On November 10, Yuanpu Huang, the Founding Partner EqualOcean, was invited by China Creation Ventures (CCV) to give a speech on Long China, a New Playbook in New Era in English. He believes that Go Global will be the opportunity of the times for Chinese companies. Here we present the edited transcript.
Thanks for China Creation Ventures (CCV)'s invitation and the generous introduction. I am Yuanpu Huang from EqualOcean.
A quick intro about me. In 2014, I founded a tech media and research company called IYIOU (亿欧), where I personally interviewed over a thousand leading entrepreneurs across China. In 2018, I launched my current firm, EqualOcean, which provides strategic planning, market research for Chinese companies going global.
In April 2023, I initiated the "GoGlobal Committee of 100 (GGC100)" bringing together a dynamic group of entrepreneurs, investors, scholars, and media experts, with focus on taking Chinese business global.
Then, in October, I was thrilled to launch the "GoGlobal Youth Network (GGY)" with ten inspiring young leaders. The goal is to nurture a generation of young Chinese with a worldwide view and ambition to contribute to global progress.
The topic of my speech today is "Long China, A New Playbook in New Era". This title might seem "又红又专" (looks like a propaganda from CCP), but I am indeed neither a CCP member or holding any position within the Chinese government. As investors and entrepreneurs, we pursue opportunities based on "non-consensus." The views I will share today will differ from the most.
The Pessimistic Consensus
Before I share my perspective, I’d like to address why many investors and business leaders are feeling pessimistic about China.
First, the world is filled with uncertainties. The negative impacts of the COVID-19 pandemic are still here, the Russia-Ukraine war does not seem to be ending soon, and the Israel-Palestine conflict has intensified. With inflation still high, the US Federal Reserve likely to keep interest rates high in 2024. Confidence in economic recovery is low, de-globalization has been gaining momentum.
Secondly, China is also facing numerous challenges. At the end of 2022, it changed its pandemic control policies, but the recovery in 2023 has not met expectations; regulatory policies on online business sectors have relaxed, but industry confidence has not yet restored; the collapse of the real estate market has further impacted many in the middle class in 2023; the acceleration of aging and high youth unemployment rates continue...
Lastly, the structural contradictions between China and the US have not found a proper solution. There’s little consensus on global issues, and we are in a new Cold War. The Chinese government emphasizes "self-reliance" in high-tech fields, while the US government restricts investment in China’s high-tech sectors. The risk of unintended military incidents, especially concerning Taiwan, is increasing.
The Non-consensus Optimism
While many hold a pessimistic view of the current trends, I stand on the side of cautious optimism.
It's true, the world is facing a retreat from globalization. But I believe we are moving towards "re-globalization" — a path to a more equitable form of global integration. Yes, the journey may be rough. The last period of "de-globalization" lasted for more than 40 years from 1913 to 1945, marked by two world wars and a global economic crisis. This round of "de-globalization" started in 2008, but we could expect to overcome it with fewer costs and in a shorter time.
In the past few years, China and the US, both have gained a more realistic understanding of each other, and a new balance is forming. The relationship between the two superpowers overall will likely be better than that between the US and the Soviet Union during the Cold War. China and the US will learn to "seek common ground while reserving differences" and jointly manage global affairs.
The lessons China learned from its "century of humiliation" and the "collapse of the Soviet Union" are: stay open to the world, and keep the economy growing. Today, China is reinforcing its role as a major trading power, and its industries are increasingly competitive in the global marketplace. Plus, investing in the education of youth and boosting the production efficiency are powerful ways to balance the effects of an aging population.
Old Playbook of China
As we reflect on China's journey, it's important to look beyond politics. It's a big mistake to compare China with the Soviet Union, or to compare the Communist Party of China with the Soviet Union's party.
Lee Kuan Yew, the founding Prime Minister of Singapore, said in his book "One Man's View of the World": over its 5000-year history, the Chinese people believe that a strong central government means national security and prosperity, while a weak central government brings insecurity and chaos.
