China High-Tech Companies

China Investing, The Pain and the Perks — Harvard Business School Global Alumni Lecture

Leave a Comment / October 10, 2017

 

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It was a delight and a privilege to give a talk on China investing to Harvard Business School’s global alumni organization. If you’d like to see the slide deck, please click here. The audio version of the lecture, done by worldwide webcast,  is also up on YouTube.

The topic was a big one — why have China investment returns so often failed to keep pace with the phenomenal growth in the country’s economy, and can investors do anything to improve the odds of success? Given an hour to discuss, I could only really scratch the surface.

A key takeaway: the past needn’t be prologue. Investing in China may prove less vexatious in the future. In part, that’s because of the growth of a mass affluent consumer market in China, a shift that plays to the strengths of many US, European and East Asian companies and institutional investors. Second, of course, everyone now can learn from past mistakes and misperceptions.

As I said in closing, “China will continue to amaze, inspire and stupefy the world. Chinese have done very well and will do better. At same time, those of us investing in China may do a little better here in years to come than we have up to now. More of the newly minted trillions in China just may end up sticking to our palms.”

 

 

 

Venture Fundraising in Yuan Soars as Investors Target Chinese Tech Firms — The New York Times

Leave a Comment / August 11, 2020

 

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HONG KONG (Reuters) – China-focused venture capital funds are increasing their bets on local technology companies and a further opening of Chinese domestic capital markets, raising money in the yuan at the fastest pace in five years.

Fund managers have raised 95.8 billion yuan ($14.54 billion) this year through late September in funds denominated in the Chinese currency, which is also known as the renminbi, compared with 56.7 billion yuan in all of 2016. That puts 2017 on pace to be the biggest year since 2012, when 145.8 billion yuan was raised, according to data provider Preqin.

There are currently 78 funds looking to raise as much as another 1.15 trillion yuan over the next couple of years, Preqin said, most of it coming from mammoth-sized state-owned entities and so-called government guidance funds, which seek to foster domestic innovation in different industries from advanced engineering and robotics to biotechnology and clean energy.

 Those include the 350 billion yuan sought by the China Structural Reform Fund, 200 billion yuan targeted by the China State-Owned Capital Venture Investment Fund and a proposed 150 billion yuan for the state-owned Enterprise National Innovation Fund.

The enormous size of the fundraising ambitions of the Chinese state-backed funds means it may take some time before they reach their final goals. The China Structural Reform Fund, which was launched in 2016, has raised 20 percent of its registered capital and its president said in an interview with Caixin Global that funding will be completed by the end of 2018.

“We’re at the all-time highest of capital-raising high water marks, with a tsunami of government-backed entities seeding incubators, VC funds, locally, provincially, nationally,” said Peter Fuhrman, CEO of China-focused investment bank China First Capital. “China has a lot of money in its government apparatus. It wants to seed innovation and entrepreneurship and this is how it’s doing it.”

The surge contrasts with the slowdown in seed financing for start ups in the United States, which is down for the past two years. It also compares with flat growth expected for U.S. venture capital fundraising in 2017, according to estimates from the National Venture Capital Association (NVCA).

CATCHING ENTREPRENEURS

Firms such as Lightspeed China Partners, Morningside Venture Capital, GGV Capital and investment and merchant bank Ion Pacific that previously only had U.S. dollar funds are launching their first funds in yuan. Others like Hillhouse Capital, Sequoia Capital China and China Renaissance that have raised funds in both currencies are adding to their yuan cash pile with new funds.

Key to those firms is to not lose potential investment opportunities in sectors closed to foreign investors or miss out on investing with the Chinese entrepreneurs who now want to list their companies locally instead of in the United States.

“Catching the right entrepreneurs in the ecosystem is our number one priority, so currencies to us are just tools, those are the tools that I need to catch these entrepreneurs,” said Harry Man, partner at Matrix Partners China, which has funds in both currencies. “That’s why if you don’t have RMB in your hand, ultimately you’ll be missing 50 percent of the deals. Then you’ll be forced to raise an RMB fund and that’s why everybody is doing it.”

Sequoia Capital China, which backed top Chinese technology firms such as Alibaba Group (BABA.N), is looking to raise at least 10 billion yuan for a new fund, while Hillhouse Capital, an early investor in companies including Tencent Holdings Ltd (0700.HK), Baidu Inc (BIDU.O) and JD.com Inc (JD.O), is targeting about 8 billion yuan for its fund, sources told Reuters.

The investment management arm of securities firm China Renaissance is also adding to its yuan reserves with a new fund worth about 6 billion yuan, according to a person familiar with the plans who couldn’t be named because details of the fundraising aren’t yet public. Ion Pacific is raising 1 billion yuan for its debut fund in the Chinese currency, while GGV Capital is about to close fundraising for its first yuan-denominated fund.

“Some sectors don’t allow foreign investors, so for example, in the culture and media industry you need to apply for certain licenses like video licenses and you need to be a local investor,” said Helen Wong, a partner at Qiming Venture Partners.

“Now the IPO window is open for the local stock market, so that encourages a lot of companies to go for a local listing,” she added, in reference to the increase in IPO approvals by regulators in 2017 that is prompting more companies to start preparations to go public. Previously, a slow approval process and long line of companies waiting for clearance dissuaded many from those plans.

The shift would give an added boost to the Shenzhen and Shanghai bourses. China has had 322 new listings this year, raising a combined $22.9 billion, Thomson Reuters data showed. This already surpasses the 252 for all of 2016, even after the country’s securities regulator slowed the number of weekly IPO approvals in May.

It could also reduce the influence of the Nasdaq and New York stock exchanges, where many Chinese technology companies previously flocked when they went public.

“For the RMB side, you see more companies in restricted sectors like healthcare and media and certain parts of cleantech that needs government support to get started,” said Hans Tung, managing partner at GGV Capital. “You also see companies in the fintech space and a lot of them need a license to operate a business in the financial services industry, so they tend to want to list in China.”

As published in The New York Times.

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Why Has China’s GDP So Outpaced IRR?

Leave a Comment / September 23, 2017

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It’s the paradox at the core of China investing: why has such a phenomenal economy proved such a disappointing investment destination for so many global institutional investors, PE firms and Fortune 500s.

Financial theory provides a conceptual explanation. Investment returns are not absolutely correlated to GDP growth. China will likely go down in history as the best proof of this theorem. China as certainly delivered exceptional GDP growth. In per capita PPP terms, China is 43 times larger than in 1981, when I first set foot in China as a grad student. No other country has ever grown so fast, for so long and lifted so many people out of poverty and into the consumer middle class.

Commensurate investment returns, however, have been far harder to lock in. Harvard Business School’s global alumni organization invited me to give an hour-long talk on this topic this week. It required a quick gallop through some recent and not always happy history to arrive at the key question — does the future hold m0re promise for global institutional investors looking to deploy capital in China.

 For more detailed look at some reasons for the big disconnect between China’s national GPD growth and investment IRR, and some suggestions how to improve matters, please have a look by clicking here at the HBS talk slide deck.

Publicly-quoted shares in Chinese companies have failed by far and away to keep pace with the growth in overall national income. In the alternative investment arena, global PE and VC firms enjoyed some huge early success in late 1990s and first part of the 2000s. Since then, the situation has worsened, as measured in cash returns paid out to Limited Partners. One major reason — the explosion within China of Renminbi investment funds, now numbering at least 1,000. They’ve bid up valuations, gotten first access to better opportunities, and left the major global PE and VC firms often sitting on the sidelines. With tens of billions in dry powder, these global firms look more and more like deposed financial royalty — rich, nostalgic, melancholy and idle.

China this year will add approximately $1 trillion of new gdp this year – that’s not a lot less than the entire gdp of Russia. Indeed, China gdp growth in 2017 is larger than the entire gdp of all but 15 countries. Who is making all this money? Are all the spoils reserved for local investors and entrepreneurs? Can global investors find a way at last to get a bigger piece of all this new wealth?

Overall, I’m moderately sanguine that lessons have been learned, especially about the large risks of following the Renminbi fund herd into what are meant to be sure-thing “Pre-Ipo” minority deals. Active investment strategies have generally done better. With China’s economy well along in its high-speed transition away from smokestack industries and OEM exports to one powered by consumer spending, there are new, larger and ripe opportunities for global investors. In virtually all major, growing categories of consumer spending, Western brands are doing well, and will likely do better, as Chinese consumers preferences move upmarket to embrace high-quality, well-established global household brand names.

Harvard, its alumni and benefactors have a two hundred year history of investing and operating in China. So, there’s some deep institutional memory and fascination, not least with the risks and moral quandaries that come with the territory. The Cabot family, at one time among America’s richest, provided huge grants to Harvard funded in part by profits made opium running into China.

