they want to buy… and what type of if they want to raise money in China etc.. so, it’s basically business intelligence in China and access to those firms, and we provide that intelligence to the companies and then if our clients are interested in them, we access, we make the connection basically between our clients and the company they are interested in.

Matthieu David:         Okay. What is the pricing of your software?

Peng Li:           The pricing depends. So, it depends on its two structures: the upfront and the backend. On the upfront as a SaaS in China we have the subscription fee on an annual basis, and once if we make the connection… if the client sees an interesting investment opportunity or the acquisition opportunity, we will connect them, and if we make the connection and they do the deal successfully, we will charge a referral fee or finder fee. So, it’s a basically a subscription fee and financial sort of a referral fee. 

Matthieu David:         What is the cost of the subscription? Could you disclose the…

Peng Li:           The cost it depends… again it depends. So, if some clients want to pay lower for an example referral fee, then the upfront fee is much higher, and if they can pay a much higher referral fee, then the upfront fee is lower. But again, we need to charge a subscription fee because we want to make sure our client is serious and they really want to do investments in China. 

Matthieu David:         I see, so every client you are going to have a different contract. You are going to kind of negotiate, and it may depend as well on how you feel about their having to acquire…

Peng Li:           Exactly, exactly so our clients are almost partners because when we talk to them, I ask the private equity funds or ask what do you want to invest in? What kind of ideal investment do you want to do in China? What type of companies do you want to acquire? And they will tell me okay, I want to acquire in the most difficult sector possible with the lowest valuation possible. Then I will tell myself, okay maybe they will do one deal every two years or three years. Then we will probably have a little bit higher upfront fee than you know… so it’s a balance between the two.

Matthieu David:         Okay, so are you not afraid that they will connect directly to that person in the article…? I mean they could skip you right?

Peng Li:           Yes, it’s actually again a great question. We have been trying to test… actually, we have almost ten daily proprietary investment or acquisition opportunities per day. So, on a daily basis. So, we have clients from the venture side, smaller business, smaller investments to the buyout side. So large MNA and much bigger deal size. That means that there are so many deals and investments in China, in the Chinese middle market, with all different type of sectors… it’s very hard for them to go and find the deals and their contact themselves. So, if you want to do a really systematic approach and trying to find as many as potential deals possible, they can do it, but efficiency is not that high because they have maybe ten people on the ground… they are all very, very busy.

They need to do auditing, and they also do cold calls or do market research. So, their job… I mean I did… I was an investment banker myself, so we had to do a lot of advisory to the clients, we had to do a lot of presentation, internal discussion, evaluation and negotiation and drafting, etc.… so all those take a lot of time, and if you ask these people… very highly qualified people and very smart people to do searching companies in the Chinese middle market and do cold calls, it’s not an efficient use of your time.

So what we are trying to be positioned is… that we are the outsource service for them because the initial part of the investment process which is sourcing deals, screening… looking for potential targets, finding the contact and getting connected, all those can be outsourced and we believe that we are a businesses development tool as well, using business intelligence in China so we can help them free their time, empower their time or empower them to do more things that are value add which is actually what they are paid to do by their limited partners or their investment banks in China, etc.

So, what we are trying to do it again… we are not afraid that they are they skip us, we actually welcome that because if they do once or they do twice, they will know that we have more and more deals and more and more value because they simply cannot go to every deal. It’s too many because we have thousands of deals a year, so that’s… literally, you need a huge team to do that.

Matthieu David:         When you say thousands of deals, you have thousands of companies you interview or you have thousands of deals which are closed that you are seeing? It seems a lot like thousands.

Peng Li:           That’s also a good question. It’s actually a lot and at the same, it’s not a lot because when you look at Chinese economy the Chinese middle market is huge and the Chinese middle market contrary to European or more developed countries, there is a lack of transparency, and there is a lack of information.

Matthieu David:         What do you call Chinese middle-market?

Peng Li:           Middle-market I would call it from anything… any revenue from 5 million US dollars to 500 million US dollars. The middle market and you know you are right to be surprised, but still in the US middle market would be 10 million US dollars or 20 million US dollars to a billion US dollars. So, it’s already much smaller than in the western or more developed market… because the Chinese economy is still an emerging economy.

So the Chinese middle market is huge, and there is a massive very, very difficult massive problem for information, and then some companies have three accounts…they have business activities that are opaque, and it’s very difficult to find their real owner. So, all those types of problems all those types of information we try to resolve them and try to give clarity and basically access to our client. When you say two thousand it’s actually not that much, I think in China we did a statistic; there are around 30 thousand to 40 thousand companies’ private companies that have around 10 million of net income.

So, you will see it’s not that much, but we have two thousand or three thousand a year, so we need three years if we don’t hire more consultants, we need ten years to cover them all. So, it’s not that much… we believe that after 5 years because we are growing as well in terms of employees etc.… after 5 years or 3 or maybe 4 years we can cover all the Chinese middle market companies and then I think it will make sense to open this SaaS platform to everyone, to yourself, to consultants, to lawyers to every company basically because we will have access to all the founders of those companies and the CEOs of those companies.

Matthieu David:         How do you screen the companies on your platform? Is it by size, is it by sector, I guess size- sector? What are the criteria you are putting in your platform? 

Peng Li:           Yes, I think its a very good question again. The way to find companies in our platform is basically five or six factors. You have size; you have their intentions to sell… so if they don’t have intentions to sell, you will eliminate all those who are not willing to talk to you or the private equity funds. You have of course their sector, that is important. We have over 200 sectors that we cover, two niche sectors. So, for example, if we go into healthcare in China, we will have services, we will have pharma, we will have CRO, etc. etc. so we have many, many niche markets. We will also have USD and RNB sort of currency, because some private companies prefer to raise a fund with USD private equity funds and some prefer to work with local investors. We also have for example… forward-looking or currently doing the transactions. So, it’s basically all the features of the transaction. You can look through all of them, and there are many, many ways to find what you want in the platform.

