Two drivers of China’s counterfeit production

The counterfeits industry in China: a consequence of economic growth

The counterfeit industry in China is seen as a problem but it should also be studied as a symptom of economic growth. In 1978, Deng Xiaoping started reforming China’s economy. For the first time, foreign investments where encouraged. Many companies wanted to relocate there because of low wages and domestic potential. The industrial power grew and the country became the factory of the world as the the international production process. Global brands like Nike or Adidas have a part of a part of their production there. In many sectors, the country started to adopt new technologies.

While China’s living standards improved greatly, the new industrial power lead to counterfeits, as factories could cheaply re-create brand products. The counterfeit industry in China seems like a minor symptom of industrialization. Hence, even if it is necessary to tackle counterfeits, it was just the result of a growing Chinese industry.

China counterfeiting is linked with brand culture

Since the early 1990’s, the counterfeit phenomenon increased quickly in China. During this decade brand culture emerged as the opening of western luxury stores in country. Fashion brands became hyped, and counterfeits were a mean to obtain luxury goods without spending years’ worth wages. Since, fakes continue to progress fulfilling the domestic market of China.

In 2015, China and Hong-Kong represented 86% of the global counterfeit industry, which is around 400 billion USD every year, according to Europol. Thanks to years of relocating for foreign companies, Chinese factories now have the skills needed to copy almost everything. In Chinese stores, 60% of luxury goods are imitations and you can also find some complete fake stores who just looks like a real one. For instance, A fake supreme store opened in Shanghai. The counterfeit phenomenon highly increased following the luxury market starting in China.

Size of the market for counterfeit products in China

The global counterfeit trade for all items, from purses to electronics to software, is worth USD 461 billion, about 2.5% of all trade worldwide. That is more than the global drug trade. Despite attempts regulation, international trade in counterfeit goods has almost doubled since 2008.

According to the 2018 Global Brand Counterfeiting Report, worldwide losses suffered due to counterfeiting amounted to USD 323 billion in 2017, with handbag companies alone accounting for $20 billion of that.

80% of the world’s counterfeit goods come from China, and many of the market’s consumers are in China as well.

The market for fake goods in China

There are several distinct market segments of consumers who purchase fake goodsin China. The primary segment is buyers unaware that they are purchasing fake products. This deceptive counterfeiting is rampant, but the market for fake goods in China is largely driven by consumers who actively search for and purchase counterfeit products. 

Middle-class shoppers who value brand prestige make up a large segment of the non-deceptive counterfeit market. They can afford the occasional $500-$1000 bag, but not the luxurious $15,000 Louis Vuitton or Birkin. These aspirational Chinese shoppers purchase fake goods for the same reason the wealthy buy real products: to emulate their high-class idols, impress peers, and enhance social status. Fake goods allow shoppers to “consume” prestigious brands without actually buying the high-quality goods.

Some consumers knowingly buy counterfeit goods even though they could afford a genuine product. They have ample funds but believe that the high prices of authentic products are unwarranted, especially when they can get a similar version at a much cheaper price.

Chinese Fashionistas chasing the trends

Some wealthy buyers of counterfeit goods in China are known as “fashionistas.” These fashionistas want to buy the hottest new products, but know that another trend will replace it next season and are thus unwilling to invest the money to stay on trend season after season. Furthermore, they see counterfeit purchases as low risk, because limited-edition or recently released products are less familiar to the general public, making it more difficult to call out a fake.  

Buyers of counterfeit goods impose a hidden cost on the brand and people who buy the real thing: they make the brand less exclusive. All non-deceptive counterfeit market shoppers share one attribute: they are willing to pay for visual attributes and functions, but not willing to shop the genuine products. 

Government regulation of the fake market in China

Affected parties have previously complained that punishments for selling counterfeit goods in China are too light to deter offenders. In February 2017 Alibaba reported that of the 1,910 cases of suspected counterfeiting they passed on to authorities, only 129 people were found guilty.

In August 2018 the State Administration for Market Regulation stepped-up efforts to crack-down on the illegal production and sale of counterfeit goods in China.

The regulator announced strict punishments for online trading platforms that fail to protect the rights of consumers and trademark owners, or that do not actively cooperate with market regulatory authorities.

They demanded that other regulators such as the Shanghai Administration for Industry and Commerce launch targeted investigations into sales of counterfeit goods in China, and specifically called out offending platforms such as Pinduoduo.

The new China’s e-commerce law, which took effect on January 1^st, aims to discourage counterfeiting in China through heavier fines and places more responsibility on digital platforms to remove sellers of fake goods. The law also addressed false-advertising, consumer protection, data protection, and cybersecurity.

The new law targets three groups: e-commerce platform operators like Taobao, merchants who sell goods on sites like Taobao, and vendors with their own websites or who sell on social media. Merchants who sell exclusively on social media platforms had been previously unregulated, but now these sellers will need to register their businesses and pay relevant taxes.

In an effort to spur major e-commerce platforms to crack down on counterfeits being sold on their sites, the law makes platform operators jointly liable with the merchants selling fake goods. Previously, only the individual merchants were liable. Platform operators can now be fined up to 2 million RMB (USD 290,000) for the property infringement that comes with selling counterfeit goods in China.

E-commerce platforms crackdown on the sale of the counterfeit good industry in China

Taobao and fake goods

In 2015, Alibaba was the subject of intense state scrutiny as the State Administration of Industry and Commerce unveiled that only 37% of the luxury goods authorities examined on its Taobao platform were genuine. In a strongly worded white paper, state authorities criticized Taobao for lax internal controls, declaring that many of the products sold on the site were substandard, violated trademarks, or were just plain illegal. Chinese consumers agreed and called on the government to tighten supervision over Taobao. Alibaba declared a zero-tolerance policy towards counterfeits, and created a new 300-person team to ramp up the fight against fake good in the Chinese market.

Luxury brands were unimpressed, and in May 2015 Gucci, Balenciaga, YSL and other brands filed a lawsuit alleging that Alibaba’s negligence encouraged the sale of fake goods on its sites. A US federal court dismissed the suit, but Alibaba’s reputation as a haven for counterfeiters persisted.

In 2017, Alibaba was again under consumer and government pressure when Taobao was found to have over 240,000 vendors selling fake goods, up from 180,000 vendors the previous year. To assay consumer anger and protect investor relations, Taobao in mid-2017 launched an initiative to crack down on the fake goods being funneled through their site. That initiative has led to 95% of takedown requests and red-flagged listings being processed within 24 hours, a significant improvement in processing times. 97% of listings for counterfeit items are now deleted before transactions even take place.

How does Pinduoduo handle counterfeit items?

Pinduoduo, the third-largest e-commerce platform in China, is another site criticized for selling low-priced knockoffs. In August 2018 the State Administration for Market Regulation investigated Pinduoduo and announced that Pinduoduo should strengthen platform management and better regulate activities of third-party vendors. Pinduoduo soon removed more than 10 million fake items from its site and blocked more than 40 million product links suspected of copyright violations. It is working with over 400 luxury brands to fight counterfeiters and has created a hefty 150 million RMB account to refund consumers who were unwittingly sold fake products.  

How counterfeiters in China get around AI controls online

There are many intricate ways in which sellers of fake goods in China have evaded regulation online. One common trick is for sellers to redirects clients to separate websites, where they can browse options and place an order. Another method is to label items as “haute couture,” which consumers are aware implies ‘high-quality copy.’ Aside from this label, Taobao sellers can change the name of the brand they are copying, or display just part of it. One seller of copycat Zara clothes lists his items as ZA or Z*ra, which allows him to sneak past the filters set by Taobao.

Taobao’s AI tools are constantly upgrading to become more difficult to trick, especially with the introduction of filters against luxury products priced below a certain point. Accordingly, some sellers of fake goods will display a price for their product that is consistent with the price for the real thing, or display a price that is outrageously high. Interested customers will talk to the shop in Taobao’s private chat function, and sellers will reveal the real, much lower price.

In-person sales of counterfeit goods in Shanghai and Beijing

Counterfeit goods sold online in China work hard to avoid detection, but physical brick-and-mortar ‘fake markets’ in cities like Shanghai and Beijing are out in the open, easy to find and even reviewable on sites like Trip Advisor. Officials routinely inspect physical stores, but they may not take the job too seriously because they know local vendors rely on the income. Regulators let the stalls peddling cheap and fake goods slide, instead choosing to target merchants who lead interested buyers to unmarked apartments, back rooms, or closets full of high-quality fake Gucci, Prada, Michael Kors, and Louis Vuitton handbags.

Aside from avoiding government regulation, counterfeiters in China work hard to stay under the real company’s radar. One fake good peddler in Beijing explains: “We careful. Louis Vuitton. They send spies and they sue. So we hide.”

The emerging authentication industry in China

The prevalence of fake goods in China and consumers’ subsequent fears of being scammed into accidentally purchasing knockoffs has created a new sector: product authentication.

There are dozens of apps on the Chinese Apple iOS app store that offer to verify luxury goods. Authentication company Zhiduoshao has hundreds of thousands of users who pay 49 RMB for a product to be checked virtually by an expert. Founder and CEO of Zhiduoshao maintains that 95% of authentication requests can be answered online via photos. Authenticators tell users what kind of photos to upload, and then carefully inspect the monogram, fabric, and technique. Often, the process only takes a few minutes.

Similar app Isheyipai boasts an “expert jury” of 12 authenticators. Users upload photographs of the item in question and choose who they want to check their product. Prices range from 49 RMB for a junior authenticator to 99 RMB for senior staff. Appraisers each have areas of expertise, such as bags, jewelry, or shoes.

Private companies offer training courses that teach appraisers-in-training how to inspect a wide range of luxury brands and products, with advice about texture, logos, stitching and everything else that a counterfeiter might get wrong. A 10-day program can cost up to 40,000 RMB.

Authentication companies in China have an uneasy relationship with the brands whose integrity they claim to protect. Cartier maintains that their products should be bought only from “authorized sellers,” while Audemars Piguet states that it does not endorse any authentication app and De Beers says it is unaware of them.

Brand wariness of authentication services is rational because Chinese counterfeiters are now imitating these authenticators too. Seemingly authentic sites copy the names, website layouts, and imagery of established authentication platforms like Zhiduoshao in order to scam consumers seeking product verification out of their money. In one case, consumers discovered that an authentication app was faking reviews and authentications to sell knockoff goods.

How brands can fight back against Chinese counterfeiting

Anti-counterfeiting strategies must be brand specific to take into account the company’s target market, the types of counterfeits produced, and how the counterfeits are being manufactured, distributed, and sold. An effective strategy combines IP protection, export and customs controls, and retail market controls.

But no matter how sophisticated the anti-counterfeit strategy is, where there is a demand there will be a supply. The only surefire way to shrink the market for counterfeit products in China is to deter consumers from purchasing fake goods in the first place. However, typical deterrence strategies that luxury brands have used in the West will not work in the Chinese market.

Many consumers are aware that their purchases are counterfeit

Most consumers who purchase counterfeit products in China are well aware that the quality is not on par with the real product. When consumers buy fake goods, they do so despite the possibility that the product will fail them. Additionally, the prevalence of sophisticated fakes means that consumers can easily buy counterfeit products with nearly genuine quality. Thus, highlighting the poor performance quality of counterfeit goods is not an effective deterrence strategy for brands to adopt in China.

Where in other countries purchase of knockoff goods is a punishable crime, in China consumers are not liable for their counterfeit purchases. Deterrence of counterfeit purchases in China cannot then be fear-based.

There are two main deterrence strategies that luxury brands can adopt to dampen Chinese consumer demand for fake goods: the ethics emphasis, and the psychosocial emphasis.

Anti-counterfeiting in China: The ethical approach

Counterfeiting is not a victimless crime, and luxury brands should tell consumers who gets hurt when they buy fake products in China.

Most counterfeit goods in China are made in sweatshops by children and slave laborers who are often the victims of human trafficking. These sweatshops are overwhelmingly in low-tier Chinese cities, and these child workers are often Chinese, making the issue hit particularly close to home for Chinese consumers of knock-offs.

The Chinese counterfeit industry’s use of child labor is much more damaging than the use of child labor by companies like Walmart and Target. Corporations can beare held accountable for exploiting cheap labor: when labor abuses are exposed, companies face plummeting share prices, lawsuits, and customer boycotts. Counterfeiters face no such risk, because consumers of knock-off goods do not know who manufacturers their handbags or sneakers.

Brands can educate against counterfeiting practices in China

Additionally, brands can educate Chinese consumers about the criminals who benefit when a shopper buys a counterfeit good. Production and distribution of counterfeit goods are heavily controlled by ultraviolent Chinese triads, who traffic in narcotics and sex slavery alongside fake products.

Consumer awareness of the hidden costs associated with their counterfeit purchase can create shame and guilt that might deter some Chinese consumers from buying knock-off goods.

Anti-counterfeiting in China: The psychosocial approach

In the West, there is a shame that comes when one admits to buying counterfeit products, and luxury brands should work hard to foster that stigma in China. For some people, the regular purchase of fake goods is a normal part of life: many Chinese consumers who own fake goods assume that the luxury brands sported by their peers are fake as well.

In 2018 the Japan Patent Office launched an anti-counterfeiting campaign that revolved around embarrassing consumers who buy knock-off products.

It is too early to see the results of Japan’s shame-based anti-counterfeit strategy, but the premise is solid. Luxury brands effected by Chinese counterfeiting could emulate the approach, and work to create a social stigma against knock-offs.

Across the board, the most effective strategies to deter Chinese consumers from buying counterfeit products are shame-based.

Who is benefiting from the counterfeits industry in China?

China is responsible for more than 70% of counterfeiting according to the World Customs Organization. Where all the money from this industry is going? Alain Rodier, in his book: The Triads: the hidden threat, indicates that the counterfeiting is linked with Chinese triads. They are using the money received from counterfeiting to invest in other illegal activities. However, the money can also be legally re-injected into the country. Alain Rodier argues that criminal money is largely reinvested in the country’s legal economy: “As far as the Chinese triads are concerned, they would have a worldwide turnover of 200 billion dollars. Much of this money is reinvested in the legal economy”. For instance, the Sun Yee On triad would have largely participated in the development of Shenzen. Even though triads and other organizations directly benefit of counterfeiting, it can be noted that this money is sometimes reinvested in the legal economy.

Rethinking the fashion industry

One way of tackle the fake industry is to completely change the opinion of people concerning clothing. Trends should focus more on quality than brands. Fast fashion might also be a big issue in consumption because of its impact on the environment. If the fashion industry evolves to its simplest form, people would not be sensitive to brand image. Without the importance of brand image, there is no demand for counterfeit luxury goods anymore. Naomie Klein with its book “no logo” lead this movement in the end of the 1990s. One way to wipe out counterfeits is to educate people to consume goods differently, without being obsessed with brands.

To conclude, the counterfeit industry is a direct consequence of the industrial growth in the country combined with the value placed on brand image. It is difficult to tackle this gigantic phenomenon generating billions each year. You have both to address the production and the consumption of counterfeit goods. The counterfeit goods industry is injuring companies because it negatively impacts their brand image, consumers who are genuinely interested in the luxury products may lose faith that what they are buying is authentic.

What brands can do to avoid intermixing with counterfeits in China

For luxury brands to avoid being sold alongside counterfeits, brands can try a brand independence, or direct to consumers strategy in China. Counterfeits are sold easily on e-commerce platforms, but selling from a brand’s own website, or brand.com, is a surefire way to avoid competing with counterfeits and keep a pure brand image.

Authors: Alison Bogy & Enzio Cacciotto

Daxue Consulting helps you get the best of the Chinese market. Do not hesitate to reach out to our project managers at dx@daxueconsulting.com to get all answers to your questions.

Luxury brands in China do not have to compete with counterfeits

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History of Volkswagen in China

On March 28^th, 1937, ‘Gesellschaft zur Vorbereitung des Deutschen Volkswagens GmbH’ was founded in Germany. Later on Sep 16^th, 1938, it got a name ‘Volkswagenwerk GmbH’. It is now one of the world’s largest international automobile companies, which produces and sells automobiles throughout the world. Today, the German company owns several world-known car brands such as Audi, Skoda, Lamborghini, Bentley, Porsche, Bugatti, Seat, and Scania.

In 1978 Volkswagen (VW) became one of the first international automobile manufacturers to enter the Chinese market. At that time, the development of the Chinese automotive industry was still in its infancy. In October 1984, Volkswagen Automotive Co., Ltd. established as the first Volkswagen Group joint venture in China. Today, the Group has 16 representative companies in the country, undertaking parts delivery and service provision for both customers and industry in addition to vehicle production and import. The Chinese market is one of the main markets of the Volkswagen Group. Operations of Volkswagen in China include the production, sales and services of whole cars, parts and components, engines and transmission systems.

China is the new center of power

The Chinese auto market is a special one in several respects – not only for its size and rapid growth. Government incentives and regulations play a role in controlling sales. For example, in 2015 the Chinese authorities temporarily cut taxes on cars in half with displacements of up to to stimulate sales for this class of vehicle.

Among the German carmakers, the Volkswagen Group has been a pioneer on the Chinese market. China is the biggest single market for the Volkswagen Group. Volkswagen in China produces and sells Volkswagen (e.g. Polo, Touran, Passat) and ŠKODA (e.g. Fabia, Superb, Kodiaq among others) brand models. Additionally, there are vehicles purposefully designed for China such as the Teramont SUV and the Phideon luxury sedan.