Harvard Management Company, the university’s $35 billion endowment, was an early and enthusiastic LP investor in China as well as large investor in Chinese quoted companies including Sinopec. Their enthusiasm seems to be waning. Harvard Management is apparently considering selling off many of its LP positions, including those in PE and VC funds investing in China.

This looks to be an acknowledgment that the GP/LP model of China investing has not regularly delivered the kind of risk-adjusted cash-on-cash returns sophisticated, diversified institutional investors demand. While China’s economy is doing great, it’s never been harder to achieve a successful private equity or venture capital investment exit. True, the number of Chinese IPOs has ratcheted up this year, but there are still thousands of unexited deals, especially inside upstart Renminbi funds.

While decent returns on committed capital have been scarce, the Chinese government continues to pour billions of Renminbi into establishing new funds in China. There’s hardly a government department, at local, provincial or national level that isn’t now in the fund creation business. Diversification isn’t a priority. Instead, two investment themes all but monopolize the Chinese government’s time and money — one is to stimulate startups and high-tech industry (with a special focus on voguish sectors like Big Data, robotics, artificial intelligence, biotech) the other is to support the country’s major geostrategic initiative, the One Belt One Road policy.

One would need to be visionary, reckless or brave to add one’s own money to this cash tsunami. Never before has so much government money poured into private equity and venture capital, mainly not in search of returns, but to further policy and employment aims. It’s a first in financial history. The distortions are profound. Valuations and deal activity are high, while returns in the aggregate from China investing will likely plummet, from already rather low levels.

Where should a disciplined investor seek opportunity in China? First, as always, one should follow the money — not all the government capital, but the even larger pools of cash being spent by Chinese consumers.

In China, every major consumer market is in play, and growing fast. This plays to the strengths of foreign capital and foreign operating companies. There are almost unlimited opportunities to bring new and better consumer products and services to China. Let the Chinese government focus on investing in China’s future. High-tech companies in China, ones with globally competitive technology, market share and margins are still extraordinarily rare, as are cash gains from investing here.

Meantime, as I reminded the HBS alumni, plenty of foreign companies and investors are doing well today in China’s consumer market. Not just the well-known ones like Apple and Starbucks. Smaller ventures helping Chinese spend money while traveling globally, or obtain better-quality health care and education options, are building defendable, high-margin niches in China. One company started by an HBS alumnus, a native New Yorker like me, is among the leading non-bank small lending companies in China. It provides small loans to small-scale entrepreneurs, mainly in the consumer market. Few in China know much about Zhongan Credit, and fewer still that it’s started and run by a Caucasian American HBS grad. But, it’s among the most impressive success stories of foreign investment in China.

Of course, such success investing in China is far from guaranteed. Consumer markets in China are tricky, fast-changing, and sometimes skewed to disadvantage foreign investors. For over two hundred years, most foreign investors have seen their fond dreams of a big China payday crash on the rocks of Chinese reality.

The rewards from China’s 35 years of remarkable economic growth has mainly — and rightly — gone to the hard-working people of China. But, there’s reason to believe that in the future, more of the new wealth created each year in China will be captured by smart, pragmatic investors from HBS and elsewhere.

 

As published by China Money Network

As published by SuperReturn

YouTube video of the full lecture to Harvard Business School alumni organization

 

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China Steps Up Warnings Over Debt-Fueled Overseas Acquisitions — The New York Times

Leave a Comment / August 11, 2020

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BEIJING — China moved on Friday to curb investment overseas by its companies and conglomerates, issuing its strongest signal yet that it wants to rein in runaway debt that could pose a threat to the country’s slowing economy.

Beijing has stepped up its efforts in recent months to restrict some of its most acquisitive companies from buying overseas assets, worried that a series of purchases by China’s conglomerates around the world has been driven by excessive borrowing.

In the latest move, a statement published by China’s cabinet, the State Council, said the authorities would punish companies for violating foreign investment rules, and establish a blacklist of businesses that did so. The statement was attributed to the National Development and Reform Commission, the commerce ministry, the foreign ministry and the central bank.

The statement pointed to acquisitions in sectors ranging from entertainment and sports clubs to hotels, but it was unclear whether or how the government would block deals.

It reiterated a warning issued in December that restrictions on overseas investments were being imposed because of “irrational” investment trends.

That statement said that the kinds of investments overseas it described were “not in accordance with macro-control policies.” The government wants to “effectively guard against all sorts of risks,” it said. The State Council document said the government nevertheless supported overseas investments in sectors such as oil and gas and in China’s “One Belt, One Road” program, which aims to promote infrastructure projects along the historic Silk Road trading route.

“It’s the loudest yet of wake-up calls that the government holds the keys to the lockbox of the country’s wealth, public and private,” Peter Fuhrman, chairman of China First Capital, an investment bank, said in an emailed response to questions. “Bad M&A is all but criminalized.”

A surge in overseas acquisitions by Chinese investors in recent years has ignited fears that soaring corporate debt levels could destabilize the country’s economy, the world’s second largest, and further weaken its currency.

Companies like Anbang Insurance Group, Fosun International, the HNA Group and Dalian Wanda Group have capitalized on cheap loans provided by state banks to snap up trophy assets such as the Waldorf Astoria hotel in New York and AMC Theaters.

Beijing’s clampdown on overseas investments shows how the interests of private business can collide with those of the Communist Party government. Beijing has made financial stability a priority this year, with the party’s congress scheduled in the fall. Among the party’s top concerns: controlling debt, stemming the flow of capital leaving the country, and China’s opaque “shadow banking” system.

But while the latest statement from the State Council is likely to have an impact on mergers and deals, a lot of Chinese money is already offshore and thus not easily restricted by the government in Beijing, said Alexander Jarvis, chairman of Blackbridge Cross Borders, which has advised Chinese companies on several soccer acquisitions.

“Deals are still going to happen,” Mr. Jarvis said. “There is plenty of Chinese capital overseas in offshore tax havens, in the U.S., across Europe, Hong Kong. I’m not sure they can fully control that capital.”

In a sign of that deal making, a Chinese businessman, Gao Jisheng, struck a deal to buy an 80 percent stake in Southampton Football Club, a soccer team in the English Premier League, for about $271 million. Mr. Gao obtained the loan from a bank in Hong Kong, a special administrative region of China that is administered under separate laws, Bloomberg reported on Thursday.

Geoffrey Sant, a partner at New York-based law firm Dorsey and Whitney, said it is likely that the latest announcement from Beijing will result in a “temporary pause” in overseas acquisitions.

“I think they are thinking there’s a bit of irrational exuberance in the market right now and they just want to cool that off,” said Mr. Sant, who represents Chinese companies. “It doesn’t make sense to permanently ban some of these areas.”

The State Council statement comes amid increased scrutiny of China’s “gray rhinos” — threats that are large and obvious but often neglected even so.

In recent months, the government has said it would increase scrutiny of companies’ balance sheets, warning that some of the largest companies could pose a systemic risk to the economy.

Encouraged by the slew of acquisitions made by some of the country’s most powerful tycoons, many smaller Chinese companies started looking overseas, spurred by China’s slowing economic growth to look for new markets.

Many, however, had no experience running the businesses they were targeting. In one such example, Anhui Xinke New Materials, a copper processing company in central China, made a deal to buy Voltage Pictures, an American film financing and production firm, for $350 million. A month later, Anhui Xinke pulled out of the transaction.

In other cases, it was not clear whether many of the big trophy acquisitions were actually good deals.

In 2015, Legendary chalked up a net loss of $540 million, according to a regulatory filing that Wanda Film filed on the Shenzhen Stock Exchange. Fosun International, meanwhile, paid a premium to buy French resort operator Club Med, which was until then an unprofitable company, eventually agreeing to a $1.1 billion price tag in 2015 after a long takeover battle. The firm made a small profit last year, according to Fosun’s filings. And last year, AC Milan, the Italian soccer club that was acquired by a Chinese consortium for about $870 million, made a net loss of about $88 million.

“I agree with the Chinese government. A lot of these deals are bad,” said Mr. Jarvis.

Companies have already started feeling the pinch of Beijing’s clampdown on overseas investments, which started in earnest in December.

The number of newly announced outbound mergers and acquisitions by Chinese firms fell by 20 percent in the first six months of 2017 compared to the same period in 2016, though it picked up in May and June, according to Rhodium Group, a New York-based research firm.

In March, Dalian Wanda, the Chinese conglomerate that owns AMC Theaters and Legendary Entertainment, was forced to abandon its $1 billion deal to buy Dick Clark Productions, the firm behind the Golden Globes and Miss Universe telecast after Beijing tightened its controls on capital outflows. Months later, Wanda sold a majority stake in 13 theme parks to property firm Sunac China Holdings and handed 77 hotels to R&F Properties, another real estate company based in the southern city of Guangzhou, for $9.5 billion.