Matthieu David:         Okay, because I felt when I looked at your platform that there was a kind of article where you have qualitative information, but you put a quantitative also with six criteria.

Peng Li:           It’s more than six, but it’s six big criteria. Six directions.

Matthieu David:         Okay.

Peng Li:           Yes, and you are right it’s basically an article… but that article will have some information about the intention to sell or their intention to partner with what type of investors. There is revenue; there is profit, there is the business model, of course, products, etc., their structure and their fund-raising history, etc. etc.

So, it depends, some have a very complete profile, some have not as complete because we have to interview. We get that information through interview, and through a basic interview with the top management or the real owner. So sometimes if they have less motive to raise money in China, they will tell you less of information obviously. So, it’s not a fixed rule, but most of the time we can get a lot of the proprietary information without signing an NDA because our consultants they are trained to get information and especially to get that proprietary sort of non-public information. 

Matthieu David:         So, it’s not only the interview right; you collect information through your fund. Where have you made it elsewhere and you write a full article on this specific company, which actually can go in a very different direction right, depending on the sector? You may talk about the location if it’s a coffee shop company, you may talk about the quality of infrastructure if it’s a production so that it can adjust to every kind of company.

Peng Li:           Correct, absolutely… the way we work is we have 30-40 databases or sources of information… some are public; some are proprietary like for example Daxue consulting, we can go to some very competent research company. So, we ask them, we gather all those information, we structure them and then we have an article, and after we have all the information, we call we identify of course the owner, and we access them through our own connections, and then we get the final confirmation through an interview. So, it’s both an interview and gathering of all the information from the various types of databases.

Matthieu David:         Since you started, did you have any client hold with your board, through service?

Peng Li:           Yes absolutely. So, we have around now 50 clients a year to date, so since we launched our SaaS in September of 2017 last year, we have closed… I mean we have received success on around 7 transactions. So most of the transactions are done by private equity funds, clients, so they basically read our news…

Matthieu David:         7 transactions?

Peng Li:           Yes. 7 transactions that are correct! They basically read our platform…

Matthieu David:         7 transactions that are like…

Peng Li:           Yes, that’s a lot more than I used to have when I was a banker myself. Yeah, correct it’s actually very high, and we are trying to increase our success rate because the more clients we have, the more we are going to have closed deals. So basically, all those deals, they go through our platform, they look at it, and they are like wow! Okay I like this company, I like this sector, and then they ask us to connect them to this company that who wants to raise money in China, so we connect them. They do their diligence, of course, they meet they sign NDA, they negotiate, etc. and then they basically invest in the company and then we get as I mentioned before the referral fee.

Matthieu David:         So, once you have the client who is looking at the database is not. I mean you don’t leave them alone right you keep connecting with them because you may actually show up some opportunities… I don’t know on a monthly basis and so on, because you have an interest that is happening right

Peng Li:           Of course.

Matthieu David:         You have direct interest that something is happening, so you are not only providing information, and people and the clients are using the leads as they want, actually not using in some cases… you are actually pushing them to look at some articles; some information even adapts the search for them so they can actually find the right target because you have an aligned interest, at least you want them to close the deal.

Peng Li:           Absolutely, our incentive is to… I was a banker, and our incentive is to make our client close deals because they are all private equity funds or MNA department of MNCs and their job is to close deals because they have dry powder, capital to invest and they need to invest. Usually, private equity funds have funds to invest for a certain period and they need to invest in China, in the best deals they can during that time frame.

So that’s why we try to generate as much deal flow and as much business intelligence in China for them daily. So now we have around ten per day. So, you know you will find… once you are on that platform you will find the ideal deal eventually and the one advantage of our platform is that we don’t need to…. most of the deals that are in our deal, don’t have financial advisors or investment bankers, so for example when I was selling this restaurant chain as an investment banker…. It’s already in the market basically the asset and me was basically selling it to many, many different private equity funds. We probably contacted over a hundred funds or strategic buyers etc.

So, all the market… it’s an auction process. So, for the buyer, if there is less advantage… if it’s an auction process because at the end of the day there is competitive friction and the highest bidder will get the asset. Here on our platform, because it’s  proprietary and only have 50 clients right now, and they are all looking for different type of deals, usually they look at the deal they are the only investor our only potential interested party for that deal and that is very, very interesting because that gives them more time for diligence more time to establish the relationship with the founder and basically get the evaluation the entry evaluation down, so that’s the massive advantage they have using our platform  

Matthieu David:         Wait, I’m not sure I understand… does it mean that if you have a client in the automotive industry, you will refuse the older ones in the automotive industry?

Peng Li:           No, no we don’t. We usually… right now for MNCs, it’s okay because we have people in the healthcare industry, we have people in the consumer industry and the industry or the manufacturing industry. So, we don’t have so many conflicts, but on the private equity side we have around 45 of those private equity funds. They are overlooking… it’s actually quite impressive and quite interesting that they are overlooking different deals. There are those who are looking for early venture deal; there are those who are looking for large buyout deals, there are those who look only for gross capital or consumer or those who only look for healthcare. So actually, right now we don’t have many conflicts but once… of course, now we have an increasing number of clients they are looking for more… some clients are looking for more of the same thing.

So, for now, we give them a sort of exclusivity. So, the first one who acts on business intelligence in China that we wrote, they will have exclusivity for a certain short period of time. So, it’s actually quite… I would say it works right now because sometimes there are some interests and they are busy on some deals, and they are not looking for new deals, and so it really happens like this. We are also trying to make it work and to understand how we make sure everyone is happy and everyone is getting the information from us.

Matthieu David:         I think the barrier to entry on your finance company in China is that you have to invest a lot at the beginning in terms of getting a lot of articles. Could you give us an idea on the size of investment of how many articles you had to pour into this business or did you maybe select some verticals some segments some strategy? How did you deal with the initial investment because I feel that is the biggest barrier to entry?