[Data Source: Volkswagen Group report 2018, ‘VW volume in deliveries to customers’]

Volkswagen in China: Demand for SUVs continues to grow

China’s automobile market is undergoing a period of slow growth as China’s economic growth slows down slowly recovers from the COVID-19 pandemic. However, the high growth rate of the SUV (Sport Utility Vehicle) market has attracted the attention of many automakers. From 2013 to 2017, SUV sales grew rapidly in China, with the growth rate reaching 27%. The share of SUV in the Chinese market continues to grow.

[Data Source: Statista, ‘SUVs share in China’s passenger car sales from 2014-2018’]

Teramont and Phideon reflect the major trends on the Chinese car market. The Teramont answers the growing demand for SUV-class vehicles. Around four in ten newly registered cars in China are currently SUVs, and that figure is rising. The Volkswagen brand alone will have more than ten models on the SUV market by the end of 2020. The year 2018 saw the launch of the Tharu, Tayron, Touareg and T-Roc. In 2021 Volkswagen plans to invest more than $4.4 billion to add more SUVs to its lineup.

Volkswagen in the battle for China’s green vehicles market

China has an important role as the world’s trendsetter and largest market for e-mobility. It alone accounted for 60 percent of worldwide demand for electric cars and plug-in hybrids in 2018. In 2018 around one million passenger cars with electric drives found buyers in China. That figure rose by 50 percent in 2019.

[Data Source: Business insider, ‘Electric vehicle sales in China forecast’]

The government is giving much attention to the field of electric mobility in China. By 2020 the fleet average fuel consumption is supposed to lie at five liters per 100 kilometers. To further advance e-mobility, the Chinese government introduced an electric car quota. Manufacturers that sell more than 30,000 cars a year in China must ensure that 10% of them are electric. All cars in the quota category receive credit points.

Volkswagen plans to invest in EV in China

The Volkswagen Group wants to lead the EV trend with a model campaign. By 2020 Volkswagen in China seek to bring 30 new fully electric and hybrid vehicles. By 2025 sales of electric models should reach 1.5 million units. Volkswagen China plans to invest more than US$12 billion in building and developing new-energy vehicles. It is the latest sign that competition for green cars in the world’s largest auto market will escalate. In 2019 Volkswagen claimed that it will introduce a new-energy vehicle portfolio of 40 locally produced models in China by 2025. Volkswagen in China has also teamed up with Anhui Jianghuai Automobile Group for a third joint venture. The joint venture will help the company to reach its goal of setting up a portfolio of pure battery cars.

Volkswagen – auto market leader in China

According to Volkswagen financial report 2019, the total profit of Volkswagen in the Chinese market was EUR 3.33 billion. By 2018 the Volkswagen Group built seven new plants in China. By then, the annual production capacity rose from 2.6 million to over 4 million. Volkswagen has the largest market share in the Chinese market during many years. In 2019 it was 14.6%.

[Data Source: carsalesbase.com, ‘China’s auto market 2019’, VW has the largest market share in China’s auto market]

Volkswagen in Shanghai

Volkswagen entrance into China formally began in March 1985, when it established its first facility in Shanghai (上海). Shanghai Volkswagen is a jointly-owned enterprise, with China and Germany each holding half of the initial investment. It is now the biggest modern automobile production base in China. Under the two major brands, Volkswagen and Skoda, it is covering markets of A0, A, B and SUV.  Despite its success, it also faces competition from other foreign automobile manufacturers. For example, Santana Motor, a Spanish car manufacturer, has experienced country-wide success since it entered the country nearly 30 years ago in 1984.

Volkswagen in Changchun

With the success of Shanghai Volkswagen, the company turned its eyes to northern China and founded FAW-Volkswagen in Changchun (长春) in the Jilin(吉林) Province. By 2019, the company had more than 100,000 employees working there. After the establishment of its facility in Changchun (长春), the company created another two branches in China: one in Chengdu (成都) and one in Foshan (佛山). The Changchun plant of Volkswagen FAW Engine is an important powertrain production base for the Volkswagen Group. The annual production capacity is 300,000 units of the EA 888 engine.

Volkswagen in Tianjin

To keep up with demand for both SUVs and electric cars, Volkswagen in China opened three new factories in 2018: in Qingdao, Foshan and Tianjin. Tianjin plant produces electric vehicles based on the MQB platform. The factory in Tianjin also make high numbers of new models from FAW-Volkswagen, especially SUVs. Volkswagen Tianjin Plant will produce SUV models for both the Volkswagen brand and the Audi brand. The facility’s daily production capacity will be 1,200 units, with an annual production capacity of 300,000 units.

As a green factory, the new Tianjin plant will introduce a number of state-of-the-art sustainability measures. It includes world-leading volatile organic compounds (VOC) emissions control technologies and solar photovoltaic technologies. The facility will also focus on reusing water, with a reuse rate of 98%. By recycling and utilizing the waste water, the Tianjin plant will save up to 300,000 tons of water annually.

The location of the new plant near the Volkswagen Platform Tianjin Branch and Volkswagen Automatic Transmission Plant Tianjin will reduce delivery times, resulting in lower supply costs and CO2 emissions in the supply chain. 

[Source: Volkswagen Group, ‘Volkswagen group in China’]

Competition in the Chinese auto market

Tesla and Volkswagen: EV price competition

Manufacturers such as Tesla and Volkswagen are ramping up operations in China to nab a piece of growing EV market. Volkswagen is readying two Chinese factories to build electric cars in 2020. The Chinese plants will have a production capacity of 600,000 vehicles. This will enable Volkswagen to leapfrog Tesla and make China the key battleground.

Tesla in China is still trying to reach its goal of making more than 500,000 cars a year by building a factory in Shanghai. VW relies on an established workforce in two of its plants in Anting and Foshun to build zero-emission cars.

Tesla’s cars have a sophisticated software algorithm to control how much electricity goes to the electric motor, air conditioning, seat heaters. Volkswagen China  uses price and massive economies of scale to gain a competitive advantage.Volkswagen’s lower price comes from the car maker’s ability to place large orders.

[Data Source: Cleantechnica, ‘China Electric Vehicle Sales April 2019’, VW EV car sales surpass Tesla’s EV car sales in China’]

Battle between GM and VW

General Motors run of strong sales in China recorded its highest September sales result ever. In 2017, GM’s sales jumped 6.3% year over year as key rivals lost some ground. General Motors’ strongest non-Chinese competitor in the market is Volkswagen Group.  Despite posting a similarly strong with deliveries rising 7.5%, VW’s volume was just around 315,000 vehicles in 2017. The driving force for GM’s gains was SUV sales. From 2018 Volkswagen in China continues to outperform General Motors, as GM posted another double-digit decline in volume. 

[Data Source: Volkswagen Group, General Motors reports, ‘VW and GM annual sales 2017-2019’]

COVID-19 impact on Volkswagen in China

The COVID-19 outbreak has exposed several challenges for the automotive sector in China. 80 percent of automotive and related companies report that coronavirus will have a direct impact on their 2020 revenues. 78 percent of companies do not have enough staff to run a full production line. In February 2020 China’s car sales plunged by 18 percent. Automotive plants in China remained closed until mid-March 2020. 

[Data Source: Bloomberg, ‘Change in China’s auto sales’, Sales drop in the Chinese auto market due to COVID-19 impact’]

Volkswagen in the Chinese market saw dropped car sales by 23% in the January to March 2020 period. The decline in sales in April 2020 was between 15% and 20% from a year earlier, while the drop in March, at the height of the pandemic, had been 40%.

Volkswagen factory in Changsha resumed operations in March, putting all but one of VW Group’s 33 car and component plants in China back in business. Volkswagen claimed showroom traffic in the end of March had rebounded to year-earlier levels. However, in 2020, Volkswagen in the Chinese market expects a decline of 3-15%.

Author: Valeriia Mikhailova

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This article Volkswagen in China: Market analysis of the nation’s #1 car brand is the first one to appear on Daxue Consulting - Market Research China.

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

A brief History of startup investments in China

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

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

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

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

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

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

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

Seed funding in China brings capital for early-stage startups

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

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

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

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

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

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

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

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

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

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

Entrepreneurship promotion and innovative ecosystem

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

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

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

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

Unicorn startups in China

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

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

Baidu, Alibaba, and Tencent: Venture Capitalists gluttons

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

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

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

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

The ‘capital winter’ was there before the Coronavirus

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

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

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

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

Investors are becoming more cautious than ever

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

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

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

Trade War worsens the general economic downturn

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

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

Assessing the Coronavirus impact on tech investments in China

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

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

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

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

Changes in consumption and tech advancements from the Coronavirus in China

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

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

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

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

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

Could Startup investments in China eventually bounce back?

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

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

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

Author: Maxime Bennehard

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

Our research on crisis management in China has already suggested the most important strategies to ensure business continuity include; embracing social responsibility, adopting technology, caring for employees, and adapting your purpose to new market demands. However to take our research one step further, we asked some outstanding China entrepreneurs from our China business podcast, China Paradigms about their experience of management during the Coronavirus in China. This is what they have to share with the rest of the world.

Think before you leap: Make a hypothesis before taking action

Hypothesis before action

Geoffrey Handley, co-founder and general partner of Haitao Capital recommends bracing your business with a worst case scenario hypothesis. This way, entrepreneurs can make principle-based business decisions rather than blindly rushing into changing X or stopping Y. Chinese founders started with a big scary base hypothesis and set of assumptions. One possible hypothesis would be, “we will have a 100% hit to our revenue for at least 3 months, then 80% for 2nd quarter. Will take us 3 quarters to get back to where we are now”. Once this hypothesis has been taken into account, then businesses can take steps on management during the Coronavirus.

No sacred cows, nothing is off limits.

When working through hypothesis scenario planning, it was evident that nothing was off limits. The guiding principle I could see in action from our portfolio co-founders was “for the benefit of the company, we, not I or me”. 

Focus on what is in demand

No doubt the Coronavirus changed Chinese consumer demands. While some products and services saw no demand, others were incredibly undersupplied. Stephane Choury, Co-founder of HI-COM ASIA capitalized on what he knew would be necessary during the outbreak. “I have realized that many people were in need of urgent legal document translation and medical related translation. We had shortlisted a few services that could be useful to people at this time and concentrated on those.”

Nicolai Peiterson, Excecutive Chairman and Co-founder of Wikifactory, a collaborative platform for the production industry, says they have focused on medical innovation. “We are rallying the global open-source hardware community, as well as established product companies, to build and submit projects for medical supplies, devices, components and equipment on Wikifactory’s open source social and collaborative platform.”

Peiterson continued, “We have over 1000 projects on our platform across 187 countries and we now encourage product companies working on Covid-19 to pool their knowledge and publish their designs on our open-source platform to accelerate the success of their work.”

Mind-boggling speed of action

Handlley witnessed how mind-blowingly fast decisions were made and implemented during the Coronavirus outbreak in China. “Just look at the factories that shifted in less than 10 days to produce PPE and face masks from something completely unrelated.”

Show employees and clients you care about their safety

Safe office, safe business

According to founder Bruno Lhopiteau, as many other companies did, Siveco initiated an action plan ‘Safe Office, Safe Business’ on January 26, aiming to take proactive measures. Support services continued throughout the holidays and full operation resumed at the beginning of February, with most staff working remotely.

Over-communicate with employees

An important tip of management during the Coronavirus is communication with the team. “In a time of crisis, proactively over communicating to provide guidance and security for employees is more important than ever. With the plethora of media reports coming out with differing views and advice, it’s hard not to be confused and feeling in-secured, the over-communication can certainly help to provide clarity and consistent information and overall direction,” said Lhopiteau.

Safety and hygiene means consumer loyalty

Mike Hofmann, Managing Director of Melchers China, emphasizes the newfound relation between consumer loyalty and hygiene. Together with their brand partner, a luxury watch brand, they provided over 20,000 masks to retail employees and store visitors. “When re-opening our retail stores, it was important to ensure our staff’s and customer’s health and regain their trust that you as brand don’t solely focus on profitability. We implemented hygienic measures at all stores, handed free masks to visitors and keep in touch with our luxury VIP customers through digital tools to foster the relationship in these unprecedented times. Product orders were reserved for pickup after the situation relaxed.” Hofmann states that they went beyond government requirements in order to show their dedication to customers.

Use the extra time for training

Choury stated, “Some of our clients used the manufacturing slowdown to prepare for the upcoming seasons by taking care of their documentation, marketing materials and website translations. So, we have actively contacted those, which also brought us business.”

As an HR Tech company in China, the CEO and Founder of ATIOM, Matthew Spriegel, says,  “During the past couple of months, we have seen a lot of companies move their day-to-day work activities online. As a company in the HR tech space, we have always had some of our key team members working remotely. Having daily and weekly huddles online have always been essential for aligning our team objectives, but also an effective way to maintain team morale, even during the tough times in launching a start-up.” Spriegel continues, “For our clients, we have seen a huge spike in their activity in using our learning and engagement mobile app, ATIOM. They have fully utilized ATIOM to ensure everyone is up-to-date on COVID-19 prevention and health procedures in the workplace. I believe that once the dust settles, we will see many companies using a more blended approach, combining online and offline activities, to their teams’ up-skilling, skills-gap analysis and most importantly, risk mitigation.”

Lhophiteau also says some of his clients used this time to prepare ahead. A large multi-site environmental utility has accelerated their usage of the bluehoney online training course, as many of their maintenance staff now have free time to study maintenance and asset management theory and best practices.

Hofmann also used the time for internal reflection. “We used the slowdown of economic activities to enhance the skillset of our workforce through remote and digital training engagements. In addition, we leveraged the downtime to reassess our business strategy and engaged in a systematic thorough industry and customer research.”

Now is the time to get digital

The most adaptable business will survive

Claudia Masueger, the Founder and CEO of CHEERS Wines, a wine chain franchise, says managing during the Coronavirus reminds her of a Charles Darwin quote: “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.” Masueger quickly adjusted her management during the Coronavirus. As soon as the crisis started, she restructured her teams and workflows, and put more attention into online and social marketing.

During the COVID-19 outbreak in China, Aurelien Rigart, Co-founder of IT Consultis, helped clients by better planning their investments in digital transformation on the long run. Rigart says, “Many companies did realize throughout this moment that they were not digitally ready and relying too much on their retails, or third party apps. Most of them now are insisting on the importance of their digital transformation and Direct to Consumer strategy.”

Everything is now digital in China

Laurent Cibot, the CEO of the Imported Health Supplements Division at OMEY Group says, “With the COVID-19, it’s like China did an other big jump into the future; the online retail is now stronger than ever. Here, all the companies are going Digital. It has been a Digital Tsunami, even in our personal lives. My son has been following online school these past couple of months. And my wife is now buying EVERYTHING on e-commerce platforms”  

O2O is the future, even more than before

Miro Li, Co-founder of Double V. Consulting says she’s seen retail businesses face serious challenges. She has been there to help them transfer to a digital model, “As an agency, we are helping offline businesses set up online shops and start training offline sales representatives to use online tools, such as live streaming and online distribution, allowing our sales people to manage their private traffic and get products sold while staying at home.”

Spriegel believes we will see many companies using a more online-offline blended approach to team training and risk mitigation. Li agrees that O2O will be even more important in the future, saying an omni-channel sales strategy is a must.

China will continue to be worth investing in

While this black swan event becomes global, China may be one of the economies that keep its head above water. Although it has not escaped the Coronavirus economic impact, there are already signs of post-COVID-19 economic recovery.

“China Economy didn’t seem to be affected by the virus; a recent study showed that 66% of Chinese companies are optimistic about the business in 2020; and I have to say that we didn’t felt any slowdown in OMEY. It would be the perfect time for foreign brands in healthcare and beauty to enter China market, as healthy living environment is now considered by Chinese more important than economic growth” says Cibot.

These tips of management during the Coronavirus are transferable across national borders. To learn more advice from China entrepreneurs, check out our podcast China Paradigms.

Let China Paradigm have a positive impact on your business!

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This article Tips on business management during the Coronavirus from entrepreneurs in China is the first one to appear on Daxue Consulting - Market Research China.

• 01:38 Introduction to Wikifactory, its mission and vision
• 08:55 How will Wikifactory as a platform, disrupt/alter the production industry?
• 16:08 Wikifactory’s business model
• 18:50 A collaborative product development social platform for companies and open-source communities
• 23:59 What is Fab Lab?
• 25:39 Insights on Digital Fabrication
• 30:30 How traffic is drawn into the Wikifactory platform?
• 35:32 What brought Nicolai Peitersen to Chengdu, China?
• 36:25 What is good to do in China and what isn’t?
• 42:41 What is a CNC machine and how does it compare to 3D printing?
• 43:54 Wikifactory and capitalism, product ownership rights and sharing projects online
• 51:58 Ethics, value creation, social issues and Wikifactory’s impact on China
• 56:54 Nicolai talks about the social credit system and its link into his work

 Building a collaborative platform for the production industry in China and around the world

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We believe, that China, with 20% of world population and as the second world economy, is impacting every single business, small to big. That is why it is a new paradigm. How does China impact your business is the ultimate question we will answer through those podcasts.

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 China Paradigms 80: Building Wikifactory to Take on the Internet of Production in China is the first one to appear on Daxue Consulting - Market Research China.

