In this episode of Industry Focus: Wildcard, Nick Sciple chats with Motley Fool analyst Ben Ra and Rui Ma, co-host of the TechBuzz China podcast to talk about Chinese technology companies coming out of the sector today. They discuss a slew of top Chinese tech companies, IP and political disputes, differences between U.S. and Chinese companies, and what the U.S. can learn from Chinese e-commerce and digital entertainment businesses. Finally, they share a promising company to watch out for in the space and much more.
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This video was recorded on August 19, 2020.
Nick Sciple: Welcome to Industry Focus. I'm your host Nick Sciple, joining me today is Motley Fool analyst Ben Ra, our special guest today is Rui Ma. Rui is an expert in Chinese consumer technology, with a background in venture capital and private equity in China. Today, she serves as a co-host of the TechBuzz China podcast.
Rui Ma, thank you so much for joining us today.
Rui Ma: Thank you so much for having me.
Sciple: So, we were talking before the show about your background in China, how you've come to develop an expertise in this space. Can you share that with our listeners and maybe give us a little pitch for the TechBuzz China podcast?
Ma: Yeah, sure. As I was saying, I was in China from 2007 to 2015. So, for eight years full-time working in investing across some multiple industries, but primarily in tech, and was lucky to be there while the tech ecosystem really grew in the early 2010s. For TechBuzz China, two years ago I started this podcast to fill what I saw was a gap in tech coverage of Chinese companies. And it was primarily to scratch my own itch and then also help my friends understand, but basically what we do is, we don't focus exclusively on public equities, but we do talk quite a bit about large companies. And so, sort of, very late stage start-ups, and we try to give perspective on the headline news -- we say, headline news that don't always make it into English language coverage. So, I think we were, for example, some of the first people to talk about the rise of e-cigarettes in China and a bunch of other topics.
Sciple: Yeah. So, just off the bat as we dive into Chinese tech just broadly, from an American perspective, why would you say it's important to understand Chinese technology and the companies coming out of that sector today?
Ma: So, I prepared some stats basically about how China and the U.S. are different, but I think everyone probably pretty much knows that China is a very large market. What many people might not realize is how digital it is, especially in consumer internet. So, enterprise software lags quite a bit, but in consumer internet, the penetration of smartphone devices, you know, we have almost a billion devices over there. And then also, e-commerce, depending on which stat you look at, it's between 25% and 44% [laughs] of total retail is e-commerce, which is higher than the U.S., even post-COVID.
And it's just very, I think, hard for people who haven't been there, to recognize that it's a mobile-first, highly digital and very large economy. That also, in the past 10 years, because of the government's encouragement and also just because of the growth of the economy, you also have a lot of talent and a lot of capital. So there's really interesting innovations coming out of China now.
When I left at the end of 2015, I still felt like it was still lagging Silicon Valley, but I think now it's pretty obvious in sectors such as e-commerce and digital entertainment, I think these are the two specific sectors in which China actually has some really interesting innovations. Some people say that they're leading, I would just say that they're different and there are lessons that the West could potentially learn.
Sciple: Yeah. This point of how Chinese technology companies are different and how Americans try to understand them. I think we hear this all the time when Americans will describe Chinese businesses as the _____ American business of China. So, you've got the Amazon of China, the Google [Alphabet] of China, the Tesla of China, that sort of thing. How useful are those descriptions actually in understanding these Chinese businesses?
Ma: I think that [laughs] it's starting to be more and more of limited use. Actually, I just tweeted, I think, last week about how one of the companies that we might discuss today, ByteDance, the owner of TikTok, and about how Neil Shen, who's probably the VC with the biggest Midas touch in China, he's the Head of Sequoia Capital China. And in an interview, he said that he did not invest in ByteDance because ByteDance couldn't position itself as _____ of China, because it was not following a Silicon Valley precedent. And that he said that he learned his lesson after he saw the company [laughs] succeed, and realized that, hey, actually I shouldn't be sticking to the old thinking of only investing in what we call clones or copycats. So I think that is starting to be more and more the case.
And then, of course, Pinduoduo I think is one of the companies that we'll be discussing today. And similarly, it's very difficult to pin down an American analogue or even a combination of analogues is hard.
Ben Ra: So, right, so for the American investor, because, you know, we look at China a lot, but we've had some experiences with companies like Luckin' Coffee, which you know, I believed in it one time. I heard that a lot of Chinese people on the street considered it a stock for dumb Americans; and this is something that I heard recently. So, how important is it to, like, actually be on the street and know what's going on in China?
