Rui Ma - Talking China
Rui Ma, co host of Tech Buzz China, stops by The Business Brew to discuss what is going on with China's current regulations. This conversation is nuanced, offers perspective on some of China's goals, and touches on a variety of subjects. The goal of the conversation is not to offer answers, per se. Rather, we are trying to help provide a framework of how to think about what the CCP might be attempting to achieve and help listeners think about how to analyze different Chinese competitive dynamics.
Rui has sixteen years of experience in technology and finance, spanning seed stage to pre-IPO investing, with a decade focused on China. She founded Tech Buzz China in 2018 to educate and consult investors, funds and entrepreneurs on Chinese tech companies products, strategies and trends. She previously worked at 500 Startups as an investment partner, and spent a decade in private equity and mergers & acquisitions roles at the Raine Group, Morgan Stanley and Merrill Lynch in both Silicon Valley and China. Rui holds a B.S. in Electrical Engineering and Computer Science from the University of California at Berkeley, and additional degrees from Tsinghua, INSEAD, UIUC and Harvard University.
We hope you enjoy this conversation with Rui. She has a great personality and is a fantastic resource. Please follow her on Twitter at @ruima and join her community at https://www.techbuzzchina.com/insider.
This episode is brought you by Koyfin, one of the fastest-growing platforms for financial data and analytics to research stocks and understand market trends. Check out Koyfin.com to see what a Bloomberg-lite, with tons of high-quality fundamental data and a powerful graph engine looks like.
+ Transcript
Bill: Ladies and gentlemen, welcome to The Business Brew. I'm your host, Bill Brewster. This episode is brought to you by Koyfin. Koyfin displays financial information simply and elegantly. It's one of the fastest growing platforms for financial data and analytics to research stocks and understand market trends. I discovered Koyfin thanks to their very passionate user base, many of which are my friends. Imagine a Bloomberg-lite with tons of high-quality fundamental data, a powerful graph engine that can show it all clearly, and a user interface that doesn't look like it was built in the 1990s. If you're an individual investor, research analyst, portfolio manager, or financial advisor, do yourself a favor and check them out. You won't regret it. Sign up for free at koyfin.com. That's K-O-Y-F-I-N dotcom.
This episode is timely. I moved it up the guest, Rui ma is a China tech expert. She is the host of a popular podcast called Tech Buzz China, and I recommend that you all check it out. I have been asked many questions about China and I have no opinions really worth sharing many unformed thoughts, probably none better than any of yours. So, I invited Rui to come on the podcast to try to fill in some of the blanks, and I hope that this conversation is a good one for you all to listen to is informative, it helps color some of the articles that maybe you've been reading lately, and I think that you're going to see a very uplifting energy in Rui. She's a heck of a person, and I'm lucky to have got to meet her, and I'm thankful that she came on the pod. As always, none of this is financial advice. All of the information contained in this program is for entertainment purposes only. Please consult your financial advisor before making investment decisions and do your own due diligence. So, with that out of the way, Rui, how you doing today?
Rui Ma: I'm doing great.
Bill: I'm very excited to speak with you. We met not that long ago in LA at a very nice day. I've been ruminating on that day about win-wins. That's been my big takeaway.
Rui Ma: Yes, me, too, and about giving back to the community as we are doing now.
Bill: That's right. Well, I appreciate you coming on my show to get back to my community. Some people, I’m on another podcast called Value: After Hours. Then they write in and they ask me questions about China. No matter how often I tell them, I have no idea what I'm speaking about, please stop asking this question. They continue to ask the question. So, I am hopeful that you can give some intelligence to my listeners that I am unable to deliver, and I know you'll be able to.
Rui Ma: Thank you. I hope so as well. I saw some of the questions, then they are very interesting indeed.
Bill: Yeah. Well, we'll stay away from some of the stock stuff. But I'm interested in kind of your take on a lot of things. We'll get into that. But do you want to give people a little bit of a background on who you are and what you do?
Rui Ma: Sure. So, my name is Rui. I am right now based in the Bay Area in Silicon Valley. It is also where I grew up. So, I was born in China, but I immigrated to the states with my parents when I was eight.
Bill: Did you speak English at that time?
Rui Ma: No. I took elementary English lessons as one does, but I could barely speak anything. I really didn't understand a word when I arrived.
Bill: Wow, that's got to be wild. My wife didn't speak English until she was six. She spoke Polish. Talking to her, she always felt like she was like behind in school, but she was always working really hard. But she didn't understand what was going on around her until she was like eight or nine and you are even further. Fine, in that way.
Rui Ma: Yeah. Eight and I was already in fourth grade, because we started off in South Carolina, where there were not a lot of immigrants, so there was only one ESL class, English and Second language, and even I was a fourth grader there was just one class. So, I was stuck with the first graders and we were just like dancing, Simon says.
Bill: Oh, that must have been tough.
Rui Ma: [laughs]
Bill: I'm serious, because you're like a fourth grader, but in the first-grade class, and no offense to South Carolina, but I'm not sure it's the most accepting culture of that kind-- That's wild. I didn't know that obviously.
Rui Ma: Back in 1989, yes. I think, there were definitely less than 10 Asians in the whole school. It might have been just me and my two friends actually.
Bill: Wow.
Rui Ma: So, yeah.
Bill: Well, at one point did you find yourself feeling truly assimilated?
Rui Ma: I think that's something that personally don't necessarily try to go for assimilation in any culture. But I think I feel very comfortable here in the US. Probably started--
Bill: I guess I should have said, comfortable as a child where you are in.
Rui Ma: [laughs] Comfortable as a child.
Bill: I didn't mean like [crosstalk]
Rui Ma: Yeah, like the [unintelligible 00:05:32].
[laughter]
Rui Ma: I think where I really probably started feeling very comfortable was probably eighth grade. When we were reading Shakespeare, and then it started to hit me that no one else understood it here-
Bill: [laughs]
Rui Ma: [laughs] -and I was like, “Oh, yes. We're all on the same page when it comes to English fluency, proficiency” with Shakespearean English.
Bill: I like that. That's funny.
Rui Ma: Yeah.
Bill: Very cool. Okay. Well, we diverted a little bit. So, you came to America.
Rui Ma: Right. Then went to school here. I'm probably older than you. I just turned 40 this year. [crosstalk]
Bill: I’m 39.
Rui Ma: Okay. Close, close, close.
Bill: Yeah.
Rui Ma: We're the upper bound of millennials and I went to school during the dotcom boom and bust here at Berkeley. So, pretty much stayed in California and moved to China in 2007 after working for three years in investment banking really for personal reasons. No particular-- I didn't actually want to go to try out my top city choices were New York or London. I was really obsessed with London. I don't know why.
Bill: London’s cool.
Rui Ma: Yeah, maybe-
Bill: Yeah.
Rui Ma: -it was all the Shakespeare, the affinity I felt for Shakespeare.
Bill: [laughs]
Rui Ma: I just ended up in Shanghai, and I stayed there for eight years actually working mostly in investment roles in real estate media and technology. Then moved back at the very end of 2015, continue to go to China the next year. So, really, really no wash my hands of China tech at the very end [audio cut] of 2016, I was intending to do something else entirely, but got sucked back in to do this podcast called Tech Buzz China, really, again, for fun as a favor to a friend. Because we were talking about how to grow his audience. He was building a website at a media called Pandaily for trying to tech for overseas readers. And got sucked back in, but all the companies and stories I was talking about was really interesting and actually way more interesting than what was taking place when I was working in China, even though, only two years had passed.
Then just gradually got sucked in more and more, so, now I'm working on a full time. [giggles] I have a community for investors and operators, but I think it's really probably mostly investors. We have in the community focused on China tech.
Bill: That's cool. I remember the first time that I heard your podcast, I think it came out somebody on Twitter. Would it make sense if it was like early 2019? Are you recording for them?
Rui Ma: Yeah, probably. We started in April 2018, I think.
Bill: Yeah. Then I was like, “Oh, this is awesome. This is somebody talking about Chinese tech in a nuanced way, and I can actually understand it.” Then it was off to the races.
Rui Ma: [laughs] Yeah. Although I haven't updated the podcast for a while.
Bill: Well, that's okay.
Rui Ma: [laughs]
Bill: I did notice that when I was trying to figure out your current-- what's currently interesting to you, and I saw you did something with the people that acquired, and then there's some other ones out there. But it was hard to find the last one. Well, [crosstalk]
Rui Ma: [laughs] Yeah. It was back in May. We do have some episodes coming up, but it just takes a lot out of me to you research, and script, and well, ours is all scripted completely opposite of this conversation. Yeah, and we basically, it just takes me a long time, and I've been really, really busy with our community. So, I write very regularly for the community.
Bill: Where can people go if they want to join the community?