Full transcript below:

Matthieu David: Hello everyone. I am Matthieu David, the founder of Daxue Consulting, a strategic market research company based in China, and this China marketing podcast, China Paradigm. Today, I am with Shiny Cheng. You are the founder of Shinjia. In Chinese, Shinijia is a way of saying “a comfortable house for you” or “a more comfortable house.”

I am not totally sure about this, but in Shanghai, under your management, you have more than 1000 apartments that you are renting out. They are beautifully furnished and already furnished and renovated. I saw the pictures. Actually, it looks like they are pictures of the most beautiful Airbnb you can find. 

You started the apartment renting business in China about seven years ago. You started without investment, fully bootstrapped. And now, you have a footing in Shanghai. And as I was saying, you have 1000 apartments under your management. You started the apartment renting business in China very young. I feel it’s nearly just after graduation. That’s something that I’d like to know more of as well. Thank you very much for being with us on a Saturday. That’s why there aren’t many people in your office currently. For people listening to us, we are recording the video for this interview as well. My first question is, what’s the market sizing of your apartment renting business in China? It could be in terms of revenue, the number of people, or the number of apartments. Is it 1000 or more?

Shiny Cheng: Okay. Thank you, Matthew. Hi, I am Shiny. Actually, it’s not 1,000 apartments. Sorry. I want to correct that. It is 1,000 apartment rooms. 

Matthieu David: I see. 

Shiny Cheng: Basically, my apartment renting business in China is about co-living apartments. So, we provide a very good and unique design at a very good price. We provide shared apartment rooms to young professionals, students, and also international young workers are living in Shanghai who want to find roommates in China. Most of the apartments are in the downtown of the city. 

Actually, I started my apartment renting business in China when I was 23 years old. So, I just came to Shanghai after university. I couldn’t find the ideal apartment I wanted to live in. I wanted to live in a downtown apartment in Shanghai. The rental was always increasing. So, I couldn’t find them. My ideal apartment has a good price and also a good design. So, this was my problem back then. 

So, I started rental housing in China, and I did the interior design. And also, I chose a very good location. And I had my roommates, so I did not need to pay the rent for rental housing in China. I found out this was a good business opportunity. 

Matthieu David: So, what you are saying is that you didn’t have to pay the rent for rental housing in China because you found roommates who were paying a bit of a markup. So, they were paying for you, right? 

Shiny Cheng: Yes, because I made the apartment nicer. I added value to it. 

Matthieu David: I see. 

Shiny Cheng: Actually, in the beginning, there were 95% foreigners in Shanghai. But now, it’s like 70% of Chinese who are living in my apartment. 

Matthieu David: Wow. 

Shiny Cheng: They now like my apartment more. And also, we didn’t do any marketing in China. We just started advertising three months ago. Already, it’s 70% of Chinese people living here. 

Matthieu David: Impressive.

Shiny Cheng: Yeah. Like many startups had huge investments, but I didn’t have that time. Eight years ago, I didn’t even know what an investment was.  I was very brave with the first apartment I rented for apartment renting business in China. It was quite risky. I got the key from the agent, and then I said I could give him a double agency fee if he gave me the key for three days. 

And in the three days, I did the decoration very fast and rented it out. Then, I paid the owner the rent for rental housing in China. Probably, if I had ¥20,000 in my hand, I could do the next one. So, it’s a lot of cash flow. So, it’s like you can start from zero. We have our decoration team. We have designers. We also have a factory for the furnishing. So, it’s a lot of work. It’s not like doing everything yourself in the beginning. There is a lot of cashflows involved. Yeah.

Matthieu David: I see. So, if I understand well, you have 1,000 rooms. So, it’s a bit less than 1,000 apartments. Maybe 700 apartments. 

Shiny Cheng: No, it’s like 200 apartments but 1,000 rooms. 

Matthieu David: Okay. So, on average, you have five rooms per apartment. 

Shiny Cheng: More than 200. Maybe, 400-500. 

Matthieu David: I see. 

Shiny Cheng: Now, it’s like probably 900 rooms. It’s between 900-1000 rooms. But generally, it’s more than four rooms in one apartment. 

Matthieu David: I see. It’s a very interesting format because I believe the four or five rooms are more difficult to start rental housing in China to one single person. And actually, you are making it easier for the landlord to start rental housing in China to 4-5 people through your platform. You don’t have to take care of so many people. So, as I understand in terms of your business model, people pay you or your platform directly. I went on your website, and for each apartment, there is contact. There is a specific person in charge. I don’t know if it’s someone already living in the apartment which is going to be in charge of the others or someone from your company. But basically, they contact this person. They pay you. And then, you have the rent for rental housing in China you pay to the landlord. I believe that it’s a long-term lease, like three or five years, because you renovate it. So, you have to have stability on the lease. And that’s your business model, isn’t it? 

Shiny Cheng: Yeah, people pay me directly because I’ve started rental housing in China from the owner for ten years. The people you contact for an apartment are my salespeople. Also, people can list apartments on the website. So, some people are also listing their own apartment on our website. But in the beginning, we only used this within ourselves. Now, people from outside also sometimes use our website to list their apartments or look for roommates because this is only for roommates.

Matthieu David: I see. 

Shiny Cheng: Now, we are also trying to create a roommates’ platform.

Matthieu David: That’s something which makes me a bit confused because I saw a button which said I could add my own apartment. And from my understanding, you were managing the apartments from A to Z. So, I understand that’s a new feature. How much do you charge in terms of commission for them? 

Shiny Cheng: There is no commission on that. They can just list on the website. It’s in the trial stage. We are just testing it out. Also, it’s not my main apartment renting business in China. The cash flow is coming from my existing apartment renting business in China. Currently, traffic isn’t much. But in the future, when we do more promotions, I want to create a handyman app so that if people have any problem in the house, they can order from the online marketplace in China. So, it’s a very simple MVP. 

Matthieu David: For people listening to us who don’t know, MVP means minimum viable product. 

Shiny Cheng: They pay service charges to us. We don’t charge any commission.

Matthieu David: I see. I want to make sure that I’m not missing anything from your business model. I feel that the rent for rental housing in China is not the only thing you provide. I am sure that you also provide other services. Am I correct that it’s more than just the rent for rental housing in China? I am sure that you are not only providing the place. Could you tell us everything you provide? What’s your value proposition? 

Shiny Cheng: We help with the product design and renovation for the owners. Usually, the apartments in the downtown are very ugly because owners are buying the apartments not to live in them but as an investment. So, we provide renovation and management for the landlord. We also provide handymen as well as cleaning services to our tenants. So, the landlord doesn’t need to take care of all the problems of the house. 

Matthieu David: I see. So, can we say that you provide cleaning and internet services? You have someone you can call for any issue which is happening. So, if someone has a problem with their washing machine or anything, you would be there to answer in Chinese and English. 

Shiny Cheng: Sometimes, the owners let us manage any problems the tenants might have. 

Matthieu David: So, the value proposition is on both sides. So, the tenant rents rental housing in China, and the owner of the apartment doesn’t have to care about anything.

Shiny Cheng: Yes. So, in the future, we can make money from both sides if they want maintenance service. 

Matthieu David: I see. I understand. In terms of client acquisition, you said you didn’t do any marketing. Actually, I went on your website and analyzed it. I used a software called SimilarWeb—I don’t know if you know it—and I found out that indeed your traffic on the website is not very high as you mentioned before. 40% of the traffic is people directly going on your website because they already know it. So, it’s not like a first acquisition. You get about 15%, which are links sending you traffic and 47% from Google by doing research. This is data from SimilarWeb. Most people who want to find roommates in China find your website through research about the online marketplace in China. So how do you find clients? Usually, before I interview people, I get a good sense of how they acquire clients. But in your case, it’s much more difficult. How do you get your clients? 

Shiny Cheng: Yeah, that’s a good question. Actually, my website is MVP. It’s not meant for getting clients at all. Because I am not a tech person, I’m still looking for a technology partner for this roommates’ platform. I didn’t find one when I started. So, I didn’t do a lot of promotion and other technology-related activities on my platform. That was my weakness. So, in the beginning, we did some promotions on some international websites in Shanghai. It’s called Smartshanghai.com. And also, I was promoting on Facebook. But actually, to be honest, I think 80% of our clients are acquired through referrals. They are neither from Smartshangai.com nor Facebook. Only 20% are acquired from online marketplaces in China. My salespeople have been at my company for eight years. So, they have many connections. And their connections introduce clients to my company. We weren’t promoting on Chinese websites, but we’ve started to promote in China. And now, so many Chinese love our apartments. Last year, we had 30% of our tenants being Chinese. But now, around 70% of people living in our apartments are Chinese. 

Matthieu David: Was it 30% last year or in the beginning?

Shiny Cheng: In the beginning, it was around 5%. The percentage of Chinese tenants in our apartments was less than 5%.

Matthieu David: So, within one year, there was an exponential increase in the percentage of Chinese tenants.

Shiny Cheng: In seven years, the number of Chinese tenants increased from 5% to 60%-70% now.

Matthieu David: I see. So young Chinese people working in Shanghai and not from Shanghai who are struggling to find apartments downtown and don’t want to live very far go to you because it’s much more convenient to share an apartment. It is safer going through you. I believe that’s also a value proposition you bring. 

Shiny Cheng: I think it’s also because the Chinese economy is improving and the salaries of young people are increasing. So, the apartments become more affordable. They want a good location, good quality, and good service in an apartment. And also, they want to find roommates in China someone who are international. 

Matthieu David: Interesting.

Shiny Cheng: I think most of my Chinese clients are also international who want to find roommates in China from other countries. Some are working with international companies. 

Matthieu David: I see. So, most of your apartments are in Jing’an which is one of the most famous districts where people want to live. It’s a very nice district but very expensive at the same time. And it’s very interesting when you say that people who want to find roommates in China from other countries—whoever they are, Chinese or non-Chinese—will tend to go to you. So, 70% of your tenants are Chinese, but you define them with an international mindset because actually, they may live with people from different countries.

Shiny Cheng: Yeah, exactly. Some Chinese told us since they had been studying in America, Europe, or Australia for four years, when they come back, it’s hard for them to have Chinese roommates. They want to find roommates in China from other countries. After studying abroad for so many years, they realize some cultural changes as well. So, the Chinese love us because of the international community. 

Matthieu David: I see. I am on your website at the same time, and I see the pictures. I feel that you made a lot of effort on pictures. Your story and what I see on the online marketplaces in China reminds me of two things. The founders of Airbnb found their first client because they advertised on Craigslist. So, let’s say they didn’t advertise on SmartShanghai.com, which is basically the same as Craigslist for foreigners here. So, they had to go through another platform to get their clients at the beginning because their platform was not very famous. That’s the first similarity I am seeing with your apartment renting business in China. The second point is that Airbnb took off when the pictures were good, bright, and beautiful. When I go on your website, I feel that you made a lot of effort on the pictures. Am I correct that you made a lot of effort on the pictures and so on to start rental housing in China? 

Shiny Cheng: Yeah. Exactly. Yeah. Every single picture is taken by a professional photographer. There are many clients who even say when they walk into the apartments; they are even more beautiful than they are in pictures. We really care about every detail. So, both the products and the pictures are good. Actually, the vacancy rate is around 4%. 

Matthieu David: The vacancy rate is around 4%. So, the occupation rate is 96%, which is extremely high. 

Shiny Cheng: It’s much higher than the average rate of around 50% in the industry. I think this is because of the quality of the apartment and photos. 

Matthieu David: To describe the apartments and the pictures I see on the website to people who are listening to us and those watching us as well, you paint the apartments in different colors as well to create more volume, I believe. The furniture is modern and a bit vintage. You have paintings and photographs on the walls. They are well-decorated with flowers. The lighting is very colorful, which makes the apartment much brighter. 

Shiny Cheng: Yeah, exactly. We really care about these details because our clients are young. They are mostly students or just working for a year or two. So, their salaries are not that high. They are probably paying half of their salaries for the rent of rental housing in China. In this industry, people don’t usually do the decoration of very good quality because that means higher costs. Because it’s a shared apartment, my clients can only afford around 4,000. If they could afford around ¥5,000, probably they would start rental housing in China to rent a single apartment. They will not rent a shared apartment. So, for us, if we improve quality, it means our profit margin will be lesser.

The owner of a popular Chinese platform even said what I am doing is very dangerous because he thinks that I spend too much money on decoration. Actually, he said, it’s quite a ridiculous industry. But now, many people in the industry are suffering. And I am very happy because I have a 96% occupancy rate. This is because of the investment I made in quality. Actually, it’s really paid off. Many people thought what I was doing wasn’t right because people were spending less on quality while I was spending more. To them, it wasn’t very healthy. Many people thought I was doing a very risky apartment renting business in China. So far, what I did has brought very good results. 

Matthieu David: And your apartment renting business in China is only in Shanghai and mainly in Jing’an. Is that correct?

Shiny Cheng: Yeah, mainly in Jing’an. It’s also in People’s Square, Xujiahui, and other places. Actually, there are many places, but 70%-80% of them are based in Jing’an. Other areas also have at least 100-200 rooms. 

Matthieu David: Got It. So now, I understand. You get a few of your clients on online marketplaces in China from third-party platforms such as smartshanghai.com and so on, but you get most of your clients through word of mouth. That’s what, at EO, we call Net Promoter Score (NPS). You have a very high Net Promoter Score. People recommend you. Right?

Shiny Cheng: Yeah, exactly. Also, we have sales.

Matthieu David: How does this work? 

Shiny Cheng: People who see the advertisements on websites come to see the apartments. Also, people who refer their friends take them to view the apartments.

Matthieu David: Okay. But these sales don’t generate new leads. It takes care of the leads, which are inbound or reaching out to you.

Shiny Cheng: No, it generates new leads. They promote our website on their social media platforms.

Matthieu David: I see. So, it’s more marketing than direct sales.

Shiny Cheng: But we don’t have much staff doing that. We have three full-time salespeople and two part-time salespeople.

Matthieu David: How many people do you have in your team? 

Shiny Cheng: They are 30 in total.

Matthieu David: 30. And you said that the main function is sales. I understand that it’s about 10%. Then you have decoration. Could you break down what the functions are in your team? 

Shiny Cheng: More than 70% of my team management in China are into product design.

Matthieu David: Product? 

Shiny Cheng: Yeah, product. I am referring to designers, project managers, and so on. Around 70% of my team is part of the product team. The marketing team makes up around just 10%. The product team makes up 70% of my team. The service team is around 30% of my team.

Matthieu David: Okay. Interesting. 

Shiny Cheng: Product comes top, followed by service, and then marketing. I am not doing a lot of marketing. Actually, I am terrible at marketing. 

Matthieu David: Before we started, you mentioned three challenges of doing business in China you are facing. One is the regulations. It will be interesting to understand why you mentioned regulations. Another one is cashflow. I think you already mentioned that. We understand why cash flow is an issue because you have to renovate before people start rental housing in China. That’s the cost, right? 

Shiny Cheng: Yeah.

Matthieu David: And the location is one as well. As far as I understand, to find the locations and maybe negotiating the contract are challenges of doing business in China as well. So, could you go more in-depth on those challenges of doing business in China?

Shiny Cheng: Location is one of the big challenges of doing business in China, especially in my industry. The economy of Shanghai is improving every year. So, people like going to Shanghai. It’s the number one destination for people from other cities. Every year, almost six million people are looking for apartments in Shanghai.

Matthieu David: Wow. So, it’s like 20%-25% of the population who are moving from one apartment to the other.

Shiny Cheng: Yeah, they are looking for apartments. People already living in Shanghai are moving apartments, and people now coming to Shanghai want to find a new apartment.  The apartment renting business in China, especially in Shanghai is very crazy. In the last three years, it’s been very easy to get investment from banks. It’s very easy to get money from investors because the market size is so huge. The needs are huge. So, many companies are coming up. Even bigger companies like Alibaba and Jindong are all investing in the apartment renting business in China. The last few years have been crazy. Generally, a lot of companies which are doing rental housing in China are coming up. So, the apartment renting business in China has been very competitive. Many rental companies are looking for good locations for apartments because the industry is very hot. 

Matthieu David: I see. So, a lot of companies are looking for the same locations. So, you have to fight to get them. That’s the challenges of doing business in China. 

Shiny Cheng: And because we are fighting for the same locations, the price keeps getting higher. I think in the last three years, prices of rental housing in China have almost doubled. When I first started doing this in Jing’ a which happens to be the best location, the rent of rental housing in China was only ¥7,000, but now it’s at least ¥15,000. So, in the last six years, it’s definitely more than doubled. This is because every year, about six million people are looking for apartments.

Matthieu David: So, the difficulty, I believe, is also to negotiate a 10-year contract because you have a 10-year contract with the owner. And you will certainly negotiate an increase in price as well. So, all those kinds of terms will be quite difficult to negotiate with as well. 

Shiny Cheng: Yeah. The owners are becoming very smart. So, they don’t want sig for ten years. Now, it’s not easy to find apartments in good locations because while we want a 10-year contract, not many owners are willing to give us such contracts. 

Matthieu David: You mentioned regulations as another challenge of doing business in China. We know that you have a very different model from Airbnb. I understand that, but you are in the same space, which is rental housing in China. Actually, you rent places that you don’t own, which I think has a similarity to Airbnb. And we know that Airbnb is facing a lot of challenges of doing business in China in terms of regulations all over the world. They are facing challenges in the US. It’s the same in Europe and, I believe, in China as well. What specifically do you face in terms of challenges of doing business in China in regulations?