Peng Li:           Yes, again I think you don’t work for consulting for anything. It’s a very, very good question. First of all, there is a number of the deal leads, and there is the quality. So, quantity and quality. So, if you have thousands of useless deals leads that no investor would be interested in. Still, that doesn’t form a barrier to entry.

So, you would suppose quality and quantity. Actually, I would say the quality is more important, because if you know what your client wants… for example, if a middle market buyer wants to see facilities management companies, for example, pest control or catering companies or cleaning companies. So, those who go to hotels and clean the uniform, etc. It’s a very, very niche and specific sort of market right.

So, you need to know that these clients, they want this type of asset. So, we are actually talking a lot to our clients. It’s not only that we wake up this morning and like okay I am going to look or I am going to ask our team to find deals in the automotive segment. No, we actually talk a lot to our client and listen to what he wants. And then when they say okay, I want to see this sector, I will direct our team to look for deals in those sectors. So, it’s actually… that, anyone who is not a banker or who has never done investments in China or the world, it’s difficult for them to get the right direction, where to find those business leads.

So then, of course, the more deals you have, the easier for you to sell your services. So right now, it’s a very, very… I won’t say easy, but the people can see the value straight away because you just go into the platform and they say wow! You have so many potential deals leads etc. That we don’t have a problem, but for sure yes for the last two years…  the first two years you have to work with clients that trust you. So, based on relationship, etc., and you cannot go to people who don’t know you.

So now we have that basis to show our new clients the value of our business intelligence in China, and now they can see it straight away and now the barriers are already here because it’s very difficult for another one who come in and say okay, I can show you ten per day… you know you already have them. The Chinese market is only that big, so how many private equity funds do you have? The quality ones? You have many hundreds, and how many MNCs you have, you have the fortune 500 and so we from that side we are pretty confident that it’s difficult for any new entrants to compete with us.

Matthieu David:         Yes, because I feel you are in the same industry as market places, so the finance industry in China and valuation in China. You have clients to look at information and you input information, but I feel that you have adjusted a little bit by getting your first clients and then adjusting segments to get more information to segments and then because you build upon those segments, you are able to get all the clients interested in this segment. ICC, you have this Groff which is intellectual in the begging and then extrapolating towards the sector. What about development? Because you are not a developer, you are not an IT developer; I don’t think your partner is an IT developer, Nasser…is there anyone who is from IT in your team, I mean from the beginning of funding partners?

Peng Li:           From the beginning, to be honest, we are using Excel.

Matthieu David:         Okay. It’s a very good tool.

Peng Li:           Yes, it’s a good tool but to become a SaaS in China; you really need to be a little bit more than that. So, we did use an IT company to build us… it’s a customized solution, so we have basically a very unique one. I don’t think there is any other software like this, it’s purely based on the needs of a basically private equity investors or MNA department of MNCs, and it’s very easy they look at the intelligence and then once they, they just need to click on it and they can request on meeting them or having a call or having more information etc. and they can also do request for customized search.

So, for example, if you are a client of mine and you say Okay, I want to look for all the business or potential targets that are in my sector. Basically consulting, that is that big for example from 10 million to 50 million US dollars. That is only located in Shanghai, So all type of criteria’s you give it to me and we will find those targets for you and we will clear or qualify the market for you, and it’s a massive city, you will save a lot of time, and it will be almost 90% coverage because we have all the sources that are out there that are available. I am not saying that you cannot do it, our client and yourself can do it yourself as well, you can do it probably as good as us, but you will take for you much much longer time and you people normally, they should be focused on your real business, core business and not on looking for targets, etc. So sometimes investment banks they do that, and they even outsource these jobs to us when they have clients who want to do investments in China or look for targets in China. 

Matthieu David:         I think that you have segmented different steps of value creation of investment bankers and you have found out that sourcing of acquisitions was actually the one you could outsource and actually you could replace someone in the company actually. You may have thought about pricing based on the salary of someone. Was it your thinking?

Peng Li:           Yes absolutely, I think you are spot on there. You asked for the price, our pricing for every client it depends of course on their need and on their capability to close deals. But I can tell you; I can guarantee you that for him buying our services is much cheaper than hiring one analyst or one associate or two analysts to do this job. It’s much cheaper, and at the same time, one analyst or two analysts they cannot have the coverage we have because we have 200 people and all we do is looking for targets, looking for information, looking for contact and getting access to them.

Matthieu David:         I see. Talking about the sponsor that you are consulting, because this China marketing podcast is about consulting… so have you had sometime used research for yourself I mean… from your fund, have you used to research that helps actually to value your company in China? In which cases? Could you give us an idea of how research can be useful or…?

Peng Li:           Absolutely, I think for example we use research basically on a daily basis. For example, if a client asks us to look at everything that is all the potential opportunities, investment opportunities in the pet food area, we, of course, we will go into the internet.

Pet food in China, so I am going very specific…  or pet care or something about the pet industry, which is very hot actually right now in China. So, we will look for all the research we can on this industry and try to understand the different segments of this industry. Whether it’s pet healthcare or veterinary services, whether it’s food, whether it’s… you know all these different types of niche, and then we will go to find these opportunities according to the research. So, basically, we use those research on a daily basis, we need to… otherwise… and again it’s specialization it’s a space, it’s an invisible hand, you are specialized in your business, it takes too much time for us to research on our own, so we have to use professional research people and output and then use them to do our own work.

Matthieu David:         Yes, I see with my client that actually was lacking information, the right information to make the right decisions. I think we are in a very similar situation with our similar businesses.

The second part of the talk I wanted to have with you is about MNA evaluation, the current situation of valuation in China. I feel something is happening in NHA. Didn’t pay well I think in Australian media, RMB. Could you tell us a bit more about how… first, how do you value companies in China? I mean do you use the same sources? Do you use the same ritual? We can be a bit technical like work and so on if you could give some directions to the people, who are listening to us. It would be very interesting!

