Extra Buzz 004: Recovery in Sight?
Dear Tech Buzz Extra Buzzers,
One major housekeeping item before we start -- we have a new website! www.techbuzzchina.com will house all of our content and news from now on. If you were ever curious how many people listen to Tech Buzz (~6,000 currently) or where they’re distributed geographically (40% US) you now have a place to look! We’re still adding to it but the bulk of the information is there. We would love it if you tell friends you think who might be interested in becoming a listener or a subscriber about it.
Additionally, we have made the first 3 newsletters public as a request from interested subscribers who wanted to get a taste before taking the plunge, but future editions password-protected (in addition to being e-mailed to you of course!). For those of you who prefer to “hear” the newsletter, you can then use this web archive for your speech-to-text purposes. We’ll send it to you in a separate e-mail -- please don’t share with others! Meanwhile, we do have the same ask, that you forward this newsletter to one other person that you think might enjoy reading it and become a subscriber. Thank you!
If you have any questions or suggestions for us, please write in! Thanks John O. and Khang-Wei K. for your responses last issue!
Stay safe and healthy!
Rui & Ying
Recovery in Sight?
It is Thursday, and as I’m trying to sort through the abundance of China tech news and tease out a common theme and insight it is once again evident that it is impossible to not write about the coronavirus, especially now that it’s led to multiple international outbreaks. As of writing, San Francisco has declared a state of emergency, and the first known U.S. community transmission of COVID-19 took place not too far away in Solano County, and every hour seems to bring with it more alarming news. What a change two weeks has brought! In comparison, there seems to be less catastrophizing in Chinese media and amongst Chinese citizens. Some of it is probably buoyed by statements from organizations such as the WHO that the epidemic has already peaked in China, but China’s most revered doctor Zhong Nanshan as of late tentatively puts forth that it’s more of an end of April timeline and so many consumers are likely to be adjusting behaviors by that estimate. It coincides neatly with a webinar I attended on Wed. hosted by Caixin (a leading Chinese financial media) where the UBS Chief China Economist said that she expected Q1 to be the only quarter in 2020 dragged down by the virus, and a “V-shaped” recovery to ensue in Q2. But is it actually happening?
By all accounts, it appears to be. As I noted in the last issue, there was a great deal of chaos as everyone -- individual workers, company executives and governments at all levels, provincial, municipal, district, and even down to the management of the specific industrial park -- tried to balance the need to resume work with the need to stay quarantined for the sake of public health. With infections and deaths slowing, economic interests seem to have won. Dr. Zhong predicts a second, new peak of infections to follow the return to work (and it’s already showing up a little bit today in the ex-Hubei graphs), but I suppose there is no choice for many when one’s livelihood is at stake.
I’ll briefly mention the resumption of work rates for those who have not kept an eye on this, but note that these terms are not well-defined, so there is no way to understand exactly how they map to actual utilization / output, which is the more important measure. Initially, the government focused on industrial sectors, which consists of manufacturing, energy, power, and the like, and those rates reached over 50% for most provinces earlier this week (see A below). However, traffic is still at one-sixth of what it was at the same time last year, nearly a month after Chinese New Year (see B below).
A. Resumption of work for industrial sector as of Feb. 21, 2020.
B. Passenger volume on Chinese roads.
But what about the services sector? On 2/26, the Ministry of Commerce (“MOFCOM”) said that it would step up targeted efforts to assist industries hit hard by the virus such as hospitality and food & beverage. According to the Ministry, the largest 20 F&B chains that they had contacted had a 57% return-to-work rate, and hospitality as a sector seems to be also above 50% (Ctrip claims it is already over 80% for those it has data for). Again, these numbers don’t divulge too much, but assuming similar methodologies, lag the industrial sector slightly, which makes sense because these are not crucial to running the infrastructure of the country. They also roughly match up with what we’ve heard so far from Apple (>50% stores reopened) and Starbucks (85%) anecdotes from friends running businesses on the ground.
But what does this have to do with China tech? Well, what the virus has done is highlight the weaknesses of non-tech businesses that are not sufficiently digitized and automatized. By digitized, I mean ranging from simple electronic documentation to full data streams of all operations, with the highest state as being able to manage remotely, which even very few software companies can do, because of cultural hindrances we discussed back in Issue 001. By automatized, I am referring to not just software but also hardware solutions that reduce the need for human input. The more diligent the business had been in adopting technological upgrades, the more quickly it can get back on its feet now that quarantines have been loosened. Let me give you a few examples beyond what we’ve talked about in the past few weeks.