Shiny Cheng: In the beginning, regulations were tough for us because we always rented a three-bedroom apartment, but there will be just one living room and a bedroom. It was not legal. But from 2013, government documents said this is legal, which makes my apartment renting business in China open to everyone. Because our quality meets Airbnb’s standards, I am thinking about reserving 20% of my apartment rooms for Airbnb business as well because Airbnb has regulation issues in China. 

Matthieu David: Because it’s short-term and there are issues with short-term, isn’t it? 

Shiny Cheng: And also, I am thinking about having a co-living hotel or building. I am thinking about having one building for that, but there are regulatory issues. It’s easier to do that in Hong Kong than in Shanghai because Hong Kong has a smaller space. However, in China, the regulations are very difficult. Even if you get a hotel, you cannot do co-living apartments inside them. Maybe you can do co-working, but you cannot do co-living. There are so many regulations. 

Matthieu David: I see. 

Shiny Cheng: I was looking for co-living buildings to invest in, but it’s so hard to find one.

Matthieu David: How do you get informed of the regulations? Do you have a lawyer with you? Do you have someone in your team management in China looking at it or you do it yourself? How do you make sure they are up-to-date and you understand them?

Shiny Cheng: We have our industry group, so we talk about this a lot. We talk about Airbnb, capsule hotels, and different co-living buildings. However, for my kind of apartment renting business in China, we have no regulatory problems. I want to do a different style of co-living, like capsule hotels. While it’s okay in Hong Kong, it isn’t in mainland China.

Matthieu David: For people listening to us, regulatory breaches can totally change the business landscape in China. Some time ago, I saw shops and restaurants closed because they were not authorized to rent out to businesses. 

Shiny Cheng: So, I think regulation is a problem for scaling up. My current apartment renting business in China is okay. Everything is okay. I want to do more businesses, but regulations are my challenges of doing business in China.

Matthieu David: When you are starting an apartment renting business in China, you need an investment. Have you gotten any investment so far?

Shiny Cheng:  I have not gotten any investment.

Matthieu David: So, you own 100% of the company.

Shiny Cheng:  Yeah, 100%. I hope I can give my shares out. It’s better to get partners. Maybe in the future, if I need a roommates’ platform, I would need investment. I would need a Chief Technology Officer (CTO), a Chief Marketing Officer (CMO), and an investor for my platform. 

Matthieu David: Maybe, some people listening to us need to reach out to you to become your CTO and CMO. Before we started, you sent a document to me, which actually summarized your challenges of doing business in China and also, what you mentioned as your failure and lesson. In your failures, you mentioned not establishing formal management processes from the start. I understand that it’s important to have processes and training, but when you start, you don’t think about it because you think about the cash flow. You want to make sure that everything is going well. So, is it really a failure from the start? Is it not a failure when you develop it or when you move from 100 to 200 to 300 rooms? 

Shiny Cheng: I started my apartment renting business in China at 23, and I didn’t have any management skills from my university. I was studying Mandarin.

Matthieu David: You studied in Hainan, right. You studied on the island of Hainan, as far as I understand. You taught Chinese in Shanghai. You started as a Chinese teacher.

Shiny Cheng:  Yes, I started as a Chinese teacher. So, I had been a Chinese teacher for one year. It was my job. So, I didn’t have any entrepreneurship skills, but I wanted to be an entrepreneur while I was at university. I didn’t want to teach. In the University, I always dreamed of being an entrepreneur. So, after university, even when I was a teacher, I was into sales. I was looking for an opportunity to be an entrepreneur. Then I found this opportunity. So, I always wanted to be an entrepreneur, but I didn’t have this kind of skill. I didn’t learn it in school. So, I learned it from my experience. In the first three to four years, people were quitting. There were factions within the team management in China, and people were talking behind each other.

My team management in China was a mess. The culture was not good. The company process was a mess. We didn’t have many SOPs. So, I joined the Entrepreneur Organisation (EO). And then, I met many entrepreneurs. Some had 10 years of experience. Some even had more than 10 years of experience. They were very professional entrepreneurs who were very successful at what they did. So, they shared their management skills and knowledge, and I learned from them. Also, the whole E.O set-up is pretty amazing. I got a lot of training from EO, so I became very, very professional. Then, I started to establish my company culture. These are core values, mission, and vision of my company. I created the environment for my company. And then, I created many SOPs for the management of my company. 

Matthieu David: What do you mean by SOP? I am not sure everyone understands what SOP means. 

Shiny Cheng: It’s the process for each department. So, I learned it from experience and practice. So, now, everything is going in the right direction. 

Matthieu David: Who were the first people that you hired? You said that it was a mess in the first three years. Which functions did you hire first during the first two years? What did you hire them for? Did you hire them to decorate? Did you hire them to take the pictures? For what functions did you hire your salespeople? 

Shiny Cheng: Salespeople like the designer, project manager, and the QC. 

Matthieu David: Quality Control? 

Shiny Cheng: Yeah, Quality Control.  I also hired a finance team, service team, cleaners, handymen, and workmen. So, these were the people I hired, but I am not good at management. 

Matthieu David: How do you assess you are not good at team management in China? 

Shiny Cheng: Because people were quitting and always leaving. This is because the culture of the company was very negative.

Shiny Cheng: They were talking behind each other and complaining. I didn’t hire the right people. Also, the company process was not very organized. Actually, it’s my fault. Everything was my fault because I was not good at managing. In the beginning, I was working from 5 a.m. to 11 p.m. every day. Everything depended on me, and I didn’t know team management in China. So, I fired the whole team management in China, leaving only one person. 

Matthieu David: Really? Did you fire everyone except just one person? 

Shiny Cheng: Yes, because there was so much negative talk amongst them. So, I fired the whole team management in China.

Matthieu David: When was it?  

Shiny Cheng: Four years ago. 

Matthieu David: Just before you join EO?

Shiny Cheng: Before joining EO. Later on, after that, I joined the EO. I think it’s very good timing. And then, I started my new team management in China and chose people who had the same values as my company. I chose them very carefully. So, I hired very slowly and fired very fast. If I found they weren’t very good, I fired them very fast. When hiring people, I pay much attention to their values and attitude. I wasn’t paying that much attention to values and attitude earlier. After values and attitude, I look at their skills and experience or performance.  

Matthieu David: Interesting. 

Shiny Cheng: I also go to many places to learn. I visit the US and many other countries to learn more about entrepreneurship and management. 

Matthieu David: Where did you go?

Shiny Cheng: I just went to Malaysia for a master class. 

Matthieu David: With EO? 

Shiny Cheng: Yeah, EO as well. Yeah, I have had a lot of training from EO, but I still need to practice more.

Matthieu David: I see. You said the biggest lesson is building culture and vision. You have already talked a little bit about it. Building culture and vision is the most significant change for my company. How did you build that? It’s very easy to wake up each morning and say “This is my vision and my culture,” but it should relate to what your company really is. So how did you build it? Did you build it because it’s what you want to be in 10 years, or it’s the mindset of your team management in China, or it’s because of your own personality? How did you build this culture and vision? How did you define it? So, the key question here is how you defined it. 

Shiny Cheng: It’s a very good question. In the beginning, I chose around 3-4 key people in my team management in China, and then we had a meeting together where we worked on the mission, values, and core values of the company. And then I ask the members in team management in China questions like why they joined the company and why they are doing what they are doing every day. So, I will ask them these kinds of questions. Also, I will ask them what’s standing in the way of their success and how they plan to reach this success. So, these are the kind of questions I ask my groups. When they answer these questions, we are then able to define why they are working in the company. For example, if someone is working because they want to share the warmth and love, we get to know the personality of that person beyond apartment renting business in China. Through this, not only are we able to know about their brains but their hearts as well. We are working because we want to share love and warmth. So, we define our mission as sharing love and warmth. 

Matthieu David: I understand that. But did you find that it was a common point with all of them or you had very diverse answers? Were the answers similar or they were very diverse, and you had to re-work several times on the values?

Shiny Cheng: It’s called a strategy summit. We hold this meeting every year. Every year, we review our culture and plan for the culture and goal of the following year. Our first core value is gratitude. The second one is proactiveness. The third is to be first before any. So, these are our core values. Thirst for learning is also one of our core values. On Mondays from 9 am to 11 am, we dedicate that time for reading and sharing only. So, we’re really working on our values, and the people can feel that. So, when new staff joins, they can feel the culture. 

Matthieu David: Do you do the Monday gatherings with the entire team management in China or it’s in small groups? 

Shiny Cheng: Entire team management in China, but we divide them into different groups.

Matthieu David: You divide them into different groups, right? Okay. 

Shiny Cheng: Yeah, we divide them into three groups, which are the marketing, product, and service groups. They will then share the reading.

Matthieu David: I see. So, do you have books you suggest? Are they business books or novels?

Shiny Cheng: It could be any book, but they are mostly professional books and also business development books. The manager or any staff can also recommend a book. Sometimes, we also watch a video or listen to the audio. We don’t always read books. 

Matthieu David: There’s one question I realize I didn’t ask you about the business model. What kind of contract do you sign with your clients? Is it the same as a typical lease contract in China? Do you pay one month’s deposit and then you pay for rental housing in China every three months? Do you have another system for them? 

Shiny Cheng: Usually, they pay one year. The second one is they pay 1.5 deposit and one month rent for per rental housing in China.

Matthieu David: So, they pay month by month, right? Three months by three months. 

Shiny Cheng: Yes, every three months. 

Matthieu David: I see. So, you have a little bit of cash flow issue on these payment terms. It’s not only about decoration. It’s also about the cash in and cashes out you have. But because the deposit is 1.5 months and you need to pay for the first month, you need three months. So, it’s 2.5 versus three months. So, you still lower the cash flow issue a bit with this deposit. I see. I understand. 

Also, you talked to me about your life motto. I’d really be happy if you could talk more about it. Could you explain to us further what your life motto is? It seems that you have invested a lot of energy, time, and thinking in your vision, values, and life motto. So, I’m pretty sure there is a lot behind this. Could you tell us more?

Shiny Cheng: I think this is very powerful. Energy is very powerful because when I was in university, I dreamt about my life today. This was my dream at the university. I grew up in a small village in China. 

Matthieu David: Where? 

Shiny Cheng: Gansu Province. There is a city called Lintan. After Lintan, there is a smaller city called Heshui. After Heshui comes to a small village which happens to be my hometown, it was very poor when I was living there. My whole family was very poor. Also, my parents left me when I was a child because my father didn’t want to take the responsibility of raising me. He gave me to my grandmother because my mother died when I was 10 months old. My father then married a new wife, and they left me. They almost didn’t take any responsibility towards me. My grandmother was also very poor. For one year, I didn’t have even have fruits. Buying milk and fruits then was very expensive. So, when I was a student in my hometown, I used to watch people who could afford fruits, milk, and everything else and I wanted to be like them. I still remember when my grandmother takes me to the city, and we would take the train. On the train, I was always the kid who couldn’t pay for the ticket, so my grandmother had to put me underneath her seat. All this while, I was watching other children who enjoyed time with their families. They could have snacks anytime they wanted.

During that time, I wanted to have all those, but I couldn’t get anything. It was terrible. And it is for this reason that I really wanted to be an entrepreneur. I really wanted to get what I needed. I felt without. Even in school, I was the poorest. Amongst my classmates, the money I got every month was the lowest. So, I felt very ashamed at that time. So, when I was at university, I already had my dream. I was super certain about my dream of being an entrepreneur. Maybe, I could be a teacher or anything else, but I was 100% sure I wanted to be an entrepreneur. And actually, it’s happening now. I travel around the world. I am free. I can do more apartment renting business in China. There are more opportunities in the future. Comparing then to now, it’s totally different. This is what I imagined when I was a child and also at the university. So, energy is a very powerful thing. 

Matthieu David: Do you think your experience as a child living with very little still influences your decision-making? Do you think it influences you as well as not to take any investment but to stay independent and manage cash flow? Do you think it actually influenced positively your way of growing the company? Let me share my experience with you. In my case, I went to middle school in a somewhat deprived area. It enabled me to love people. When I was a student, I was teaching people from those deprived areas to be to gain admission to famous schools. That had a positive impact on my life because I was more generous. And I feel that, actually, that’s what you just said as well. In terms of management, do you think your childhood experience is still influencing you? 

Shiny Cheng: Exactly. Every single time. Every second. Yeah. I think that’s also why I am what I am now. My past shaped my present. I’m very ambitious. I want to do more apartment renting business in China. I’ve always wanted to be number one in my industry. I want to be the best. I don’t want to stop. I’ve always hungry for learning and more opportunities. This is because I was very needy during my childhood. Sometimes, I am also insecure. That’s why you said I don’t want investment. I don’t want to rely on someone. I always want to be in control. I am afraid of losing control when there is an investment. So, I think my childhood somewhat influenced this. I am 31 now. Before turning 30, I was always needy. But now, I feel like, actually, love doesn’t come from what I want. Love comes from what I am giving. So now, actually, I have started to change my mindset. I should embrace and accept myself. The most important thing, in the beginning, is giving to people. In my co-living apartments, I really want to give value first and then get the money back. But now, I am practicing more and more of this in my life. Also, I do Yoga and other spiritual activities. I do meditation, as well. So now, I’m starting to learn how to give back. 

Matthieu David: What are the next steps for Shinijia and also, yourself?

Shiny Cheng: Next step? A roommates’ platform for finding roommates in China. I have always wanted a platform. It’s very challenging for me. I find technology very interesting. I am learning. I’ve started to learn it. I am also looking at more real estate investments. I have also invested in a small coffee company. I also want to join a startup group. I want to learn how to invest. I would like to invest in some small, innovative, and interesting companies. Yeah. 

Matthieu David: I see. Congratulations. I’m very, very impressed. I didn’t know as much of your apartment renting business in China that I do now. I am very impressed by what you did, your personality, and your company. I hope I can interview many more Chinese entrepreneurs like you. I really enjoyed the talk, and I think a lot of people did enjoy it as well. 

Shiny Cheng: My voice is not very good. 

Matthieu David: The content is perfect. The content is very interesting. 

Shiny Cheng: Yeah, I hope you guys can understand my poor English. My Chinglish, actually. 

Matthieu David: That’s a great interview. Thank you very much. I hope everyone enjoyed the talk. Bye-bye, everyone.

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

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This article Podcast transcript #50: Behind the scenes of an apartment renting business in China is the first one to appear on Daxue Consulting - Market Research China.

Full transcript below:

Matthieu David: Hello everyone. I am Matthieu David, the founder of Daxue Consulting, a strategic market research company based in China, and this China marketing podcast, China Paradigm. Today, I am with Shiny Cheng. You are the founder of Shinjia. In Chinese, Shinijia is a way of saying “a comfortable house for you” or “a more comfortable house.”

I am not sure about this, but in Shanghai, under your management, you have more than 1000 apartments that you are renting out. They are beautifully furnished and already furnished and renovated. I saw the pictures. Actually, it looks like they are pictures of the most beautiful Airbnb you can find. 

You started the apartment renting business in China about seven years ago. You started without investment, fully bootstrapped. And now, you have a footing in Shanghai. And as I was saying, you have 1000 apartments under your management. You started the apartment renting business in China very young. I feel it’s nearly just after graduation. That’s something that I’d like to know more of as well. Thank you very much for being with us on a Saturday. That’s why there aren’t many people in your office currently. For people listening to us, we are recording the video for this interview as well. My first question is, what’s the market sizing of your apartment renting business in China? It could be in terms of revenue, the number of people, or the number of apartments. Is it 1000 or more?

Shiny Cheng: Okay. Thank you, Matthew. Hi, I am Shiny. Actually, it’s not 1,000 apartments. Sorry. I want to correct that. It is 1,000 apartment rooms. 

Matthieu David: I see. 

Shiny Cheng: Basically, my apartment renting business in China is about co-living apartments. So, we provide a very good and unique design at a very good price. We provide shared apartment rooms to young professionals, students, and also international young workers are living in Shanghai who want to find roommates in China. Most of the apartments are in the downtown of the city. 

Actually, I started my apartment renting business in China when I was 23 years old. So, I just came to Shanghai after university. I couldn’t find the ideal apartment I wanted to live in. I wanted to live in a downtown apartment in Shanghai. The rental was always increasing. So, I couldn’t find them. My ideal apartment has a good price and also a good design. So, this was my problem back then. 

So, I started rental housing in China, and I did the interior design. And also, I chose a very good location. And I had my roommates, so I did not need to pay the rent for rental housing in China. I found out this was a good business opportunity. 

Matthieu David: So, what you are saying is that you didn’t have to pay the rent for rental housing in China because you found roommates who were paying a bit of a markup. So, they were paying for you, right? 

Shiny Cheng: Yes, because I made the apartment nicer. I added value to it. 

Matthieu David: I see. 

Shiny Cheng: Actually, in the beginning, there were 95% foreigners in Shanghai. But now, it’s like 70% of Chinese who are living in my apartment. 

Matthieu David: Wow. 

Shiny Cheng: They now like my apartment more. And also, we didn’t do any marketing in China. We just started advertising three months ago. Already, it’s 70% of Chinese people living here. 

Matthieu David: Impressive.

Shiny Cheng: Yeah. Like many startups had huge investments, but I didn’t have that time. Eight years ago, I didn’t even know what an investment was.  I was very brave with the first apartment I rented for apartment renting business in China. It was quite risky. I got the key from the agent, and then I said I could give him a double agency fee if he gave me the key for three days. 