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As published in The New York Times.

The New York Times Interview Transcript

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China’s New Plan for Silicon Valley Partnerships — Global Times

Leave a Comment / August 11, 2020

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The once-sizzling romance between China and Silicon Valley has cooled rather dramatically. This has some potentially serious consequences for both sides, but especially for China, which desires to invest in and gain access to some of the hottest new ideas from this cradle of innovation. A new strategy is needed.

Until recently, Chinese investment funds and companies were investing hundreds of millions of dollars every year into promising Silicon Valley start-ups, as part of a strategy to forge closer ties between the US high-technology sector and the large Chinese market. But the flow of funds has largely dried up.

There are two main reasons. First, Chinese regulators imposed new restrictions on large overseas investments. Second, the US government began to take a less friendly attitude toward Chinese technology investment in the US, killing several proposed deals and holding up approval on many others.

There is every sign that things in the US are going to get more restrictive rather than less. As someone convinced of mutual benefits from Chinese investment in US technology, it all seems highly counterproductive. The world needs more deep and extensive ties between the Chinese and the US high-technology world, not just in start-up investing but also in university research and scientific conferences, shared research and development (R&D) labs, and partnerships among large companies working in hot fields like semiconductors, robotics, artificial intelligence and clean energy.

What can China do? Rather than sending money out, it can encourage more US high-technology start-ups to relocate to China. There is a huge amount to be gained, both for China’s continuing industrial upgrading and for innovative US technology companies looking to grow into giants.

China has in abundance the most vital ingredients for technology start-up success:  capital, a market and talented managers and engineers. In many industries, for example advanced manufacturing, robotics and new battery technologies, China often has more to offer technology companies than the US.

China already has lured a lot of Chinese-born scientists and technologists back from Silicon Valley to open start-ups. The next step is to lure some of the best early-stage US technology companies to China. This addresses a big weakness in the US high-technology scene: companies there tend to view the China market as an after-thought. In reality, it is often the market most worth prioritizing.

I’m seeing how well all this can work on the ground. We’re helping a promising US robotics company build its future in China. It is establishing a Chinese company as its main asset and moving some of its core team to China. It expects to add many more staff in China. The breakthrough product it’s now perfecting has a huge potential market in China’s manufacturing industry.

Originally, this company was aiming to find investors in China to help it grow in Ohio. We helped explain why bringing the company to China would make a lot more sense. The company is applying for R&D grants as well as venture capital in China. Within a 100-kilometer radius of its future base in Shenzhen, South China’s Guangdong Province is the largest concentration of potential customers and partners in the world.

We foresee big mutual gains if China can attract many more exciting early-stage technology companies. They  will create jobs, pay taxes and invest in local R&D. The benefits to China should be far larger than just buying some shares in a technology company based in Silicon Valley.

The objective isn’t to evade US rules but to bring start-ups early in their growth stage to the market where the demand is greatest. Technology companies do best when they sit close to the biggest concentration of customers.

The Chinese government has already said it wants to make the country more of a magnet for global technology talent. Shenzhen is a great city for US start-ups to grow big.

The steep drop in Chinese investment in Silicon Valley may actually prove a blessing in disguise. It’s smart to keep more of that capital at home to invest in great technology companies in China. Many US technology start-ups will achieve far more, and far more quickly, if they make China their future home.

The author is Chairman and CEO of China First Capital.

http://www.globaltimes.cn/content/1061519.shtml

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China Probe of Big Companies Could Redefine Their Role Overseas — VOA News

Leave a Comment / June 26, 2017

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China is probing the loan practices of a group of big private sector conglomerates who have been on a high-profile global spending spree over the past few years.And although the review targets only a few of the country’s most politically-connected companies, some analysts see an attempt to increase government control over the role played by the private sector in foreign markets.

“I think this is an attempt to change the direction (of) the role these Chinese companies play in the Chinese economy,” says Paul Gillis, a professor at Peking University’s Guanghua School of Management. “To align them more closely with the policies of the government and to reduce the risks that actions of these private companies could end up having a shock effect on the economy as a whole.”

Chinese authorities say they launched the probe because of worries that highly leveraged overseas deals pose risks to China’s financial system. Officials have already expressed worries over mounting debt among Chinese lenders, some of which may remain hidden by China’s opaque lending networks.

Notable companies targeted

According to media reports, the list of companies under review is a relative who’s who of Chinese enterprises.

Among those reportedly targeted are Dalian Wanda, which owns the AMC Theaters chain in the United States and has been actively courting deals in Hollywood. High-flying insurance company Anbang, which owns New York’s Waldorf Astoria and Essex House hotels. Also on the list is Hainan Airlines, which bought a 25 percent stake in Hilton Hotels last year and another insurance company Fosun, which owns Cirque de Soleil and Club Med.

Over the past few years, China has seen massive amounts of capital moving overseas with companies and wealthy individuals buying assets abroad. Authorities began taking steps late last year to tighten controls. But many big conglomerates view foreign investment as a golden opportunity – given the low global interest rate environment – and worth the risk of highly-leveraged investments.

Peking University’s Gillis says it appears the Chinese government is coming to terms with how to effectively regulate private enterprises, companies that behave more aggressively than their state-owned counterparts. But he also sees the move as a further consolidation of power by President Xi Jinping, bringing companies more under the control of the central government.

“I think many of the companies had a pretty favorable treatment from prior administrations, and I think Xi Jinping is less enamored of these large private companies than some of his predecessors were.”

Expensive acquisitions by companies like Wanda and Anbang have thrust China into the global spotlight. But the news and commentary that followed the companies’ mega-deals has not always been positive.

FILE - People walk past an entrance to the Anbang Insurance Group's offices in Beijing, June 14, 2017.

People walk past an entrance to the Anbang Insurance Group’s offices in Beijing, June 14, 2017.

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In some cases, the deals have given China a black eye, says Fraser Howie, author of the Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise. Anbang’s attempt last year to purchase Starwood Hotels is one example, he says.

“This is high profile, global Bloomberg headline, Chinese company buys Starwood Group, next week it’s all off because the funding was never there, the due diligence could never be completed there, it made all Chinese bidders look horrible,” said Howie. “It looks dreadful for the party and for the leadership that these private entrepreneurs are running out there and yet China as a country is being impacted by it.”

Earlier this month, the head of Anbang was the latest to be swept up in the ongoing financial crackdown.

Regulating private spending?

Authorities so far have not said specifically what the targeted companies may have done wrong, if anything. Some analysts argue that the probe is just a part of a process that began six month ago to curtail the flight of capital from China.

“If cross-border M&A deals make sense, if they deliver strong returns, then there should be no problem either for bankers or those doing the buying. But, if Chinese groups overpay and get the money to do so from Chinese banks providing risky or underpriced loans, then Chinese regulators have an obligation to step in,” Peter Fuhrman, Chairman and Chief Executive Officer of China First Capital tells VOA in an emailed response.

Others see a deeper message about Xi Jinping’s view on the role that private companies should serve broader national goals.

Howie says the probe challenges assumptions about the role of private enterprises in China.

“If anyone ever thought these companies were truly private in the sense of being independent or beyond government reach. Clearly that was never true,” he says. “Everyone operates at the discretion of the Communist Party, even if you’ve done nothing wrong and clearly even if you are wealthy.”

 

https://www.voanews.com/a/china-probes-big-comanys-overseas-loan-practices/3913190.html

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China’s Millions of Alzheimer’s Patients Cannot Wait Any Longer for Specialised Care — South China Morning Post

Leave a Comment / August 11, 2020

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No health care problem looms larger in China than Alzheimer’s disease. It is the fastest-growing major disease on the mainland, with at least 9.5 million ­sufferers and perhaps as many undiagnosed cases. Almost a million Chinese are diagnosed every year with Alzheimer’s, with the number of new cases expected to rise sharply by around 2030.

Of the major diseases in China, Alzheimer’s also has the greatest mismatch between the number of patients and amount of specialised care available. The US has about half the number of Alzheimer’s patients, and 73,000 beds in specialist treatment centres. China has fewer than 200 beds. Alzheimer’s care is a US$250 billion industry in the US. In China, it has barely even begun.

By 2050, the number of Alzheimer’s patients in China is expected to reach 45 million, about half the number worldwide

The reason for this mismatch is clear. China’s health care system is already under strain to improve the quality of care overall, especially for diseases like cancer and hepatitis. Alzheimer’s is not a top priority, either for government policy or health care companies and investors.