Rui Ma: techbuzzchina.com/insider. Actually, everything we do is on the website. So, all the past podcast transcripts, etc., as well. I'm actually someone who doesn't listen to a ton of podcasts. I'd like to read more. So, I'm really obsessed with having accurate transcripts for everything we do, because I like to use search and jump around.
Bill: Yeah, it's interesting that you say that it takes a lot out of you. I find like I had to take a break and I don't know there's something about it is very draining to record something and then to have the pressure of having them come out a lot. I don't know. I like doing it quite a bit. There's obviously something that I enjoy about it to do it but it's not-- It is draining. It takes a lot of [crosstalk]
Rui Ma: It is. Right. It is. Yeah.
Bill: Then you took a bunch of investors to China in 2019, right?
Rui Ma: Yeah.
Bill: Friend of the pod, Sean Stannard-Stockton was on that.
Rui Ma: Yeah. Oh, yeah. Sean is great. He reached out to us and was basically like, “We don't intend to invest in China. We don't have any investments for China, but we think China is really important to understanding how the world is going to evolve and directly impacts stuff in our portfolio. So, our friends went there had this great trip, we're really envious. Can you take us there?” Initially, I was like, “No, not a tour guide.” [laughs] But Sean introduced us to members of MOI, Global Manual of Ideas, and we were able to get together a group of, I think, it was 15 investors. 15 really great ambassadors. It was an amazing trip. We actually still talk in this WhatsApp group that we created-
Bill: That’s cool.
Rui Ma: [crosstalk] every day. Yeah.
Bill: Shoutout to MOI. Do you know, John?
Rui Ma: I do not know John, but I want to say I'm really inspired by the community he's built. In some ways, what I'm doing a Tech Buzz China insider is a very, very small version. Tiny, tiny, tiny version of what he's done. I actually tell people, even though, I'm not personally part of the community, I tell people about my respect for the community, and what I observed firsthand the camaraderie that mutual respect, the very open sharing, and how much people identify with each other because of their affiliation with this community.
Bill: Yeah, Manual of Ideas is, you know what it is, there's no assholes. It is a bunch of people that I look up to them as individuals, and I think that they are a very thoughtful group of investors and people, and I agree with you. He's cultivated a very solid following. There's not a ton of members. I’m fortunate to be in it. It is a bit inspiring, I'll say. There you go, John. You inspire me, if you listen which I think you maybe.
Rui Ma: You inspire me, too. [laughs]
Bill: All right, so, to frame a little bit when we were talking in LA, there was the crackdown on education tech, right? Is EdTech is correct, is what the crackdown was on?
Rui Ma: Oh, it was technically on after school tutoring. But a lot of those companies had raised venture capital funding and some of them order publicly listed. So, yeah. [crosstalk]
Bill: I thought what was interesting, because I'm an idiot when it comes to this stuff. So, I'm just going to ask you super first grade questions, and hopefully, you cannot think that I'm too dumb.
Rui Ma: No.
Bill: So, one of the interesting conversations, can you frame a little bit about what those education companies and what the culture of after school education was like in China before the crackdown?
Rui Ma: Before the crackdown, so, to give you some context basically, China is culturally a society very much values education, and the entire K TO 12 system is really to gear you to be prepared for the college entrance exam, which is the one grade level playing field. No matter who you are, you are taking this one exam. Well, I guess it's actually not a uniform exam. It differs from province to province, but they're largely the same level of difficulty etc., and based on your score really determines where you go to college. In China, it's really important where you go to college, because [unintelligible 00:13:32] networks are, I would say, much closer than even here in the States, and it really determines where you get work. Because, much like in finance, you have target schools. In China, it's even more I think, a lot of the job ads are geared towards specific grads of certain universities, etc. So, it really determines the trajectory on which the rest of your life depends.
What was happening was that, this is an extremely competitive exam. It's only one shot right for couple of days, and you just do it once, and it doesn't matter what your extracurriculars and your grade point average, or whatever it is. It's just everything is based on this one exam. So, people prepare like crazy for it. In order to prepare like crazy for it, they try to get into the best public [unintelligible 00:14:17]. But they get to the best high school, and then in order to get to the best high school, they actually have to test into the best middle school. So, it's this whole system where it's like, you were taking tests in order to qualify for the best instruction that ultimately prepares you for this one college entrance exam throughout your whole life. So, it's very, very, very stressful.
In order to get a leg up, you do a ton of after school tutoring. What was being distorted in the market was number one, not only was the after school tutoring super intense. So, people are studying, kids are studying till maybe midnight every day like 11 PM very normal. Every day. It's like six days a week. I did a scholarship and try to and the regular schedule, if you're in high school with six and a half days of study, you only get one full day off a month. Every day, you're starting from 7 AM and ending at 11 PM. Just pure studying like nothing else.
For the after-school tutoring that was taking place, not only did people perceive this to be necessary for their kids advancement, but they were spending a ton of money on it. When they were spending a ton of money on it, it started to distort the market, because as teachers realize like, “Oh, hey, I can get more money tutoring kids.” So, some of them left to go become tutors or others did even worse, which is they just didn't teach the things they're supposed to teach in class. They would say, “Hey, you should come to my tutoring class after your tutoring sessions after school where I can help you understand what's going on in class.”
Bill: Oh, that’s messed up.
Rui Ma: Yeah. In reality, they weren't actually teaching. Of course, for you to get a good test score and for you to excel in class, you have to attend these. Even though, they were voluntary on paper, technically, what was happening was it started becoming some kind of compulsory situation. If you look at China, China has a-- and I'll just I'm just giving you the background on why this was [crosstalk]
Bill: No, I really appreciate this. This is helpful.
Rui Ma: Yeah. So, it's really expensive. If people were felt like, they had to do it or else they could not or their kids were not going to succeed in life. It became a huge expense. So, I’ll give you an example. They did a survey of Beijing. So, Beijing is the one of the richest cities in China. So, you can't use this number for elsewhere in China. But in the city of Beijing, they did a survey, and parents were saying that, they were expecting to spend over 400,000 USD on their kids from zero to age 18. About half of that or maybe a little over half wasn't like real estate. Buying real estate in the right school districts.
But then the other half was like in was a lot of it was towards after school education. So, you can imagine, this is a great burden to parents, and it was having an effect on people's willingness to have kids. There's a population demographic crisis in China right now, where the birth rate is dropping precipitously. So, it’s not anyone near replacement rate. So, the government's naturally quite worried about this. Of course, from the welfare perspective of the parents, they don't have the parents be stressed out. But again, the consequences of that are having kids, which is not good for the state. So, that is really the main reason for the after school tutoring crackdown, that influx of capital, because everyone wanted to be to for their kids to have a leg up. But there's so much capital that flowed in that it was really distorting the situation. Middle class, you, average middle class, citizens were feeling like they're practically bankrupting themselves to send their kids to school.
Bill: Yeah, and especially in a scenario where they-- you spend all this money to get into the right school district, and then the teacher isn't even really teaching at school, because they're trying to sell the after-school service. That's like particularly burdensome.
Rui Ma: Yeah, they have to actually outlawed that behavior. It's weird. Again, if guidelines had to come out and say, this is illegal, you know that it was happening sort of scale.
Bill: Yeah.
Rui Ma: Yeah, this happened a few years ago. But again, some teachers are still doing it. I wouldn't say that's the main behavior in 2021, but that was certainly a factor that was going on in years past. [crosstalk] I just gave you an example how bad it was.
Bill: So, why was this year the year that sort of the headlines happened across my computer screen, and the EdTech crackdown, and stuff like that? What happened recently that brought it to the forefront of people's attention?
Rui Ma: Right. So, it's always been discussed as China wants education to be a public good. So, K to nine, which is compulsory education is free. In high school, it isn't very expensive. In college, it isn't very expensive. It's nothing like what we have here in the US. So, it's meant to be a public good, and after school tutoring, again, was making it in effect, like an actually very expensive thing to educate our kids, to educate people's kids. So, that's always been an issue.
But I think it was really again, brought to the forefront because of the census data. So, China does a data census every decade just like we do here in the US, and the census data really showed that the population decline was probably worse than people were expecting, and the government really-- I think it's not necessarily the government jobs often realized it was more like, okay, based on this data, things that we have been preparing for a while. Now, we really feel like we have the political will, the consensus to really push it [crosstalk]
Bill: That makes sense. Now, it's not just a feeling. Now, we've actually got something to point to.
Rui Ma: Yeah, I would say it was not a feeling. Anyway, it was already like data, but it was more like, this is the straw that broke the camel's back, basically, one additional data point that just made it like, “Okay, guys, we can't deny this. We really have to do something.” You could argue that the action they ended up taking, which is making all the after school tutoring programs then to nonprofits is somewhat drastic or I would use the word, draconian. Maybe that wasn't the necessarily the right action to do. But it was pretty clear. Again, hindsight is 2020 that some action was going to be taken.