And in the three days, I did the decoration very fast and rented it out. Then, I paid the owner the rent for rental housing in China. Probably, if I had ¥20,000 in my hand, I could do the next one. So, it’s a lot of cash flow. So, it’s like you can start from zero. We have our decoration team. We have designers. We also have a factory for the furnishing. So, it’s a lot of work. It’s not like doing everything yourself in the beginning. There is a lot of cashflows involved. Yeah.

Matthieu David: I see. So, if I understand well, you have 1,000 rooms. So, it’s a bit less than 1,000 apartments. Maybe 700 apartments. 

Shiny Cheng: No, it’s like 200 apartments but 1,000 rooms. 

Matthieu David: Okay. So, on average, you have five rooms per apartment. 

Shiny Cheng: More than 200. Maybe, 400-500. 

Matthieu David: I see. 

Shiny Cheng: Now, it’s like probably 900 rooms. It’s between 900-1000 rooms. But generally, it’s more than four rooms in one apartment. 

Matthieu David: I see. It’s a very interesting format because I believe the four or five rooms are more difficult to start rental housing in China to one single person. And actually, you are making it easier for the landlord to start rental housing in China to 4-5 people through your platform. You don’t have to take care of so many people. So, as I understand in terms of your business model, people pay you or your platform directly. I went on your website and for each apartment, there is contact. There is a specific person in charge. I don’t know if it’s someone already living in the apartment who is going to be in charge of the others or someone from your company. But basically, they contact this person. They pay you. And then, you have the rent for rental housing in China you pay to the landlord. I believe that it’s a long-term lease, like three or five years, because you renovate it. So, you have to have stability on the lease. And that’s your business model, isn’t it? 

Shiny Cheng: Yeah, people pay me directly because I’ve started rental housing in China from the owner for ten years. The people you contact for an apartment are my salespeople. Also, people can list apartments on the website. So, some people are also listing their own apartment on our website. But in the beginning, we only used this within ourselves. Now, people from outside also sometimes use our website to list their apartments or look for roommates because this is only for roommates.

Matthieu David: I see. 

Shiny Cheng: Now, we are also trying to create a roommates’ platform.

Matthieu David: That’s something which makes me a bit confused because I saw a button which said I could add my own apartment. And from my understanding, you were managing the apartments from A to Z. So, I understand that’s a new feature. How much do you charge in terms of commission for them? 

Shiny Cheng: There is no commission on that. They can just list on the website. It’s in the trial stage. We are just testing it out. Also, it’s not my main apartment renting business in China. The cash flow is coming from my existing apartment renting business in China. Currently, traffic isn’t much. But in the future, when we do more promotions, I want to create a handyman app so that if people have any problem in the house, they can order from the online marketplace in China. So, it’s a very simple MVP. 

Matthieu David: For people listening to us who don’t know, MVP means minimum viable product. 

Shiny Cheng: They pay service charges to us. We don’t charge any commission.

Matthieu David: I see. I want to make sure that I’m not missing anything from your business model. I feel that the rent for rental housing in China is not the only thing you provide. I am sure that you also provide other services. Am I correct that it’s more than just the rent for rental housing in China? I am sure that you are not only providing the place. Could you tell us everything you provide? What’s your value proposition? 

Shiny Cheng: We help with the product design and renovation for the owners. Usually, the apartments in the downtown are very ugly because owners are buying the apartments not to live in them but as an investment. So, we provide renovation and management for the landlord. We also provide handymen as well as cleaning services to our tenants. So, the landlord doesn’t need to take care of all the problems of the house. 

Matthieu David: I see. So, can we say that you provide cleaning and internet services? You have someone you can call for any issue which is happening. So, if someone has a problem with their washing machine or anything, you would be there to answer in Chinese and English. 

Shiny Cheng: Sometimes, the owners let us manage any problems the tenants might have. 

Matthieu David: So, the value proposition is on both sides. So, the tenant rents rental housing in China, and the owner of the apartment doesn’t have to care about anything.

Shiny Cheng: Yes. So, in the future, we can make money from both sides if they want maintenance service. 

Matthieu David: I see. I understand. In terms of client acquisition, you said you didn’t do any marketing. Actually, I went on your website and analyzed it. I used a software called SimilarWeb—I don’t know if you know it—and I found out that indeed your traffic on the website is not very high as you mentioned before. 40% of the traffic is people directly going on your website because they already know it. So, it’s not like a first acquisition. You get about 15% which are links sending you traffic and 47% from Google by doing research. This is data from SimilarWeb. Most people who want to find roommates in China find your website through research about the online marketplace in China. So how do you find clients? Usually, before I interview people, I get a good sense of how they acquire clients. But in your case, it’s much more difficult. How do you get your clients? 

Shiny Cheng: Yeah, that’s a good question. Actually, my website is MVP. It’s not meant for getting clients at all. Because I am not a tech person, I’m still looking for a technology partner for this roommates’ platform. I didn’t find one when I started. So, I didn’t do a lot of promotion and other technology-related activities on my platform. That was my weakness. So, in the beginning, we did some promotions on some international websites in Shanghai. It’s called Smartshanghai.com. And also, I was promoting on Facebook. But actually, to be honest, I think 80% of our clients are acquired through referrals. They are neither from Smartshangai.com nor Facebook. Only 20% are acquired from online marketplaces in China. My salespeople have been at my company for eight years. So, they have many connections. And their connections introduce clients to my company. We weren’t promoting on Chinese websites but we’ve started to promote in China. And now, so many Chinese love our apartments. Last year, we had 30% of our tenants being Chinese. But now, around 70% of people living in our apartments are Chinese. 

Matthieu David: Was it 30% last year or in the beginning?

Shiny Cheng: In the beginning, it was around 5%. The percentage of Chinese tenants in our apartments was less than 5%.

Matthieu David: So, within one year, there was an exponential increase in the percentage of Chinese tenants.

Shiny Cheng: In seven years, the number of Chinese tenants increased from 5% to 60%-70% now.

Matthieu David: I see. So young Chinese people working in Shanghai and not from Shanghai who are struggling to find apartments downtown and don’t want to live very far go to you because it’s much more convenient to share an apartment. It is safer going through you. I believe that’s also a value proposition you bring. 

Shiny Cheng: I think it’s also because the Chinese economy is improving and the salaries of young people are increasing. So, the apartments become more affordable. They want a good location, good quality, and good service in an apartment. And also, they want to find roommates in China someone who are international. 

Matthieu David: Interesting.

Shiny Cheng: I think most of my Chinese clients are also international who want to find roommates in China from other countries. Some are working with international companies. 

Matthieu David: I see. So, most of your apartments are in Jing’an which is one of the most famous districts where people want to live. It’s a very nice district but very expensive at the same time. And it’s very interesting when you say that people who want to find roommates in China from other countries—whoever they are, Chinese or non-Chinese—will tend to go to you. So, 70% of your tenants are Chinese, but you define them with an international mindset because actually, they may live with people from different countries.

Shiny Cheng: Yeah, exactly. Some Chinese told us since they had been studying in America, Europe, or Australia for four years, when they come back, it’s hard for them to have Chinese roommates. They want to find roommates in China from other countries. After studying abroad for so many years, they realize some cultural changes as well. So, the Chinese love us because of the international community. 

Matthieu David: I see. I am on your website at the same time, and I see the pictures. I feel that you made a lot of effort on pictures. Your story and what I see on the online marketplaces in China reminds me of two things. The founders of Airbnb found their first client because they advertised on Craigslist. So, let’s say they didn’t advertise on SmartShanghai.com, which is basically the same as Craigslist for foreigners here. So, they had to go through another platform to get their clients at the beginning because their platform was not very famous. That’s the first similarity I am seeing with your apartment renting business in China. The second point is that Airbnb took off when the pictures were good, bright, and beautiful. When I go on your website, I feel that you made a lot of effort on the pictures. Am I correct that you made a lot of effort on the pictures and so on to start rental housing in China? 

Shiny Cheng: Yeah. Exactly. Yeah. Every single picture is taken by a professional photographer. There are many clients who even say when they walk into the apartments; they are even more beautiful than they are in pictures. We really care about every detail. So, both the products and the pictures are good. Actually, the vacancy rate is around 4%. 

Matthieu David: The vacancy rate is around 4%. So, the occupation rate is 96%, which is extremely high. 

Shiny Cheng: It’s much higher than the average rate of around 50% in the industry. I think this is because of the quality of the apartment and photos. 

Matthieu David: To describe the apartments and the pictures I am seeing on the website to people who are listening to us and those watching us as well, you paint the apartments in different colors as well to create more volume, I believe. The furniture is modern and a bit vintage. You have paintings and photographs on the walls. They are well-decorated with flowers. The lighting is very colorful which makes the apartment much brighter. 

Shiny Cheng: Yeah, exactly. We really care about these details because our clients are young. They are mostly students or just working for a year or two. So, their salaries are not that high. They are probably paying half of their salaries for the rent of rental housing in China. In this industry, people don’t usually do the decoration of very good quality because that means higher costs. Because it’s a shared apartment, my clients can only afford around 4,000. If they could afford around ¥5,000, probably they would start rental housing in China to rent a single apartment. They will not rent a shared apartment. So, for us, if we improve quality, it means our profit margin will be lesser.

The owner of a popular Chinese platform even said what I am doing is very dangerous because he thinks that I spend too much money on decoration. Actually, he said, it’s quite a ridiculous industry. But now, many people in the industry are suffering. And I am very happy because I have a 96% occupancy rate. This is because of the investment I made in quality. Actually, it’s really paid off. Many people thought what I was doing wasn’t right because people were spending less on quality while I was spending more. To them, it wasn’t very healthy. Many people thought I was doing a very risky apartment renting business in China. So far, what I did has brought very good results. 

Matthieu David: And your apartment renting business in China is only in Shanghai and mainly in Jing’an. Is that correct?

Shiny Cheng: Yeah, mainly in Jing’an. It’s also in People’s Square, Xujiahui, and other places. Actually, there are many places, but 70%-80% of them are based in Jing’an. Other areas also have at least 100-200 rooms. 

Matthieu David: Got It. So now, I understand. You get a few of your clients on online marketplaces in China from third-party platforms such as smartshanghai.com and so on, but you get most of your clients through word of mouth. That’s what, at EO, we call Net Promoter Score (NPS). You have a very high Net Promoter Score. People recommend you. Right?

Shiny Cheng: Yeah, exactly. Also, we have sales.

Matthieu David: How does this work? 

Shiny Cheng: People who see the advertisements on websites come to see the apartments. Also, people who refer their friends take them to view the apartments.

Matthieu David: Okay. But these sales don’t generate new leads. It takes care of the leads, which are inbound or reaching out to you.

Shiny Cheng: No, it generates new leads. They promote our website on their social media platforms.

Matthieu David: I see. So, it’s more marketing than direct sales.

Shiny Cheng: Butwe don’thave much staff doing that. We have three full-time salespeople and two part-time salespeople.

Matthieu David: How many people do you have in your team? 

Shiny Cheng: They are 30 in total.

Matthieu David: 30. And you said that the main function is sales. I understand that it’s about 10%. Then you have decoration. Could you break down what the functions are in your team? 

Shiny Cheng: More than 70% of my team management in China are into product design.

Matthieu David: Product? 

Shiny Cheng: Yeah, product. I am referring to designers, project managers, and so on. Around 70% of my team is part of the product team. The marketing team makes up around just 10%. The product team makes up 70% of my team. The service team is around 30% of my team.

Matthieu David: Okay. Interesting. 

Shiny Cheng: Product comes top, followed by service, and then marketing. I am not doing a lot of marketing. Actually, I am terrible at marketing. 

Matthieu David: Before we started, you mentioned three challenges of doing business in China you are facing. One is the regulations. It will be interesting to understand why you mentioned regulations. Another one is cashflow. I think you already mentioned that. We understand why cash flow is an issue because you have to renovate before people start rental housing in China. That’s the cost, right? 

Shiny Cheng: Yeah.

Matthieu David: And the location is one as well. As far as I understand, to find the locations and maybe negotiating the contract are challenges of doing business in China as well. So, could you go more in-depth on those challenges of doing business in China?

Shiny Cheng: Location is one of the big challenges of doing business in China, especially in my industry. The economy of Shanghai is improving every year. So, people like going to Shanghai. It’s the number one destination for people from other cities. Every year, almost six million people are looking for apartments in Shanghai.

Matthieu David: Wow. So, it’s like 20%-25% of the population who are moving from one apartment to the other.

Shiny Cheng: Yeah, they are looking for apartments. People already living in Shanghai are moving apartments, and people now coming to Shanghai want to find a new apartment.  The apartment renting business in China, especially in Shanghai is very crazy. In the last three years, it’s been very easy to get investment from banks. It’s very easy to get money from investors because the market size is so huge. The needs are huge. So, many companies are coming up. Even bigger companies like Alibaba and Jindong are all investing in the apartment renting business in China. The last few years have been crazy. Generally, a lot of companies which are doing rental housing in China are coming up. So, the apartment renting business in China has been very competitive. Many rental companies are looking for good locations for apartments because the industry is very hot. 

Matthieu David: I see. So, a lot of companies are looking for the same locations. So, you have to fight to get them. That’s the challenges of doing business in China. 

Shiny Cheng: And because we are fighting for the same locations, the price keeps getting higher. I think in the last three years, prices of rental housing in China have almost doubled. When I first started doing this in Jing’ a which happens to be the best location, the rent of rental housing in China was only ¥7,000 but now it’s at least ¥15,000. So, in the last six years, it’s definitely more than doubled. This is because every year, about six million people are looking for apartments.

Matthieu David: So, the difficulty, I believe, is also to negotiate a 10-year contract because you have a 10-year contract with the owner. And you will certainly negotiate an increase in price as well. So, all those kinds of terms will be quite difficult to negotiate with as well. 

Shiny Cheng: Yeah. The owners are becoming very smart. So, they don’t sig for ten years. Now, it’s not easy to find apartments in good locations because while we want a 10-year contract, not many owners are willing to give us such contracts. 

Matthieu David: You mentioned regulations as another challenge of doing business in China. We know that you have a very different model from Airbnb. I understand that, but you are in the same space, which is rental housing in China. Actually, you rent places that you don’t own, which I think has a similarity to Airbnb. And we know that Airbnb is facing a lot of challenges of doing business in China in terms of regulations all over the world. They are facing challenges in the US. It’s the same in Europe and, I believe, in China as well. What specifically do you face in terms of challenges of doing business in China in regulations?

Shiny Cheng: In the beginning, regulations were tough for us because we always rented a three-bedroom apartment but there will be just one living room and a bedroom. It was not legal. But from 2013, government documents said this is legal which makes my apartment renting business in China open to everyone. Because our quality meets Airbnb’s standards, I am thinking about reserving 20% of my apartment rooms for Airbnb business as well because Airbnb has regulation issues in China. 

Matthieu David: Because it’s short-term and there are issues with short-term, isn’t it? 

Shiny Cheng: And also, I am thinking about having a co-living hotel or building. I am thinking about having one building for that, but there are regulatory issues. It’s easier to do that in Hong Kong than in Shanghai because Hong Kong has a smaller space. However, in China, the regulations are very difficult. Even if you get a hotel, you cannot do co-living apartments inside them. Maybe you can do co-working, but you cannot do co-living. There are so many regulations. 

Matthieu David: I see. 

Shiny Cheng: I was looking for co-living buildings to invest in, but it’s so hard to find one.

Matthieu David: How do you get informed of the regulations? Do you have a lawyer with you? Do you have someone in your team management in China looking at it or you do it yourself? How do you make sure they are up-to-date and you understand them?

Shiny Cheng: We have our industry group, so we talk about this a lot. We talk about Airbnb, capsule hotels, and different co-living buildings. However, for my kind of apartment renting business in China, we have no regulatory problems. I want to do a different style of co-living, like capsule hotels. While it’s okay in Hong Kong, it isn’t in mainland China.

Matthieu David: For people listening to us, regulatory breaches can totally change the business landscape in China. Some time ago, I saw shops and restaurants closed because they were not authorized to rent out to businesses. 

Shiny Cheng: So, I think regulation is a problem for scaling up. My current apartment renting business in China is okay. Everything is okay. I want to do more businesses, but regulations are my challenges of doing business in China.

Matthieu David: When you are starting an apartment renting business in China, you need an investment. Have you gotten any investment so far?

Shiny Cheng:  I have not gotten any investment.

Matthieu David: So, you own 100% of the company.

Shiny Cheng:  Yeah, 100%. I hope I can give my shares out. It’s better to get partners. Maybe in the future, if I need a roommates’ platform, I would need investment. I would need a Chief Technology Officer (CTO), a Chief Marketing Officer (CMO), and an investor for my platform. 

Matthieu David: Maybe, some people listening to us need to reach out to you to become your CTO and CMO. Before we started, you sent a document to me, which actually summarized your challenges of doing business in China and also, what you mentioned as your failure and lesson. In your failures, you mentioned not establishing formal management processes from the start. I understand that it’s important to have processes and training, but when you start, you don’t think about it because you think about the cash flow. You want to make sure that everything is going well. So, is it really a failure from the start? Is it not a failure when you develop it or when you move from 100 to 200 to 300 rooms? 

Shiny Cheng: I started my apartment renting business in China at 23 and I didn’t have any management skills from my university. I was studying Mandarin.

Matthieu David: You studied in Hainan, right. You studied on the island of Hainan, as far as I understand. You taught Chinese in Shanghai. You started as a Chinese teacher.