But, over the coming decades, no disease will possibly impact more lives in China or possibly cost the country more to treat. By 2050, the number of Alzheimer’s patients in China is expected to reach 45 million, about half the number worldwide.

The total cost of treating all of them is impossible to estimate. Alzheimer’s is already the most expensive disease to treat in the US. With the number of cases there expected to double in the next 20 years, US government spending on Alzheimer’s care is on course to become the single most expensive part of the national budget, topping even military spending.

China is likely to take a different path, with more spending done by patients and their families, rather than through national health ­insurance. But the near-total lack of ­Alzheimer’s treatment centres, and trained nurses and doctors, is one of the most significant market failures in China’s health care industry.

 While the government, SOEs and private sector have been making significant investments in old age care, most of it has gone towards flats in retirement communities, for older people fundamentally still healthy and active. There has been little investment in elderly care. The urgent need is to provide specialist centres for people with Alzheimer’s and other chronic diseases that afflict the elderly, like Parkinson’s, arthritis, and post-stroke conditions.
In China, Alzheimer’s is still often seen not as a disease but as an inevitable and natural part of ageing

In China, Alzheimer’s is still often seen not as a disease but as an inevitable and natural part of ageing, a sad side effect of enjoying a long life. The national broadcaster, CCTV, has of late been airing public service advertisements to raise awareness about Alzheimer’s as a disease. This is the same education process the US and Europe began over 40 years ago.

Alzheimer’s, like diabetes, obesity or colorectal cancer, is a disease of economic success. As a country becomes richer and health care standards improve, people live longer. Nowhere has this transformation happened more quickly than in China, meaning an explosive growth in the number of Alzheimer’s cases as has never been seen before.

The average life expectancy in China has ­increased more in the past 30 years than in the previous 3,000. China’s life expectancy is still growing faster than that of developed countries.

The facts: Alzheimer’s is an incurable disease that afflicts a large number of older people, but not the majority. About 3 per cent of people aged 65 to 74, and 17 per cent of those between 75 and 85, will develop the disease. Those over 85 have a 30 per cent chance of getting it. It is a mystery why some old people get Alzheimer’s and most do not.

One interesting correlation: people with higher education levels are less likely to get the disease. The more you use your brain in complex ways, the more you may inoculate yourself against Alzheimer’s.

Rural people are more susceptible than city-dwellers. With a larger percentage of Chinese living in rural areas, the percentage of over-80s with the disease may end up higher than in the US, Europe or other more urbanised Asian societies of Japan, Korea, Taiwan or Singapore. Women are more likely to get Alzheimer’s, as they live longer on average.

Despite billions of dollars spent on scientific and pharmaceutical research in the West, there are no drug or surgical treatments for Alzheimer’s. Brain chemistry and biology make developing a drug for Alzheimer’s difficult.

Brain chemistry and biology make developing a drug for Alzheimer’s difficult

Despite this, there have been remarkable successes in Europe and the US, especially in the past 10 years, at care facilities managed by specially trained nurses and doctors. They work together to slow the progress of the disease in patients, through physical therapy, psychological counselling, special equipment to improve memory and mobility, one-on-one assistance, and a safe living environment designed for the care of people gradually losing their ability to think, speak and function.

The result: Alzheimer’s patients in Europe and the US now live twice as long after diagnosis than 30 years ago, an average of eight to 10 years.

Dozens of US and European-listed companies are focused on research and specialist Alzheimer’s care in nursing homes and clinics. China has none.

Traditionally in China, more money has been spent on children’s education than on medical care for older people. But, as Chinese live longer, the way money is spent across three generations is likely to change. The grandchildren of people in their 80s will have usually already been through college and are working. That leaves more money, both in the hands of older people and their children, to provide more high-quality care for those at the end of their lives.

Alzheimer’s care will also ­become a huge source of new employment in China

How should China build its Alzheimer’s treatment infrastructure and bring it quickly up to global standards? The biggest need will be providing care to those with average family income and savings levels.

If there’s one advantage to getting a late start, it’s that China can learn from the mistakes of, and adopt the best ideas developed in, the US, Europe and Asia. Japan, for example, is not only building specialist nursing homes for Alzheimer’s patients in the final years of their lives, but also community centres for those still living at home or with relatives.

Home nursing care is expanding in the West, ­improving and lengthening the lives of Alzheimer’s patients. Home nursing is still at a very early stage in China, but it is the fastest growing industry and largest source of new jobs in the US.

From little spending now on specialised Alzheimer’s care, China will certainly grow into the world’s largest market for it. Alzheimer’s care will also ­become a huge source of new employment in China.

It’s hard to think of a business opportunity in China with better long-term investment fundamentals than specialised Alzheimer’s care. But the greatest return on investment would be in limiting the suffering of Alzheimer’s patients and their families.

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Peter Fuhrman is CEO and Dr Wang Yansong, is COO, respectively, of China First Capital. This article is adapted from a version originally published in The Week In China

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http://www.scmp.com/comment/insight-opinion/article/2098539/chinas-millions-alzheimers-patients-cannot-wait-any-longer

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WikiLeaks Dump Adds to China’s Foreign-Tech Wariness — Wall Street Journal

Leave a Comment / August 11, 2020

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While the purported CIA documents leaked this week by WikiLeaks focus on the likes of Apple and Samsung, Chinese companies like Huawei do get some coverage. 

While the purported CIA documents leaked this week by WikiLeaks focus on the likes of Apple and Samsung, Chinese companies like Huawei do get some coverage.  
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By Eva Dou

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BEIJING—The latest WikiLeaks trove hands fresh ammunition to China’s cyberspace hawks, already pushing to reduce dependence on foreign products that could be vulnerable to espionage, observers say.

“The level of alarm in China will certainly increase, and with it a renewed determination to clamp down still further on U.S. technology companies’ operations in China,” said Peter Fuhrman, chairman of Shenzhen-based advisory firm China First Capital, which follows China’s tech sector.

The documents released this week—more than 8,000 pages in all—purport to show how the U.S. Central Intelligence Agency breaks into computers, smartphones, TVs and other electronics for surveillance. Many documents deal with leading non-Chinese brands like Apple Inc. and Samsung Electronics Co., though there is some coverage of Chinese products, including routers from Huawei Technologies Inc. and Baidu Inc.’s search engine.

The Chinese-product references are relatively sparse—and, in some cases, obscure. An undated list of CIA internal hacking demonstrations, for example, includes the “Panda Poke-Huawei credless exploit”—which one cybersecurity specialist says may be a method for taking advantage of vulnerabilities without logins or other “credentials.” There is also the “Huawei VOIP Collection,” a reference to “voice over internet Protocol,” making phone calls over the internet.

The document doesn’t say whether these methods were used for intelligence gathering. Huawei declined to comment.

A file titled “Small Routers Research-work in progress” lists router models from Huawei and ZTE Corp. It also mentions China’s three state-owned telecom companies and Baidu’s search engine, without further details.

The telecom companies and Baidu declined to comment.

The leak also offered what seem to be workaday notes among colleagues, including one CIA worker’s complaint about one piece of software’s default-language setting. “I don’t speak Chinese,” he griped.

WikiLeaks’ website is blocked in China, but Chinese state-run media reported the document leak, focusing on U.S. companies. Overall response has been muted, possibly because the official spotlight this week is on Beijing’s annual legislative gathering.

Cybersecurity experts say China maintains its own robust cyberhacking apparatus, though Beijing characterizes itself as purely a hacking victim, not a perpetrator.

“China is opposed to any form of cyberattack,” foreign ministry spokesman Geng Shuang said Thursday. “We urge the U.S. side to stop its wiretapping, surveillance, espionage and cyberattacks on China and other countries. China will firmly safeguard its own cybersecurity.”

In recent years, China has seized on leaks about U.S. surveillance to fan public support for its domestic tech products. U.S. tech brands felt a chill after former U.S. National Security Agency contractor Edward Snowden revealed NSA surveillance methods in 2013.

“It is like snow on more snow,” one China executive of a U.S. technology company said of the potential sales impact of the latest leaks.

These leaks could help countries counter CIA tapping and develop their own capabilities, said Nigel Inkster, former deputy chief of U.K. spy agency MI6.

“China, Russia et al will now both be better attuned to the risks posed by these capabilities,” he said, “and will no doubt seek to use them themselves.”

https://www.wsj.com/articles/wikileaks-dump-adds-to-chinas-foreign-tech-wariness-1489061414

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Turbulence and Paralysis: the Year Ahead in US-China Relations — Financial Times

Leave a Comment / August 11, 2020

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A month before his official inauguration, Donald Trump is already tossing diplomatic grenades in China’s direction. It is a sign of things to come. 2017 is shaping up to be a highly eventful, taut and precarious year for China-US relations. This is partly due to a simple scheduling coincidence.