From my perspective, China's political framework has remained stable for the last three decades. Yet, economically, the drivers of the growth have evolved significantly. Since the housing reforms of 1998, several key sectors have been the drivers of China's economic expansion:
- Real Estate: Back in 1998, real estate made up 4% of China's GDP. This figure grew to 5.1% by 2007 and reached 6.1% in 2022. If you also consider the construction sector, which accounts for 6.9%, real estate's contribution to our economy is quite substantial, at nearly 13% in 2022.
- Low-end Manufacturing and Exports: In 2001, the year China joined WTO, China's share of global exports was 4.3%. This share expanded to 8.9% in 2008, 12.8% in 2017, and stood at 15% by 2021, reflecting China's growing presence in global markets.
- The Internet Economy: The number of Chinese internet users surged over 100 million in 2005, reached 500 million by 2011, and broke the 1 billion mark in 2021. E-commerce also saw remarkable growth, with online shopping transactions exceeding 100 billion yuan in 2008, 1 trillion yuan in 2012, and 10 trillion yuan by 2019.
Thus, over the past two decades, China's wealthiest individuals have mostly emerged from these sectors.
The New Playbook
Since 2018, the forces that have driven China's growth have shifted significantly. As industries mature, their drawbacks start to show up. The high housing prices severely impacting Chinese consumption, low-end manufacturing bringing huge environmental problems, and large internet companies leveraging their platform advantages to impact small and medium-sized enterprises.
China is not content with the role as "world's factory" . It aspires to become a core country like the United States, aiming for the higher-end, more profitable parts of the global value chain. This ambition is unrelated to who leads the country or to ideology. Five years down the line, this "new playbook" has essentially taken shape. China's new growth drivers mainly come from the following areas:
-High Technologies: Represented by new energy, new materials, biotech, artificial intelligence, etc. In terms of investment, China's R&D spending reached 1.9678 trillion yuan in 2018, accounting for 2.19% of GDP; and in 2022, it exceeded 3 trillion yuan, reaching 3.0783 trillion yuan, representing 2.54% of GDP. In 2022, China surpassed the United States for the first time in the "Nature Index," ranking first in the world.
-Advanced Manufacturing and export based on Engineer Dividend: The "Competitive Industrial Performance (CIP) Index" released by the United Nations Industrial Development Organization (UNIDO) in 2023 shows that China ranks second in the world, closing the gap with Germany. Correspondingly, Chinese foreign trade exports, the new energy vehicles, lithium batteries, solar panels are becoming the main growth drivers.
-Digital Capabilities: The massive amount of data collected from internet and smartphone usage has supercharged various industries with powerful digital tools. This means Chinese companies understand consumer behavior better, get feedback to factories faster than ever. Plus, China's digital logistics network is the most efficient. So, in the Chinese market, more and more foreign companies are finding themselves rapidly losing competitive edge.
The New GoGlobal Wave
As the old drivers of economic growth slow down and new ones are still proving their worth, China's progress might seem to be slowing. It's understandable, given the COVID-19 pandemic's disruption and the halt of global interactions in the past few years, that many international businesspeople and investors may not fully grasp the changes happening in China. Naturally, this leads to a somewhat gloomy view of the current situation.
However, China's new drivers have already shown their formidable potential in many areas. Since 2020, a powerful 'new wave of goglobal' has swiftly risen in China. Particularly since the lockdowns in 2022, businesses across different sectors in China have been actively pursuing growth abroad. This 'new goglobal wave' is driven by a new generation of entrepreneurs and capitalizes on China’s strengths—supply chains, engineering talent, and digital capabilities—and marks a shift from being an OEM/ODM base to becoming an exporter of brands and technologies worldwide.
Notable success stories include the bubble tea chain Mixue (蜜雪冰城), which launched its first international store in Vietnam in 2018 and now operates over 4,000 locations overseas. E-commerce platform Pinduoduo's international version, Temu, which is projected to exceed 15 billion USD in GMV in just one year by 2023; the portable energy storage company EcoFlow (正浩创新), founded in 2017, reaching a revenue of 1 billion USD from international market in 2022. And consider the efficiency leap in logistics: what used to take around 25 days for Chinese cross-border e-commerce platforms to deliver to the Middle East now takes roughly 7 days.
