China's new economy

René Burri, Former Summer Palace. Dead lotus flowers in Kunming Lake. Beijing, China, 1964


Considerations about the last 20 years and the next 20 years

China's new economy is at a critical turning point. Over the past two years, as a venture capitalist (VC), our understanding of industries, companies, technologies and investment logic has undergone major changes. We used to divide the history of new China into “the first thirty years” and “the last thirty years” of reform and opening up. Today I would like to borrow this concept and divide China's new economy into "two decades, before and after".

The first twenty years are, of course, from 2000 to 2019. During this period, China's GDP increased by 9 times, forming the world's largest industrial chain and the world's second largest consumer market. It was the mega-industry and the market that created China's new economic takeoff.

In the first two decades, the most important result of China's new economy was the emergence of consumer Internet platforms. We are familiar with the fact that, backed by such a huge market in China, a platform can simply back its continued expansion with financial capital, eventually reach monopoly status, target a future monopoly, discount it at a huge net present value (NPV), and then use this NPV as valuation funding to help it achieve monopoly.

However, in terms of scientific and technological development, some foreign scholars conducted a study to locate each country's position on the “smile curve”. According to his research, we can find that from 2000 to 2019, although the scale of China's economic industry has increased greatly, it has always been in the middle position, that is, the manufacturing and assembly links, compared to the two ends of R&D and sales, the added value is relatively low.

However, China has also achieved industrial upgrading in some fields, such as high-speed rail, new energy, 5G, etc. But these R&D-heavy embedded technology industries are all dominated by government departments, and the government is their investor or main customer.

Thus, last year, General Secretary Xi Jinping mentioned in his speech that the new round of scientific and technological revolution and industrial transformation has given a strong impetus to economic development, and also had a profound impact on employment and income distribution, including some negative impacts, which need to be effectively addressed and resolved.

In my opinion, the first two decades of China's new economy were essentially a “capital-leveraged country”. Consumer internet mainly depends on business model innovation, and technology content is not high. For example, the QR code that we usually scan was invented in the 1990s. The reason why it develops so fast is that it can maximize the positive external benefits created by the country in the development process, such as increasing the disposable income of Chinese residents, improving logistics and transportation, and popularizing information. Yes, it's not what we entrepreneurs do.

However, the negative external effects generated by this all-win capital development model supported by the State, results in “golden age” problems for the whole society, such as increased income inequality and lack of social security for new workers, etc. among other socioeconomic issues.

Thus, the central government proposed “high quality development” and “common prosperity”, promoting healthy economic development, optimizing the distribution structure, creating opportunities for more people to become rich, avoiding successive movements of evolution and involution. This is a major turning point and an important opportunity for China's new economy, and it is also the beginning of the next two decades of China's new economy.

The next two decades of China's new economy must be one of “leveraged national capital”. Under the guidance of the national grand strategy and through capital-driven industrial modernization, China's economy can realize the transformation from large-scale development to high-quality development.

On the “Smile Curve”, China will not only have to operate on a large scale, but also keep moving towards the upper left corner. Going up is to increase the industry's added value, which will bring more high-skill jobs, further increase per capita income, and at the same time reduce costs and increase efficiency through technological empowerment, and maintain the competitiveness of Chinese manufacturing in the world. Moving to the left is to improve research and development capabilities, so as to solve the problem of locking key technologies.

In the new stage of development, our investment should focus on “high-quality development + inclusive benefits”. Our venture mainly focuses on three main lines. The first is supply chain transformation and optimization. China has the world's largest industrial and supply chain, but it is still relatively fragmented and generally lacks the capacity to transform technology and information, so there is huge room to be tapped to increase its value.

The second is the replacement of embedded technology imports. For example, chips: China's biggest annual import is chips. Because of the global shortage of semiconductors after the epidemic, oil prices have dropped a lot. China imported chips worth 350 billion yuan in 2020, more than twice as much as crude oil in second place.

Another example is medical equipment. Many medicines and medical equipment in China depend on high-priced imports. There is plenty of room for home replacement. Once nationalization is achieved, the cost of medical consultation can be greatly reduced.

The third is sustainable development. Now the whole world is striving to achieve carbon neutrality and China is very advanced in this regard and has made huge investments. For example, photovoltaic power generation costs US$100 per kilowatt-hour of electricity in the early stage of overseas development, but after the continuous development of Chinese enterprises, the cost has now dropped to a few cents per kilowatt-hour of electricity, which is why it can have large-scale applications. Similar to electric vehicle (EV) batteries, batteries made in China have greatly reduced the cost of producing EVs, which is why EVs have developed so rapidly in recent years.


three cases

What kind of achievement will China's new economy achieve in the next two decades? Let me share three cases with you.