Shiny Cheng:  Yes, I started as a Chinese teacher. So, I had been a Chinese teacher for one year. It was my job. So, I didn’t have any entrepreneurship skills but I wanted to be an entrepreneur while I was at the university. I didn’t want to teach. In the University, I always dreamed of being an entrepreneur. So, after university, even when I was a teacher, I was into sales. I was looking for an opportunity to be an entrepreneur. Then I found this opportunity. So, I always wanted to be an entrepreneur but I didn’t have this kind of skill. I didn’t learn it in school. So, I learned it from my experience. In the first three to four years, people were quitting. There were factions within the team management in China and people were talking behind each other.

My team management in China was a mess. The culture was not good. The company process was a mess. We didn’t have many SOPs. So, I joined the Entrepreneur Organisation (EO). And then, I met many entrepreneurs. Some had 10 years of experience. Some even had more than 10 years of experience. They were very professional entrepreneurs who were very successful at what they did. So, they shared their management skills and knowledge, and I learned from them. Also, the whole E.O set-up is pretty amazing. I got a lot of training from EO, so I became very, very professional. Then, I started to establish my company culture. These are core values, mission, and vision of my company. I created the environment for my company. And then, I created many SOPs for the management of my company. 

Matthieu David: What do you mean by SOP? I am not sure everyone understands what SOP means. 

Shiny Cheng: It’s the process for each department. So, I learned it from experience and practice. So, now, everything is going in the right direction. 

Matthieu David: Who were the first people that you hired? You said that it was a mess in the first three years. Which functions did you hire first during the first two years? What did you hire them for? Did you hire them to decorate? Did you hire them to take the pictures? For what functions did you hire your salespeople? 

Shiny Cheng: Salespeople like the designer, project manager, and the QC. 

Matthieu David: Quality Control? 

Shiny Cheng: Yeah, Quality Control.  I also hired a finance team, service team, cleaners, handymen, and workmen. So, these were the people I hired, but I am not good at management. 

Matthieu David: How do you assess you are not good at team management in China? 

Shiny Cheng: Because people were quitting and always leaving. This is because the culture of the company was very negative.

Shiny Cheng: They were talking behind each other and complaining. I didn’t hire the right people. Also, the company process was not very organized. Actually, it’s my fault. Everything was my fault because I was not good at managing. In the beginning, I was working from 5 a.m. to 11 p.m. every day. Everything depended on me, and I didn’t know team management in China. So, I fired the whole team management in China, leaving only one person. 

Matthieu David: Really? Did you fire everyone except just one person? 

Shiny Cheng: Yes, because there was so much negative talk amongst them. So, I fired the whole team management in China.

Matthieu David: When was it?  

Shiny Cheng: Four years ago. 

Matthieu David: Just before you join EO?

Shiny Cheng: Before joining EO. Later on, after that, I joined the EO. I think it’s very good timing. And then, I started my new team management in China and chose people who had the same values as my company. I chose them very carefully. So, I hired very slowly and fired very fast. If I found they weren’t very good, I fired them very fast. When hiring people, I pay much attention to their values and attitude. I wasn’t paying that much attention to values and attitude earlier. After values and attitude, I look at their skills and experience or performance.  

Matthieu David: Interesting. 

Shiny Cheng: I also go to many places to learn. I visit the US and many other countries to learn more about entrepreneurship and management. 

Matthieu David: Where did you go?

Shiny Cheng: I just went to Malaysia for a master class. 

Matthieu David: With EO? 

Shiny Cheng: Yeah, EO as well. Yeah, I have had a lot of training from EO but I still need to practice more.

Matthieu David: I see. You said the biggest lesson is building culture and vision. You have already talked a little bit about it. Building culture and vision is the most significant change for my company. How did you build that? It’s very easy to wake up each morning and say “This is my vision and my culture”, but it should relate to what your company really is. So how did you build it? Did you build it because it’s what you want to be in 10 years, or it’s the mindset of your team management in China or it’s because of your own personality? How did you build this culture and vision? How did you define it? So, the key question here is how you defined it. 

Shiny Cheng: It’s a very good question. In the beginning, I chose around 3-4 key people in my team management in China, and then we had a meeting together where we worked on the mission, values, and core values of the company. And then I ask the members in team management in China questions like why they joined the company and why they are doing what they are doing every day. So, I will ask them these kinds of questions. Also, I will ask them what’s standing in the way of their success and how they plan to reach this success. So, these are the kind of questions I ask my groups. When they answer these questions, we are then able to define why they are working in the company. For example, if someone is working because they want to share the warmth and love, we get to know the personality of that person beyond apartment renting business in China. Through this, not only are we able to know about their brains but their hearts as well. We are working because we want to share love and warmth. So, we define our mission as sharing love and warmth. 

Matthieu David: I understand that. But did you find that it was a common point with all of them or you had very diverse answers? Were the answers similar or they were very diverse, and you had to re-work several times on the values?

Shiny Cheng: It’s called a strategy summit. We hold this meeting every year. Every year, we review our culture and plan for the culture and goal of the following year. Our first core value is gratitude. The second one is proactiveness. The third is to be first before any. So, these are our core values. Thirst for learning is also one of our core values. On Mondays from 9 am to 11 am, we dedicate that time for reading and sharing only. So, we’re really working on our values, and the people can feel that. So, when new staff joins, they can feel the culture. 

Matthieu David: Do you do the Monday gatherings with the entire team management in China or it’s in small groups? 

Shiny Cheng: Entire team management in China, but we divide them into different groups.

Matthieu David: You divide them into different groups, right? Okay. 

Shiny Cheng: Yeah, we divide them into three groups, which are the marketing, product, and service groups. They will then share the reading.

Matthieu David: I see. So, do you have books you suggest? Are they business books or novels?

Shiny Cheng: It could be any book but they are mostly professional books and also business development books. The manager or any staff can also recommend a book. Sometimes, we also watch a video or listen to the audio. We don’t always read books. 

Matthieu David: There’s one question I realize I didn’t ask you about the business model. What kind of contract do you sign with your clients? Is it the same as a typical lease contract in China? Do you pay one month’s deposit and then you pay for rental housing in China every three months? Do you have another system for them? 

Shiny Cheng: Usually, they pay one year. The second one is they pay 1.5 deposit and one month rent for per rental housing in China.

Matthieu David: So, they pay month by month, right? Three months by three months. 

Shiny Cheng: Yes, every three months. 

Matthieu David: I see. So, you have a little bit of cash flow issue on these payment terms. It’s not only about decoration. It’s also about the cash in and cashes out you have. But because the deposit is 1.5 months and you need to pay for the first month, you need three months. So, it’s 2.5 versus three months. So, you still lower the cash flow issue a bit with this deposit. I see. I understand. 

Also, you talked to me about your life motto. I’d really be happy if you could talk more about it. Could you explain to us further what your life motto is? It seems that you have invested a lot of energy, time, and thinking in your vision, values, and life motto. So, I’m pretty sure there is a lot behind this. Could you tell us more?

Shiny Cheng: I think this is very powerful. Energy is very powerful because when I was in university, I dreamt about my life today. This was my dream at the university. I grew up in a small village in China. 

Matthieu David: Where? 

Shiny Cheng: Gansu Province. There is a city called Lintan. After Lintan, there is a smaller city called Heshui. After Heshui comes to a small village which happens to be my hometown, it was very poor when I was living there. My whole family was very poor. Also, my parents left me when I was a child because my father didn’t want to take the responsibility of raising me. He gave me to my grandmother because my mother died when I was 10 months old. My father then married a new wife, and they left me. They almost didn’t take any responsibility towards me. My grandmother was also very poor. For one year, I didn’t have even have fruits. Buying milk and fruits then was very expensive. So, when I was a student in my hometown, I used to watch people who could afford fruits, milk, and everything else and I wanted to be like them. I still remember when my grandmother takes me to the city, and we would take the train. On the train, I was always the kid who couldn’t pay for the ticket, so my grandmother had to put me underneath her seat. All this while, I was watching other children who enjoyed time with their families. They could have snacks anytime they wanted.

During that time, I wanted to have all those but I couldn’t get anything. It was terrible. And it is for this reason that I really wanted to be an entrepreneur. I really wanted to get what I needed. I felt without. Even in school, I was the poorest. Amongst my classmates, the money I got every month was the lowest. So, I felt very ashamed at that time. So, when I was at university, I already had my dream. I was super certain about my dream of being an entrepreneur. Maybe, I could be a teacher or anything else but I was 100% sure I wanted to be an entrepreneur. And actually, it’s happening now. I travel around the world. I am free. I can do more apartment renting business in China. There are more opportunities in the future. Comparing then to now, it’s totally different. This is what I imagined when I was a child and also at the university. So, energy is a very powerful thing. 

Matthieu David: Do you think your past experience as a child living with very little still influences your decision-making? Do you think it influences you as well as not to take any investment but to stay independent and manage cash flow? Do you think it actually influenced positively your way of growing the company? Let me share my experience with you. In my case, I went to middle school in a somewhat deprived area. It enabled me to love people. When I was a student, I was teaching people from those deprived areas to be to gain admission to famous schools. That had a positive impact on my life because I was more generous. And I feel that, actually, that’s what you just said as well. In terms of management, do you think your childhood experience is still influencing you? 

Shiny Cheng: Exactly. Every single time. Every second. Yeah. I think that’s also why I am what I am now. My past shaped my present. I’m very ambitious. I want to do more apartment renting business in China. I’ve always wanted to be number one in my industry. I want to be the best. I don’t want to stop. I’ve always hungry for learning and more opportunities. This is because I was very needy during my childhood. Sometimes, I am also insecure. That’s why you said I don’t want investment. I don’t want to rely on someone. I always want to be in control. I am afraid of losing control when there is an investment. So, I think my childhood somewhat influenced this. I am 31 now. Before turning 30, I was always needy. But now, I feel like, actually, love doesn’t come from what I want. Love comes from what I am giving. So now, actually, I have started to change my mindset. I should embrace and accept myself. The most important thing, in the beginning, is giving to people. In my co-living apartments, I really want to give value first and then get the money back. But now, I am practicing more and more of this in my life. Also, I do Yoga and other spiritual activities. I do meditation as well. So now, I’m starting to learn how to give back.

Matthieu David: What are the next steps for Shinijia and also, yourself?

Shiny Cheng: Next step? A roommates’ platform for finding roommates in China. I have always wanted a platform. It’s very challenging for me. I find technology very interesting. I am learning. I’ve started to learn it. I am also looking at more real estate investments. I have also invested in a small coffee company. I also want to join a startup group. I want to learn how to invest. I would like to invest in some small, innovative, and interesting companies. Yeah.

Matthieu David: I see. Congratulations. I’m very, very impressed. I didn’t know as much of your apartment renting business in China that I do now. I am very impressed by what you did, your personality, and your company. I hope I can interview many more Chinese entrepreneurs like you. I really enjoyed the talk, and I think a lot of people did enjoy it as well. 

Shiny Cheng: My voice is not very good. 

Matthieu David: The content is perfect. The content is very interesting. 

Shiny Cheng: Yeah, I hope you guys can understand my poor English. My Chinglish. 

Matthieu David: That’s a great interview. Thank you very much. I hope everyone enjoyed the talk. Bye-bye everyone.

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

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This article China Paradigm 50: Behind the scenes of an apartment renting business in China is the first one to appear on Daxue Consulting - Market Research China.

Full transcript below:

Matthieu David:  Hello, everyone. I’m Matthieu David, the founder of Daxue Consulting and its China business podcast China Paradigm. Today I am with Andrei Prokhorovich – I hope I pronounced it well, it’s a Russian name. You are Russian, and you have been in China for a while. You had been in Yantai, you have been in Hong Kong as well. I think you are now in Beijing, Hong Kong. You are the founder and CEO of Eurasia Development, which is supporting the introduction of foreign technology in China, and I feel even more than this when I looked at your website and everything you do. That’s something I’d like to understand better.

From my understanding of what your company is doing, it is using technology, supporting the development, finding men, it could also support in setting up a factory in China, specifically – I have this feeling, but you will tell us if it’s correct or not – with Russian companies, and the thing that I would be very, very interested in understanding better.

Thank you very much, Andrei, for being with us. You are the current CEO of the company you founded in November 2012, so already six years. From my experience, where your company has more than four years, I think it’s a solid company. You have a standard model. You have found something interesting for your clients to do.

Would you like to tell us about the number of cases you have treated, the number of clients you have worked with, an idea with the size of your business, what stage you are in terms of development?

Andrei Prokhorovich:  Okay, Matthieu, thank you very much for the invitation. I’m really pleased, and it’s a big honor for me. Actually, I heard about your company a lot before. So, yes, I know a little about you.

Well, actually, I do live in Hong Kong. My company was established in  Hong Kong. Yes, I’m going there a few times a year, but most of the time I stay in mainland China. Actually, my company was established in 2012, but I’m living in China for 13 years. It’s like 90% of the time; I spend in China. I’m going to trips to other countries, but I’m living here, and my family is also here.

How did I start? I was born in Vladivostok; it’s a seaport.

Matthieu David:  It’s very close to China?

Andrei Prokhorovich:  Yes, far east of Russia, so very close and because of that, I have relations with some Koreans, Japanese, and Chinese companies back to the end of the 1990s when I’ve been a student, and I started to work. I established my first company in 2001. I also was a student and started to import some products from China.

In 2006, I moved to China. We established the first company in China in Yantai. Yes, everybody asked me, “Why, Yantai? Why not at Shanghai or Beijing or Shenzhen?” Well, it’s because of my Chinese friends. The first guy who I met, I mean the Chinese guy who I met, he was from Yantai. He invited me, and when I came, I just stayed here. I liked that city; it’s not big but –

Matthieu David:  So before, you don’t know Yantai. Just a couple of information, Yantai is in Shandong. You have Qingdao because it’s a more religious city, Jinan because it’s the capital, and then you have the Yantai which a business province, which is a very nice city, very industrial city. As far as I know, a lot of Korean companies have some economic interest in Yantai as well.

Andrei Prokhorovich:  Exactly. A lot of Koreans and Japanese companies set up in Yantai. Actually, the Yantai is now number 20 by GDP in China.

Matthieu David:  As a city?

Andrei Prokhorovich:  Yes, exactly, because it’s more than $100 billion. Yes, more than USD 100 billion GDP of the city.

Matthieu David:  Wow.Where are you now?

Andrei Prokhorovich:  Right now, I’m in Yantai. Yes, I’m in the head office.

Matthieu David:  Okay.

Andrei Prokhorovich:  Yes. Back to my story, if it’s possible, why I was making the import-export business in China? Why? Actually, the first time when I sought about the technology transfer in China, it was 2004. I was a young guy, and it was some meeting in Russia where some guys from venture companies came, and they told us about venture capital and the Silicon Valley and so on. At that time, I got an idea. China and Russia can be a good partner in this field because Russia produces a lot of very interesting technology, but Russia had some problems with commercialization, with the monetization of these technologies. At the same time, I saw some potential, huge potential of China 15 years ago. Back at the time, I see a huge potential.

Matthieu David:  Could you show what technology? What technology are you talking about in 2005 and 2006, you say?

Andrei Prokhorovich:  Yes. But at that time, I was thinking about technology, but I didn’t know which technology we can transfer, which was going to be our technology transfer in China, because, at that time, I have no idea how to do this business. Yeah, I have no money. I have no connections. I’m in networking; I had nothing. So it was just an idea. I started to make this idea come true just in 2011.

Matthieu David:  I see, so it took five years?

Andrei Prokhorovich:  More, It took seven years.

Matthieu David:  What did you do between?

Andrei Prokhorovich:  Exporting for business. We export from China construction materials, equipment and such kind of things to Russia, and then we scale to CIS countries – Belarus, Ukraine, Kazakhstan, Georgia, Armenia, and so on. So that’s where I made my first money. Then in 2011, I built up the business plan for technology transfer in China. In 2012, I established a company.

Your question was about some numbers, the revenue and the clients, and so on.

Matthieu David:  Yes, some idea of the size because it’s important for people who will listen to us to get an idea at which stage you are in terms of development. It’s a different story when you start when you develop, or when you are mature. At which stage are you currently? How many companies do you represent? How many cases do you get revenues, the team members? Any number to have an idea.

Andrei Prokhorovich:  Okay. Let me go step by step, I will explain. Back in 2011, when I built a business plan, I was alone. It was just me. In 2012, when I established this company, it was two of us – my wife and me because my wife helped me a lot to build.

Matthieu David:  Chinese?

Andrei Prokhorovich:  She’s Russian but living in China with me. Just in 2014, we hired three persons. The first employee was hired in early 2014. For now, two of them still work with me and become my younger partners. One of them left, and he’s a Senior Consultant in Ernst and Young in Australia.

From 2014 until now, we have more than 20 employees. I’m talking about just Eurasia Development. We have more than 20 employees who are in charge of law, legal consulting like analysis, intellectual property lawyers and so on, also people who translate, also people who make the connections and communications with the Chinese partners. For now, we have more than 20 people.

The maximum revenue – and here we talk just about Eurasia Development, I will explain to you a little bit more. I separate these things. Maximum of what we have is about USD 20 million a year, but it depends.

Matthieu David:  $20 million U.S. revenues?That’s huge.

Andrei Prokhorovich: Yes.

Matthieu David:  Do you distribute cost? What’s your cost? Your cost is not only about consulting, right? You buy the technology.

