Extra Buzz 003: The Epidemic Continues ...
Dear Tech Buzz Extra Buzzers,
Thank you so much for your ongoing support and kind words! We especially appreciated the note from Tracy H., extensive feedback from Warren T., and the chance to meet in person Chadd G. and Andrew P. at the Daily Journal Shareholder’s Meeting in Los Angeles this past Wednesday in the presence of the one and only Charlie Munger! It is great to know that we are helping you in your work and studies at the same time that we are learning so much for ourselves. Our continued ask is that if you find this newsletter or the podcast helpful, please share with at least one friend or contact who you think might benefit from joining the community. As always, please do give us a review on iTunes or wherever you get your podcast. And for Extra Buzz subscribers, we’ve created an ongoing 10% discount for any and all referrals: just tell them to click here to sign up.
Much love from us to you on this Valentine’s Day! 🥰
Rui & Ying
The Epidemic Continues, But Work Must Resume
The COVID-19 coronavirus epidemic is still front and center in China, so while we would love to move onto other topics, with business very much not yet proceeding as usual in China, there simply isn’t much else to discuss. While we are always trying to understand the longer-term implications over the short-term ramifications, some events – such as the entire country’s return to work – are still very much unfolding in real time and things are changing rapidly, meaning that it’s not impossible some of the observations we make below become outdated as soon as they reach your inbox. That being said, we’re still trying our best to tease out the most relevant and important insights we can in these chaotic and uncertain times, so thank you for bearing with us.
As you’ll recall, we’ve covered the impact of the virus on China tech on both the last podcast episode and the last newsletter, and assessed the lasting effect on sectors such as online video, education, telemedicine, philanthropy, alternative proteins, grocery e-commerce, remote work, and more. We believe that the epidemic is going to give these categories a permanent boost – they are well-positioned to grow during the crisis because most of these sectors already had multiple unicorn startups delivering robust solutions well before the virus hit. This means that most of them already had the product, talent, infrastructure and capital on hand to deploy more widely immediately.
Of course, being poised to grow quickly is still very different from being actually able to handle the traffic and demand from the sudden quarantine of the most populous country in the world, so it was no surprise that most programs failed to work as intended, whether it be remote work or grocery e-commerce, even if they were backed by the likes of a Tencent or Alibaba. (Perhaps especially if they were backed by one of those two, as both rushed out significant waiver programs for merchants and users in response to the virus, and even if they hadn’t, would have been a top choice for survival and mission-critical tasks regardless.) Also as expected, purely virtual solutions will likely recover much more quickly than those reliant on physical labor and logistics networks, both of which are still sufficiently paralyzed to have warranted warnings for the quarter from Alibaba’s management in their recently held earnings call.
And this is where I think a few quick notes on China’s small businesses is helpful to understand the level of panic, which is highest amongst this group. One recent survey of small business owners by Peking University and Tsinghua indicated that only 34% had one month’s worth of cash-on-hand, 33% with two months and 18% at three months. Without knowing the underlying data, it is difficult to say how representative this is of the entire country. I am always cautious of relying on self-reported surveys, but it is no secret that Chinese small businesses have always gotten the short end of the stick when it comes to commercial lending, so it is not implausible that these numbers approximate reality. In fact, this disparity in lending and GDP contribution – it’s estimated that only 20-25% of bank loans go to small and medium enterprises despite their GDP share of 60% – has created many opportunities in fintech, including in the once high-flying but now permanently grounded P2P lending space.
The government has made some splashy moves – including injecting $174Bn of liquidity into the system last week to calm the markets (it worked, maybe?). But on the small business side, its exhortations to the large banks to loosen lending requirements does not seem to be applied evenly and is not working as intended. As of yesterday, even more guidelines have been given on further reducing rates and forgiving interest payments for a few months for small businesses, but as we’ve seen in the past, the incentive structure may not be in place for the banks to really comply.