Bill: Okay, that makes sense. Then the other big thing that's come across my screen recently is, is the gaming crackdown or how would you describe, I don't know if crackdown is the right word, but how would you describe what's going on in gaming, as my kids sit behind me and play Minecraft, which maybe they should be subject to some of the same rules?
Rui Ma: Yeah, first of all, it was really hilarious to me. I'm not a parent yet, and it's was really hilarious to me how many Western parents were in favor of the-- [crosstalk]
Bill: Yeah, I was like, I want this.
Rui Ma: [laughs] Yeah, I personally thought it was really harsh, but everyone was like, “Hey, you wait until you have kids, then you'll really understand.” So, the gaming crackdown that you're talking about is specifically a minor. So, under 18, now can only play three days a week, Friday, Saturday, Sunday, and other holidays from 8 PM to 9 PM. So, that's three hours total a week. The way they're going to force it is basically, it looks like at least the way 10 cents enforcing it out. It's probably how everyone's going to enforce it, they're going to use facial recognition. So, your gaming accounts tied to your real id which has your age on it, and they're going to basically, if they think that you might be a minor playing, they're going to force you to swipe your face, basically, move your face around in front of the camera and verify that you are the person playing in that way catch minors who might be abusing or trying to skirt around the rules. But that is the gaming cracked out.
Bill: I liked your tweet the other day, what did you say? It was last night. What did you say?
Rui Ma: [laughs]
Bill: That you read a story about like, it was some grandma swiping her face in order to let her kids play or something.
Rui Ma: Yeah. No. [laughs]
Bill: [laughs]
Rui Ma: It was the top tech story in China, and it was all over my feet. It was hilarious. It is basically, there is someone had been playing at 3 AM a couple days in a row, and then one day, they had gotten a Penta kill, so, like five kills in a row which was in Dota 2. Then this person, but basically people were like, “Okay, this has to be a little kid playing or some team playing,” I guess the assumption is that teams are really good at this game. But my observation I think is true. [laughs]
Bill: Yeah. grandmas probably aren't on average.
Rui Ma: Yeah, exactly. They were like, “Hey, Tencent said, you guys, this is clearly a kid play. You guys are not really observing the rules.” Tencent went and looked at it and said, “Hey, based on the information that you've given us,” because someone had taken a screenshot of that account and stuff. This is actually a 60-year-old grandma. I don't know if she's a grandma but a 60-year-old female playing, and this person has swiped a face to verify that they're the player 17 times in the last couple months.
Bill: Wow.
Rui Ma: So, basically, they were like, “We've done everything we can to verify that this is not a minor.” On the off chance that this is someone's grandma swiping their face for their grandkid. Please stop doing it. That's not what you're supposed to do. So, that became the biggest-- [crosstalk]
Bill: But also, if it’s not swiping it for your grandkid, good for you for being so good at Dota 2. That's dope.
[laughter]
Rui Ma: Yeah, all my friends are like, “Hey, she should go and open up a gaming livestream and become an influencer.”
Bill: Yeah, she could be on Twitch, or something, or whatever the equivalent is and she could just be the really cool older woman that just gets Penta kills all the time. That would be super fun to watch.
Rui Ma: I had never heard of the word Penta kill until I’ve seen [crosstalk]
Bill: I had neither but I'm going to start using it.
Rui Ma: Yeah, Penta kill.
Bill: Yeah. If I don't watch out, it might be in my portfolio for my bad stocks.
Rui Ma: [laughs]
Bill: But anyway, I digress. Within that context, it seems to me that if you were to be charitable to the government, you would say like, they're looking out for children's interests. Maybe to the Western world, it's heavy handed, or like you said, draconian. But I guess the thing that is hard for me and you had actually said this, I believe in another tweet that the people that are informed about China don't really have strong answers on what's going on, but it seems like a lot of the uninformed people are convinced that they know.
Rui Ma: [laughs]
Bill: Do you mind expanding a little bit about that? Because it seems to me that the more that I learn about it, the more I'm like, “Okay, I know, I don't know anything about this.” What do you think about what I just asked, and then where should people maybe start to try to get more informed?
Rui Ma: Okay. So, two questions. First, about the government's gaming restrictions. I would say, yeah, overall, China is very protective. Some people use the word paternalistic about the youth, and it is something I think quite cultural. I'm just reflecting on the fact that I spent half my childhood in China half in the US, and I don't think there was this sense in the US or at least it wasn't part of the propaganda that you're a minor, and you're the youth of China, and you're expected to create the future. Maybe people say that, and so marketing speak. But in China, this is very much taught to you like every day, you're the future of the country, and the rest of society, it's their job to make sure that you as children, as you get the best resources. Everyone's happy to basically sacrifice for you so that you can become the best you can be for the sake of society, for [crosstalk] country. I don't think that senses really here.
Bill: No, I think here we say, let's leave it to the parents and see it all turns out.
Rui Ma: [laughs]
Bill: For real, that's the philosophy here.
Rui Ma: Yeah. So, first of all, the sense of ages, I think very, very much more apparent. In Asian societies in general, and especially like youth, people really, really try to devote a lot of resources to youth. If people feel like it's their response-- people, I mean, just everyone else in society who's not young, I feel like it's their responsibility to do something for the youth, and youth in general, not just their own children. So, that one cultural element is there, and then you have the fact that in regulation wise, China actually has a lot of restrictions for how minors use the internet. It's not just gaming time play, it's like, there's a lot of content that's considered inappropriate for youth things like you can't flaunt your wealth, because they believe that as a child, you're very impressionable, and they want to again paternalistically control your environment, so that you are not met with that influences what you are “vulnerable.”
Bill: Okay. What's going on with Chinese E-commerce? The creator economy and I've read about how many video self-produced influencers for lack of a better term are creating almost their own QVC? What's going on in E-commerce in that way in China relative to the US?
Rui Ma: Relatively, so the biggest thing that is in China that isn't here yet, and the US in a big way is live streaming E-commerce where I think most people are calling it live-commerce now. It is basically interactive QVC. It’s the home shopping where it's just one way maybe you can dial in. I guess, maybe QVC is somewhat interactive as well. [crosstalk]
Bill: Yes, QVC is very interactive. Thank you very much.
Rui Ma: [laughs] Yeah. But now it's primarily on your phone. You already see this on Amazon live, you see it in a couple of startups such as Popshop live, which by the way took their inspiration from China. But in China, it's a really big industry. I think it was something like $150 billion last year, and the top live streamers whose names are Via and Austin each had over $3 billion of gross merchandise volume GMV last year.
Bill: Oh, my goodness.
Rui Ma: Yeah, that's not net revenue, and I would [crosstalk]
Bill: Yeah, it's not their take rate or whatever, but it's what's going through--
Rui Ma: It’s definitely not their take rate.
Bill: Yeah.
Rui Ma: It doesn't count for returns, and sometimes these are promotions, like people maybe buy it and then don't even check out. They could still be counted as GMV depending on how GMV counted. GMV is a very squishy metric, but that's still pretty impressive because they're not one-man shops there, but there are one person in front of the camera. But they usually do have a big team. Via actually has 500 people.
Bill: Yeah, you would have to. You can't do that kind of volume without a team behind you.
Rui Ma: Yeah, absolutely. So, it's the hottest thing. So, TikToks owner ByteDance has a similar app in China called Douyin, and that is one of their big-- It is poised to be one of their big revenue drivers very soon. But they're already driving a ton of E-commerce volume through the platform. I would say that, actually just did a panel on live-commerce for Agora, which is the video company, real time video-audio company that powers some of these platforms. I do expect live-commerce to come here into the West. I think it's just slower than it happened in China for various reasons. I could go into if you want.
Bill: Yeah, I'd love to hear them. I’m a QVC investor [crosstalk] so, I can nerd out on this all day, but people are tired of hearing me talk about QVC.
Rui Ma: QVC. [laughs] Okay, very interesting. Yeah. I will say the reasons are, so, number one in China, you have infrastructure reasons. Really cheap physical logistics, that makes just E-commerce penetration higher in China than here. Then you have really easy mobile payments, mobile wallets that makes it really much simpler, a much cleaner experience when you shop just in general. Then you have the fact that the biggest player in this space, though, the one with 60% market share in China and E-commerce is Alibaba, and they really threw themselves in to live-commerce. I think without them throwing themselves so hard at this opportunity, it wouldn't have grown the way we've seen it happen in China.