2017 will be the first time ever when both the US and the PRC in the same year will usher in new governments. The US will kick things off on January 20th by swearing in Donald Trump as President. China, meanwhile, will undertake its own large political upheaval, its five-yearly change in political leadership, culminating in the 19th Communist Party Congress sometime late in the year. Virtually the entire government hierarchy, from local mayors on up, will be changed in a monumental job-swapping exercise orchestrated by Xi Jinping, China’s president.

The US under Mr Trump, with a Republican Congress at his back, seems intent to challenge China more assertively in trade, investment and as a currency manipulator while intensifying the military rivalry. China’s leadership, meantime, will become deeply absorbed in its own highly secretive, inward-looking and internecine political maneuvering. While Mr Xi tries to further consolidate his power, Mr Trump will likely be asserting his, leading to a globally ambitious US and an introspective China. This would represent something of a role reversal from recent precedent.

With the chess pieces all in motion, businesses should be plotting their moves in China with caution. The proposed Trans Pacific Partnership (TPP) trade deal is dead, leaving China’s still-evolving “One Belt,One Road” initiative as the main impetus for new trade flows in Asia. Donald Trump says he will push for what he claims to be more “more fair” bilateral trade deals. China, with its $365bn trade surplus with the US and high barriers to much inward investment, is clearly in his sights.

How will China react? The only certainty is that as the year progresses, China’s government apparatus will slow, and with it decision-making at policy-making bodies and many State-owned enterprises (SoEs). All will wait to hear what new tunes to march to, once the new ruling Politburo is revealed to the public in the fourth quarter.

Chinese officials at all levels are already jockeying for promotion. That means falling into line with Mr Xi’s anti-corruption campaign. The Party Secretary in Jiangsu province, one of China’s wealthiest, got an early head start. He instituted his own form of localized prohibition, ordering that government officials could no longer drink alcohol at any time, in any kind of setting, anywhere in Jiangsu.

The booze embargo did include one loophole. If senior foreign guests are present, alcohol can flow as before, like an undammed torrent.

As the Party Congress approaches, it will be even harder to get a deal with a Chinese SoE lined up and closed within any kind of reasonable time frame. Even after the Party Congress ends, it will likely take more months for any real deal momentum to return. Investment banking bonuses along with billings at global law, accounting and consulting firms are all likely to take a hit.

One other certainty: the renminbi will come under increasing pressure as the US ratchets up its moves to apply tariffs to Chinese exports and China’s own economy remains, relatively speaking, in the doldrums. How much pressure, though, is another question.

Anyone making predictions about the speed and degree of the renminbi’s decline is playing with a loaded weapon. A year ago some of the world’s biggest and loudest hedge fund bosses, including Kyle Bass, David Tepper and Bill Ackman, were proclaiming the imminent collapse of the renminbi. The renminbi, despite slipping by about 6 per cent during 2016, has yet to behave as the money guys predicted.

The Chinese government uses non-market mechanisms to slow the renminbi’s decline. A recent example: its abrupt move in November to tightly control outbound investment and M&A. But shoring up the currency will undercut one of China’s larger economic imperatives, the need to upgrade the country’s industrial and technological base. That will require a prodigious volume of dollars to acquire US and European technology companies such as recent Chinese deals to acquire German robot-maker Kuka and US semiconductor company Omnivision.

Chinese investors and acquirers not only face tighter controls on the outflow of US dollars. The US is also becoming more antagonistic toward Chinese acquisitions in the US and globally. Deals of any significant size need to pass a national security review overseen by a shadowy interagency body known as the Committee on Foreign Investment in the United States, or CFIUS.

CFIUS works in secret. In recent months, it has blocked Chinese investment in everything from a San Diego hotel, to Dutch LED light bulbs as well as US and European companies more explicitly involved in high-tech industry including semiconductor design and manufacturing. The strong likelihood is CFIUS will become even more restrictive once Mr Trump takes over.

Unlike most areas of bilateral tension between the US and China, this is one area where the Chinese have no room to retaliate in kind. China already has a blanket prohibition on investment by US, indeed all foreign companies, into multiple sectors of the Chinese economy, from tech industries like the internet and e-commerce all the way to innocuous ones like movies, cigarettes and steel smelting. So, for now, China quietly seethes as the US intensifies moves to prevent China investment deals from being concluded.

China will probably need to regroup and start playing the long game. That means investing more in earlier stage tech companies, especially in the Silicon Valley, and hoping some then strike it big. These venture capital investments generally fall outside the tightening CFIUS net. China wants to spend big and spend fast, but will find it often impossible to do so.

Even as political and military tensions rise between the US and China in 2017, one ironic certainty will be that a record number of Chinese are likely to go to the US as tourists, home buyers or students and spend ever more there. China’s ardour for all things American – its clean air, high-tech, good universities, relatively cheap housing, and retail therapy – is all but unbounded.

If informal online surveys are to be believed, ordinary Chinese seem to like and admire Mr Trump, especially for his business acumen. Mr Xi, understandably, may view the new US President in a harsher light. Xi faces cascading complexities as well as factional opposition within China. He could most use a US leader cast in the previous mold, committed to constructive cooperation with China. Instead, he’s likely to contend with an unpredictable, disapproving and distrustful adversary.

https://www.ft.com/content/b1801637-4219-3222-9f45-658740aa1187

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China’s depressed northeast is down but not out – if officials can fix its ailing state-owned firms — South China Morning Post

Leave a Comment / August 11, 2020

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I’m delighted to share the OpEd essay written by my China First Capital colleague Dr. Yansong Wang and published in today’s South China Morning Post. Her piece is titled “China’s depressed northeast is down but not out – if officials can fix its ailing state-owned firms”. It offers up her analysis on the disappointing economic conditions and vast untapped potential in her home region, China’s Northeast, formerly known as Manchuria, and in Chinese as 中国东北. I agree with her policy prescriptions as well as prudent optimism the region can be transformed just as America’s Rust Belt.

Her final paragraph notes a paradox familiar to me as well. In Shenzhen, we’re lucky enough to know two of China’s most consistently successful listed company chairmen, Mr. Gao Yunfeng , the founding entrepreneur of Han’s Laser Group  (大族激光集团), the world’s largest laser machine tool company, and Mr. Xing Jie, of a highly innovative and successful publicly-traded SOE, Tagen Group (天健集团).

Both, like Yansong, come from Jilin Province and all three have found success far from where they were raised, in Shenzhen. Yansong puts across her final point with conviction: “We need to create the conditions where the younger versions of these two successful entrepreneurs choose to stay in the northeast and build an economic future there that we can all take pride in.”

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–Dongbei Yansong Wang

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Over the course of my 35 years, China’s northeast has gone from being the country’s economic powerhouse to its most systematically troubled large region. Much of the region’s enormous state-owned industrial complex is in difficulty, while gross domestic product growth continues to lag. The deepest and most poignant signs of the economic malaise are a falling population and the fact that the northeast’s birth rate is now one-third below the national average.

The concern about how to revive the economy animates not only the highest levels of the central government, but also many people who recall the key role the region has played leading China’s modernisation. The concern is warranted. It now needs to be matched by some fresh thinking and new policy initiatives. I’d like to see the northeast become a laboratory for bold ideas about how to restructure state-owned enterprises in China.

I care deeply about what happens in the northeast. Though I now live and work in Shenzhen, I was born and raised in Jilin (吉林) province. My parents and 95-year-old grandmother still live there. I owe a lot of my life’s achievements up to now – undergraduate study at the University of Science and Technology of China in Hefei (合肥), followed by a PhD in physics from Princeton, to my current role in an international investment bank – to the mind-expanding public education I received growing up in the northeast.

The climate and its mainly landlocked geography are a challenge. But there is no reason the northeast should be a victim of its geography. The part of the US with the most similar conditions, the states of Minnesota, Michigan and Wisconsin, has successfully moved away from a focus on heavy industry to being a world leader in all kinds of advanced manufacturing and food processing. Great companies, including 3M, Cargill and Amway, all hail from this part of the US.

Could my home region produce its own world-conquering companies? I believe so.

Step one is to reorient investment capital away from the tired and often loss-making state-owned enterprises towards newer, nimbler private-sector firms. At present, too much investment goes to one of the most unproductive uses of all: new loans to companies that can’t repay their existing ones. This kind of rollover lending generally does not produce one new job or one new increment of GDP.

The central government is stepping up, announcing in August plans for 127 major projects, at a cost of 1.6 trillion yuan (HK$1.8 trillion). The problem isn’t so much that the northeast has too much heavy industry; it’s more that it has too much of the wrong kind. Basic steel is in vast oversupply. But the northeast could shine in developing speciality steel for advanced applications in China. One example that strikes me every time I ride on China’s high-speed rail network: too much of the special steel used on tracks is imported from Japan and Europe. We can make that.