Ma: [laughs] Yeah. Yeah, we did a whole episode on Luckin' and it was interesting to see its coverage in the U.S. media. In case there are anyone in the audience who don't know about this stock, it was basically a really, really big fraud. [laughs] So, made up substantially all of its revenues. I'm not sure that if you were just visiting China you would have necessarily, or even lived there or talked to people there regularly would have necessarily known it's a fraud, because I think that in itself was still a surprise to many Chinese people. I think, if you had a better understanding of the market, you probably might have just been more aware and might have been more like -- I think, if you read Chinese coverage of the company, a lot of people were just more skeptical of the products they were rolling out, right, because it would've just been more obvious to you if you were culturally fluent, that like, actually milk tea is a much bigger market but it has a lot of competitors. So, when they started launching these vending machines and new tea products, you could much more easily compare it to the competition and be like, oh, that's not actually competitive and that's just PR, or you know, basically have more context.
So, I would not say that in the case of that company, you know, everyone in China knew it's a fraud or anything, but I do think there definitely was a lot of discussion, like people were like, why do Americans love this company so much? [laughs] It must be because they like coffee. [laughs] So, there was a little bit of that, like there was confusion, I think, in China, why this was such a high-flying stock. But let's not also paper over the fact that people in China didn't know it was a fraud either.
Ra: So, I think one of the reasons is, because we think of China as this growing economy, and obviously, you know, economy in that situation, you kind of want to get at businesses that are in consumer goods, things that people actually buy. And I think in China, the market now, I mean, there's this IPO of the semiconductor company, for example, SMIC, [Semiconductor Manufacturing International Corporation] it's kind of a different focus than here. Like, I think the government plays a bigger role. So, the companies that are, sort of, seen as being endorsed by the government seem to have more popularity, at least in the market. How important is that link with the government, how do you think about that? Because it is a closer relationship, there are, you know -- and we consider the Communist Party here as like, you know, the worst thing in the world. I know it's much more complex than that. But all of these companies do have links with the Communist Party in terms of their employees being members and all that. What do you think about that interplay between government and business?
Ma: Yeah, so I think for the most part -- so, I worked in real estate investing my first two years in China, and that it's very obvious that having good government relations is crucial to your business. In fact, that might be the single [laughs] most important factor over everything else. And then I also did some media investing and that is also a very big factor. And the media is a protected industry, so again, it's very different.
But when it comes to digital companies and technology and internet companies, what I found and I confirm with many other people, [laughs] just in case it was just not my own private experience, which is that, in general, the government actually is not very involved until the company is much bigger, in which case, a lot of it is actually just people trying to take credit, OK. [laughs] So, every district and city is like, hey, I was the one who incubated Alibaba, you know, give me some credit for bringing all these jobs and upgrading my economy to a service economy, knowledge worker economy here in my district.
I think that when it comes to companies that have content on it, for sure there are local regulations where it's basically self-censorship and moderation is highly important. We've seen companies, even public-listed companies, have their apps taken off of app stores in China, because they violated something or another. And a lot of times it's not clear what the violation was. So, I think in that sense, for internet companies, that is typically what I see as the, sort of, relationship with the government, that the government will come in and regulate you and there's always the fear that you may have triggered something and you get taken off of app stores, which is horrible.
It is quite different from the case that you're talking about, which is SMIC, that is very different, I think. So, the semiconductor industry is one where China greatly lags behind the U.S. and Japan and whatever. So, that is also a very CapEx intensive industry. And the government has announced this $78 billion, what they call a big fund into the industry. And everyone in China can see, sort of, the trade tensions that's hinging upon protecting the -- on the U.S. side of protecting the semiconductor IP. So, I think in that case, it's actually quite different.
I would say, in general, in internet, what you really have to think about is changing rules, right? Like gaming regulations and approvals, not being approved for companies like Tencent, that depend on government approvals before they can monetize. And of course, when it comes to content companies the risk of overstepping some kind of boundary and then effectively getting temporarily banned is often the case.
Sciple: Yeah. I want to get into more of the content issues later on in the show. I know we're going to spend some time talking about TikTok, but you mentioned the lag of Chinese technologies in the semiconductor space and comparing and contrasting that with the internet. One of the questions I wanted to ask you about is a common narrative you'll hear in the U.S. around Chinese technology is that Chinese companies don't innovate, they're fast followers, IP theft, that sort of thing. To what extent is that narrative valid, is it more true in some sectors than others, can you, kind of, break that down for us?