Because in 2016, they basically decided they said, “Hey, commerce is great and all, but we really want people not to just only come here and search for things. When they think of it, we really want them to just come here and browse. We want it to be content.” So, they believe that the future of commerce is content. So, how can we make content? Well, at the time live streaming was already really hot in China as an entertainment like you can go watch people doing stuff on TikTok live streams. So, the entertainment live stream was already really hot. They said, “What if we could make that into an E-commerce component?” What happened was they not only fiddled with the what I would call the supply side, the talent side, they trained, earlier I mentioned the live streamers Via and Austin, they actually were part of efforts that Alibaba invested in to train these live streamers. Because not everyone, even if you're good at entertainment live streaming doesn't necessarily mean you're going to be good at shopping live streaming.
Bill: Yeah, no. It's like a very specific skill set.
Rui Ma: It's a specific skill set, and you need to also help them understand how to not only promote, but pick merchandise, negotiate with merchants, etc. So, they did, they invested heavily into that. They then also, of course, put it front and center in their app. So, it was literally in the middle of the front page of the app, after they decided that they were going to go heavily into it. So, on the user side, you couldn't avoid it, and then you're getting lots of promotions also, to use it. You would get special discounts to use during live streams.
Then they also made it a central part of the merchant experience. So, Alibaba has Singles' Day, which is the Chinese version of Black Friday except much bigger, and it's huge shopping event in China where every merchant like they were really is going to participate if they want to be big in E-commerce at all, and they made it a central part of the Singles' Day even in the first year. So, a lot of merchants were basically incentivized to experiment with it. So, they really filled every [crosstalk]
Bill: When was this timeframe? Sorry.
Rui Ma: 2016. Only five years ago. Yeah. You can think of it as Alibaba wasn't the first platform by the way, but they were beaten by [unintelligible 00:34:01] which is a very small platform, just by a couple months. Alibaba was really the most important platform. So, before then you can think of GMV in China and through livestream E-commerce is really zero. Then five years later, it’s like $150 billion.
Bill: That's crazy.
Rui Ma: Yeah. But again, because they put in all this effort and truly made it a strategic priority.
Bill: Yeah. If you look at what Amazon has done it, it feels I don't know that this is a true statement, but at least from the consumer standpoint that it's almost like an afterthought. It's not at the center of the homepage. It's not being pushed.
Rui Ma: It’s not at the center. I noticed that they started pulling it, I think up more and more. It is on the top tab. So, it is on one of the sections. But it's technically on the front page when you're on the PC. I think it's harder to discover if you're on mobile, but really you have to do-- What I like to say is, live streaming E-commerce people like to think like, “Oh, it's just uniquely Chinese phenomenon.” I don't think there's anything uniquely Chinese about it. It's not like people weren't trying to just love shopping on their phones or live streams. It's not part of the culture. It's because of all these incentives that people like Alibaba, again, the dominant, dominant market player invested in and put into the marketplace, and that's how they were able to accelerate it so quickly.
Bill: I don't think it's uniquely Chinese either, and I say that one because of my love for quality value and convenience also known as QVC.
Rui Ma: [laughs]
Bill: But so the psychological aspect of that business, the reason that I like it is, there are a lot of customers, I don't know that whether or not it's the majority or not. But they have this subset of super customers. They describe the host as family. I think that you probably experience from the podcast, people feel like they know you, when your voices in their ear. Now, you put some video on top of that, and it becomes part of your daily routine, and it's like, this host or salesperson for lack of a better term is like somebody I know. There's an emotional connection with these people. I think that that's human. If you study QVC, it's throughout geography. So, I don't think that it would be uniquely Chinese at all.
Rui Ma: No, not at all. It's just that, again, QVC has a little bit of a-- [crosstalk]
Bill: People think it's for old ladies. I get it.
Rui Ma: [laughs] But I don't know how it works these days. But back in my day when I'm old and back so when I was young, you had to call in. But imagine how frictionless it is on your mobile, especially, when if you have an integrated storefront and payment experience, and in the case of all the live streaming E-commerce apps in China, it's also gamified. So, the interactivity is not just from me being able to ask questions, but the host can also interact with me. They can throw me raffles. They can give-- In China, it's very common to give you home balls, so, red packets, which is basically cash. It is basically like a raffle.
Say, every five minutes, maybe I give out some free gifts or some cash. So, you're incentivized to stay there and participate and not leave. I do think also, that is one thing that is missing in some of the products I'm seeing. I think more and more people are incorporating it, but the time scarcity and the real time aspect of the live streams are much, much more present in the Chinese versions of the apps partly because the streamers are trained to use it, partly because the tools themselves have those functions. But yeah, I think it can absolutely work here as well and waiting for Amazon and other players to put it in. But right now, if you go to Amazon live, you can only chat on the side.
Bill: Yeah. Do you think that so part of the reason that a lot of people like to call in to QVC? It's funny to even say out loud. But I do love it. The part of the reason they call in is they want descriptions of the product, so, you're looking at something on television historically, and it's like, “Well, what is this basket feel like? How much can this basket take? Do you think that the logistics system in China gives it a competitive advantage? Maybe not relative to Amazon, but relative to history, because I've heard how long does it take to get your package from Alibaba and JD. I've heard its same day almost, right or even quicker?
Rui Ma: JD definitely less. JD is known for their logistics. So, it's less than 24 hours typically, it's usually like next half day if you order whatever before midnight, you get it before noon. Then they're now actually working on one hour and 30-minute delivery.
Bill: That's insane.
Rui Ma: [crosstalk]
Bill: I know, but it's just so fast to think about.
Rui Ma: [laughs] Yeah. But if you're not using JD, which is a premium E-commerce experience, maybe it's a couple days. But two days is very standard. We have it in Amazon as well. So, it's more that I think for China, it's not like the logistics, per se. I think they actually did surveys on why people like to buy on the live streaming E-commerce, and a lot of it is actually because of promotions.
If you think about it, the whole point of live streaming E-commerce is that, the transaction has to happen then. If it doesn't happen, then you might as well just be doing playing a video. So, how can you get people to transact right then. You have to get them to impulsively buy, and then if you want to get them to buy most like the easiest is to sell them something they already know, and are interested in, and maybe understand, or maybe already want to buy so a branded product they're familiar with, and then give them a discount. Give them a price they can't refuse.
Bill: Yeah. QVC does the Deal of the Day, and then they were like--
Rui Ma: Yeah, exactly.
Bill: And then they were OGs of BMPL. They've always had easy pay way before BMPL was a thing, they always had it.
Rui Ma: I know. We're just always repackaging the same concepts and-- [crosstalk]
Bill: Yeah, it's funny how the world works that way, but I do think it's really interesting. Is there a reason why China and this actually might tie into the VIE questions that you may get a lot? But is there a reason why like some of these Chinese platforms became so dominant like Tencent and Alibaba? I remember listening to some of your previous interviews and some things that you said about your days in venture capital that like there wasn't-- the industries there actually were or still sort of are starved for domestic capital. So, they needed external capital to come in. Was it like a race for money that they won, or is it just kind of like--? Why is the competitive landscape the way it is with these major super apps in general?
Rui Ma: Well, I think at least part of the reasons because there was lax regulation, and there were basically no antitrust rules. If you were Alibaba, you could do things like-- this is what they got fined a couple billion dollars for which is make people do so-called to choose one. So, tell a merchant that if you want to show up on our platform, then you're going to have to remove your stuff off JD, as an illustrative example. Please don't sue me Alibaba.
[laughter]
Bill: They just got fined. They don’t think. Yeah. Okay, it’s fair.
Rui Ma: [laughs] I guess, yeah-
Bill: Your talking theory.
Rui Ma: [crosstalk] probably pretty safe.
Bill: Everything's opinion here.
Rui Ma: [laughs] I think that is part of it. The other part of it is the fact that, yeah, if you were first to raise capital, outraised your competition, you could do pretty well. In the beginning, capital is pretty scarce. So, it was probably flowing towards the first-place winner and it just like snowballs from there. But I do think the regulations had a lot to do with it.
Bill: That's interesting, because again, as somebody that's very uneducated about this all. When I do read about it, it seems as though the majority of attention goes through a small number of platforms there, and I think that's probably just how the internet works anyway. Scale benefits accumulate to the winner, but I enjoy at least reading about it. I can't say that I'm knowledgeable about it at all.
Rui Ma: Yeah. I would say it's a little exacerbated in China, probably. Again, I agree with you. In fact that an investor messaged me and was like, “Oh, I'm really not a fan of these antitrust rules because monopolies, it’s only way internet companies can make money.”
[laughter]
Bill: I hate this competition stuff. I want to invest in monopolies. Yes, we get it, sir or ma’am.
Rui Ma: [laughs]
Bill: [laughs]
Rui Ma: Oh, so, I was like, “Okay, well.” I don't know agree with that necessarily. But again, it's probably some of these markets unless they're regulated our winner take most, winner take all markets, but you have the fact that in China, players were doing certain things that would definitely not fly in the US. So, gave you an example. This is still being resolved. This is literally being resolved as we speak hasn't yet happened where Alibaba and WeChat, which is owned by Tencent bitter rival like mutually ban each other’s. So, you cannot, for example, send a link to an Alibaba specifically to a Taobao store within your WeChat because the other person just will not be-- [crosstalk]
Bill: Wow.