How do we go from being a tired rust belt to a rejuvenated region pulsing with opportunity? The central and provincial governments should encourage more experimentation to push forward the scope and pace of state-owned enterprise reform. A starting point: banks could shoulder more of the cost of restructuring state firms. That will allow for new forms of mixed ownership, asset sales, and bigger and more effective debt-for-equity swaps.

I would also like to see the northeast become the first place where service industries, now mainly restricted to state firms – including banking and insurance – are opened up to private competitors.

There is no shortage in the northeast of the most important facilitator of economic development: a well-educated population. For now, sadly, too many of the entrepreneurially inclined leave the region. Indeed, two of the most visionary listed company chairmen I know are, like me, Jilin natives now living in Shenzhen, Gao Yunfeng of Han’s Laser and Xin Jie of Tagen Group. We need to create the conditions where the younger versions of these two successful entrepreneurs choose to stay in the northeast and build an economic future there that we can all take pride in.

Dr Yansong Wang is chief operating officer at China First Capital

http://www.scmp.com/comment/insight-opinion/article/2050099/chinas-depressed-northeast-down-not-out-if-officials-can-fix

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Bill Gross, America’s “Mr. Unicorn”, Plots A Future in Asia

Leave a Comment / November 18, 2016

 

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Few technology entrepreneurs start one unicorn, a tech company with a market valuation of over $1 billion. Elon Musk has started three. Xiaomi’s Lei Jun two. Bill Gross has started and exited from seven, and has another two in his active porfolio.

Gross is the founder and chairman of Idealab, one of America’s oldest and probably still most successful technology incubators. Idealab was established in 1996. Gross was 38 years old then. He had already started and sold two software companies. He decided to take some of that money, as well as some from investors he knew, and start his own incubator.

From the beginning, Idealab has pursued a unique path among technology investors in California. Unlike most other incubators and VC funds, Gross himself comes up with most of the ideas for the new Idealab companies. Idealab then provides the first round of capital for each new company, hires a CEO and Gross takes on the role as non-executive chairman. Idealab has a full-time team to manage the back office work like HR and accounting for new companies during their early stages.  Idealab headquarters is in an old brick warehouse in the California city of Pasadena, near Los Angeles, and close to Caltech, where Gross went to school.

In the last 20 years, Gross has started 150 businesses. Of these, 45 have had successful exits, either through IPOs or M&A. A similar number are still in the Idealab portfolio.

The unicorns Gross created include some of the most successful early successes in e-commerce and online advertising. The companies are: eToys, Overture, Tickets.com, Netzero, Centra, Shopping.com and  Citysearch. Two other Idealab companies have recently merged with other tech startups. These merged companies, Twilio and Taboola, also now have valuations above $1 billion. Over the years, Gross also started and sold companies to Google, eBay, AOL, AirBNB. Along with internet companies, Gross has also started companies in solar and renewable energy, robotics, online education, wireless networking, 3D printing machinery, home medical care.

Gross long ago stopped raising money from outside investors. Idealab is a corporation, not a fund. Gross has the kind of freedom most tech entrepreneurs can only dream of – the imagination and drive to start new technology companies, a few new ones every year, and the capital to help them grow. Idealab’s capital contribution into each new company is about $250,000. If a company begins to grow according to plan, Idealab then raises outside money from VC firms, mainly the large ones based in Silicon Valley. Idealab’s return on invested capital up to now: 13.5 times.

Gross was born in Japan, but moved to California as a boy and got his start as an entrepreneur while in middle school. For 20 years, he has seen technology business opportunities earlier than most people. Anyone interested in where technology is headed, the important problems it may solve, how to incubate successful startups, and how China and East Asia may become more deeply integrated into California’s innovation ecosystem should listen to what Gross has to say.

 

Venture capital investing and incubators have grown very large in the last few years, both in the US and also elsewhere including China. There’s still a lot of capital looking for good ideas. Let’s dissect please how you look at the world. What are the key “metatrends” you see that will impact the shape and size of the global economy over the next 35 years?

Let me take you through those quickly. Start with population growth. The projections are there will be 9.7 billion people on the planet by 2050, up from 7.4 billion today. Larger population means lots of possibly negative impacts and so areas where technology needs to come up with new solutions. What are the major challenges in the future? I think mostly about six. I’m an engineer, so let me give you a list:

  1. climate change;
  2. how to the meet the need to provide better, more affordable healthcare and prevention against global epidemics
  3. food security, having enough safe food available across the world
  4. the growing technological divide between people living with the benefits of modern technologies and those who are left behind
  5. the workforce of the future, how to make sure people have the right skills to find productive jobs
  6. the future of the internet, how to provide security and privacy to everyone using it.

 

The people working to solve these problems probably hope to win Nobel Prizes, not become technology entrepreneurs.  So, where do you see the concrete business opportunities, where there’s both a future market and a potential for some kind of new technology breakthrough?

Of course, you wouldn’t expect me to hand over the keys to my kingdom, to give you the exact business areas we are now working on. But, I can share the industries where I think there’s lots of opportunity worldwide and where we’re actively coming up with new business ideas and looking to start new companies. Again, if you don’t mind, let me give it to you as a list.

  1. Autonomous cars and drones
  2. Clean water and clean energy
  3. New education models, including MOOCs
  4. Agriculture technology, including urban farming, growing food closer to population centers
  5. Advanced machine-meaning and deep neural networks to provide better, smarter data and decision-making
  6. 3D Printing, using metal, new materials
  7. IoT consumer and business
  8. Home automation
  9. Virtual reality and human-computer interaction
  10. New forms of transportation, including hyperloop and perhaps even flying cars
  11. Space, inexpensive launches, to space mining and microsatellites
  12. Software and information security systems to manage each of these

While it’s still possible to start successful companies with limited capital and get to market quickly as we’ve been doing for the last 20 years, some of the newer business opportunities I like will need much larger amounts of money and a longer incubation period. But, the rewards for success will be larger than anything we’ve seen up to now.

 

Up to now, you’ve focused only on building breakthrough tech companies in California to serve to US market. There are other places in the world with money and markets for good technology.

Yes, I definitely see a fusion of powerful and positive forces taking place in Asia that could allow Greater China to emerge as an important constituent in globally-important innovation, both as a market and as a base of ideas and manufacturing. This will be good for China, good for Asia, good for the US, good for the world.

I’m an inventor, and so have always looked to China. I have huge respect for the ingenuity, diligence and entrepreneurship of the Chinese people. Look at the example of China’s greatest inventor, Lu Ban, who lived almost 2,500 years before America’s Thomas Edison. He came up with ideas for flying machines and all kinds of advanced wooden implements .

 

So what role can you envision China playing as one of the world’s centers of technology innovation?

China, like the US, is a place where a large domestic market, manufacturing strength, capital and entrepreneurial culture all come together.

A few years ago, I gave myself a challenge, to come up with one new business idea every day.  I’ve mainly been able to keep up that pace. We could start even more companies, but there’s often one big constraint. We can’t find enough great people to run each new company. Greater China is blessed with having a large number of talented managers and engineers. That’s a huge and valuable resource. On the downside, intellectual property protection in China isn’t nearly as robust as it needs to be.

 

All of Idealab’s billion dollar exits happened during the early years of the internet, with IPOs for companies including eToys, Citysearch, Tickets.com and the sale of online-advertising business Overture to Yahoo. Have big exits become harder?

IPOs have certainly slowed down. The total number of annual IPOs in the US has been falling since we got started 20 years ago. It used to be over 300 companies on average IPOd every year in the US. It’s now below 100. This year is looking like one of the slowest for US IPOs. A big reason is the cost and regulatory burden of being a public company in the US. Our exits now come from M&A.  We continue to do pretty well.

Let me quickly go over our three of our most recent M&A exits. The three are all in different industries — mobile phone security, solar energy and robotics. We started Authy to provide simple but more effective mobile phone data and transaction security. We merged it last year with Twilio, which IPOd this summer on the New York Stock Exchange and now has a market cap of over $4 billion.

RayTracker is a company we started to improve the performance and energy production from solar panels by getting them to track the movement of the sun across the sky. This has been a passion of mine since high-school, to make solar energy more affordable and efficient. We sold RayTracker to First Solar, a Nasdaq-listed company. Today ground mounted trackers like RayTracker invented account for more than 90% of all solar installations in the US and First Solar is a leader the field.