Peng Li:           Sure, I work with many, many private equity funds, so they make investments in China for a living, so we know how they do a valuation. I mean I used to be an investor myself working for private equity funds so, I think in China the main difference in the valuation in China and abroad is that in China the valuation is typical… relatively speaking is much higher than in the US or in Europe.

Matthieu David:         Why so?

Peng Li:           I think there are a few reasons for that. I think first of all you have, if you look at the structure of the economy you have many, many state-owned companies and those state-owned companies in China, SOE’s, as we call them, you cannot invest in them obviously. They are state assets; they are managed by the government. So what else do you have? You have listed companies and private companies. You can make investment on them, but the listed companies, unfortunately, you only have a few thousand, you have 4000 of listed companies in China and they are all very young because if you look at the history, China has only been opened for 40 years to market economy, and those companies are very young, and they are very young meaning that they are growing very, very fast and once you grow very fast, the growth is actually a factor of high valuation.

So, if you’re growing very fast, obviously you’ll get a very, very high valuation, and that’s one massive, big reason of why Chinese companies are much higher value, and the second reason I think is that the Chinese retailers… sorry the Chinese retail investors, so people like me and you and our neighbors, if they have some money, they’ll put it in the stock market.

Usually, in China, they don’t have many choices of investment, not like in the US. Here, you either buy a flat or you put the money in the stock market. So, a lot of people would just put a lot of money into the stock market and just… it’s a very retail-oriented market. So also, here, once you have the institution and the retail putting all their money into the stock market then obviously the valuation goes up also very high. So, I think it’s a lack of investment vehicles or investment options because the Chinese cannot go abroad and buy US stocks or European stocks, it’s purely Chinese stocks.

So, I think that’s also another reason, and the third reason is the massive amount of liquidity that has been created by the government in the market. So, you had the crisis in 2008-2009, and I think the Chinese government just did quantitative easing of I don’t know how many thousands or millions or billions… I don’t even remember it… a huge amount of money that had been poured into the market, meaning that those market either they will be invested into infrastructures or factories, etc., and a lot of them are directed into real estate, into companies. Into the stock market.

So, all those reasons will basically affect the valuation in China and make the companies really highly, highly valued. I believe that its very overvalued and I can see on our clients, our private equity clients, they feel that it’s just very difficult to be an investor in China, a proper investor a professional investor because you have to be careful with the inter-valuation and if you invest at a very, very high valuation and you only can make money when its even higher at the exit. Right. So now there is some doubt about… if that valuation will come down because of the economies. Not as hot as before. But yeah, I am also one that believes that it has to come down at some stage and it will certainly be sooner than later.

Matthieu David:         Do you think it’s difficult for professional investors to invest in China because we don’t use the same tools, like comparable DCF equity value and that basically, you are more market-oriented, it’s a peer ratio, on the stock exchange it is very high, actually its more comparable than DCF based on cash flow than it is in business? That’s what you mean by saying it’s difficult for professional investors?

Peng Li:           No, I think you’re right. I think all the DCF, the comps, the MNA transactions, MNA comps, etc. all those tools to do valuations, it is based on the market. For example, if some companies want to buy Daxue consulting and you are ready to sell it for a certain price, but if you see the market is… all your peers, the other consulting companies are valued really, really high, so you are very likely to accept the high price, similar price as your peers.

So I think in that way, the market is always influencing the mind of the entrepreneurs, so that’s why they have very, very high expectation in terms of valuations, so that makes the life of professional investors in China more difficult, especially if they don’t have access to a lot of leverage in China because that’s another problem or another issue, that we can talk about, because the way to make money on your own investment, there are three different ways, you have the leverage, you have of course growing the business, and you have the arbitrage between the entry and exit multiple. Here in the US or the West, a lot of LBO funds they use leverage to increase their return, but in China, they don’t have access to that. Anyway, that’s deviating from our subject, but I think the main message is that you cannot… the entrepreneurs have very, the very high expectation on their valuation, so they will only change their mindset if the market goes down or the valuation in the market goes down.

Matthieu David:         I see. Good, thank you. Thank you very much. I think we closed to 40 – 45 minutes. It’s the end of our China vlog where we have interviewed another fierce entrepreneur in China.

Peng Li:           A bit quick.

Matthieu David:         Good, glad you enjoyed it. Thank you for your time. I enjoyed it. And this episode of China Paradigm will be published I guess in a few weeks. You will see on our China podcast youtube channel. Thank you, everyone, for listening.

This article Podcast transcript 7#: Valuation in China, what differences and specificities? is the first one to appear on Daxue Consulting - Market Research China.

Matthieu: I’m today with Florent Bonnefoy, founder of Bonnefoy + Partners since last year. He started his food business company in China last year in 2017, in May 2017.  And you have been in the food business for like 10 years, or even maybe more. And then in China, only in China, you are going to tell us exactly. You have been working for the prestigious Michelin Guide in China. You have launched it. You have worked on it. You have launched it. And now, you have created your own food business in China advising entrepreneurs, advising companies on how to start, develop, and manage their food-related business. It’s an interesting thing because you don’t say only food business in China, but food-related business in China on your presentation.

I understood Greater China because I feel you are also, involved in Hong Kong. I would say even Asia because I read that you had been operating in Singapore as well. You have done in Singapore. So it’s very, very interesting to have you in our China podcast. I feel that so many people are interested in China’s food industry. So many people are interested in cafes, restaurants in China, and all these food-related businesses and health field as well. This is such a topic that I think it would raise a lot of interest among our audience. Thank you very much for being with us for this episode of China Paradigm, the China business podcast that reveals entrepreneurs in China secrets.

Florent: Thank you, Matthieu. It’s a pleasure to be with you today and to be able to share with your audience my experience related to the food industry in China.

Mathieu: First question. How do you get a Michelin Star?

Florent: Well, so as you mentioned, I worked for the Michelin Guide in China for 10 years. And I launched the first edition of the Shanghai Guide. So I did many things when I was at Michelin, but my key responsibility was to establish a strategy and a roadmap for Michelin’s business growth in Greater China.