Fear is still the most dominant emotion, as deaths and confirmed cases continue to pile up (more than 64,000 cases as of this writing and nearly 1,400 deaths), and unfortunately, small business owners find themselves between a rock and a hard place. The government is fairly clear about supporting a(n orderly) return to work, at least for “important industries,” such as energy, automotive, and the like. But what happens when you are not in those vital sectors? Continue to shutter operations and bankruptcy looms, but return to work and you risk having to quarantine your entire workforce if even a single case of infection emerges. That’s what happened to one Suzhou business, whose owner is now on the hook for the ~$600 per head 14-day quarantine costs he must pay for all 200 of his employees because one of them tested positive for the coronavirus. That’s on top of the money he has lost from pausing operations.
In the spirit of caution, other districts are asking that businesses do not resume any operations offline at the risk of being fined. More creatively, one business park tried to balance the demand for revenue and the risk of infection by asking all businesses and employees to submit money to a pooled “infection fighting fund,” the contents of which would be returned in full if no infections occur. The park was criticized for levying such a heavy fee (in tens of $000s, and up to 2 months pay for employees) against its already distressed tenants, and just confirmed that the proposal will not be executed. What these cases demonstrate is that as of this week at least, there has yet to emerge a uniform calculus of risk and reward when it comes to resuming business-as-usual, and until then, it is very valid for Alibaba and others whose businesses are dependent on small enterprises and individual consumers to be worried about the lack of visibility. That being said, the fundamental advantages of these platforms haven’t changed, and their positions could well be strengthened, as in the case for example of Alibaba allocating a few $B of additional lending (at discounted rates, of course) to its customers. I only feel for the small business owners who most likely do not have the balance sheet to tide them over until then.
And The Party Must Go On
One important thing to note though, is that while there will be lots of news of this and that business closure, not all will be attributable to the virus, and it’s important to understand which these are and which are merely businesses that have already been in steady decline. One such (in my opinion, somewhat click-baity) headline that was widely circulated and caused much (unnecessary) distress was the closure of the top-rated KTV (karaoke) bar in Beijing (the King of Party), which was known for its lavish environment and influencer and (minor) celebrity sightings. Karaoke has been long cited as a national pastime, and for older millennials like myself, it remains a nostalgic entertainment option, but these types of establishments have actually been doing poorly for the past few years. A simple search will yield results along the lines of “KTVs are flailing and failing” from way back in 2015.
One room at the King of Party, where Wang Sicong, China's most eligible bachelor, was rumored to have spent $360,000 in one night.
The reasons are numerous, but a big one is changing consumer tastes. Instead of sitting in a darkened room with neon disco lights drinking overpriced alcohol while your drunk friends are screaming into the microphone, these days Gen-Z’ers and younger millennials are looking for more flashy entertainment. That means they are looking for much the same things their peers are overseas – dancing, lasers, festivals, and lots of EDM (it’s already the 2nd biggest genre in China, according to Netease). So while the epidemic will no doubt hit hard the live entertainment business, it’s definitely not going to affect all of them in the same way. The karaoke business, without some serious innovation, is likely on its way out, and the King of Party recognized this in its dissolution proposal, noting that 2019 revenues were markedly lower than the year prior.
The other aspects of live entertainment that are “on trend,” however, may not suffer much at all. We already see Bilibili, Douyin, Kuaishou, Netease and other content platforms with livestreaming capabilities hold “cloud” clubbing and music festivals with popular EDM DJs. Why yes, go ahead, rave your heart out in your pajamas. After a few attempts, one was able to hit nearly $300K in revenue after a 5 hour session. To me, it’s not that the DJ business is ever going to transition online – I doubt that, even when VR can replicate the visual experience – but these livestreaming experiments, coupled with mandatory quarantines, are going to further accelerate the trend we’re already seeing of Chinese Gen-Z having very different entertainment habits from prior generations. Instead of the “millennials have killed this-and-that” headline that we see in the U.S., it’s definitely going to be “Gen-Z has killed such-and-such” in China.
A masked DJ has the room going wild on Douyin livestreaming.