Digitization
We already talked about e-signatures last time as vastly speeding up the onerous paperwork that’s been demanded for businesses to resume work, and most will agree that’s hardly some advanced technology. What if you went beyond just digitizing your paperwork and put all your transactions on an immutable blockchain? Specifically, Ant Financial’s Double Chain Connection, launched last year. We’ve already said before that private enterprises in China generally have very poor access to credit versus their state-owned counterparts. However, Ant Financial will let you borrow against your accounts receivable (money owed you by your buyers) if it’s all on the blockchain, providing much needed cash that could tide you over for a few months. (Remember, most Chinese small businesses have less than 3 months of cash in their bank accounts!) In these contact-less times, the blockchain is the perfect tool for verifying these transactions without the need for additional proof or trust.
And … Automation
China, as the world’s factory, has been ramping up industrial robot capacity for the last few years, and accounted for 36% of global installations last year, making it the largest market ahead of both the US and Europe combined. Of course, robots don’t get viruses, and depending on the task, human workers can be quite costly. As early as 2004, state-owned media the People’s Daily talked about how difficult it was for Chinese manufacturers to fill vacancies for various technicians and how the lack of talent led to these workers being offered salaries that were multiples of the typical white collar worker.
While the need for industrial robotics is obvious, the service sector is just as short of workers. In recent years, the spotlight has been on the rise of the “New Blue Collar” 新蓝领, which are not your factory workers, but those in services jobs ranging from beauticians, personal trainers, to nannies, to taxi (or Didi) drivers, couriers, real estate agents and more. No four-year university degree is needed for these professions, although vocational training is often required. It is estimated that there are now over 120mm workers in these “new blue collar” professions, greater than those in manufacturing (100mm) or construction (80mm), which make up a large number of the traditional blue collar industries. And blue collar workers as a whole number over 400mm, versus white collar workers, defined roughly as those making $8500 or more annually and not relying on their “physical labor” for a salary, number 200mm or so. The latest survey (2019 Q4) on labor supply and demand showed that the largest gaps in employment are security guards, cashiers, waiters and housecleaners. Young people don’t want to go into these industries because of the lack of career progression, so these fields are seeing positions filled by older employees who are nearer retirement than not.
So, like most impacts we’ve talked about, the existing trend has been around and a product offering already exists -- the epidemic is not creating the space from scratch, merely (hopefully) accelerating it. The service robot market in China, for example, was already $1.8Bn a year ago (but only about one-third of industrial robots) and growing at a steep clip (44%). But in the numbers we gave earlier, it’s obvious that these are not just inventions to appeal to the government’s directives on AI (because that happens often, too) or for flashy consumption, but are rational responses to current gaps in the labor market. In the earlier article featuring Ctrip on the hotel sector for example, it’s service robots that’s giving customers more confidence in their safety. Disinfectant robots and delivery robots make contact-less cleanings and deliveries possible. Ctrip is providing some of the former to their hotel customers. Drones, too, have been used to deliver medicines and other supplies. It is important to note that none of these are particularly “hardcore” technologies -- most of the cleaning robots, for example, are really just fancier Roombas. And just to give you a sense of scale, over $10Bn of regular vacuum cleaners are sold in China every year, so $1.8Bn for all service robots is almost laughably small. But if China holds onto its supply chain supremacy, then that figure can grow very quickly, and that, I think, is generally a good thing.
A disinfecting robot (with UV).
“Retaliatory Consumption”?
The term “retaliatory consumption” 报复性消费 has been thrown around to explain the observed (and expected) spike in shopping as the epidemic wanes. The term arose out of the SARS epidemic, when many Chinese people were also subject to long periods of quarantine, and found themselves over-consuming as soon as they were let outside to let off steam. Indeed, stories have circulated in the news of various restaurants, tea shops and shopping centers being overwhelmed with orders on their first day back in operations, because folks had been so deprived during their extended shut-in. But others note that this is likely not sustainable -- young people in China these are especially known for living month-to-month, spending all of what they earn (and even more), and many may have only received a low base pay (sans commissions) for February, which means that their spending power is greatly reduced. So maybe the safest bet is for a surge in those everyday treats that Chinese people are known to splurge on -- milk tea and hot pot, although the latter is still difficult given that most restaurants are still implementing a take-out / delivery only policy. So milk tea it is then. Maybe that explains why Naixue, a leading milk tea company based out of Shenzhen with plenty of venture capital backing, has just filed confidentially for a $400mm IPO. It’s been rumored to have been seeking to go public for a while, and I can’t tell if this is the best or worst timing.