Ma: Yeah, I mean, when I was working there, I represented, for example, media companies. There was always some kind of issue going on of IP infringement, etc. I think overall, it's gotten better, a lot of it because domestic businesses are now defending their IP. But how much better? Well, I was reading this dispute between, I guess, people [laughs] on Twitter talking about IP and defense in China versus the U.S. And I went and looked at the stats, and it's true that, in general, even the highest IP infringement in China did not get the kind of payouts that you see here in the U.S. But I don't know if that's necessarily an indictment of the Chinese system. And maybe it's just because we're really litigious here. [laughs] So, what I can say is, I think generally IP rights are rising. It's probably not still as good as the U.S. But I think it's greatly improved from the impression that many people have, which is like, there is no IP protection. And I don't think that's true anymore.
That being said, I think in general, if you're talking about, sort of, copying product design, for example, if you see just the amount of talk that came about when Facebook's Instagram copied Snapchat, [Snap] for example, right, like they'll never live that down, right? [laughs] But in China that's just not a big thing. People are just like, oh, innovation, that's an interesting product feature, I'm going to put it in my product. In fact, what you'll see is that, you know, maybe people will be putting into their products even when they shouldn't be. [laughs] So, you'll see these bloated products copying the best of many other things. And I think culturally, that's not considered a big problem. I wouldn't say it's necessarily applauded, but it's not considered like thievery, like it is here.
And also, I think what is something to think about is, in China, I would say, yes, you see product innovations on, like I said, e-commerce and digital entertainment, but also overall, I think there should be a distinction between fundamentally novel technologies and then innovations in the application of the technology. So, what I'm trying to say is that, basically, like the U.S. still leads, it seems, for the most part, especially in AI and all these other, in semiconductors, etc., in fundamental research. But I think China has a lot of strengths also in applying some of the technologies, once it's released into the wild. Because there's also value in that. You could be the first person to discover something, but you could be also the first company to apply it at scale. And those take different competencies, and of course, have different values, I guess, to the investor.
An example I like to give is like one, this is an old, old example, when I was doing technical diligence for proposed investment and peer-to-peer video sharing in China. This is over 10 years ago. You know, the consultants we picked were based in the U.S. and were Westerners, and they basically said, well, this technology is obviously not very novel, but the fact that the company you're looking at could support the number of concurrent users it could, just because China is a huge market, really shows that this company does have some core technology. They didn't develop peer-to-peer file sharing, but they're really good at applying it. And I think that might be more of the "innovations" that you see from China; the scaling up.
Sciple: Right. When you talk about these kinds of applications, innovations, that brings me to one of those companies you mentioned earlier, Pinduoduo, which I want to talk about a little bit here. I mean, this is a company founded in September 2015, five years later, it's one of the three biggest e-commerce companies in China. And it is one of these companies that defines the _____ of China definition. So, for folks who aren't familiar with this business, how would you describe Pinduoduo to an American?
Ma: [laughs] Well, as you noted in your notes, the prospectus describes it as Costco meets Disneyland, which I always thought was very weird. But I think what they mean is, Pinduoduo is basically this app where you go in, and I would say the primary value proposition is that things on it are cheap. That has several implications, it's cheap because basically a lot of the products are unbranded, which I don't think it's the same with Costco, [laughs] because I shop there and I shop branded goods. But the idea is that you go in, you are pushed a lot of these deals. And these deals, obviously, are different each time you log in. And they try to personalize it and whatnot. But effectively, you don't go in, typically, primarily you're trying to search for something, you go in, basically, and you interact with the feed. That's the primary selling point, where you're just like, shown all of these really, really cheap products. So, I think in that sense, that's what the founder means by it's like Costco, because you go in, you know, Costco doesn't even mark its aisles. So, you can go in and you, like, wander the store, and buy whatever deals appeal to you at the time.
What's another innovation it has is that it tries to use basically your social graph, your friend's network to do group buying purchases. So, it used to be that you needed to get tens of people to get a special price on a deal. So, like, the three of us, for example, could get a lower price if we bought together. But basically, that was a gimmick for it to really just acquire customers very quickly. And it was able to do that because it was invested in by Tencent, who still owns about 17%, I think, of the company. And Tencent owns, as the audience probably knows, WeChat, a billion MAU [monthly active users] super-app in China. And so, Pinduoduo was able to do that. And that's why some people call it social commerce, although I really think the social element of it is quite limited by this point, because they're at 600 million active buyers now. So, they're sort of [laughs] limited, I think, you know games they could play by like, oh, invite your friends to buy this with you together.