And Not Just for the Kids Either ...
If Gen-Z’ers are showing us how flat the world is becoming, how this or that DJ is as adored in Stockholm or New York as they are in Beijing or Chengdu, this next point is to remind you that there are many Chinas, and the China you see in Bilibili or Netease is just 20% of the population (~330mm). The pandemic and the subsequent quarantine restricts everyone equally, rich or poor, young or old. And for the senior citizen population in China, a highly sociable crowd with many offline group get-togethers, including the world-famous China square dancing, the epidemic is especially disruptive and isolating.
At the start of the virus, senior citizens, especially those who are older or less educated and less tech-savvy, were much slower to receive (the already delayed) notices on the virus and even slower to believe or follow them. A veritable disaster since by all accounts they are more vulnerable to the disease. Since then, numerous new folk songs and rhymes in every conceivable dialect and Chinese opera style have been composed and distributed explaining the protocol for preventing infection. Especially in rural areas where the general level of education is low (recall only 10% of Chinese people have a college degree), this was the best way the severity of the virus could be explained to them. They’re blasted over speakers in villages and played on TV as PSAs and forwarded in WeChat groups with super dramatic click-bait titles. While eventually effective, the need for them underscores that there is still a huge disparity in how information is consumed by different age groups in China and the level of fluency each has with the internet.
Ideally, young people stuck at home with their parents and grandparents are showing their elders how to better use their smartphones, and historically, that’s what often happened over Lunar New Year break. State media certainly encouraged it. It’s what’s been attributed to some of the new user spikes during New Year’s every year. This year, however, as the break has been indefinitely extended due to the virus, many are finding themselves in a bad mental state, whether from fear or boredom or too much exposure to the parentals (or the kids!), as some have confided on social media. It’s only been in the past few years that psychology and mental health has been talked about openly in China, so it is interesting that state and other mainstream media are devoting space to it. Unfortunately, China has terminated its (rather simple) vocational certification for counselor in 2018, instead of upgrading it to conform with international standards, and the country currently still suffers from a lack of qualified practitioners. (But then again, so does the US.) However, as a serious student of psychology who has put time into following and understanding the Chinese ecosystem, I am pleasantly surprised that mental health occupies such a prominent place in the current epidemic. This is a growing field globally and is increasingly being integrated with technology in Silicon Valley (see: headspace, talkspace, betterup, etc.) Maybe my expectations were too low, but I find it encouraging that at least on paper, there is some awareness and effort to address the mental health of those affected by the epidemic.
Do You Agree?
Finally, there is a lone, very small, but potentially life-changing improvement for Chinese society in these contact-less times though that I hope carries over, and that is e-signature and document management. China has digitized significantly in the last decade, but signing things with pen and paper is still just one of those things that hasn’t gone away nearly as fast as it ought to have. With the return to work comes a document that many companies are having their employees sign – a “disease prevention agreement,” where the employee agrees to be truthful about their health condition and take precautions to stay well. Certain villages have taken to asking their residents to sign documents promising not to congregate for the sake of playing cards, too, and certain apartment buildings are also asking residents to verify where they’ve been, resulting in a flood of extra epidemic-related paperwork.
I’m not super clear on the legal enforceability of violating such an agreement, but companies such as Netease are taking no chances, and employees are being texted a link where they can provide their e-signature, allowing the company to collect tens of thousands of documents instantly and without risk of unwitting infection to anyone. E-signatures are already in use among a small percentage of businesses, but the epidemic offers consumers the opportunity to familiarize themselves with what has been so far mostly a B2B SaaS product. Who knows, maybe this helps accelerate the death of the company chop system too (a physical stamp used in place of signatures for official business documents) – it’s always been a wonder to me how it continues to survive despite its archaic inconvenience and obvious replacement (e-chops, which already exist!).
Thank you for reading, and we want to know all your questions and comments! Send to us at rui at techbuzzchina dot com. Stay safe and healthy!
Best,
Rui