F&B has food delivery to lean on, but what about traditional retail? Well, they are experimenting with livestreaming, just like their ecommerce counterparts. However, just like the issue we saw with education -- whereby even a great teacher might not make a good livestreamer not just because they’re not familiar with the tools but because of the inherent differences in digital versus analog interactions -- we are seeing that not very many high commission-making shopping guide* make for good livestreamers. (*That’s the direct translation, but they’re just the same as commission-making “sales associates / specialists” here in the US.) So, while these moves make for good headlines, it doesn’t mean that immediate traffic or sales are always that impressive. Nonetheless, as is the case with education, there is something to be said for moving so many members of one profession online at once -- no doubt this kind of mass “up-skilling” will push China even deeper into digital experiences, since it’s not just about the availability of the technology, but its adoption. And of course, like with any mass experiment, there will be some winners, and it’s not unheard of to have some shopping guides sell a week’s worth of goods in one livestreaming session.
Alibaba, of course, was very quick to see the opportunity and opened up free livestreaming services to offline retailers over two weeks ago, allowing for “one-click” livestreaming. Tencent WeChat did not lag behind either, of course, and WeChat announced the intention to add livestreaming to mini programs in January, and just began beta testing this week. If you listened to our Tech Buzz episode 37 on WeChat mini programs, you would know about their key characteristics and the gap they were originally designed to fill -- small, light applications connecting small offline vendors to consumers online. The epidemic has greatly accelerated the need for many businesses as well as government agencies to operate online, and mini programs is one of the most cost-and-time-efficient ways to do so. To deal with the deluge of requests, WeChat has announced that it will increase resources and move to a 24/7 review process as of last week, with most applications reviewed and approved within two hours. Alibaba also saw a surge with its own mini programs platform (pretty much every major Chinese company has one now) after it put out calls for developers to build utility tools for the epidemic. More impressive though, in my opinion, is the number of government mini programs like this one that have come out for the latest in disease spread and prevention information. The benefits of the mini program -- quick to develop but many-functioned -- and especially within WeChat, easily shared for a population that isn’t desktop-fluent but smartphone-savvy, are definitely being made obvious during these trying times.
But Only After Watching These Videos …
Finally, one last note on the darling of Chinese internet in recent years, short video. With the epidemic, we saw the transformation of short video from a Gen-Z entertainment pastime to one where all generations were using it for the latest news. Virus-related content have been dominating screens and is one of the top concerns for a lot of gray-haired users, who have been introduced to the platform by their children over this extended family bonding time. Traditional media have seen the opportunity and piled in, flooding the platforms with content. How will this play out after the epidemic is over? Will the short video platforms start to look more like Weibo? Is that even possible when their algorithms are not (explicitly) time-sorted? I’m skeptical. Meanwhile, they did enjoy the highest spike in DAU, even higher than mobile games. Of course, some of these numbers were “seasonal,” in that the New Year’s vacation was going to mean more activity anyway, but Douyin and Kuaishou both still had 5mm and nearly 7mm downloads respectively in the last month, so still pretty impressive.
% of user time spent. Top: 2020 Chinese New Year holiday. Middle: Jan. 2-8, 2020. Bottom: 2019 CNY holiday. L to R: Social networking, short video, mobile games, news, online video, digital reading, e-commerce, mobile music, transportation, others.
2020 Chinese New Year pre- versus post- DAU for the top 10 apps in 0,000s of users. (L to R: Douyin, Kuaishou, Weibo, Game of Peace, Honor of Kings, Sina News, QQ, iQiyi, Toutiao, QQ Browser.)
Will the epidemic, after highlighting the resilience of businesses that have invested in digitization and automation, finally bring China into the age of SaaS (software-assisted) and robotics (hardware-assisted)? The latter is still nascent everywhere in the world but the former has been endlessly discussed by Chinese investors and entrepreneurs going on a decade now, and every year reality has fallen brutally short of expectations. Will 2020 be the year we are pleasantly surprised?
Thank you for reading, and I want to know all your questions and comments! Send to us at rui@techbuzzchina.com. Stay safe and healthy!
Best,
Rui