And then the final thing I think that is really different about Pinduoduo, that people might not realize is that, it actually works very closely with suppliers. So, like I said, a lot of the goods are unbranded. And Pinduoduo actually started off by this merger of a fruit selling platform and then a gaming company. So, the idea is that it takes consumer insights from the buying data and informs suppliers on what to make. So, they call that model C2M consumer-to-manufacturer. And you see a lot more companies in China doing this. And basically, the idea is that you take the consumer demand, you aggregate it and then you're able to pick out the most salient points and then inform the supplier, in fact, what to make. So, in that way you, sort of, have this virtuous recycle where the supplier doesn't have to wonder about what to make and how much to make, that they already know. So, it's much less risky for them. And hopefully that means they can give you better pricing. And then this model just chooses itself even further.
Ra: For me, it kind of exemplifies, you know, almost like the gamification of e-commerce, where there's like this merging between entertainment and e-commerce or social media and e-commerce. You see the live streaming going on Taobao. And also, I think, on Pinduoduo they have a livestream function now, where people could get on and show their product and you could buy it there immediately. I see that as being much -- I mean, Facebook is trying to do it with Facebook Shops. So, there's a little bit of that going on here in the U.S. And I think that's going to proceed here.
I feel that in China it's much more advanced. Can you describe what that world looks like in China, that sort of merging between entertainment, live streaming and social media and e-commerce, how does that work in China?
Ma: Yeah. Well, first of all, just the livestream e-commerce. So, a lot of people -- I think Amazon also tried to do this. I watched a couple of their live streams and I found it to be very, very [laughs] different from the experience in the Chinese apps. Which is that a lot of the e-commerce live streamers, you have sort of two different types, one is actually selling their own goods. So, these are literally farmers, they're just like live streaming on their phone next to their crops. Like, I watched one where there was this beekeeper and she was just like with her bees, you know, talking about her honey. And then you have other ones who are, sort of, more polished. They are almost like entertainment stars where they're like really funny, they're really good at talking up the product and getting the energy up. And then these people are selling other people's products primarily. So, they have deals with a lot of actually very big brands to sell things.
And the biggest live streamers in China are actually of the second category. Like, one lady, her name is Viya, she's the top livestream on Taobao. And just to give you some context of how big she is. The GMV, [gross merchandise revenue] not her revenues, because she takes a cut of it, but the total amount of goods she sold in 2018 was equivalent to one of the top malls in Beijing. [laughs] So, it's like taking a well-known mall you know, and then that person sold that much in one year.
And I think that the difference is like, yeah, it's live streaming, you get into a room where there could be thousands of other people. You could gift and get attention from the live streamer, give them, you know, like stuff that you buy from virtual currency. But the primary thing is that you can ask them questions and you can interact with them and you get the sense that, No. 1, you're more connected with them. So, maybe you start trusting them more. Like Viya, she has a lot of fans, which really trust her recommendations, and that she's giving them the best price.
But also, yeah, it is more entertainment in the sense that a lot of these live streamers have really interesting personalities. And at least for me, you know, watching a farmer sell their goods in their house or in their field, versus looking at a shelf of fruit in the supermarket is a very different experience. So, I think in that sense, it's still very different, yeah, from what the West is doing in terms of livestreaming and e-commerce, but that is definitely one of the areas in which, I would say, China is ahead. I mean, just looking at the amount of users who use it daily and the amount of GMV going through these platforms, that is probably one of the fastest growing e-commerce segments in China.
Sciple: You mentioned earlier the relationship between Tencent and Pinduoduo. They've built basically their entire business on top of WeChat. I mean, this is a nearly a $100 billion business built inside another multi $100 billion business. Can you talk about these dynamics of building a business inside WeChat's Mini apps, how it works and how Pinduoduo specifically has exploited that to build their business?
Ma: Yeah, so I think, for WeChat, for those of you who don't understand it, it was primarily a messaging app. While it has a social feed, a lot of it is based on the fact that it should be between trusted people. So, it's primarily between your close social network. And what Pinduoduo did was No. 1, Tencent and Alibaba are nemeses in China, and they actively block each other's services from being accessible inside their own apps. So, actually if I had to send a Taobao link, for example, to someone inside a WeChat, you have to give like this special code, it's a kind of weird to explain, but basically it's like as if, you know, you can't send, I don't know, Twitter links through your Facebook Messenger or something like that. So, you do, sort of, have to pick a side. Very few companies have been able to get away with not picking a side. But what Pinduoduo did was just exploit that. So, it said in the beginning -- and it still does it now, but in the beginning much more so, where they had a couple of games, like I said, group buying. So, of course, maybe the default option is to go to your family and friends and be like, hey, I could buy this fruit for RMB 16 yuan-whatever, but if we buy it together then it's a RMB 8, a lot of the deals actually give you significant cost savings if you just brought in other people.