Rui Ma: Yeah. So, you said this, like--
Bill: It’s like Twitter and Instagram, but not quite.
Rui Ma: Oh.
Bill: They're not quite as bad, but it was an integration. But it's similar.
Rui Ma: Twitter does not let me send a lot of links. But it also does let me send a lot. So, I don't know-- [crosstalk]
Bill: They don't. You can link but there was an integration. I think Instagram didn't like [crosstalk] full integration with Twitter link. So, it certainly would let you send the link. It wouldn't not let you send the link. That would be insane here.
Rui Ma: Right. Yeah. So, in this case, this is not what's happening. You actually would have to end-- So, there's a special function, it's not just an Alibaba, it's also ByteDance. I try to share a for example, Douyin video, I have to create this code that special for WeChat, and then paste into my WeChat, and then my friend will take this code, which is like scrambled, Unicode basically, and then go to the app, put it in, and then it will bring up the page I'm trying to send them.
Bill: Wow, and that's still going on.
Rui Ma: That's about to be resolved. The authorities have made it very clear, they don't like this. So, I guess, [crosstalk] that way.
Bill: Yeah. That's a really good point. The authorities have made it clear they don't like it. So, I think it's probabilistically more likely than not that something is going to come out. When that thing comes out, I feel like my Twitter feed is going to explode with people saying, “See, I told you that you can't trust China. They're changing the rules.”
Rui Ma: [laughs] Maybe, this piece of use has already gone through the new cycle, but it's possible because the substantive changes aren't yet reflected. So, it's possible that when the changes are reflected, this is going to be a whole new cycle. Yes, and I do expect those reaction.
Bill: Because I feel like a lot of the people that I interact with are investors, and I do feel like, “Look, a lot of what was done uncovering a lot of the frauds in China was very good investigative work, and people deserve to be commended on it.” But I also think it's used as a crutch to stop thinking in many instances. I just think there's a lot of Western hot takes on what's going on in China that are completely unresearched. As somebody that follows the regulations that come out, and how some things are foreshadowed, how do you on average gauge the CCPs, well, I might really put you in a tough spot here, but-
Rui Ma: [laughs]
Bill: -how they go about their business? Do you think it's rational? what they do, do you think it comes out of left field, do you think it's like with--? I know, it's a broad question, but I think I'm going to stop it there. Sometimes, I ramble with my question as I am.
Rui Ma: [laughs] First of all, I would discount the people who are like, “Oh, yeah, I know exactly what the government's going to do,” because whatever I read Xi Jinping thought or whatever the heck, it's not true, because the guidelines or the speeches from Xi or stuff from the government, until the policies are revealed, we're very close to when the policies are revealed are pretty general. There are things that like, “Oh, hey, we need to improve the infrastructure of our country. We need to invest more in stem talent.” It's like the same thing the White House says. We understand our weaknesses, we need to make them less sucky. So, that's just not very necessarily helpful.
What you do get a good sense of is what the priorities are, because China as with any country, there are a ton of problems. There’s problems everywhere you look. So, based on what the government is saying, well, they will literally say, this is our highest priority, then what their priorities are. So, in that sense, I guess you could say, you might know where that regulations are falling. However, the specific execution, how the laws actually finally shake out to be, you wouldn't know unless you were working in that industry. So, anti-trust, for example, I certainly didn't know. But I then went and talked to lawyers who had been working on advising the government or regulators on anti-trust, and then I was like, “Oh, okay. You've been working on it for four years.”
So, in that sense, you could get somewhat of a heads up, but some of these other situations like EdTech, again, you might know a general direction, you might know the government is really serious about education, but which government isn't serious about education, about improving education--
Bill: Especially, extractionary practices on middle class families trying to make their kids better. That's not going to fly politically anywhere.
Rui Ma: Anywhere, exactly. Somewhat predatory, etcetera. Of course, something's going to happen, but did you know it was going to be nonprofit? No. Anyone who says that, I think, I would be like, “Show me a chat transcript, or a voice memo, or something predating the regulations that proved to me that you are that prescient,” because I don't think that's really generally the case. I would say overall for me, I can understand where the government is going. As for the exact policies, my personal opinion says, it's really hard to find a policy that everyone's going to be happy with—
Bill: Yeah.
Rui Ma: Right, no matter how good your intentions are. Unfortunately for investors, you are not necessarily the stakeholder that is being prioritized. So, whether or not-- when people are saying this is a good or bad policy, what they're really saying as investors are that this doesn't benefit me as a shareholder, or maybe this actively hurts me. So, I could understand that, but if I take a non-shareholder perspective that I would say directionally, I can understand where a lot of the policies are going, I don't have enough knowledge. I’m not a policymaker in the weeds researching this, you're in, you're out. I don't know if that was the best decision to make. So, I can sit here and be an armchair analyst, and do hot takes all day, but I am someone who I guess gives the regulators, policymakers a little bit benefit of the doubt that they're trying their best. Not they've weighed in the cost of benefits and decided that this was the best way.
Bill: Yeah, and I think like that what I enjoyed so much about being able to listen to the conversations in LA is like, I came away with that kind of a feeling about what was going on is, okay, if I were an investor in China, I definitely wouldn't want to invest on a company clearly on the other side of policy. But if I were on the west looking at say, well, education has now become non-profit, to draw the click were or the connection to, “Oh, boy, everything has to watch out.” I think is lazy thinking. I think it misses a lot of nuance, I think that you have to respect the power that the government has, but at the same time, I think this is where Charlie Munger people are going to skewer me from this. But I think this is where he's saying like, I don't disagree with what they're doing in certain instances, and sometimes, I wish I had the power to wave a wand and make the world as it should be. I'm empathetic to how he thinks about that, whether or not I would express it the same way as different, and I just lost half my listeners in perpetuity.
[laughter]
Rui Ma: Really?
Bill: People don't like that Charlie said that. I think he deserved to follow up with Becky Quick. But yeah, people didn't like what he said about China at all. I think they perceived him to be defending communism, and I'm not sure that's what he was really trying to do. But yeah, again, that's another--
Rui Ma: Charlie's too old and senior to give a crap.
Bill: Yes.
Rui Ma: About what the rest of us [unintelligible 00:51:39]
Bill: That's correct.
Rui Ma: [laughs]
Bill: You had mentioned or thought that your last comment triggered for me is, it appears to me that some of the finds and whatnot, when I read some of the articles, it appears to me that the government of China is saying you have to donate back to the people of China to make sure that everybody comes up together as a business analyst. Do you think that there is something that the government, like, are these companies able to be run for for-profit motives, or are they going in the direction of a Soviet type for the benefit of society, and does that impede their competitiveness?
Rui Ma: I think, well, first of all, this is a question by the way, it's not just foreign investors are asking, Chinese people are asking as well. When common prosperity came out, not that it was a new phrase, it's been a phrase that's been part of the Communist Party's literature since the 50s. It's just that it's taken first priority. Now, people didn't necessarily understand what it meant that people will shortly understand what common prosperity means. But how does it actually affect us? So, there has been more clarification from the government on this. However, not so clear that I'm not sure I can answer your question maybe to the exactitude that you desire.
Bill: Well, there's no exact-- No, I don't desire anything. I'm just curious to hear you riff on it.
Rui Ma: Yeah, so, I think, one thing we can be sure of is that, they're not looking for equal outcomes. Because that is something that Chinese people were also very alarmed about their area, trying to make us into the old communist in the old days. That's not what they're looking for. It's really more about making the people who have not benefited equally from the economic development of the past four decades since the economy opened up. So in China, it's very obvious that the urban and coastal 400 million people or so live vastly better lives than the inland 1 billion or so people who are primarily in rural China-
Bill: Much like your--
Rui Ma: -[crosstalk] about China. Yeah, not actually necessarily that different. By the way, China and US share so many things in common. So, that's what they want to try to fix, because if they don't do anything, then what's going to happen is that the damages are going to continue to accrue to the coast, and to the already well resourced, and then the gap may get bigger or even if it doesn't get bigger, it's unacceptable right now, because if you are someone who didn't live in the Tier-1, Tier-2 cities, and you were in rural China, the last 40 years, yes, it did benefit your life, but it didn't really nearly benefit your life to the degree that you see a Beijing or Shanghainese would have benefited.
So that is the intent about common prosperity. It's not that now everyone's going to whatever have the same wealth, assets. It's more like we need to help the people that didn't get most of the economic benefit. I would say that the shareholder implication. So, you could pass the mistake and say that the companies now might have to do more of these things they called, it's called the third distribution. But really, it's just philanthropy. It's not required. The government has made it clear that it's not required, but it's highly recommended.