So when it comes to stars, I know that a lot of people have these questions and say why this restaurant has one star or two stars, or this one has three stars. Actually, there are five criteria. And everybody can find those criteria. It’s static knowledge. Basically, of course, the quality of the products is very important. And then the technique. So it’s about the chef and how he’s mastering the technique. And then, you have also a question of creativity. So how is the chef inputting his personality into the food?

So if you take a very simple staple in China, Dim Sum, for example. So if you have very good shrimps, then the technique is very good. So your shrimp dumpling, the technique is good. It’s not too moist. The texture is nice.

Then how a chef would make a difference by adding a little something to that dumpling that will make it different from other very good shrimp dumplings.

Then, we have a fourth criterion which is actually an economic criterion. So it’s value for money. This is a very important criterion.

And the last criterion, which is very important, is actually consistency. So it means consistency all the time, but also consistency over the menu. So you cannot have…. and we have a lot of restaurants in Asia which are actually very famous for one item. And because that item is a dish, they do it perfectly. But then, the rest of the menu is just okay.

And actually, for the Michelin Guide in China, you cannot have this kind of inconsistency. You need to have consistency over the menu. Of course, the menu, no matter which dish and inspector, so the famous guys who are going to the restaurants to taste them. No matter which dish they will choose, actually the dish would be good. So it’s really important.

So if I repeat this, it’s quality of ingredients, technique (so, actually expertise of the chef), then you have creativity (so innovation), the personality of the chef, consistency, and the value for money.

Matthieu: What’s the business model of Michelin Guide? How do you then make money? Is it the guide only or are there other revenue streams?

Florent: So, the business model has been shifting actually. So it went from a traditional publishing business model. So as you mentioned, selling the guide was the main source of revenue for the guide to something that is much more based on sponsorship and events.

Matthieu: So the event you mentioned in your presentation sent to me, Food Forward 2017 is actually very much in line with what you just said. It’s an event. You mentioned like 30 million views and 800,000 engagements. Could you tell us more about it?

Florent: Well, I said Food Forward happened last year in June, end of June, beginning of July. So it’s an event that was created by Michelin and by Ideo. Ideo is a business consultancy, an American food consultancy.  So it was cooperating together. And actually, the goal of that day was really to try to tackle a few issues that we had seen as very important about the food industry in China.

So the issues we identified were, first, the status of the chefs. So as you can imagine, in China, actually being a chef is not something that is quite glorious. And until now, I mean in a traditional Chinese family, if you ask many Chinese chefs, younger ones actually, if you tell your parents, “Oh, I want to become a chef,” usually they will try to ask you not to do that. Maybe, try to be a lawyer or a doctor.

And it’s not like in Europe or in the US where being a chef is kind of really cool and popular. So we identified that problem. There is a topic here that seems to be very important, and we wanted to have people talk about it.

The other one was also another topic about fine dining in China and also trends in Chinese cuisine industry. Chinese cuisine is diverse. When people tell me, “Oh, I don’t like Chinese cuisine,” I’m like, “Okay, but you can always find one cuisine in China that would be suitable to your taste.” I mean, there are so many different types of cuisines tastes. So, the event was also trying to see why Chinese cuisine, maybe, is not that popular in the US or Europe. Or why is it not that popular in the US and Europe?

So we invited different chefs coming in from the food industry in China, historians, and researchers. And so the event was really about trying to tackle those topics. So Food Forward was a one-day conference, basically. As you mentioned, what was important for us is okay, we don’t want it to be only an offline event. And we also want it to be an online event because otherwise the impact… I mean the impact had to be more important.

So we had sponsors, for sure. We, of course, used the Michelin Guide. The Michelin Guide has always had a presence, a digital presence, for a long time till now. We grew it over time. That took us about four years. And it’s really organic growth. The thing is you can imagine that the Michelin Guide coming to China was a big event in 2016.

So at that time, all our digital accounts, WeChat or Weibo…. of course, we had like a lot of fans. We needed them to go to purchase fans or to grow with us. Actually, it was very organic growth.

Matthieu: How many?

Florent Bonnefoy: I can’t remember now. Yeah. It’s still 100,000 or…..

Matthieu: Purely organic?

Florent Bonnefoy: Yeah, purely organic. And I am sure it’s more now. Of course, for Food Forward,  we used those accounts. But also, we partnered with these different platforms which are doing live streaming. And so that’s, of course, better. So you could follow the conference, of course, live. And that brought a lot of audiences. So you can see the resource.

Matthieu: Number of views, yeah. I repeat. So you got like 30 million views and 800,000 engagements. I guess engagement is tweets and people reacting to what you’re saying.

Florent: Yes.

Matthieu: Is that engagement?

You mentioned the diversity of Chinese cuisine. We usually talk about eight cuisines in China. I feel you would say that they are much more than this. What’s your takeaway on this?

Florent Bonnefoy: Well, actually, if you talk to Chinese chefs and if you talk to a few people who are doing food research, they tend to say that now those eight cuisines is an expression. Actually, it’s been changing over time. So, maybe, 50 years ago, those eight cuisines were a little bit different. You have a large variety of cuisines in China.

The provinces around Shanghai, so what we call Jiangnan region, those cuisines have a lot of elements in common, but just one of them is actually considered as one of the eight cuisines. So, it is very diverse. I would say there are more than just eight types of cuisines in China. For example, if you go to more remote places in China, for example, Xinjiang, where actually you have Uyghur cuisine, it’s very different from what you can find in the south of China.

Then, Hunan cuisine, the spices of Hunan cuisines are also very different from the spices of Sichuanese cuisines. Some of them are not considered as one of the eight great cuisines of China.

Matthieu: We see some clients with a lot of sensory research. We support them in tasting the product to taste-test. Do you feel that the different cuisines in China….. you talked about Hunan, which is spicy? You talked about Uyghurs which is Muslim, and they actually like more sugar. But actually, we found out in some research. Do you feel people favor different kinds of cuisines in China? Would some population favor sugar or some population favor more spicy food? And then, when you have a concept from the West, you may consider more Mexican food, for instance, in the places where people like spicy food, or a place where you have more sugar, pastries in places where people like sugar. What’s your view on this, on the difference of tastes?