And then there were other games, like you could -- bringing your friends to cut the price for you. So, it was literally like this movement of slashing the price. [laughs] So, each friend you invited does you a favor by basically clicking on this link, slash the price for you, and then your hope is that it goes down to zero. Of course, it never does. [laughs]
And then there were these even like lottery games where everyone could put in a small amount of money, it's almost a little bit like gambling, a small amount of money. And let's say, the price would be big, it would be like an iPhone or something, but then if we all put in money, we all have a chance to win. So, they did a lot of these gamifications, where it was really easy because of the very social nature of WeChat, especially among close connections, that people would be like, yeah, that's cool. Sure, Rui, like, you know, you're my cousin or whatever, I will click on this link and just help you out. But what they did was then they basically installed the mini app by doing that action onto their WeChat. And I think as you noted in the notes, basically Pinduoduo to this day has a lot of active users on WeChat, even though they have also their own stand-alone app, but I think the active number of users, it might still be higher in their WeChat Mini program than in their stand-alone app.
Sciple: Well, I think that's been really impressive to me, looking at their data as well, it's not just, I mean, you see these social aspects about how customers can stumble across your brand, become familiar with it. You know, see an opportunity to save some money, but their retention rate. I mean, is that just the social aspect of the platform, being able to keep folks around once they get them in? How do you explain why their retention rate is so high, because it's even better than JD [JD.com] Alibaba's retention?
Ma: Okay. This is my personal opinion, talking to lots of friends who use Pinduoduo. Obviously, I don't use it here in the U.S. I have Costco. [laughs] But I think a lot of it is just because the goods they recommend are, sort of, everyday items. So, I think the one case study they put out very early on. And I think everyone in China knows about it, like, tissue paper. They just have these very cheap consumable items, where toothpaste, like whatever it is. That's actually just high frequency buying, period.
And No. 2 is like, once you start getting used to the program and you're OK with the feed and you know what you're looking for or you are cool with being recommended items on the platform and you are OK with its quality, which by the way, is not the greatest, because of the cost generally. So, if you can accept that level of quality and the fact that it takes a little longer than many of the other e-commerce platforms or you're willing to put up with it because you want a cheaper price, then I think, yeah, it makes sense. It's not really as much the social aspect, because yeah, they have games in there and stuff, but I don't think that is really what's driving the sales.
Another important point I think we didn't get to talk to earlier, which is that in China, you have the urban rich, you know, who might lead very, like lives that most of us might recognize here, they drink Starbucks and do intermittent fasting [laughs] and whatnot, but then you have 1 billion people who live in much poorer places where the infrastructure is very different. That's always, I said, one of the reasons why e-commerce is so advanced in China. Because if you look at offline retail, for most of non-super-urban China, it's very crappy. So, your experience of going into your store down the street is horrible, so you'd much rather, of course, buy things online.
And that is also, in large part, Pinduoduo's initial customers. They were actually known as, sort of, like, Taobao, or they called it e-commerce for people outside the fifth ring, and outside the fifth ring, in China is kind of like this concept of, you know, people who are not as rich, [laughs] not are ...
Sciple: Other side of the railroad tracks.
Ma: Yeah, yes. [laughs] Something to that effect.
Ra: There's been some management, I don't want to say shake-ups, but going on with Pinduoduo, where Colin Huang, who's the Founder-CEO, is going to leave. I think he's already no longer the CEO. So, in conjunction with what's going on with JD.com, I kind of see Richard Liu, kind of, taking a backseat. What's your take on the management changes that are taking place in both companies, is there something that we should be watching out for, is this something that -- is it possibly something that's across the board in China or just unique to those two companies?
Ma: Yeah, well, I mean, Jack Ma also did the same, although I guess, his retirement was technically 10 years in the making. I think that -- yeah, I unfortunately don't have personal insight into this, but I can tell you what some of the analyses I read, you know. Of course, some people are a little bit skeptical or suspicious of the moves, and then there are other people who say, especially in the case of Colin, his good mentor Duan Yongping, who is a very successful entrepreneur, Warren Buffett fan, actually brought Colin to his Warren Buffett charity lunch many years ago, is a guy who's dedicated his life to philanthropy and, you know, is mostly behind the scenes and an investor currently.
Colin is on the younger side for doing that, but there are some people who think he's just merely following in his mentor's footsteps. I don't know, it seems a little bit early, given how [laughs] young his company is, just, sort of, five years old. But at the same time, like I guess, he's had health issues in the past. And maybe there are good reasons for him to do this. So, [laughs] that's the level of insight I have, unfortunately.