Vast Market Opportunities
Alibaba once came close to rivaling Amazon's market value, thanks to the massive e-commerce market in China. However, it became clear that to be a world leader, a company must reach beyond China. ByteDance's success around the globe and Pinduoduo's bold moves into international markets might even surpass tech giants like Meta and Amazon.
The fundamental idea is this: Chinese online platforms are building a 'high-speed highway' connecting Chinese suppliers to customers worldwide. With China's robust supply chain, advanced digital technologies, and the '996' work ethic, these companies are poised to be more competitive than their overseas counterparts.
My travels this year took me to over 20 countries, where I found that in Southeast Asia, the Middle East, Africa, and Latin America, the digital infrastructure is largely created by Chinese entrepreneurs or overseas Chinese. For instance, Transsion (传音) from Africa, the express delivery company J&T (极兔) starting from Indonesia, and the fintech unicorn Stori in Mexico, were all founded by Chinese or people of Chinese descent—there are many such examples.
Chinese brands, sharpened by fierce competition at home, are highly competitive when they go global. Look at DJI (大疆), Anker Innovations (安克创新), Insta360 (影石创新), Haidilao (海底捞), BYD (比亚迪), Bosideng (波司登), and Luckin Coffee (瑞幸咖啡) — many are already global leaders.
Looking ahead, we expect a growing number of Chinese firms to earn a substantial portion of their income, maybe 30% to 50%, from international markets. It's likely that in any given industry, the top three global brands will include names from China. China is on track to transform from having the most Fortune 500 companies to boasting the most world's top 500 brands.
Today, more than a dozen Chinese companies in this sector are publicly traded, including Anker Innovations and ZhiOuTechnology (致欧科技). Firms such as SHEIN, Xingyun Group (行云集团), EcoFlow (正浩创新), and Insta360 are poised to join the public market in the coming years. By around 2027, we anticipate a significant surge in IPOs from these innovators.
In international markets, Chinese companies are well-positioned to generate an additional economic output of 100 trillion yuan.
I'd like to share with you some bold predictions for the next five years:
-By the year 2028, I see Luckin Coffee potentially overtaking Starbucks in the number of stores worldwide, aiming for around 50,000 outlets, with more than 20% located internationally.
-In the same timeframe, I expect Pinduoduo's international platform, Temu, to reach a gross merchandise volume (GMV) exceeding 300 billion USD, together with its Chinese business could surpass the global sales of Amazon at that point.
-By 2028, I believe Chinese digital logistics firms will be able to deliver goods globally within five days, or perhaps even three days, revolutionizing the speed of international commerce.
-Over these next five years, we anticipate over 30 new public offerings from companies engaged in "Silk Road e-commerce" or the 'new goglobal ' trend. We also foresee numerous Chinese companies spinning off their international divisions, adding dozens more to the list.
While these forecasts are ambitious, their implications are worth considering:
-Intense competition from Chinese businesses may lead to a decline in less competitive firms globally.
-Forward-thinking Western companies should deepen their investment in China, treating it as a hub of innovation and learning from Chinese businesses to stay competitive.
-Investors from the West would do well to increase their stakes in China and its entrepreneurs. Diversifying investments between China and the U.S. is prudent. Furthermore, the growing presence of globally competitive firms founded by Chinese or overseas Chinese entrepreneurs, particularly in the 'new goglobal' sector, presents substantial opportunities.
At EqualOcean, we're dedicated to helping Chinese companies expand their global footprint and supporting foreign businesses entering the Chinese market. Leveraging our comprehensive understanding of China's industries and our wide network of resources, we offer services such as industry analysis, market research, and networking support. We have proudly served prominent clients like Intel, Amazon, Bain Capital, Microsoft, and iFood, to name a few.
With the clock ticking, I'll wrap up my talk with Charlie Munger's recent point of view: China has better prospects over the next 20 years than almost any other big economy. The leading companies in China are stronger and better than practically any other.
Thank you once again to CCV for this opportunity, and thank you all.