Bill: That’s required in my book for the record.
Rui Ma: So, a lot of companies-- [laughs]
Bill: [laughs]
Rui Ma: Okay, so a lot of companies to do it. What I would say is like, as a shareholder, actually consider the economic state have tried to and the projects that these companies have proposed. There are actually not the donations, a lot of the projects are just investments in rural China that the government is now-- I always think of it as maybe accelerating a little bit, but encouraging companies to do it. But it's actually a really great opportunity anyway. It's basically saying that trying to put more investment in the poor places in China versus just I don't know, selling more lattes to people in a Shanghai bund or something.
So, it's not like there's no return there. It's just that the government is trying to direct you to a different area of investment. I don't personally think, it's going to be very detrimental to the company's finances. I think a lot of people are thinking of it as like a straight up donation that they have no control over. But again, it's really just socially responsible projects that maybe wasn't the first thing, Alibaba or Tencent to do list that they're now going to invest in, but should yield more customers, more middle-class buyer for them in the future.
Bill: Yeah, this is what, I don't know, if you saw I floated some questions on Twitter, but somebody had said like, it's going to hurt the incremental margins or whatever. I was saying like, “Yeah, but you could argue.” I think, pretty credibly, that it helps the terminal value, if it's done in a way that balances government interests with capitalism, because you can lift the standard of living among everyone. I think that there's a reasonable argument to be made that not leaving a portion of your society behind actually increases the probability of longevity and increases aggregate wealth, which would increase purchasing power. Now, this is going to be offensive to my Western brethren, but this is why I don't think Charlie Munger is just some insane old guy. I actually think like, you can argue that side of the equation. Time will tell which side is correct. But I'm not sure that its objectively one way or the other.
Rui Ma: Yeah, I am with you, and also, I think we need to realize that these are just plans. If the plans don't work out, the government can adjust them. The government has been known to be very adaptable when certain policies don't work out. In fact, the even the EdTech stuff, so pretty, again, pretty draconian, pretty extreme, pretty absolute. But maybe it doesn't work out in the next three, five years, and you might see some pullback. It certainly happened in other sectors before. So, I think people assuming that this is the way it's been set, and this is a path that can never curve. That's not really realistic either.
Also, one thing I wanted to point out is, what I find really interesting is when people, I don't understand how people reconcile saying that we need to simultaneously believe everything the government says, and then are decrees, and then believe nothing the government really decrees. I feel like it's like confirmation bias.
Bill: [laughs]
Rui Ma: It's really being selective. It's like, “Okay, if you believe that--" If the government says, “Oh, we highly suggest you to do more philanthropy and you believe that is ironclad and you must follow it, then why don't you believe them when they say something else.” Like we support private enterprise, and we're liberalizing our markets. By the way, look at it, we are allowing Wall Street banks and financial institutions to have fully owned subsidiaries here. So, why do you believe one and not the other?
Bill: Because cognitive dissonance is very hard for people to keep.
Rui Ma: It is very painful.
Bill: Yeah. It requires actual, real true thought that makes people tired and people don't like that.
Rui Ma: [laughs]
Bill: I actually think that's the reason.
Rui Ma: It's true. No, no. It is true. Neuro biologically, we don't like cognitive dissonance because it just takes too much energy. So, it's an avoidance mechanism.
Bill: Yeah, and I think the other thing is, there's something very real at least in the western-- I don't think this is going out on a ledge to say this, but you are also overlaying political bias, and home country bias, and us versus them, and then you combine it with cognitive dissonance and I just don't think people can do it. I really fundamentally don't think the human iOS, to borrow Jim O'Shaughnessy’s term, is prepared to just be rational about stuff on average when these issues come up.
Rui Ma: Yeah, and I think, for me, personally, I live in the Bay Area. My life, my family is all here. Sure, my work is largely revolving around tech companies, but at the end of the day, I don't really think that hard about like-- I care about the direct impacts to my life. I care about the fact that I [unintelligible 01:00:37] did sell solar panels today, because my power keeps on going out, and I worry about wildfire insurance, and the drought in California, and all this stuff. I don't know why people can get so worked up over something that's happening on the other side of the world. Especially, if it's something very abstract like-- I don't know, some political degree, I don't know. [laughs]
Bill: And something that honestly doesn't have, I think, if you think probabilistically, it's very, very hard to be certain that you're certain, that you're correct about whatever your assessment is. I find it interesting that a group of investors who theoretically should understand probabilistic thinking are so certain about certain issues that they have absolutely no clue what's going on inside the rooms that they're going on. I know enough to know I don't know.
Rui Ma: Right. I know, exactly. That was a tweet you referenced basically, I was saying that I know a lot of people who are much better connected than I am, much more knowledgeable, much more experienced, and they know exactly what they don't know, and a lot of things they don't know because it's not visible to the public. We're not Xi Jinping, we’re not the head of the PBOC. So, we can only sort of guess, and have, exactly like you said, a probabilistic assurance of what comes next. The confidence levels.
Bill: Yeah. The other thing that I liked that you had said is I don't know why-- I'm going to misquote you here, but the takeaway that I had is like, “Why are people so hyperbolic, and why do they want to create conflict between two major superpowers when there doesn't need to be any?” As someone that's living in today's world, I'd just rather not go down that rabbit hole.
Rui Ma: Right, exactly. It has nothing to do with China-US. I don't want to see it between any powers at all, period. I'm a pacifist. But I suspect it is because of Twitter, and how it rewards negative loops of engagement. So, [unintelligible [01:02:44] has a really good schtick about this which is that Twitter basically has no brakes. So, if I want to engage with someone, and they're positive, I retweet and I respond. But if I disagree with them, if I vehemently hate what they're saying, I also retweet and respond. So, and then it just amplifies the signal. Then, it's just like whatever's most controversial, whenever it gets the most positive and negative feedback becomes the most amplified noise [laughs] unfortunately.
Bill: Yeah. I like to think that karma ends up killing the negative people a little bit earlier than the positive ones, but we'll see. I'd like to see that physiologically. I think that the negative stuff really takes a toll on your body, but I'm not a scientist and I'm not a doctor. But I've always found positive people to be more fun to be around. Just my two cents.
Rui Ma: I think you're right.
Bill: We'll see who makes it longer. We've got a long time to play that out. Do you mind riffing on a little bit-- everybody at least in the investor class is worried about the VIE structure, and I have heard you talk about how the lack of regulation does not mean that they're illegal, and actually, the discussion of VIEs in a way makes the structure a little bit more valid, potentially. Do you mind just discussing that? For people that don't know, the VIE was created, it's a variable interest entity, it's basically a derivative ownership, because China was not open to outside capital, and this is a loophole that they created in what, the late 90s?
Rui Ma: Yeah. I think with IPO [unintelligible [01:04:26].
Bill: Then, it's never been fully addressed within China Regulations, and now, they're starting to talk about maybe addressing it. Is that a fair characterization of where we are and where we've been?
Rui Ma: Kind of. Yeah, China restricts investments in certain industries, not all industries. Internet companies are unfortunately one of them because it's considered under media-
Bill: That’s right. Media and telecast.
Rui Ma: -broadcast etc. So, you cannot directly invest in internet companies operating in China. You have to invest in a shell company that then has these agreements, contracts. You cannot own direct equity ownership. Like you said, you are owning an economic interest. Then, what happened is that no one was overseeing VIEs at all for many, many, many years, because the VIEs themselves are usually in the Cayman Islands. So, offshore, not inside of China. It doesn't fit into the legal system in China. So, a lot of people, by the way, don't think China has any laws, but it does. The courts or the regulators, they're like, "Hey, that's not even a Chinese entity. We can't regulate this. We can't do anything with this.” You have things like antitrust had to say specifically-- when the antitrust laws last year came out against internet platforms, they have to specifically say that this also applies to VIEs because that was not clear in the past that oversee VIEs with the DD-IPO and trigger this-- I wouldn't say triggered, but there's this data security law that was coming online, that had already been passed and just went into effect actually on September 1st.
DD went ahead with its IPO even though, I guess, they were asked by certain regulators not to, then the idea from the Chinese government is basically that in the past, we didn't have an official way to enforce you not going to listen abroad. Because there was no official review process, because you're a VIE. So, no one technically had no real jurisdiction over you. But now, we're going to have a process where we're going to review your data security, no matter where. As long as you operate in China and have any Chinese user data, then we're going to enforce-- [crosstalk]
Bill: Okay, and by data security, just real quick, you're talking about privacy security, yes?
Rui Ma: I'm not talking about privacy security, actually. It’s different from privacy. It's more that you need to be responsible for the data that you collect on customers. In this case, the fear-- they haven't really talked super transparently about it but everyone believes that the fear is that the listing abroad means that the exchange operator, [crosstalk] foreign regulators can ask for data from you but the data is actually of Chinese citizens. So, the trading governments like, we want to have oversight over this process. So, we want to decide who gets to list overseas and to doesn’t.