Sciple: Yeah. In any event, you know, Pinduoduo, a fantastic business to watch. I mean, its growth has been incredibly impressive, and we'd just have to see where the company goes from here, with the new management or him moving up to the Chairman role, etc. Another company I wanted to talk about, while we had you here is, TikTok and ByteDance. I think that's one clear example, when you look at TikTok, that's an app that went from a standing start at zero in 2016, to kind of like Pinduoduo today. I'd say it's one of the five most important social media apps in the world.
And from my perspective, TikTok has been the first Chinese app that's really succeeded and gone viral in the West, even WeChat is used mostly by Chinese expats abroad. Why has TikTok been so successful where other Chinese apps have struggled?
Ma: Okay. Yeah, a couple of things. So, I've spent a lot of time researching ByteDance, because I'm actually writing an eBook on the company. But basically, I would say a couple of things. So, the company itself was very intent on going global from the very beginning. So, someone leaked their 2013 -- they were founded in 2012. Someone leaked their 2013 board deck, and it basically was like, we're going international. [laughs] So, from the very beginning the entrepreneur, the Founder, Zhang Yiming has been very clear that like, hey, if we limit ourselves to China, even though China is a huge market, it's still after all only one-fifth of the world's population. We can never be a company like Google, Facebook, etc., right? So, the idea that a lot of Chinese entrepreneurs of the past decade have is that when mobile internet came about. So, while the PC internet era, the U.S. was much further ahead, when it comes to mobile internet, everyone is sort of at the same starting point. So, if you want to build a global company, you can. And that's their mantra, right, global from day one.
The reason why they're successful is, of course, they have this algorithm-driven engine that's not social graph based. So, they don't -- you know, TikTok, for those of you who don't use it, it's basically just skips over your social graph altogether, you don't need to have friends on the platform, you don't even need to know who you want to follow, because the algorithm decides everything for you. Like, the simple way to explain it is, all the other content platforms prior to this, you go in and you tell the platform what you want to look for, whereas TikTok brings the content to you. So, you go in, and it's like almost a passive experience.
My friend, Eugene Wei, called it the sorting hat from Harry Potter, right, it kind of knows what you want and just feeds to you. And I think that that's one reason why they were able to grow. But of course, the reason why they were the first Chinese company to do so is, No. 1, this algorithm-driven engine is not as dependent on, sort of, cultural understanding of the population that you're trying to serve. And they were able to also capitalize on the huge surge in video worldwide.
But at the same time, I do have to give the company a ton of credit for really using local operations. That's something they're still in the process of trying to do more and more of. But if you look at their company structure and staff versus a lot of other Chinese companies, culturally they're much more decentralized. They really empower local employees. And the amount of truly international talent that they've hired is, I think, substantially larger than many other Chinese tech companies. So, you can see that they're really applying, sort of, a global management philosophy as well as they were lucky with this product that can go global and has less friction, relatively speaking, to go global.
Ra: Do you think they have any potential with e-commerce? I know they've been trying for a while to integrate that into their platform, do you think they'll do a good job there or is it purely going to be short videos?
Ma: Yes, so the thing about -- well, you're talking about ByteDance, right? So, ByteDance is a lot bigger than just TikTok. And TikTok, in fact, its Chinese version, Douyin, is much more advanced than TikTok, and live streaming, e-commerce being one of the main things that you could do there that's different. So, you can live stream already on TikTok, but live streaming, e-commerce and being able to buy things directly is still a different experience. I think that for ByteDance it's pretty obvious they're making this into their next big platform. So, in the beginning of 2019, they like, not restructured necessarily, but really put in a lot of resources and engineering talent into the live streaming platform.
And that's because, if you look at China, there is another short video platform called, Kuaishou. That is also quite big. So, $25 billion-ish valuation. And unlike ByteDance, which gets substantially all of its revenue through advertising, Kuaishou actually does it through live streaming, e-commerce and live streaming transactions. So, that is something that you can see that ByteDance is going after as well.
I think so far, you can see from -- we work with BigOne Lab, which is an alternative data platform in China. You can see like, e-commerce, live streaming is just really blowing up everywhere, and Douyin is actually doing quite well. So, I think that there's no doubt in my mind that that's one of the, you know, huge things there, huge verticals are going after features and functionalities, but also, I am personally, I guess, pretty bullish on their prospects there.
Ra: So, I don't think we can get by without talking about the measures that the U.S. government is taking against TikTok and the worries that we have here that the Chinese government can get access to this data. What do you think about that, and how do Chinese people on the street think about that?