Andrei Prokhorovich:  No, no. We don’t buy technology. We do mostly consulting, that’s the point. Sometimes if we talk about the business model, our business model is consulting. But sometimes we also get equity.

For example, some startups coming to China, or plan to come to China, and we have some big potential of them, and we think to cooperate, they need the help because they don’t know how to act in China’s tech market. They don’t know how the world works here, how you need to communicate with the Chinese partners, potential strategic partners or investors or government relations (GR), how to build it up, so we help them with all of these things. Just sometimes, we get equity from these projects.

Matthieu David:  I’m sorry, but I feel very, very surprised. Is it $20 million U.S. or 20 million RMB?

Andrei Prokhorovich:  U.S. dollars.

Matthieu David:  $20 million the U.S.

Andrei Prokhorovich:  Exactly.

Matthieu David:  You’re a millionaire.

Andrei Prokhorovich:  Not really, but everything depends – okay, let me explain. Some deals, some cases make us about $30,000. We work on some cases for one year or even more, and it can bring us about USD 30,000 of profit, $30,000 for a year, so it’s a small number. But sometimes if we’re talking about some M&A deals, and we helped to sell some companies to Chinese strategic partner or some big investor or wherever there could be some absolutely different number because we can get like about USD 1 million of bonus. That’s the point. It’s much better in this case.

Matthieu David:  Then, your company is extremely profitable.

Andrei Prokhorovich:  Yes, we are profitable, but we are growing. You see, as a foreign technology in China, we are investing. So my strategy is to use the profit which we get to invest in other projects. Like for example, we invest in Dodo Pizza. Maybe you heard about this, maybe not. It’s a really interesting Russian –

Matthieu David:  Yes, I’d like to know more. I went on your website, and I saw this case on your website. I have to find actually the notes that were prepared by my team on your company, we prepared, and we looked at your company deeply on the Internet, and we found that Dodo Pizza, right?

Andrei Prokhorovich:  Yes.

Matthieu David:  It’s a case of M&A, right?

Andrei Prokhorovich:  It’s not M&A, absolutely, because we’re entering into China’s tech market with this company together. Back in 2015, we started this project. We started to learn more about it. I wrote to the founder of the project.

Let me start from the beginning. Fedor Ovchinnikov is the founder of Dodo Pizza. He founded this company in 2011. It was a small pizza chain. The guy, he was a crazy entrepreneur. He had a dream.

Matthieu David:  Where is he from?

Andrei Prokhorovich:  From Russia.

Matthieu David:  From Russia?

Andrei Prokhorovich:  Yes, from a very small Russian city.

Matthieu David:  Most of your clients are from Russia?

Andrei Prokhorovich:  Mostly, yes. Actually, the first deal which we closed in China was the project from Georgia. I mean the country Georgia, not the state.

Matthieu David:  Basically, the CIS, right?Soviet Union countries?

Andrei Prokhorovich: Yes, exactly. It was a biological project. We’re trying to see what China’s tech market needs. Like for example, just 20 years ago, China doesn’t drink milk at all, right? But now they drink a lot. After milk, comes some yogurt. Even six or seven years ago, some sour cream factory was established and built up in Shanghai and so on.

In late 2014, we see these, like five years ago, we see that China’s tech market is growing, so we will start thinking what China will need in this case, and we get an idea. Maybe something for the new product, maybe something for the sour cream or something like that or yogurt. We have connections. You see, my company has big connections all around Russia and CIS countries. Also, with Georgia, we have connections with the Academy of Science of Georgia. We followed some interesting project there; it’s bacteria. Georgia, for thousands of years, had been drinking milk and making some products from this, so they have interesting technologies in this field.

We find some company – not a company actually. It was one of the few engineers who are working on bacteria. We took these engineers, we took this bacteria, brought them to China, made the joint venture in China, attracted a little bit more than USD 5 million to this project, built up the laboratory here in China, in Yantai.

Matthieu David:  In Yantai?

Andrei Prokhorovich:  Exactly.

Matthieu David:  Is it that most of your projects, I believe, are in Yantai? Is it your strategy?

Andrei Prokhorovich:  It used to be because you see I cooperate a lot with the technology parks in China. Maybe you know their organization, which is called Tourch.

Matthieu David:  I’m not familiar with it.

Andrei Prokhorovich:  It’s a Government Association of Technology Parks in China which includes more than 100 –

Matthieu David:  How do you spell?

Andrei Prokhorovich:  T-O-U-R-C-H. I remember an image.

Matthieu David:  Okay.

Andrei Prokhorovich:  Maybe I have some more logo.No, no. I can send the link in later.

The point is that’s the biggest association of technology parks in China. China invests a lot of new technology, in fundamental science, and also in the acquisition of technology or buying, as I say, brings in from different technology fields all around the world. I cooperate with them for a while – not a while, many years actually. This is one of our strategies. We know how to cooperate with these government technology parks in China, and these technology parks in China give very good conditions if you enter China’s tech market.

For example, if you rent the office in Shanghai, it costs a thousand dollars. I’m sure that your office is pretty expensive, right? But if you come to the Technology Park in China and if you prove that your project is interesting, they can give you the office for free, or free space for three years, like 100. Do you want 100 square meters? Okay, 100 square meters in the beautiful building, the glass, free for three years and so on. And sometimes also they can cut your taxes like income tax and so on.

Matthieu David:  How much can they cut?

Andrei Prokhorovich:  About 10%. From 25 to 15%, yeah.

Matthieu David:  Okay, to the people who are listening to us, the tax in profit in China is 25%, and some technology park in China can reduce to 15%.

Andrei Prokhorovich:  To 15%, yes. Also, they have the grant programs, which if you bring the company into China and you start some research and development here, important or not that important, it depends on you. But you have engineers here, and you make research and development, you can also participate in some grants programs which give you the money. Like for example, our partner just received USD 1 million as a grant.

Matthieu David:  That’s huge.

Andrei Prokhorovich:  Yeah, for him, it’s free money. He can use it for business and development.

Matthieu David:  Let’s be more specific. What kind of company can get this grant, and what do you have to commit to for this grant? I interviewed an entrepreneur before who raised money from JD.com. Their office, even the technological staff, and what they do actually, they receive the grant, and they have to create the jobs. They have to stay in the technology park in China. And they have to create a certain number of jobs based on a business plan. What’s your experience with getting grants from the Chinese government as a foreign technology in China? This is something I don’t know precisely because the company he was managing is a Chinese company. As a foreign company, as a foreign technology in China or joint venture, when you get a grant, what do you need to commit on?

Andrei Prokhorovich:  Actually, for now, it’s going to be the same. It doesn’t matter if your company is established in China, even as a joint venture or wholly foreign-owned enterprise, if you establish a company in China and make some research and development. Of course, they have some requirements. How many people should work on the research and development department, and so on? But in the case from grant to grant, from province to province, and from program to program, it’s usually a little bit different.

Matthieu David:  Do you know the different programs all over China?

Andrei Prokhorovich:  We don’t know all of them but, as a foreign technology in China,  now we are working on that. I think until the end of April we’re going to have the list of most programs in China because we have to provide this as a service in the future too.

Matthieu David:  As far as I understand, you try to understand the environment in China, what industries can work – you talked about milk and a bacteria from Georgia, a company dealing with bacteria – and you look at the grants, the ecosystems, technology parks in China, and then you reach out to the companies which is mainly within Russia and CIS, to tell them, “Why not hire us in order to enter China’s tech market, products in China, and set up the Chinese presence or the Chinese factory for the world or to sell in China?” Is it your model? Is it how you work?

Andrei Prokhorovich:  In some cases, yes. Actually, I want to make clear one thing. We don’t do factory setup. We’re helping to construct because, for example, some hardware project is coming to China. They produce, for example, some kind of hardware product. I don’t know, it’s a robot, or it’s a drone or whatever. So they have some really important parts. They have intellectual property, and they have the know-how, which they don’t want to open the other companies. So the goal is to find reliable producers in China who already produce some parts. Like for example, it could be 10 different factories that produce different parts of the product, and then we make one place where we set it up. We combine it together.

Matthieu David:  Assemble.

Andrei Prokhorovich:  Assemble the final product, yes. So over there we hold the know-how.

Matthieu David:  I was talking with a big firm, and they were telling me that a lot of foreign businesses are mainly about assembling different products in China and then exporting those things within China’s tech market. But not producing every part, it’s mostly assembling.

Andrei Prokhorovich:  Exactly.

Matthieu David:  I get more and more clear about what you do. The thing is I’m still uncertain about how you can manage so many things. You’re 20 people in your team. They have this core competence of regulation, know how to assemble, or they knew how to find the right people. What’s the model? You coordinate to find the right people, find the right partner, or is everything internalized, which must be very hard?

Andrei Prokhorovich:  Most important in what we do – actually, in some cases, our company is the same. We sell information; we sell knowledge. That’s the most important thing. Because most of the companies in Russia, actually in other countries too, they don’t know how to work, how to manage your business in China. They don’t even know how to introduce China’s tech market. So what do we do?

When the clients come, we’re checking their technology. First of all, checking in China. Because maybe there is some competitor technology which, unknown in the Western market, already exists in China. So we check the SIPO, it’s an administration of the intellectual property in China. We have full access to this database. So we check the patents, copyrights, trademarks, and so on. So first we check this part.

Also, of course, we check the market. Then we go further. They’re making some legal research because some of the foreign technologies in China are prohibited. I mean not technology – international investments, foreign investments in China.

Matthieu David:  As you said, it is encouraged so that it can be 100% foreigner. It is tolerated, and it is forbidden. For instance, agriculture is very difficult to enter, so most of it is forbidden. And of course, everything which you need to work on is forbidden for a foreign player, like in a lot of different countries, it’s forbidden for a foreign player to produce work in the country. So yeah, we have three different categories. First, you check that.

Andrei Prokhorovich:  Yeah. We check. Actually, China has four categories.

Matthieu David:  Okay. What’s the top one?

Andrei Prokhorovich:  I don’t remember how to say that in English, but it’s prohibited, which we cannot do anyway in China, such as mobile telecommunication products.Or restricted, for example, car making. All the car producers, when they come through China, they share, give the 50% or sometimes even 51% of the shares of the company to China government companies. At the same time, they bring know-how, they bring all intellectual property, they bring their engineers, they teach local staff how to do these products. So it’s like a ticket to enter China’s tech market. Okay, two more. It’s when it’s allowed to do business in China. And one more, when it’s preferable when the government helps you with this program.

So which of these kinds of things? Because over there are also many, many details. Just like last year, we have an interesting case with – can I say the name or not? Maybe I’m not going to say the name of the company, but it’s a very famous company in Russia. It’s an IT project, very famous. It’s like one of the 20 best IT companies by the Forbes list in Russia.

Matthieu David: What kind of IT? Is it like CIM? Is it like Cloud?

Andrei Prokhorovich: If you don’t mind, I’m not going to say because if I say, I’m sure that all people will understand, but we have this strict NDA about this. I’m sorry. But maybe later, when we meet we will discuss this. The point is that it was very interesting.

When we check first the wall, is it restricted or allowed to come with such kind of business to China? It was allowed. But when we started searching more deeply, they would need to have some license for it.

Actually, I will explain its IT platform. They need to get some licenses such as ICP, AGI, and so on.And such a kind of license, just joint venture companies can get. Whereas at least 50% owned by the Chinese. So our mission is to understand how to bring this company to China.

If you give me one more second, not just legal research is important, because it’s much more important to get feedback from the Chinese experts. And this was your question, do you find the people? Yes, that’s what we do. For the whole time of our job, we build up big networking of the Chinese experts. We have more than 200 Chinese experts who work in different fields, technology fields as AI, biotechnology, medical technology, big data, and so on. So we have the experts who work in this business in China. So we can come to them and get their feedback about foreign technology in China.

Is it acceptable? Does China’s tech market need this technology or not? And then we build the strategy – how to soft land and land this company in China, how to scale, or maybe we need to go straight to some strategic partner to scale much faster. Your example was about JD and the company who got the grant. It’s a great opportunity for scaling in China if you have a partnership with JD or Alibaba or Baidu, such as big companies.

Matthieu David: You say, 200 experts. How do you interact with them? Because you don’t hire them, right?

Andrei Prokhorovich: No.

Matthieu David: They are experts. How do you keep in touch with them, make sure that you keep the connection? Because you don’t always have a product for them, how do you enter the relationship and the connection?

Andrei Prokhorovich:  Sometimes it’s friendship, first of all, yeah. Maybe it’s the position of my life to make more friends as I can.

Matthieu David:  There in Yantai?

Andrei Prokhorovich:  No, no, no. All around China, yes. All around China – Shanghai, Beijing, Shenzhen, everywhere. We cooperate a lot with Guangzhou province. It’s Guiyang City because the center of the big data in China is Guiyang. Like at the end of May, we’ll go there, we meet with somebody, the companies, and not just the companies, with some government people, officials over there, and we cooperate with them a lot. This end of May, I will bring there eight Russian projects. Different like it’s virtual reality, artificial intelligence in China, big data projects, new retail projects, and so on.

One more thing about interacting – you asked me. You see, in some cases, we copied their venture capital. Look at the venture capital companies. The company who manage, for example, USD 100 million, like an investor, or usually about three to four people manage this. All other people who consult them, it’s the people who outsourced, or it’s the experts. It’s a networking, which works with them, cooperate with them. Sometimes you can pay them; sometimes you can motivate them differently. So in some cases, we copy this model.

Because we also see the future of the company, we are thinking about establishing the venture fund in the future who want to invest in the projects which come to China’s tech market. Because actually now, we’re not ready for this. Anyway, as a foreign technology in China, we are learning more and more about China and how to work here, and we need more successful cases here. But when are we going to be ready? Yes, we have that such kind of plan.

Matthieu David:  Okay, let’s talk about specific cases. You began to talk about Dodo Pizza, but I am on your website, and I got a print screen of your portfolio, SkyEng, Hudway, PharmZnanie, BIOTEX AGRO, UNA Wheel, CG Bio-Med Research, “UralArm” Project Group. Could you tell us what you did for a couple of them, the ones which would be a good illustration of what you do?

Andrei Prokhorovich: Okay, let’s start with my favorite one. This project, I start talking about it, but I didn’t finish, it’s Dodo Pizza. Actually, it’s an IT company who’s making pizza. For now, the company has more than 70 IT developers who build Dodo IS (it’s like Information System), who manage the whole business. It’s very interesting. In the core, it’s an IT company. The final product for their final customers, if we talk about B2C, it’s a pizza. But IT system helps to manage all the processes. Yes, I invite you to visit us because I think maybe next month, we have the grand opening of the new pizza shop.

Matthieu David:  In Yantai?

Andrei Prokhorovich: No, no, no. In Yantai, we have one. We opened in Hangzhou, in downtown. It’s a very good place. We opened a new pizza shop which doesn’t have cashiers. You cannot pay by cash or cards there. That’s all. And also, we’re implementing the Artificial Intelligence in China for quality control and such kind of things. So, it’s an interesting new retail format. So, I invite you.

What did we do with the project? In 2015, we started cooperation with this project. My team and I started preparation of the strategy on how to bring the company here. We started from market analysis. We analyzed the market of the pizza and who we’re going to compete with, and how we need to change the recipe of the product to the customers.

Then we localized the IT system here. It’s also an interesting story because you need to use local systems, and so on. We localize their system; we adopt the product. We established our company here, and in 2016 we launched the first pizza shop in Yantai for a market test. And the format which we started here, actually, it’s acceptable in all countries where we work now. For now, Dodo Pizza works in 12 countries.

Matthieu David:  In Yantai, can you give us a bit of an idea of how big the shop is, how many clients you’ve got every year within the shop?

Andrei Prokhorovich: Okay. I will tell you the maximum work we have. We have about 200 orders a day. It’s not that much. The revenue is pretty small. The maximum revenue which we get, it was about 250,000 RMB a month.It’s not that much. Actually, it’s a very small amount of money.

The pizza shop is pretty small. Its totality is 110 square meters, including the kitchen, so it’s small. Anyway, the point is that the format which we started here is not really good for China. Yeah, we became profitable on the seventh month after launching –

Matthieu David:  Which is very good.

Andrei Prokhorovich: Yeah, which is very good for this kind of project, but the return of investment is very slow, very low. So we need to change something.

Matthieu David:  I see. So what you are saying is that you are cash flow positive. Meaning, you cover your costs. After seven months, but because you don’t have a big or high margin, it will take a long time to pay for the first six months of investment plus the initial investment you have made. Is that what you say?

Andrei Prokhorovich: Exactly. Our business model is not just a corporate chain. We also plan to franchise. And for this, we need a lot of potential Chinese partners who are going to be a franchise, who’s going to buy then pay us a royalty, and they will be happy in the future. But if ROI is pretty bad, then they’re not going to be happy, and our brand is not going to boom.

So we changed the format. It took us two years to collect that data, to understand what we need to change. Last year, we made a new strategy. We changed everything. And now, this pizza shop will be opened in Hangzhou in one or one and a half months.

Matthieu David:  Wow. Nice. Can you tell us more about what’s specific for this pizza restaurant? You said it’s an IT company. Does it mean that you have very few people in the shop? Does it mean that everything goes online and you can deliver? What do you mean to be an IT company at your pizza restaurant?