Florent Bonnefoy: This is a very interesting question and a very important one. It’s a commonplace to sit. China is very big. So the food market in China is very big, and people are very different from one market to another one. So if you take Shanghai and if you take the major cities in China, people in Shanghai, people in Guangzhou, people in Beijing, or Hong Kong, they are all different, and their tastes are all different.

And yes, in some regions….. and there is something very interesting that happened. I’ve been living in China for 12 years now, but all my experience in China…..  I mean, actually, I have lived in China for longer. So the first time I came to China was in 1999. And then, I studied in Beijing in 2002.

So at that time, actually, the Chinese consumers were traveling less. So, for example, when you’re in Beijing, the kind of food you could find in Beijing was basically Dongbei food, so Dongbei food from the northeastern province and Beijing food… a little bit of Cantonese but not well-executed. And that’s it. And maybe, Sichuanese. And in Shanghai, it was much more like Shanghainese cuisine and cuisines from the nearby provinces. And in Guangzhou, in Canton, people were mainly eating Cantonese food.

And for example, they couldn’t have spicy food. It turns out that ten years later, or let’s say now when I go to Guangzhou or Canton to see my friends, now there is a trend for spicy foods. So we used to say Cantonese people can’t eat spicy foods. And now, they are all about spicy foods.

In Shanghai, you have a population of people who are traveling a lot, and now they’re curious. So, there is a lot of diversity in terms of restaurants in China, because you can cater to those people. So for example, you were talking about Mexican restaurants wanting to open in China.

Do you want that Mexican restaurant to go to a place where people love spicy food? I’m not sure. You have to go to a place where you know, that people would accept and be interested in foreign cuisine because they wouldn’t have this… It’s not because it’s spicy that you would necessarily need to go to a spicy region, but it’s just more like… okay, this is a type of cuisine that would be maybe better perceived in a place where they already know about foreign cuisines. So you have to know your market basically and understand really who the people and what their habits are. It’s a very, very interesting question.

Matthieu: So we just talked about creating a new concept. Should we stick to the existing taste of the population or make them discover new tastes? You said that basically, the discovery process is very strong in the food industry in China. People may be interested in overseas or foreign businesses in China or new concepts. So even in a place where they don’t eat spicy foods, they may actually be interested in eating spicy foods, like Guangzhou.

Talking about the food industry in China and how to start a food business in China, how to run a restaurant in China, for you, what would be the key success factors and the key failure factors you have to watch very carefully?

Florent Bonnefoy: Well, of course, first of all, the food has to be good. I mean, you cannot come here and try with something just okay. The food concept must be very, very strong. So I’ve been to restaurants with different concepts and think that is unique. Also, there is a kind of… I would say, in China, fun is also very important.

Matthieu: How do you make fun?

Florent Bonnefoy: Fun is being playful. I would say playfully. So you have a few examples of people who really, really understand the market here. One is Paul Pairet. So he’s in fine dining. So Paul Pairet is a local French chef. Of course, he was trained in France, and he has extensive experience in Asia. His project really started in Shanghai. And I think he’s one of the foreign chefs in China who really understand the Chinese market. All of his concepts, be it Mr. and Mrs. Bund or Ultraviolet or The Chop Chop Club which is not close, but they all have something that is really unique and also playful. And it’s working very well here. And that’s what made him very successful.

Matthieu: Could you be more specific on some key examples of why you would call a place playful?

Florent Bonnefoy: Well, for example, if you take The Chop Chop club, I think one thing that was working very well with the Chinese is the fact that for The Chop Chop Club, which was a barbecue place, you had large screens that were announcing when the piece of meat was ready. So basically, they were grilling and roasting a big piece of meat or a bigger piece of fish. And so, in order to order, you had to…. it was a little bit like a market or a marketplace. So you had to actually look at the screen, and then you would order according to the time, but maybe you would not get the food. I mean it was very playful, and people really enjoyed that, the stress of ‘Am I going to get that meat?”, “Am I going to get that dish or not?”.

Matthieu: To topic. To the topic of conversation on the table.

Florent: It was so playful. It would be the atmosphere, the general environment of the restaurant, but also, the menu was…. he designed a very extensive menu which is not something you usually do for a French restaurant, but which is something that you do in China. If you look at Chinese menus in Chinese restaurants, they are extensive. It’s like you have a large range of choice. And actually, he made it on purpose in order to make people comfortable and say, “Oh yeah. We can choose a lot of things”. It was very clever.

Mr. and Mrs. Bund started its food business in China 10 years ago, and it’s still here in a very competitive place which is the Bund in Shanghai. And it’s doing very well.

Matthieu: So you said good food, to be unique, to be playful.

Florent Bonnefoy: Location is very important. Once you have your concept and actually, location, can influence the concept and vice versa. So those are the two things that would make your restaurant successful. If you have a good concept, but not in the right location, then probably, business won’t be good. If you have a good location, but a concept that is a week, it’s the same. You’re not going to make it. So it’s really very, very important. Those two factors are very important.

Then a last critical factor which actually, is also sometimes overlooked is some people would think, “Okay, we have very good food. Our concept is quite strong”. But they overlook marketing. And actually, you need to sustain awareness in the midst of a lot of noise. It may be harder in China because people are constantly solicited. And the attention span is actually quite short. So marketing is still very important.

I would also say by marketing, also traditional public relations. And so, working with magazines, working with journalists and food critics is also quite important. On top of this, there is also KOLs in China which are important. But I would say traditional PR is very important to still be on top of the news, to always bring something new, and that people keep thinking about you.