Ma: Yeah, so I think that, like the national security concerns that have been raised are definitely legitimate, in the sense that, like, you know, if an adversarial government has access to your citizen's data, that seems to be very problematic. At the same time, I do think there are various experts who have pointed out that that's not -- even if that's happening, we need a, sort of, broader legislation overall on how our data is treated, because, [laughs] you know, these are all these advertising companies, for example, that are sort of freely selling your data, that basically not just TikTok or whatever, you know, many people are having access to.
I think that, for on-the-ground Chinese reaction, I wrote about this a little bit, I think you sort of can use two words; one is resignation, and one is indignation. And I think they exist in equal measure. So for, you know, like most Chinese people, except for the trolls on Weibo, which is China's Twitter. So, most reasonable Chinese people are like, yeah, our government also limits the access of foreign companies or even domestic ones, but like heavily moderates, let's call it, censors, polices, whatever, the content on our internet and our access. So, it's sort of inevitable or understandable, let's call it, understandable that a foreign government would do the same.
At the same time, they think that it is kind of sad that this is happening. And that, you know in the case of TikTok, that maybe -- or sorry, in the case of TikTok, I think people are more understanding, because of the Trump rally story and whatever. But in the case of, I think, WeChat, a lot more people are just like, I don't understand why that's happening. Because it's so not widely used, as Nick said, and it's also not an open content platform, in fact, it's quite closed.
But there's a surprising amount of resignation and, I think, understanding actually, than I had previously imagined. I thought people would be just like very up-in-arms, but there's a [laughs] lot more people I talk to, who are like, well, yeah, that's kind of -- that might just be how it is with many countries going forward.
Ra: What about Huawei, which might be even important with Huawei?
Ma: I think Huawei is a little bit different. And I think because of the nature of the business that it's in, like, telecom equipment, and the fact that it's like people have -- well, I think, Huawei has, relatively speaking, been less controversial inside of China in many ways. It's been around a lot longer. ByteDance, by the way, is a very controversial company inside of China. A lot of the people who complain about, like, oh, you know, all our kids wasting their hours watching dancing and lip-syncing videos. Hey, you hear the same exact complaints from parents and other people in China about Douyin. So, I would say, in that respect it's actually not necessarily, like, the most loved company.
Huawei tends to be less controversial, because you know, what are you complaining about, like, its phones, right, or not many people have experience with telecom equipment, for example. And so, I think for Huawei there is a lot more, probably people who feel that the company was wronged. Yeah. Whereas ByteDance has far less support, I think, inside of China.
Ra: So, we're speculating here about the possibility of TikTok being acquired by, I don't know, Microsoft or by Twitter. I think some people say that -- I would probably go with the side that it's going to be a lot harder; I think they're going to drag it out a lot longer than people might think. What's your feeling about that, what do you think is going to happen there in terms of a possible acquisition, lawsuits?
Ma: Yeah. I mean, [laughs] I am following this like anyone else, I think. I have been talking to employees, like, inside the company and ex-employees, etc., about how they feel. So, I don't have any inside information, all I know is that like, ByteDance I think itself has put out this AR, [Analyst Relations] I guess, or a PR inside of China that this is not going to affect its business in the long run, because revenue contribution-wise, international is still very, very, very limited. Last year it was like, de minimis out of its something, like, $18 billion revenue pool, that U.S. contributed really not very much, nothing at all. And even this year, pre-ban, it was expected to only contribute $0.5 billion, which I think would be very optimistic [laughs] at this point.
I think that for the lawsuits that it's been threatening, you know, like, it has to make some kind of move to protect its domestic stance, because -- and China, again, there is so much criticism of the fact that like, oh, you know -- and this is maybe misunderstanding of the U.S. system, but they're like, hey, Huawei put out all these, sort of, hard-edged statements and defended itself really well, like, what are you doing TikTok, so. And I don't know if you saw, but TikTok actually finally came up with a website, TikTokUS.info, where it, at least so far, it seems to have taken one of the harder stances [laughs] against media coverage and whatnot. The U.S. government maybe put out basically information sites on, oh, we're the good guys, we're being wronged here. So, at least on that front, they have to put up somewhat of a fight. It's setting a precedent for not just themselves and maybe their future businesses, but also all other Chinese internet companies.
So, I think, yeah, that's probably going to happen more. As for how long everything will take, yeah, I have no idea. I've been asking a lot of lawyer friends, but I don't think anyone really knows, because this is such a special and unique case. And you know, we have an administration that put out these executive orders that basically has everyone flummoxed, right? Legal experts, company executives, no one really understands. In fact, I was just on a podcast with a U.K. media, and one of the other guests was the guy who wrote Jack Ma/Alibaba, and how Jack Ma is built, and he's like a China internet expert. And he basically said [laughs] something that I thought was really true, which is that the executive orders read a lot like Chinese draft law, extremely vague. And you just don't know what it means until more clarity comes out, so.