The first company is called Baibu, which is the largest smart supply chain platform for textile fabrics in China. Textile is a trillion-scale market, and 90% of the world's textiles are made in China. But China's textile supply chain is at a very primitive stage, with tens of thousands of manufacturers spread across the Yangtze River Delta and Pearl River Delta.

So what Baibu is doing is the industrial Internet of the textile industry, linking the upstream e downstream from information asymmetry, efficient configuration, transforming the physical factory into a cloud factory, connecting hundreds of thousands of looms, optimizing production capacity and reducing costs and increasing efficiency.

The second company is called Ursa Major. Welding is a traditional manufacturing industry and a huge industry. Welding involves almost all industrial fields. Welding is necessary for building bridges, ships, cars and houses. Its market size is also in the hundreds of billions.

But welding is a very traditional industry that relies heavily on the skills and experience of operators. Now there are less and less good welders, and young people are not willing to do it, so we are facing the dilemma of a talent gap after 80s and 90s. Ursa Major uses AI to train welding robots, which can solve the problem of shortage of welding workers at once, fast and well.

The third company is called Baioheng, which is also in a low-key area – the cement industry. Many years ago a Frenchman invented a cementitious material technology that can transform foundry industry waste into concrete with cement-like properties. This technology was developed in the laboratory for many years and then the Australians continued its development but finally did not put it into practical application. First, there are not many foundries in these countries, and you cannot find production waste as a raw material; second, these countries also don't have much demand for cement.

In the end, several Chinese found this a great business opportunity, as China has the largest foundry industry in the world, and a large amount of waste that cannot be disposed of, making it a headache for companies. On the other hand, China is focused on infrastructure and needs a lot of cement. In addition, the State Council has very strict requirements for peak carbon, and cement production is a major carbon emitter because it needs to calcine limestone, which is responsible for about 20% of the country's total emissions, so the State strictly limits cement production capacity. This geopolymer material from Baioheng does not need limestone or calcination in the production process, and the carbon emission generated is very small, only 30% of that of cement, so it can kill three birds with one stone and settle very quickly in various provinces of the country.

The companies mentioned above have a common characteristic: they are all enterprising companies, but through a key technology they leveraged a large industry and quickly became sub-sector leaders. This phenomenon also exists in other developed countries: a large industrial chain can sustain hundreds of “invisible champions”. China is the world's biggest producer and there must be hundreds of “invisible champions”. Therefore, 20 years after the high-quality development of the new economy, investors cannot blindly pursue financial scale as before, but must focus on quality and work with a deeper understanding of the industrial chain and supply chain.


Secretary General's speech

The above are some of my understandings of China's new economy and some reflections on high-quality development in the future. Finally, I hope to study with you the Secretary General's speech “A correct understanding and apprehension of the main theoretical and practical issues in the development of my country” published by the magazine seeking the truth. I am particularly impressed, and look forward to sharing it with you as a guideline that we should always keep in mind in our future investments.

The first point is to focus in the direction of common prosperity. Common prosperity is the essential requirement of socialism with Chinese characteristics, and we must pursue business opportunities that create inclusive value in our investment.

The second point is the Secretary General's discussion on capital. Marx and Engels did not encounter large-scale capital problems in those days. The establishment of a socialist market economy was something that the Communist Party of China discovered and led the country to “cross the river by feeling the stones”. The most essential characteristic of capital is the pursuit of profit, which is engraved in capital's DNA. However, in China, capital must understand two principles: first, it must closely integrate its own investment return interests with national interests, and actively play the role of factors of production.

Therefore, the next two decades of China's new economy also bring an era full of opportunities for our investment industry. If we can seize the opportunities of the times and add value to the overall situation of high-quality development, we can make a difference in the new era and contribute to the healthy development of the socialist market economy.

The above is my opinion that I share as an investor: let's roll up our sleeves and work hard together to make a good “second half” of China's high-quality economic development.

* Li Shimer é founder and managing partner of Becoming Capital.

Speech at the 2022 Global Venture Capital Conference hosted by the Qingdao Municipal People's Government, June 10-11.

Translation: Arthur Scavone.

Originally published in Beijing Cultural Review

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