Matthieu: You were talking about playful. You gave an example. I feel now food is very connected to the phone. People take so many pictures of food. Have you found some concept which could make it more playful or some marketing which would make it more playful for the experience? Also, for the marketing, would you have some examples of someone who has been able to leverage the fact that people are automatically by themselves without any instruction taking pictures of anything they eat as soon as it looks good?

Florent Bonnefoy: Well, what you are mentioning here is a global trend. So food has to be instagramable, meaning that, basically, you kind of have… plating has become very important. So you cannot have dishes that are good but don’t look that good, but that’s important now to have something that would be looking very, very good. You cannot neglect that aspect. And I know that chefs, for example, there is a trend in force now for some chefs who now refuse that people are kind of phobic. They don’t like people to take pictures of their food.

Matthieu: That can never happen in China.

Florent: Sorry.

Matthieu: That could never be in China, right?

Florent Bonnefoy: I think, currently, no, but who knows? I mean you can have a very strong chef. It’s always a question of the personality of someone who says, “No, I don’t want people to take pictures of my food.” And maybe that would actually be a good PR campaign. It would attract that attention for sure. And it’s true that in China, the testing that people do is take out their phone and take a picture of the food. I do that all the time because I trend. I have to, but also, I was doing way before. It is very important.

The food looking good is still not the most important factor, but it is important. You cannot overlook it. I can’t remember what article I saw. So I think it was in…. maybe, it was in Time out. And the journalist was leaving, so she made a compilation of all the worst-looking food she saw. Actually, some of the pictures were really… I mean you could see like a bird.

So you need to pay attention to these kinds of things because it can be very absolutely negative for your food business in China.

Matthieu: I see. You were mentioning this very successful foreign chef in China, who started Mr. and Mrs. Bund. Everyone who has been in Shanghai, even actually for a short time, should know it, it’s very successful and famous. But at the same time, you said that he created a concept that he closed. So you see some very successful people in the food industry in China who are still running restaurants in China and still closing them. And that’s something I see so much. It’s that a lot of concepts are opened and closed.

Why is it so? Why is a restaurant such a difficult business compared to other businesses where they could stay in business for 10, 15 years? A restaurant which has been in business for 10 years is pretty rare. I mean, especially in China. What’s your analysis on this in terms of cost structure? Is it the rent? Is it the people? Is the fact that the population and tastes are changing in China? What’s your analysis on it?

Florent Bonnefoy: Well, there are many different factors that can be. You can have a good concept. You can have all the factors I just mentioned that will make you successful. For example, if your landlord decides to raise the rent or your investor is not paying anymore. There are different factors that could lead to your business closing.

For sure, it’s a very difficult environment. It’s a very difficult business. Now, having good food is not all. Actually, it’s not everything. You can’t think that just having good food will do the job. You need strong marketing and communication. For sure, that’s very important.

In the case of people who are trying to import brands, famous brands, or famous persons, essentially, people are sometimes rushing and they expect because the brand is famous in Europe or the US, they would expect, “Oh okay, we would be famous in China as well.” Actually, they often rush. And if they have investors coming to them and maybe throwing a lot of money to them…. and then they don’t really do the due diligence. That is a very important thing to do before you launch any type of concept in China because you cannot just say, okay, I’m famous, let’s say, in the UK or France. Then I’ll be famous in China.

Matthieu: Would you have some examples of companies which retreated? I don’t know if you think about the case of Cole for instance, which entered China as a bakery and then retreated.

Florent: I don’t want to name names, but I would say you have two very striking examples of people in the food business in China. I won’t name names.

Matthieu: I understand.

Florent Bonnefoy: One very famous French brand that launched in Beijing, with a lot of PR, six or seven years ago. They launched in a mall in Beijing next to the CBD. And so the market was not there yet. And so they were selling a lot of refined food, refined European food. And the market was not there yet. And they had to withdraw within less than one year. And it happens. It happens. But now, they want to come back to the Chinese food market. And actually, it’s very difficult because all their investors remember that seven years ago, they tried to enter Beijing and that they failed.

And now, actually, there could be a market for them in China, really because people’s habits have changed and the demand for refined foods has, of course, grown exponentially. So it’s difficult for them to find investors now because investors in China remember that kind of experience they had in Beijing.

Matthieu: Interesting. When you say good food, does it mean good ingredients? Does it mean it should be imported?

Florent Bonnefoy: For sure, it means good ingredients. Yeah.

Matthieu: Does that mean it should be imported? That’s actually my question. Do you feel that good food in China and mainland China is necessarily imported food, imported ingredients?

Florent Bonnefoy: No, it depends on the type of food you’re doing. For sure, for Chinese cuisines, you have a lot of new ingredients in China. And now, you have people producing ingredients and really going for quality. Of course, agriculture and the food industry in China have a lot of crises. But I also think because, by people’s demand, people want healthier food. Actually, now in the past years, there have been a lot of efforts in order to actually produce more qualitative and better ingredients.

So you have, now, entrepreneurs and people really wanting to do that. So good ingredients don’t necessarily mean imported ingredients. You have here also…. actually, a lot of foreign chefs in China work with local ingredients. And some of the local ingredients are very good.

Matthieu: How do they make sure? How do they make sure the ingredient is good? You know there is a concern about pollution. You know there’s concern about healthy food and meat as well. It could be anything which is grown or also from the meat. There is a concern with coming from China. And a lot of concerns of consumers are that they go to a fine dining place and they’re not sure the price they pay is really corresponding to very, very good ingredients because there’s always this concern and skepticism about what you have on your plate in China. Is it local? How do you react to this? You seem less skeptical than the average consumer.

Florent Bonnefoy: No, what I would say is, of course, you cannot be sure 100% that the same as you would be in Europe. You cannot be sure 100% what you eat here, actually. The only organic trend in China is taking off really quickly. The Chinese government is also putting a lot of efforts into that. Now, for sure, you cannot be sure 100%, but I would say it’s the same in a lot of other places.