Sciple: Yeah. So, I want to kind of conclude with a couple questions going away. The first, as you've talked about over the past several years, tensions between the U.S. and China, bubbling over, continuing to become more and more tense. If we assume current trends and policies remain in place or in force, and I know it's really hard to predict the future, but if you make that assumption, how do you think the landscape for tech companies in China looks different five years from now than it does today?
Ma: Yeah, I just think that, it's going to be -- yeah, like you said, it's going to be very, very hard to predict, but I know that in the near-term, at least as of right now, it seems that Chinese companies have -- and investors, because they are after all; you know, the capital side matters, are far less interested in going into, at least, the Western market, the U.S. market than they were a few years back. And a lot more attention is being focused on the internal, domestic market. And like we said, Pinduoduo, for example, is one of those examples where you could build a $100 billion business just focused on rural consumers in China. So, I think that is going to take up a lot more attention in the next few years because of the political tensions, but also because of the fact that there are viable opportunities there.
That being said, I think, also there's going to be a lot more interest in the industries that the U.S. has come out with sanctions against. So, semiconductors, I think, you know, pretty much everyone knew for the longest time that China is really weak in semiconductors, but there was just no incentive to go there, right, when you have these other lower, what you call, like, lower lying fruit, that you can go after, right, why go after something so CapEx intensive and risky when you can go and build an app. But now I think there's going to be a lot more talent being interested in this business, because they see a true opportunity. This is a captive market, where if you don't do it, you know, other people now can't, right, so now you can go after as a domestic player.
I also think the political tensions will probably result in some sort of new alliances. I'm actually pretty new to semiconductors, really didn't look much at it before. But just researching it for, you know, understanding more about China tech, in general, I found that it's not just the U.S. who's in this market, there's also Japan, Korea. Korea especially has incentive to cooperate with China because if its northern neighbor [laughs] that it wants China to help keep in check. So, you might see different alliances exist, whereas before, it was uneconomical for a lot of these businesses to do these things, but now that some markets are decoupling then you're going to see other international players jump in and take advantage of the opportunity as well.
Sciple: Okay. And last question. You pay a lot of attention to China and developing businesses in that country, what's one Chinese company you're excited about that a lot of Americans wouldn't be familiar with?
Ma: Yeah. So, I think going back to just like, tying it with what we said earlier about, for example, Pinduoduo, ByteDance, etc. These are innovations in entertainment and e-commerce. And especially for Pinduoduo, because of its closeness with the supply chain, a lot of its business model is really benefiting from that. I think another company that people don't realize is Chinese, is this company called Shein. And actually, it's very low profile inside of China. It's only started to get coverage recently, because everyone thinks they're preparing for an IPO.
But if you look at app stores, you'll see that they're like the top shopping app in many, many different regions. And I think what's interesting about them is that this is a company that had -- the founding team started off being in search engine optimization. So, they're really good at using data to drive decision-making, and what they've done is they've been able to collaborate with, you know, the supply chain, they're located in Southern China, the manufacturing supply chain for fashion in China and they've been able to reduce turnaround time from design to shipping product to five days, so.
And they've like -- I don't know if they perfected, but they're in the process of really optimizing using data-driven marketing. Like, literally putting photos out there of goods that don't yet exist and then making it and then getting feedback and then deciding whether or not to go all-in on more advertising for that product. So, I think that's just really interesting in terms of, you can see big data and e-commerce. This is the dream, right, for every fashion manufacturer out there, to have no waste and to know exactly what you should be selling to whom, and then sort of making it.
So, yeah, I think that's an interesting company.
Sciple: So, Shein, that's S-H-E- I-N?
Sciple: Awesome. So, yeah, write that one down, folks. Rui, thanks so much for joining us on the podcast. If folks want to check out the TechBuzz China podcast, pay attention to your work, where can they go do that?
Ma: Oh, very easy. We're on all the platforms, it's just Tech Buzz China, three words. And you can also go to our website, TechBuzzChina.com. We also have a newsletter and we're putting out a lot of, sort of, primary information on ByteDance, if that's a company that you're interested in recently. Yeah.
Ra: Thank you, Rui.
Ma: Awesome. Thank you so much.
As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear.
Thanks to Tim Sparks for mixing the show. For Rui Ma and Ben Ra, I'm Nick Sciple, thanks for listening and Fool on!