I interpret that as them wanting to exert more control over the VIE, which is what this whole thing is about because no one was overseeing it at all. Now, various agencies are now tasked because of data security, national security reasons to that oversee VIE because all these really powerful platforms with a lot of data or all VIE structures. This does not necessarily mean that the VIE structure will not get regulated. That's not what I'm saying. I'm just saying that now people are taking a look at it very seriously, and this is no longer going to be a loophole that where there is just a regulatory gap. So, we are going to do something about this. What they're going to do about it, we don't know yet. All we know is that right now, they have a data security review. There could be and there are rumors of other restrictions.
But I think personally, it's very unlikely that the VIE gets killed. I don't mean necessarily the VIE-- Maybe the VIE, that specific structure maybe doesn't survive, that's possible. But what I mean is the intent of the VIE which is to let foreign capital flow into otherwise restricted businesses, I don't think that at least doesn't make sense to me that that will be killed. That doesn't seem to be consistent with the signals that government has given, it's not consistent with the reality on the ground, which is that USD-- because it's long-term shareholders, LPs that primarily invest in USD is still a much better investor base for investing in technology. So, there's just not enough long-term RMB holders inside of the country to support the industry. So, China basically has to decide, there are competing objectives. We want to keep our data secure, but we still want foreign investment because our domestic investment is not able to meet the demand, because we still want a thriving science and technology industry. So, I personally think the last objective is going to trump out the other one because I think it's pretty easy to have a review for data security and get comfortable around that versus completely killing foreign capital access.
Bill: Yeah. That makes a lot of sense. Do you mind talking a little bit about why there is not the patient capital? It seems to me as though US based tech investors are a better group at the moment, and maybe that's changing a lot. But at least historically, culturally more suited to wait. They're more patient basically is what it all boils down to, and that Chinese investors tended to be more day trade or month trade focused, and that even some of the best VC funds in China were not able to raise sufficient capital, because it was hard to find LPs that would lock up capital for a sufficient amount of time. Is that a fair way to categorize the investor basis historically, and do you see that shifting at all?
Rui Ma: It's certainly shifting. There is more long-termism in RMB LPs, but it is probably not coming fast as fast as definitely my VCGP friends would like. I think the main reason really is just because the market is too young. If you think about asset management, and wealth preservation, and accumulation, it's just a much, much, much longer history in the US and in the West. I don't know. You can think of like people have had hundreds of years, in the US like the Rockefellers or like the Rothschilds in Europe [crosstalk] many families like that in China, everything was completely remade when the communists took over, and then no one really made any money until the economy opened up in 1979. So, therefore, it's just like a very, very new thing.
In fact, in China, I think, it's probably in the second generation now. But I remember a decade ago, the conversation was about-- all the founders are still there. There are companies, there's been no generational transfer of power or wealth. Much of Asia too by the way. Singapore is a little bit more ahead, etc., but China is definitely pretty young in this process. That's why you don't have the Harvard, Yale, and [unintelligible 01:12:23] who are happy to put money away in really long locked up funds. You don't have that as much in China. To give you an example, the example I like to use is one of the top VC funds in China, 5Y Capital raised-- is it 5Y or [unintelligible 01:12:31]? It's one of them. Sorry, I'm getting the name mixed up, but they just raised the beginning of this year around $2 billion, and then I think $1.7 billion of that was in USD, and the rest was an equivalent in RMB.
Bill: Wow.
Rui Ma: This is like a top, top, top fund--
Bill: Wow.
Rui Ma: -that I'm sure people would be dying to throw money at. They want RMB-- All the GPs I talk to want RMB because RMB is, you don't have to deal with VIE stuff, and then you can invest in more flexible industries directly. It's not that VIE is bad, I shouldn't say that.
Bill: No, but it reduces your flexibility.
Rui Ma: [crosstalk] flexible, and you can very easily go public. In China, all of that, that's actually pretty hard. But whatever. That's the story, but they're happy to take RMB if I'm an AUM [laughs] investor as I [crosstalk] have to take all currency.
Bill: You are not going to say no, all right?
Rui Ma: Yeah. All currency, but it's just hard. It's hard to find investors that are able to commit that amount of time, and even for one of my friends who just raised an USD fund and RMB fund, and he said he could only get eight years on his RMB fund.
Bill: Wow.
Rui Ma: Which is still pretty good, because again, five years ago was more like a five-year fund that you're looking at which is really impossible for doing early-stage VC, you only do growth.
Bill: Yeah. Do the fund structures have the option to extend over there or not really?
Rui Ma: Yes.
Bill: Because like here, you have a 10-year, and then a couple of years.
Rui Ma: 10+2. Yeah, they do. They do generally. But again, you're missing two years upfront.
Bill: Yeah, which is a big deal when you're talking about 5 to 7 years, or 7 to 10 years, or whatever. Every year matters in that.
Rui Ma: Every year matters. Exactly. Again, it's just also the pool of capital isn't that large.
Bill: Yeah. That's where you had said that, and it really clicked for me that this doesn't make sense for a lot of the concerns that I hear. I just don't think people are thinking about this strategically. If you were China and you were thinking long, it doesn't make a ton of sense to, for lack of a better term, screw foreign investment now. Why now? Why in the time of a global technology race of getting installed bases would this be the time that you would say, yeah. We're going to crack down right now. Right now, is when we don't want foreign capital. It makes no sense to me strategically, and I don't perceive China's government to be silly in certain ways. That would be a shocking divergence of my perception.
Rui Ma: Yeah.
Bill: Do you mind talking--
Rui Ma: And not to mention they're investing in VIEs where you don't even own [laughs] the domestic company like I have control over the company, why don't I let foreign capital invest in the shell company? It's a great gig. [laughs]
Rui Ma: Yeah. Why is it so hard to go public their relative to here? I heard the space that you were on, somebody said you just checked the box here, and it's a lot different there, but wouldn't mind if you expand on that a little?
Rui Ma: Yeah, the US is a disclosure-based exchange. Partly, I would say I really attribute a lot of things to just time. Again, Wall Street has had hundreds of years, 200 years, or whatever it is to develop. In China, the capital markets are really new. They're primarily found in the 80s and 90s. Then, of course, we had a new exchange being announced just last week. But the rules in China are very, very onerous compared to the US. I was just looking at the rules for the Beijing exchange. You actually have to be listed on another exchange for 12 months or fulfill certain market cap revenue, R&D investment, operational cash flow requirements before you can list.
It's not just that. It's an application-based process. So, the regulators can stop approving at any given time, and they could do it for many reasons. They could do it because the market is too hot or too cold, or they don't want to approve certain industries, and they want to approve other industries first for whatever obscure, not transparent reason. So, going public in China is actually pretty hard on the main boards. There are lesser OTC exchanges that is much easier to list, but what I'm talking about the main changes here are significantly, significantly harder. Even Hong Kong is in the middle. Hong Kong has, my understanding, is a lot more onerous requirements in the US. In fact, so great example is DD.
This is what's been reported. What happened is that, in the US, when DD is listing, DD didn't have a lot of the full licenses. So, license for the car, license for the city, and license for the driver in many of the places they're operating. I think the number that's been reported is actually quite high. Well, let’s call it more than half, more than half of their revenues, one of these three licenses was missing, or incomplete, or lapsed, or whatever it was. So, in Hong Kong, the exchange said, “Okay, we're doing DD on your revenues, and if any of these licenses are not compliant, then I refuse to let you count that revenue." So, you cannot count that revenue.” So, DDs revenue was apparently going to be greatly reduced if they listed in Hong Kong according to the rules exchange there.
However, in the US, you could say, “Hey, by the way, your revenues, and oh, yeah, just so we're not always compliant.” You just have to disclose the risk and then the shareholder, the buyer decides whether or not that's a risk they want to take. Now, the risk is not actually that high because for a lot of these places, what I'm saying is not the SEC is being totally irresponsible. It's that the punishment for non-compliance is a fine and the fines actually pretty minimal. So, DD could just sit there and get fined, pay the fines all day and then sometimes they have to wait for approvals to come through because it's not always possible to get the licenses in time or whatever it is. They do have good reasons for saying these are real revenues and should count them, even if there's an asterisk. But the fact of the matter is in Hong Kong, you just would not even be able to consolidate it into your financial statements, which would make it look like a very different company.
Bill: Yeah. That's interesting. The other thing that I've heard you talk about that I've been super fascinated on is this fast fashion trend that's going on in China and how quickly they're getting products to market.
Rui Ma: So, you think you're talking about the unicorn, Shein, which is rumored to be valued at $46 billion although I guess they denied it. It’s about seven days for them right now.
Bill: Wow.
Rui Ma: That's what’s been said.