Andrei Prokhorovich: Yes, there is an IT system which helps you. It’s collecting all the data. It has very friendly interfaces for the workers who work in the pizza shop, on the employees. And of course, it’s connected to some systems for delivery, so it’s an auto format. There’s a bunch of things I think I can show you how it works in reality. If you come to the pizza shop, I’m going to show you how it works.

In the future, of course, we’re going to implement much more innovative things such as AI, as I told you before, it’s already tested. We trained the MiraLink in Russia, and we will implement it in a Chinese pizza shop. Short explanation: every pizza is coming out from the oven should be checked by the shift manager if the quality of the pizza is good enough to give it to the client or not.

Anyway, it’s seconds. It’s a time of the manager in the pizza shop. So we put the camera with MiraLink which was trained and understand which pizza is good enough, and our standards make it, or it’s not good enough, and it’s not made by our standards.

Matthieu David:  Okay. So, by visual – I don’t say facial because it’s not facing – but by visual recognition, you’ll know if the pizza is made of the ingredients you want to use, it’s big enough, and so on. I see.

Andrei Prokhorovich: Yeah.

Matthieu David:  Is this already working in Russia?

Andrei Prokhorovich: Yes, it’s tested in Russia. Also, of course, in the big cities in China, if you stay in the place where there are lots of people coming to the pizza shop, you need to cut the time for their ordering and such kind of things, and China is really good at this. China, actually, now has lots of new business models which now we are copying. Everybody was talking before that China copy, and it was actually one of the biggest problems for us to bring projects here because the founders and investors, they are afraid of China. They said, “Oh, they will steal everything. We’re not going to go there.” So it was one of the biggest barriers.

But now, we see an absolutely different situation. China is making its own business models, so now we also learn from them. We also set up like a WeChat mini program for our Dodo Pizza, and so on. I will send you the link, so you will see how it works.

Matthieu David:  How do you work with Dodo Pizza? Do they pay you to operate and they hire you? Do you take equity in the company? Do you take the license in China? What’s the deal with such a company?

Andrei Prokhorovich: Okay. I have equity in the company, in the project – I mean in the Chinese part of the project because the company is now growing all around and I’m just in charge … not in charge. I used to be in charge because I used to do all of this project, but now we have the CEO of the project which also grew up from my first pizza shop. So in our first pizza shop, it was not just testing. It’s also for preparing the staff, the management of all levels. And now we had the people who grew up in the pizza shop; they are building a new detailed project. Now they have their office in Hangzhou.

Matthieu David:  Did you finance them with your own site or this company was able to actually pay for the start, for financing the lead, for financing the first job, and so on?

Andrei Prokhorovich: At the beginning, I financed that. In the beginning, it was my investments. Not big. It’s like about half a million and much more, about half a million USD. Then, from last year, the global Dodo Pizza office started investing in this project. And the next step, I plan to attract more investments for scaling, for growing a little corporate chain, like for example, 10 pizza shops, we can open in Qingdao or some other big city. And then we’re going to be ready for selling their franchise.

Matthieu David:  I feel that you have been very involved in this project. My question is, if you are as involved as you are on this product, Dodo Pizza, how can you have so many projects? Are you sleeping? Are you taking weekends? Are you awake all the time? How do you manage your company because I feel you are very involved with your projects? You can talk about them in detail.

Andrei Prokhorovich: Actually, I’m not involved in all projects totally. Anyway, some projects I’d prefer because I invest there. Some projects we work with, and we consult them, but we have a team who do this job. I’m just building up a strategy way, strategy vision how to work with these and where to go, or which connections we need to turn on, to which expert we need to go to finalize the strategy, or to understand how to work here or here.

About the sleeping, yeah, I sleep not that much, unfortunately. But I get used to. Weekends, well, for the last nine years, I’ve been on a trip with my family for fun just one time. It was last year. For nine years, I didn’t go anywhere. I just work, work, and work.

Matthieu David:  And you went to Qingdao?

Andrei Prokhorovich: Good joke. No, we went to Turkey.

Matthieu David:  My question about how you manage your company is that I understand you invested in Dodo Pizza, so I think you may have been much more involved in it. But how can you scale your business if you are so involved in the project?

Andrei Prokhorovich: You need to prepare for the team. The most important is the people. Every business is always about the people; you know that. So our focus is to find and prepare the right people, one of the focus on every business. Because if we talk about the SkyEng, it’s just a consulting. We consult them on how to do this and this.

Matthieu David:  There are two of the projects. SkyEng is purely consulting. Do you have another project where you were very involved in the operations in China?

Andrei Prokhorovich: Mostly, it’s Dodo Pizza. For others, it’s consulting and different consulting. Some of them just need intellectual property strategy, so we are thinking about how to protect the intellectual property, so it’s not going to be stolen and so on, just sometimes to sell it. Because you see, technology transfer in China …

Let’s define what is technology transfer in China. For this, we need to define these two words. What is technology? It’s knowledge. It’s know-how. It’s all kind of intellectual property objects. What is a transfer? It’s a selling, buying. It’s licensing, sub-licensing, and franchising. So that’s what we do for most of the companies. We consult them how to take their foreign technology in China, how to soft land it, and find the right partners, hire the people inside, and find the right partners in China.But we’re not making the business development for them.

Matthieu David:  I see.

Andrei Prokhorovich: That’s why we don’t spend much time on this.

Matthieu David:  Talking about being in Yantai, I always say that if one foreigner was in a certain city, it could actually try to support a lot of foreign companies to establish in a certain city. For example, in Yantai, how many people live in Yantai?

Andrei Prokhorovich: Yantai, if we talk about downtown, it’s about two million people. But if we talk about the whole Yantai, it’s about 7.2 million people.

Matthieu David:  That’s huge. That’s the size of Belgium. That’s the size of a country.

Andrei Prokhorovich: Yes.

Matthieu David:  So, you could actually be a Russian citizen to get all the businesses from Russia, and even maybe much more businesses from overseas and so on. Do you think there is a strategy for you to say, “I am the Yantai guy, I am the one you need to go through who are going to really have the connections, understand Yantai, to be in Yantai and develop in Yantai”? Do you feel that that’s too narrow, there’s not much growth there?

Andrei Prokhorovich: It depends on the project. For example, if it’s going to be like some agricultural project like BIOTEX AGRO – you can see it also in my portfolio on the website, it’s an agricultural project – in this case, of course, Yantai is good because Shandong Province is an agricultural province and you can find a lot of customers here, find new customers. Also, there are some laboratories for testing the soil, and so on. So, in this case, yes. This is a good one.

But if we talk about big data projects, of course, it’s better to go to Guiyang because you know that China is growing by clusters, when it’s going to be the export-oriented economy, when they think about just to export. Remember there were cities, like the city which produce – I don’t know – suits, and the city which produces lighters, and so on. But now, in high technology they grow in the same way, like a city of big data, Guiyang; the city of hardware, Shenzhen; Artificial intelligence in China, mostly in Beijing; biotechnology is mostly in Shanghai, and so on. So it depends on the project.

In many cases, I advise, if it’s necessary to rent in Yantai because the costs are much lower here – the cost for living, the cost for the employees, costs for the rent, and so on. So for the first entering, for the soft landing, maybe Yantai. Not for all, but for some projects, it’s a very good position.

Matthieu David:  I’m going to surprise you but the first company I started, I was thinking of starting in Yantai. The reason is that there was a very famous French, Mr. Amber, you may know him, who was advertising a lot about Yantai, so I went to Yantai. I was in Beijing. I went to Yantai, met with him. And then I found out that actually, the help of the government was topnotch. Actually, it was pretty much the same process. The disadvantage I would have is that I would have to move everything from Beijing to Yantai. It would be more difficult for me to recruit people. It would be more difficult for me to be in an international environment where I could get more clients, it is easier for me as well. It was another business. Actually, it would be more complicated.

I have another friend who started a language school. He registered the company in Jinan because his wife is from Jinan, and that’s so troublesome because they live in Beijing and they have to go for everything which is administrative, they have to go to Jinan. Not far from Beijing, but still they have to travel to Jinan.

I understand the cost, but at some point, you also need to have access to China’s tech market. Also, you need to get access to talent, and a lot of talents want to be in Beijing, Shanghai, Guangzhou, or Shenzhen. I’m not saying there is no talent in Yantai, sure there are. But maybe they are expensive as it is in other cities because they are very scarce. The cost topic – I understand in terms of offices, I understand in terms of cost of living, but it has a downside which is the access to China’s tech market and the life of every day. What do you feel about what I’m saying now?

Andrei Prokhorovich: Yeah, I totally understand you. Talents, yes, sometimes it’s a problem to find talents here. But for this, if we talk about my company, we’re searching for talents all around China and Russia, and then Ukraine and wherever. Yeah, we’re looking everywhere, and some of them are coming to Yantai. After Shanghai and Beijing, we have the people who come here to work with me.

If we’re talking about the access to China’s tech market, it depends on the technology, and it depends on the product which you work with because now everything is online. A lot of my staff works online. Like for example, we have now in our company people who don’t like to work in the office. Productivity is much higher when they work at home or wherever they want to, but not in the office, because people feel uncomfortable when they’re staying with other people. Yeah, there’s such kind of people. And they see if I put him to the office, his productivity go down. If he’s sitting at home, his productivity goes up. So, why not work at home? I don’t care. I need the result. So, for me, it’s not a problem.

So we can work. Like for example, last six months I wasn’t in Yantai even more, no. I just came back to Yantai, and I’ve been here last time in August. So from August to March, I’ve been everywhere – Shanghai, Moscow, Russia, different cities, and so on, but not in Yantai. But everything is working. Like for example, one of the directors of the Eurasia Development now, he moved to Russia for, I think, maybe for one or two years. The other one, like chief operation officer, I think that we’re going to open the small office maybe co-working in Beijing, and he can move there. We can work this way.

Matthieu David:  I see. Talking more specifically of what Russia and China can bring to each other, Russia has been very strong in technology and the first country of being outside in the space with Sputnik. A lot of technologies have been developed in Russia. On the other hand, China is a big giant in China’s tech market, as we say, Artificial intelligence in China, and so on. Which field do you feel are the most promising between Russia and China in terms of technology?

Andrei Prokhorovich: Thank you. Good question. Mathematics. Russians are very good at mathematics. If you take a look at the Mathematics Olympic Games, for the last five years, I think Russians won from universities, guys from universities. So, it means that they are good in algorithms, also an AI algorithm. At the same time, Russians specialist is much cheaper compared to Europe or compared to the U.S. like big data scientists. These people cost a lot, and Russia has that. But actually, let’s talk not just about Russia. If we talk about Artificial intelligence in China, it’s also Belarus. They have lots of interesting projects and lots of data scientists and AI researchers who work in Belarus.

Of course, Russia is a big market. We focus on that, but for the future, we think we need to go global. Because anyway, you see most of our clients is the startups. I mean the startups, not the early stage, the startups of the late stage, like after round A, and so on, who already have some money and can pay us for consulting.

In this case, we need to take a look at all over the world because the U.S. has much more startups. But at the same time, some of them want to enter China’s tech market, and they also don’t know how to work in China. We already have the client. Actually, they are from Russia, but it’s already an American company. We have two clients like that.

Matthieu David:  I see. You are mainly working for foreign companies entering China. I believe that you have tried to or thought about already supporting Chinese companies going overseas, Russia maybe most specifically. Some Chinese companies are doing very well in Russia – VHK, AliExpress, for instance, for the Russian market. Have you already begun on serving Chinese companies to go to Russia and do you have cases to share with us?

Andrei Prokhorovich: Actually, we started to think about this back in 2014. 2014 we started to think about this. We went to some Chinese companies and said, “Hey guys, we can make scouting for you. We can research and find some technologies, products, and startups. You can come to China which you can acquire or whatever.” But Chinese companies which we found at that time, they weren’t ready for the pay for the service. So we said, “Okay, maybe you need more time.” At the same time, I see that it’s a huge potential. It’s just incredible. How many Chinese companies in the future can go overboard, especially to CIS and Russian market? I see these and, as a foreign technology in China, we are preparing a platform for this. We’re not serving these – 

Matthieu David:  Not yet?

Andrei Prokhorovich: Not yet. This year, right now, we have a negotiation with the Chinese company. It’s a big Chinese company. It’s already unicorn. We have a negotiation with them, and maybe next week we plan to sign the contract. Now, we’re discussing and finalizing the details. If we do this, it’s going to be our first case when we go with a Chinese company to Russia. But now we don’t have such kind of cases.

At the same time, I feel that it will grow. China’s tech market will grow because you know the political situation in Russia. Now they have bad relations with Europe and the U.S., and because of this, technology transfer from the western countries to Russia is closed. Even if we try to remember, like in the 1930s, it’s a stallion. Most of the factories in the 1930s and 1940s in Russia were built up by the American and Europeans according to American – these technologies. And it wasn’t stolen. The Germans, French, and the U.S., even Ford. Did Ford supply all the projects to Russia? Yes, he sold it. But now, the western market is not selling the technologies to Russia. Sometimes like Siemens try to play this game or some other big companies trying to do this, but mostly it’s closed.

At the same time, we can see that China is growing. It’s becoming the technology superpower. Of course, some of the projects, some of the foreign technologies in China such as robotics in China, for example, because I’m sure that in a few years, China will be number one in the world in robotics, I mean industrial robots.

By the government plan, by 2020 they plan to build 50% of all industrial robots in the world, so it’s a big number. They already acquired KUKA. There were just three big producers in the world. Two of them are Japanese, and one of them is German, KUKA, and it’s already acquired by Midea. It’s a Chinese company. So they do a great job.

At the same time, Russia will need this. So yeah, we can play in this field. We can bring Chinese technology to Russia in the future. So, yes, we’re preparing.

Matthieu David:  Is it a big market enough for a Chinese company? I feel that when you talk about the French market to the Chinese company, it’s too small. It’s only 67 million people. It’s like the size of maybe even last. Russia is about 150 million. As I remember, CIS I don’t know, maybe 250. How many people in CIS?

Andrei Prokhorovich: Russia is about 146-148 million totally, and all CIS is about 250 million.

Matthieu David:  Is it big enough for Chinese companies?

Andrei Prokhorovich: It depends on your foreign technology in China and the company, of course. But the Russian market is also pretty hard. Of course, the European market is much better for Chinese and they, of course, focus on the U.S. and the European market. But the third largest market is Russia in this case. The problem is that the economic situation in Russia is not that good. So, yes, it depends on the product.

But for example, some medical products can be sold a lot from China to Russia. As I remember, Russia is importer number one of Chinese generics. I should research this information. I’m not sure, but Russia is a pretty big market for China in this case.

Matthieu David:  My last question, because it’s already one hour, how do you stay up to date? I feel that you have a lot of knowledge about the tech box. You tell me biotech is more Shanghai, Artificial intelligence in China is going to Beijing. You have all this knowledge about China. How do you stay up to date? Do you read in Chinese all this information? Do you read in English? Do you talk to people? Do you meet a lot of people? How do you gather all explanation and stay up to date?

Andrei Prokhorovich: My main mission in the company and maybe in my life is communication. I communicate a lot with all kinds of people. Yes, I talk a lot. Every day, I’m always on the phone or by Skype or Zoom meeting, and I talk, talk, talk, and trying to collect this information and make some strategies. Yes, this is what I do – communications. I communicate in English mostly. My Chinese is not that good. When I came to China, I knew just two words, which is nǐ hǎo and xièxie. The third word which I learned was gānbēi. That’s how my business started.

Matthieu David:  Do you have to drink a lot in China?

Andrei Prokhorovich: I used to. Before I came to China, I didn’t drink a lot at all. But Shandong Province is the most drink – 

Matthieu David:  You do it for business, right? Is it for business?

Andrei Prokhorovich: I used to do it, but I quit drinking in 2013. I don’t drink alcohol.

Matthieu David:  Is that accepted by business people in China?

Andrei Prokhorovich: Yes. Sometimes they look at you like this. But it also depends. On the south of China, they don’t care. They ask you one time, “What do you drink?” like wine, baijiu. If you say, “I don’t drink at all,” they say, “Okay, no problem.”

In the north of China, yes, sometimes they look at you like this like, “Why don’t you drink? Drink with me for respect,” or something. I say, “Guys, sorry. I don’t drink at all because…” I give them some reasons like, “I need to take care of my health. I am preparing for the kid” or whatever.

Matthieu David:  Yeah. I actually feel pretty well tolerated to be a bit different. In Chinese business, people are very tolerant of foreigners who have different habits.

Andrei Prokhorovich: The people in China changed a lot. For these 13 years which I stayed in China, people changed a lot. I meet a lot of Chinese who are open-minded. Such great people, like our chief communication officer, he’s a Chinese, but when I’m looking at him – sometimes I think he’s not from China because he’s more open maybe than me.

Matthieu David:  And maybe you have changed as well.

Andrei Prokhorovich: Yeah, probably.

Matthieu David:  Thank you very much for your participation in this China business podcast.  It was very impressivefor everything you’ve done. I discovered the company. I just want you to know that what I prepared, and to the interview, I’m very impressed.

I’m looking forward to meeting with you in person when you are in Shanghai, and maybe I would go to Yantai.

Andrei Prokhorovich: I hope to see you in one month.

Matthieu David:  Good. Thank you very much. Have a good weekend.

Andrei Prokhorovich: Thank you, Matthieu. Bye-bye.

Matthieu David: Bye, everyone, see you in the next episode of our China marketing podcast, China paradigm.

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

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This article Podcast transcript #32: A successful story in China’s tech market is the first one to appear on Daxue Consulting - Market Research China.