Matthieu: Interesting. Okay. Okay. And when you open a restaurant in China, would you have some best practices in order to select your ingredients? Should you have special channels or should you have special tips to make sure when it’s imported, it’s a way of ensuring you have…

Florent Bonnefoy: Yeah, the problem with importing foodstuff, of course…. so if we’re talking about foreign chefs in China, they need imported ingredients. Some ingredients, you cannot find in China because they cannot be imported in China.

Matthieu: For instance?

Florient Bonnefoy: Some beef from Japan is not authorized in China. I mean you have quite a few ingredients that are not available in China. So you need to find ways to replace those ingredients.

So if you can’t work with Japanese beef, then you work with Australian beef. For example, some of the truffles are not authorized in China, so they have to replace with other kinds of truffles, It’s this type of ingredients.

Chefs usually… I mean, when you start off with ingredients, the best thing to do is to go…. especially when you are in a market like China, if you are a foreigner chef in China, the best thing to do is to go around, meet chefs, meet other restaurant owners and ask them. Okay?

And you would tell me, why would they give you there….. and some of them, they won’t. But usually, you would find a lot of solidarity within the community because everybody knows that the F & B business is a hard one if you are a foreigner wanting to do an F & B business in China. And there is a kind of ‘Okay, yeah, I’m going to help you.’ So I know a lot of foreign chefs in China, actually very famous ones, who actually came here in China and they asked the other chefs, and they found some really goodwilling chefs and people who helped them.

So I would say yes, when you run a restaurant in China, first try to meet people and see how you can get ahead on that. Community.

Matthieu: Yeah. You’re helping companies and entrepreneurs in China to start, develop, and manage their food-related business. So it’s not necessarily restaurants. For those who would be interested in interacting with you, what kind of services, what do you work on? Do you work more on basically the sourcing points of ingredients, on the marketing, on the PR, or the concept? How do you work with your clients?

Florent Bonnefoy: We work on three elements. One is a concept. So, we have existing restaurants to refine that concept. So it goes from the consumer experience, quality of the foods, quality of the cooking, and also, I must say general consumer experience. Then we also develop concepts. So I work in the hospitality industry with hoteliers and property developers. And so, we help them to find the right concepts for their properties. So this is one thing.

The second one, we work on marketing. So once you have a good concept, you need to have good marketing. So we work on that.

Matthieu: When you talk about property development, you are talking about modern department stores, right? You don’t talk about…

Florent Bonnefoy: Resorts. So yeah, it could be malls.

Matthieu: Okay.

Florent Bonnefoy: So, hotels basically. When a property developer brings in a hotel brand, we will also help them to find the right, good concept for their hotel.

Matthieu: Okay. Okay. What do you feel is the minimum investment to open a restaurant in China? What is the minimum investment?

Florent Bonnefoy: That question all depends on the location, the city you want.

Matthieu: Oh you feel it’s the location.

Florent Bonnefoy: Location.

Matthieu: Okay.

Florent Bonnefoy: It’s the kind of restaurant you want to develop. Is it more like global? It has a lot of different factors. There is no minimum or maximum. It depends.

Matthieu: In terms of location, what prices do you see? In China, we talk about the per day per square meter. So there are some ranges for offices. I guess there are some ranges for restaurants as well. Some will be expensive like ¥30 per day per square may be expensive; ¥10 per day per square meter may be cheap. What is the range you have in mind?

Florent Bonnefoy: It’s also very valid. If you go to a place like Guangzhou, Guangzhou is actually less expensive than Shanghai. Or If you go to Hong Kong…. okay, if you are in Hong Kong in Central, for very, very small spaces like less than 60m² to 70m², you already have rent sometimes going over HK$100,000 for a month which is already €10,000 euros. So you need to sell a lot of menus when you have this kind of prices. Hong Kong is a very difficult market to that extent, which makes it very difficult. Even though it’s a very sophisticated market and you have a lot of diversity, you can have different types of concepts.

It’s now, in China, one of the most diverse dining scenes, but it’s a very difficult one.

Matthieu: Are you based in Beijing or Shanghai?

Florent Bonnefoy: Shanghai.

Matthieu: Shanghai. So in Shanghai, what would be the range you would feel expensive and the range you would feel is actually a very good deal? I mean I understand that it depends on location. For instance, if you are in Bund, it’s different. For instance, Bund, what do we talk about in terms of pricing and what do we talk about when we talk about other places? If you have some branches, or at the same ideas with Shanghai compared to Changsha, compared to other cities in China, to give a sense to the audience of how expensive rent can be in China.

Florent Bonnefoy: Well, for the same type of…. so basically, restaurants are bigger in Mainland China than in Hong Kong. If you based on 100 square meters, then you will have places where it’s about ¥30,000 to ¥50,000, which seems to be acceptable on that market.

Matthieu: Okay. Okay. When you rent a place, do you need to put a deposit? Do you have some constraints? Do you need to get a commitment for one year, two years?

Florent Bonnefoy: You need to pay a deposit.

Matthieu: Deposit. Okay. I see. Good. Thank you very much for your time.

Florent Bonnefoy: Thank you. I hope it was interesting enough.

Matthieu: Very instructive. I guess the audience and anyone interested in food business would have directions; directions on where to investigate and where to be good at. Being playful is a very interesting topic. So thank you very much. I hope you enjoyed it.

Florent: Yeah. Thank you. Yeah, sure.

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.

This article Podcast transcript #9: the keys to success in opening a food business in China is the first one to appear on Daxue Consulting - Market Research China.

Highlights of this episode:

• What is negotiation 4.0? The importance of respect
• Why preparation is the most important step to negotiating
• Is there a need to adapt knowledge and strategy while in China?
• Is BATNA (Best alternative to a negotiated agreement) still relevant today?
• Advice for an entrepreneur on negotiating with investors
• Nicolas’s opinion on ‘The Art of The Deal’ and other book recommendations

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.

Make the new economic China Paradigm positive leverage for your business

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

This article [Podcast] China Paradigm #34: How to negotiate for mutual gain in China is the first one to appear on Daxue Consulting - Market Research China.