Bill: This is from concept to final product, right? This is very, very fast iterations, yeah?
Rui Ma: Yeah. It's not actually that surprising. Number one, when we went to China in 2019 with investors, we visited two companies in this space. They're not fast fashion but they're like fashion e-commerce companies. One was Ruhnn which already went private, didn't do well post IPO.
Bill: Went private, went public you mean? Sorry.
Rui Ma: Went public and then went private.
Bill: Oh, really.
Rui Ma: Went public and then private already. Then, the other company is [unintelligible [01:19:59], which is still public. They were actually the first company to try live commerce. What it did, it showed us that-- or they told us that, yeah, it was only seven days for people to make their clothes.
Bill: That's amazing.
Rui Ma: Mm-hmm. Ruhnn was doing also-- We actually walked by one of their sample rooms where people were, I guess, doing the first part of the sample. I think some of it was done manually. I don't recall exactly. But they were also able to get their order volumes to 100 pieces which is by the way, Shein's magic. It's not just the time to turn around from design to production, but that they're able to get the minimum order quantities to so low. Because generally, when you work with factories [crosstalk]
Bill: Yeah. You've got a ton of upfront costs. Then you want to--
Rui Ma: You’ve a ton of upfront-- Yeah, and they don't want to do minimum order volumes that are very low, because they have to put in the-- whatever, I've just there, why [crosstalk]
Bill: Yeah. You've got to tool it, you've got to get it ready for the run, and all that stuff.
Rui Ma: Exactly. For electronics, you additionally have the problem that you may have different components and the minimum order volumes for different quantities for the components may vary. So, maybe you have 10 items and 9 of them, you can get a minimum order of 1000, but then the 10th one, you have to order like 10,000 for whatever reason, and then you have all this inventory. So, in general factories, I would say the magic of Shein is, of course, it's seven days, it's impressive, but it's really also the really low pieces that they can order, and then quickly replenish. That counts for their success.
Bill: It's amazing to think of the progress that's gone on in manufacturing, and I hear-- and again, like I'm really very uneducated about this, but it seems to me that China is really out-iterating the US, whether or not it's speed or-- I don't know that that's a fair comment, but it's just the feeling that I have. Do you think that's a fair feeling?
Rui Ma: In manufacturing?
Bill: Yeah, and some tech too. I don't know. I sometimes wonder if we have legacy systems in the US that put us at a little bit of a disadvantage.
Rui Ma: I'm going to steal an idea from my friend, Jeff Ding, and ask you to think of innovation as sort of two pieces. One is the fundamental breakthrough research, and the other is the scaling up of that research. I do think China is actually very good at the latter, because even when you scale up, there is some iteration that you're doing for commercialization, and just the scaling of itself requires you to do that. But China is actually still pretty lagging on the fundamental research part. So, it doesn't have a lot of the really high-level talent, whatever STEM PhDs. It doesn't have the ecosystem. It's just not as dense in terms of talent for a lot of these industries. Of course, that may be changing, by the way, if we continue to have really unfavorable policies towards Chinese Americans, and they all go back to China. But as of right now, China’s still lagging.
So, I understand what you're saying about the quick to iteration thing, but I think it's primarily on the scaling and application layer, and not yet on the fundamental research as much. So, you see that in how quickly the apps, of course, iterate, and change, and distribute and grow, but you also see it in the physical realm with consumer goods.
But I would argue that consumer goods is really because China's been the world's factory for the last 40 years. In China, it's not just about individual factories, it's like whole clusters of factories. Just like whole regions, like the Pearl River Delta, the Yangtze River Delta, where there are just entire industries. Remember earlier I was saying you might need different components for whatever item you're making. Well, what if all everyone who makes every single component that you need is within a 20-mile drive of each other. That really speeds up. Yeah, that really speeds up how quickly you can produce things and how quickly you can change them. That's what's happening in China actually. For textiles and apparel, that is primarily in the Pearl River Delta, Guangzhou, Cantonand that's where she and has their offices, and that's where-- it's not going to be just Shein by the way, it's going to be a ton of other Chinese brands. Actually, my friend, did has one called Cider and they just raised from DST Andreessen $130 million Series B unicorn in 12 months.
Bill: Wow.
Rui Ma: Doing fast fashion.
Bill: That's amazing.
Rui Ma: Well, they would argue it's more high-quality fast fashion in Shein [laughs] but still some kind of fast fashion.
Bill: I guess fast fashion in my pea brain is how quickly you can iterate, but that's not really the correct terminology.
Rui Ma: I think it's referring to the phrase [crosstalk]
Bill: Yeah, I think so too but that’s not how I meant it.
Rui Ma: Yeah, okay.
Bill: You know what, I think it is really interesting, how you are talking about geographic, I wonder a couple things. One, I wonder whether or not having such a focus on education and not allowing children to play as much potentially stunts some creativity that should be unlocked in a child's brain. I don't know how that would foster itself through an entire ecosystem, and it's just a thought. The other thought that I have is what you touched on about geographic competence. I watched something on the glassblowers of Italy and specifically, Venice, and how when you have these geographic clusters of expertise, that's how you get these really, really robust communities of innovation around it. One thing that America definitively benefits from is Silicon Valley and West Coast thinking, and being clustered in that way. That's a very robust advantage. I don't want to poopoo us too much, but it's interesting how those things happen in the world.
Rui Ma: Yeah. No, I agree with you absolutely. Just geographic clustering is important for everything in such as in China. Zara for example, the sort of godfather fast fashion, their entire supply chain is in Spain, is my understanding, and that's how they were able-- They had to build it from scratch. I think Shein actually is able to ride on the fact that all the other international brands had already basically invested into creating this cluster in China, so they could just take advantage of it, but Zara really had to-- kudos to them. They have to build it from scratch.
The second point you said about the creativity, that is something absolutely is a concern in China. I'm not sure that it is going to show up on policy level necessarily, but if you just talk to your average parents, they do recognize that this is a problem. No one actually wants the testing system. Everyone thinks it's dumb, and useless, and is a waste of time, but no one has come up with a better solution to ensure fairness. That's why people still subscribe to the testing system, but not because people love it. People think there are many division aspects of it, and would love to see more creativity. I don't disagree at all that I think the US system in general, we produce a lot more quirky people.
[laughter]
Bill: Yes, we do.
Rui Ma: To put it politely.
Bill: Yes, we do.
Rui Ma: Yeah, to put it politely. But of course, again, you do have China, it has 1.5 billion people, so you also just have a much, much larger denominator. So, there are also plenty of quirky people there as well. But if it were me and a lot of my friends who had kids, their children's education’s probably the number one reason that they left. Even the pollution taking years off of your life, some people were like, “Ah, maybe I could deal with it,” but when it came to ensure my kids have a really great education in childhood and not a super regimented existence, they tended to choose leaving China.
Bill: Interesting. Well, I'll tell you what, I have truly enjoyed this conversation. I hope it's been enjoyable on your end. I've had a great time, and thank you very much for spreading some of your perspective to people that ask me questions and get really bad answers from me, because I don't have anything intelligent to say about these things.
Rui Ma: [laughs] Not at all. You actually are quite well informed, much better informed than many other people. [laughs]
Bill: Well, I think it's really interesting. I just think that in the world-- this is going to sound so hippy-dippy, but empathy goes a long way and trying to analyze situations and perspectives through the eyes of someone that is trying to accomplish a goal is so much more effective than assuming the answer is whatever your brain thinks, and then imputing wrongness elsewhere. I don't know where I got it. I think law school had something to do with it.
Rui Ma: Oh, you went to law school?
Bill: Yeah.
Rui Ma: Okay.
Bill: Yeah, I think it was good even though-- The only tangible thing that I could tell you that I took out of law school was my wife.
Rui Ma: [laughs]
Bill: I didn't actually physically take her out. It’s just where we met.
Rui Ma: That's very important. As Charlie Munger would say, one of the most important decisions you can make as a human being is your choice of spouse.
Bill: Yeah, indeed. I didn't mean to cut you off when I thanked you.
Rui Ma: No, I wanted to thank you for having me. I really enjoyed this conversation as well. Hopefully, we didn't turn away too many people from your podcast, but I'm pretty sure like [crosstalk] very authentic.
Bill: I think I'm the only one that turns people off. I don't think you did anything bad.
[laughter]
Rui Ma: Not at all. I think you have a very authentic style, and I really appreciate the direct and yet very gentle way that you cradled my answers, and also the very direct way you ask them. So, thank you so much.
Bill: Well, thank you for joining. I hope you'll return again sometime in the future when we have something new to talk about. Regardless, I look forward to a life of talking to each other. I've enjoyed the times that we've spent together. So, let's continue.
Rui Ma: Well, thank you so much. I treasure them as well.
Bill: All right. Cool.
Rui Ma: Thank you so much, Bill.