The other recent exit is a little bittersweet, because we may have come to market a little too early with a product consumers originally didn’t really understand. They do now. Being too early with an idea can lead to failure just as quickly as being too late.  Our company was Evolution Robotics, which was probably the first company to design hardware and software for a home robot to clean floors. We had to come up with substantial new technology in vision recognition and spatial mapping, including our own proprietary indoor GPS system using infrared. We sold our company to a competitor, iRobot, which is now by far the largest company in this industry.

 

Can we have a peek inside the current Idealab portfolio? Talk to us about companies you think have the potential to grow into billion dollar businesses within the next few years?

I mentioned already my lifelong passion for clean energy and making solar energy cheaper and more efficient. We have two companies now, Edisun and Cool Energy, that have unique solutions that are finding a lot of market acceptance. Edisun both generates and stores solar energy, so it can be delivered to the grid when it’s needed. Cool Energy uses a Stirling Engine to capture low temperature waste heat, like from machines in a large factory, and turn it into clean electricity.  It can also make electricity from waste cold, like the huge refrigeration vessels used for LNG storage.

Mark Andreesen, the guy who invented the first commercial web browser and is now a successful venture capital investor, has said that “software is eating the world”. He means that just about every product and service is going to need more and better software in the future. I agree. The problem is, where are all those new software engineers going to come from? We’ve started two companies to teach kids how to write software, CodeSpark and Ucode. We’re noticing CodeSpark has more and more kids in China using it to learn to write software. We need to come up with a Chinese version, as well as Japanese, Korean.

One other area where we see huge potential is capturing and analyzing more and better mobile data, then using it for more efficient advertising. This could be as big a future market as “Pay-per-click” online advertising that earns so much money for Google and Baidu. I have a longer history in this area than most people. Overture, a company I started and sold to Yahoo for $1.6 billion in 2003, was an early successful pioneer of online advertising.

 

In the last 20 years, you’ve started 150 businesses, and had ideas for hundreds of others. Few people anywhere at any time have done that much business creation. What you have you learned about the reasons why start-ups succeed and fail?

I believe that the startup organization is one of the greatest forms to make the world a better place. If you take a group of people with the right equity incentives and organize them in a startup, you can unlock human potential in a way never before possible. You get them to achieve unbelievable things.  But if the startup organization is so great, why do so many fail?

This matters to me as an investor and entrepreneur. I’ve started more failed companies than probably just about anyone else. They all looked promising at the beginning, had money and people in place, but ended up dying. Each time a company fails it’s heartbreaking for the entrepreneur. So, trying to get some usable analysis on this process may end up reducing the failure rate for me and I hope many others too.

I tried to look across what factors accounted the most for company success and failure. So I looked at the five key factors — the idea, the team, the execution, the business model and the timing. It accounted for 42 percent of the difference between success and failure. Team and execution came in second, and the idea, the differentiability of the idea, the uniqueness of the idea, actually came in third.

 

After 20 years at Idealab, and twenty years before that starting and running your own start-ups, aren’t you getting tired of this, the pressure, the risk, the uncertainty of starting new companies? There’s got to be an easier way to earn a living.

I think we are in a very exciting time where technology and innovation permeates everything we do, and every company.  If the previous 20 years of my life were devoted to fostering entrepreneurship, I would love my next 20 to be about pushing new technological boundaries to make the world a better place. To happen, it’s going to need Asia and California to push together.

 

Version as published by Nikkei Asian Review

Chinese version as published by Caijing Magazine (财经杂志中文版）

Bill Gross’s TED Talk on why startups succeed

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The Big Sort — The Economist

Leave a Comment / August 11, 2020

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“THE vultures all start circling, they’re whispering, ‘You’re out of time’…but I still rise!” Those lyrics, from a song by Katy Perry, an American pop star, sounded often at Hillary Clinton’s campaign rallies but will shortly ring out over a less serious event: a late-night party in Shenzhen to kick off “Singles’ Day”, an online shopping extravaganza that takes place in China on November 11th every year.

The event was not dreamt up by Alibaba, but the e-commerce giant dominates it. Shoppers spent $14.3bn through its portals during last year’s event. That figure, a rise of 60% on a year earlier, was over double the sales racked up on America’s two main retail dates, Black Friday and Cyber Monday, put together. Chinese consumers are still confident, so sales on this Singles’ Day should again break records.

It points to an intriguing question: how will all of those purchases get to consumers? Around 540m delivery orders were generated during the 24-hour spree last year. That is nearly ten times the average daily volume, but even a slow shopping day in China generates an enormous number. By the reckoning of the State Post Bureau, 21bn parcels were delivered during the first three quarters of this year.

The country’s express-delivery sector, accordingly, is doing well. In spite of a cooling economy, revenues rose by 43% year on year in the first eight months of 2016, to 234bn yuan ($36bn). And although the state’s grip on China’s economy is tightening, the private sector’s share of this market is actually growing. The state-run postal carrier once had a monopoly on all post and parcels. Now far more parcels are delivered than letters, and the share of the market that is commanded by the country’s private express-delivery firms far exceeds that of Express Mail Service, the state-owned courier.

China’s very biggest couriers have been rushing to go public on the back of the strong growth. Most of them started life as scrappy startups, and are privately held. But because of regulatory delays, which mean a big backlog of initial public offerings, many companies have resorted to other means. Last month, two of them, YTO Express and STO Express, used “reverse mergers”, in which a private company goes public by combining with a listed shell company, to list on local exchanges. In what looks to be the largest public flotation in America so far this year, another, ZTO Express, raised $1.4bn in New York on October 27th. Yet another, SF Express, China’s biggest courier, recently won approval to use a reverse merger too.

But investors could be in for a rocky ride. Shares in ZTO, for example, have plunged sharply since its flotation. That is because the breakneck growth of courier companies masks structural problems. For now, the industry is highly fragmented, with some 8,000 domestic competitors, and it is inefficient.

One reason is that regulation, inspired by a sort of regional protectionism, obliges delivery firms to maintain multiple local licences and offices. Cargoes are unpacked and repacked numerous times as they cross the country to satisfy local regulations. Firms therefore find it hard to build up national networks with scale and pricing power. All the competition has led to prices falling by over a third since 2011. The average freight rate for two-day ground delivery between distant cities in America is roughly $15 per kg, whereas in China it is a measly 60 cents, according to research by Peter Fuhrman of China First Capital, an advisory firm.

A handful of the biggest companies now aim to modernise the industry. Some are spending on advanced technology: SF Express’s new package-handling hub in Shanghai is thought to have greatly increased efficiency by replacing labour with expensive European sorting equipment. A semi-automated warehouse in nearby Suzhou run by Alog, a smaller courier in which Alibaba has a stake, seems behind by comparison but in fact Alog is a partner in Alibaba’s logistics coalition, which is known as Cainiao. The e-commerce firm has helped member companies to co-ordinate routes and to improve efficiency through big data.

Other investments are also under way. Yu Weijiao, the chairman of YTO, recalls visiting FedEx, a giant American courier, in Memphis at its so-called “aerotropolis” (an urban centre around an airport) in 2007. He was awed by the firm’s embrace of advanced technology. He returned to China and sought advice from IBM on how his company could follow suit. YTO is using the proceeds of its recent reverse merger to expand its fleet of aircraft, buy automatic parcel-sorting kit and introduce heavy-logistics capabilities for packages over 50kg.

There is as yet little sign that China’s regions will begin allowing packages to move freely, so regulation will remain a brake on the industry. More ominously, labour costs are rising. There are fewer migrant labourers today who are willing to work for a pittance delivering parcels. This week China Daily, a state-owned newspaper, reported that ahead of Singles’ Day, courier firms were offering salaries on the level of university graduates.

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http://www.economist.com/news/business/21710004-chinas-express-delivery-sector-needs-consolidation-and-modernisation-big-sort

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ZTO Spurns Huge China Valuations For Benefits of U.S. Listing — Reuters

Leave a Comment / August 12, 2020

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By Elzio Barreto and Julie Zhu | HONG KONG

Chinese logistics company ZTO Express is turning up the chance of a much more lucrative share listing at home in favor of an overseas IPO that lets its founder retain control and its investors cash out more easily.

To steal a march on its rivals in the world’s largest express delivery market, it is taking the quicker U.S. route to raise $1.3 billion for new warehouses and long-haul trucks to ride breakneck growth fueled by China’s e-commerce boom.

Its competitors SF Express, YTO Express, STO Express and Yunda Express all unveiled plans several months ago for backdoor listings in Shenzhen and Shanghai, but ZTO’s head start could prove crucial, analysts and investors said.

“ZTO will have a clear, certain route to raise additional capital via U.S. markets, which their competitors, assuming they all end up quoted in China, will not,” said Peter Fuhrman, CEO of China-focused investment bank China First Capital.

With a backlog of about 800 companies waiting for approval to go public in China and frequent changes to the listing rules by regulators, a New York listing is generally a quicker and more predictable way of raising funds and taps a broader mix of investors, bankers and investors said.

“ZTO will have a built-in long-term competitive advantage – more reliable access to equity capital,” Fuhrman added.

U.S. rules that allow founder Meisong Lai to retain control over the company and make it easier for ZTO’s private equity investors to sell their shares were some of the main reasons to go for an overseas listing, according to four people close to the company. U.S. markets allow a dual-class share structure that will give Lai 80 percent voting power in the company, even though he will only hold 28 percent of the stock after the IPO.

Most of Lai’s shares are Class B ordinary shares carrying 10 votes, while Class A shares, including the new U.S. shares, have one vote. China’s markets do not allow shares with different voting power.

ZTO’s existing shareholders, including private equity firms Warburg Pincus, Hillhouse Capital and venture capital firm Sequoia Capital will also get much more leeway and flexibility to exit their investment under U.S. market rules. In China, they would be locked in for one to three years after the IPO.

As concerns grow about a weakening Chinese currency, the New York IPO also gives it more stable dollar-denominated shares it can use for international acquisitions, the people close to the company said.

IN DEMAND

Demand for the IPO, the biggest by a Chinese company in the United States since e-commerce giant Alibaba Group’s $25 billion record in 2014, already exceeds the shares on offer multiple times, two of the people said.

That underscores the appeal of the fast-growing company to global investors, despite a valuation that places it above household names United Parcel Service Inc and FedEx Corp.

The shares will be priced on Oct. 26 and start trading the following day.

ZTO is selling 72.1 million new American Depositary Shares (ADS), equivalent to about 10 percent of its outstanding stock, in the range $16.50 to $18.50 each. The range is equal to 23.4-26.3 times its expected 2017 earnings per share, according to people familiar with the matter.

By comparison, Chinese rivals SF Express, YTO Express, STO Express and Yunda shares trade between 43 and 106 times earnings, according to Haitong Securities estimates.

UPS and FedEx, which are growing at a much slower pace, trade at multiples of 17.8 and 13.4 times.

“The A-share market (in China) does give you a higher valuation, but the U.S. market can help improve your transparency and corporate governance,” said one of the people close to ZTO. “Becoming a New York-listed company will also benefit the company in the long-term if it plans to conduct M&A overseas and seek more capital from the international market.”

China’s express delivery firms handled 20.7 billion parcels in 2015, shifting 1.5 times the volume in the United States, according to consulting firm iResearch data cited in the ZTO prospectus.

The market will grow an average 23.7 percent a year through 2020 and reach 60 billion parcels, iResearch forecasts.

Domestic rivals STO Express and YTO Express have unveiled plans to go public with reverse takeovers worth $2.5 billion and $2.6 billion, while the country’s biggest player, SF Express, is working on a $6.4 billion deal and Yunda Express on a $2.7 billion listing.

ZTO plans to use $720 million of the IPO proceeds to purchase land and invest in new facilities to expand its packaged sorting capacity, according to the listing prospectus.

The rest will be used to expand its truck fleet, invest in new technology and for potential acquisitions.

“It’s a competitive industry and you do need fresh capital for your expansion, in particular when all your rivals are doing so or plan to do so,” said one of the people close to the company.

http://www.reuters.com/article/us-zto-express-ipo-idUSKCN12L0QH

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Google Returns to China, As a Hardware Company — Financial Times

Leave a Comment / August 12, 2020

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The end is in sight for Google’s seven wilderness years in China. With none of the theatrics that accompanied its voluntary withdrawal from the country due to web-search censorship in January 2010, Google is now firmly on a path not only to return to China but also to potentially seize a spot alongside Apple as one of the most profitable tech companies there.

This is a likely outcome of Google’s announcement last week that it is entering with full force the global consumer hardware industry. Google Pixel mobile phones, Google Home artificial intelligence-enabled speakers, Google Daydream View virtual reality headsets, these will be the engines of Google’s revival in China. Based on what Google has so far revealed – including pricing – these products may find a large market among Chinese consumers.

The company has made no specific mention of plans to re-enter China. China’s government will not likely strew the ground with rose petals to welcome Google back.

Instead, Google can rely on China’s enormous grey market for electronics hardware to bring its products into China’s on-and-offline retail network. Hong Kong is usually the main transshipment point, not only because prices are lower than in the PRC, but the quality of hardware sold there is considered to be higher.

There is a precedent here. Apple took six years after the iPhone’s launch to ramp up its official sales channels in China by doing a deal with the main carrier, China Mobile. By that point, an estimated 30m to 50m grey market iPhones were already in use in China.

Mobile phones running Google’s Android system already dominate the Chinese market, with about 300m sold this year. Most are sold unlocked without carrier subsidy. None can freely access Google search, storage or maps. The Google Pixel will likely have similar limitations.

But Pixel will have huge advantages no other Android phone can match of closely integrating the operating system and device hardware to optimise the performance of everything else on the phone.

All of China’s many Android brands will be impacted, but none more so than the current market leader, Huawei. It now dominates the high-end Android market in China, even more so with Samsung’s recent woes. The Pixel will be priced to compete directly with Huawei’s flagship models.

It is not only in its home market of China that Huawei may get battered. It has also set great store on becoming the world’s leading Android phone brand in Europe. That will certainly be far harder to achieve now.

As it happens, Google’s announcement came at a time when just about everyone at Huawei, along with everyone else in China, was enjoying a week-long national holiday. They return to their desks this week to find the tech world disrupted. No one quite predicted Google would amp up its hardware strategy to this level.

Google had toyed around before, selling small volumes of its outsourced Nexus-branded mobile phone to showcase more of Android’s features. Huawei was one of the companies making Nexus phones. Google also bought in 2011 Motorola’s mobile phone business and unloaded it two-and-a-half years later to China’s Lenovo, a deal that has not worked out at all well for the Chinese company.

But, this time Google says it is not dabbling. It defines its future strategy as becoming, like Apple, a fully vertically-integrated hardware and software business, but one with the world’s most powerful system of proprietary voice and text-enabled artificial intelligence.

Google introduced three hardware products last week. More are certain to follow, including perhaps a mid-priced phone that will take aim squarely at China’s Xiaomi (among others), already reeling from falling sales and an inability to crack the more lucrative higher-end Android market.

Google’s advantages run so deep they can seem unfair. Not only does it own and develop the Android software its competitors except Apple rely on, it also already has one of the world’s best and most recognizable brands. Also worth noting, Google now has about $70bn in cash, mainly sitting outside the US, looking for new markets to conquer.

As for the other new Google hardware products – the home speaker and virtual reality (VR) headset – the market seems ripe for the taking. Despite billions of government dollars invested into Chinese companies working on machine-learning, artificial intelligence and VR, none has come to market in any significant way.

Even if they now do, none can match Google’s enormous breadth, capability and experience in human-machine dialogue.

Though a success in the US, Amazon’s Echo home speaker, which is capable of interacting with the human voice, is a non-entity in China. It does not understand spoken Chinese. Google, on the other hand, is quite adept at Chinese. While Google Maps, Gmail, Drive are all blocked in China, Google Translate is not.

Indeed, the Chinese government quietly stopped blocking it about a year ago. It’s the only one of Google’s major online offerings that can be readily accessed in China. The reason: Google Translate has become an essential tool for Chinese companies active internationally, as well as for many of the 150m middle class Chinese now vacationing abroad each year.

If Sundar Pichai, Google’s CEO, is correct, the world including China is moving from a “mobile-first to an AI-first world”. Google is already miles farther down this path than any Chinese company. It need not reestablish its search engine business in China to be a major force there.

As for China’s government, however it chooses to react to Google hardware products sweeping into China, its own aspirations to nurture globally-competitive indigenous tech companies probably just got a lot harder to achieve.

In the seven years since Google departed, China became in many areas even more of a tech Galapagos. Poised now to reenter China by the back door, Google should like the way the competitive landscape looks there.

If Google takes just 1 per cent of the China Android market – and my prediction is it will do markedly better – it will have $2bn of annual revenues in China, a business larger, more valuable and unassailable than when it pulled out.

Peter Fuhrman is Chairman & CEO of China First Capital, a boutique investment bank

 

As published in the Financial Times

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Can Xiaomi Reverse Its Slide in China? — CNBC Interview

Leave a Comment / September 28, 2016

 

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From King-of-Mobile to possible also-ran in two short years, China’s Xiaomi is struggling to reclaim its spot at the top of China’s domestic phone market. Here’s my interview on CNBC on the tough challenges Xiaomi faces. Nerves are starting to fray among investors who put money into the company less than two years ago at a $45 billion valuation.

To watch the interview, please click here.

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