Ep 44: So Young, More Beautiful – The Allure of China’s Plastic Surgery Market

Transcript

(Y: Ying-Ying Lu; R: Rui Ma)

[00:00] R: Last week, So-Young International, that’s so-dash-young in case you had trouble finding the filing like I did, went IPO on the NASDAQ, raising over $166mm.

Y: So-Young, whose Chinese name is 新氧, or New Oxygen, has a mission to bring “health and beauty” to everyone, as “the most trusted technology company in the broader consumption healthcare service industry.”

R: What the heck does that mean, you ask? In plain language, So-young is an internet company that markets and facilitates plastic surgery and other medical cosmetic procedures to Chinese customers.

Y: That’s right, it’s basically an app that gives you expert content so you can ask questions and do research, provides you with a social community so you can get some support and further advice, and once you’re pretty sure you know what you want, you can use the reservation function to actually book the procedure.

[00:55] R: In total, it’s raised about $250mm in venture capital, including some from Tencent back in Series C. Last year, it made $90mm dollars in revenue, which was more than a dozen times more than its revenues just 2 years ago. It also made $8mm of net income, and claims to have a market share, in terms of time spent on similar apps anyway, of 82%.

Y: Maybe that’s why investors are positive on the company. After pricing at $13.80 per ADS last week, it’s now trading at about $20, which is a respectable jump.

R: Yeah, especially when you consider the performance of other recent Chinese IPOs, including Douyu, the subject of our Episode 43, which announced its IPO around the same time, but has had to push back its debut plans due to market uncertainties.

Y: It’s a volatile world out there. What makes So-young different from the other Chinese companies we have been covering? Ruhan, the influencer marketing company, was also a category leader and the first like it to go IPO in the US. But it has stayed well below IPO price. Are you telling me that the plastic surgery market is bigger than the influencer marketing market?

R: Well, what if I did? The “medical cosmetology” market is indeed huge, and again, China, while not the necessarily the largest market by size — Americans are still spending more money on plastic surgery than any other country — China seems to be leading in terms of how well the industry has integrated with technology, especially mobile internet.

Y: Yet another consumer internet segment in which Chinese entrepreneurs have uncovered some unique opportunities. Well, let’s not waste any time, and get right to it. How are Chinese people keeping so young, and more beautiful?

[3:15] Y: Hi everyone! We are TechBuzz China by Pandaily, powered by the Sinica Podcast Network! We are a biweekly podcast focused on giving you a peek into what’s buzzing within the tech community in China.

R: We uncover and contextualize unique insights, perspectives and takeaways on headline tech news that don’t always make it into English language coverage. So you can be smarter about the world of China tech. TechBuzz China is a part of Pandaily.com, an English language site that tells you “everything about China’s innovation.” I’m one of your two co-hosts, Rui Ma.

Y: And I’m your other co-host, Ying-Ying Lu. We’d like to acknowledge our partners DealStreetAsia and SupChina, creator of the Sinica Podcast Network!

R: In addition to TechBuzz, you can also find Sinica which covers current affairs, NuVoices on women, the business-oriented ChinaEconTalk, and the Caixin-Sinica Business Brief from China’s leading business magazine.

Y: Speaking of DealStreetAsia, their annual private equity and venture capital conference, Asia PE-VC Summit, is set to take place on the 17th & 18th of September this year. To register, go to their website at dealstreetasia.com!

R: And speaking of conferences, I will be in New York City on Monday May 20th for the third annual SupChina Women’s Conference. Come and listen to top leaders discuss how women are impacting China’s tech, business financial and consumer trends!

R: Today’s episode is brought to you by the University of San Francisco. USF’s new Masters in Applied Economics combines econ training with practical skills in data analytics — all geared towards helping you understand and analyze today’s new digital economy. Their curriculum covers skills like R and Python, machine learning, and experimental design; plus topics like the economics of platforms, auctions, pricing, and competitive business strategy. To learn about joining the Fall 2019 inaugural class, TechBuzz listeners can visit usfca.edu/techbuzz.

[5:36] R: I’ve always known the plastic surgery industry in China is big, but do you have any idea how big, Ying-ying?

Y: Well, Americans spent more than $16.5Bn on plastic surgery and “minimally invasive procedures” last year. That’s from the American Society of Plastic Surgeons. That includes your usual catalogue of nose jobs, boob jobs, tummy tucks, etc. as well as botox, fillers, and even laser hair removal.

R: According to the International Association of Aesthetic Plastic Surgery, the US has consistently been the country with the most number of surgeries performed, and last year it was followed by Brazil, Japan, Italy and Mexico. I was personally a little surprised to not see South Korea on that list, but it does have a smaller population, and these are not per capita numbers.

Y: Also, those are not necessarily even the right numbers to look at. I mean, you don’t see China in the top 5 either, right? But in So-young’s prospectus, research firm Frost & Sullivan apparently thinks the market in China was nearly $18Bn in 2018. Wouldn’t that have made it number one? Not to mention, So-Young’s own 2018 State of the Industry Report pegs the market size in China at an even bigger $33Bn. What’s going on here?

R: I actually don’t know, but the only way this could work is if the “medical aesthetic service industry” that So-Young speaks of includes more than just nose jobs and botox. It’s hard to get an exact definition, but if you take the most popular definition of “specialties that focus on improving cosmetic appearance,” which is pretty general indeed, and add to it procedures like permanent makeup, or chemical peels, then it makes sense that we can get to that larger market size.

[7:35] Y: Yeah in Chinese, this field is known as 医疗美容, or 医美, which can also be translated as medical cosmetology, which gets farther and farther away from licensed medicine. Included in this broad category are hair removal, hair transplants, and all kinds of lasers and ultrasound things that might tighten skin, eviscerate fat, brighten your complexion, or whatever else people want done to their bodies.

R: Some of those procedures sound like they are barely more complex than your normal spa treatment these days, which often already use pretty advanced machinery. I mean, I’ve done laser hair removal and I wouldn’t have thought of it to be remotely in the same category as plastic surgery. But there you go, I guess I’m a 医美 client too!

Y: Yeah, if we define it this way, then China is already the second largest market in the world, and poised to become the first by 2021. Or at least, again, that’s what Frost & Sullivan says. And that’s the market opportunity CEO and founder Jin Xing saw six years ago when he started So-Young.

[8:37] R: 金星, Jin Xing, not to be confused with the transgender celebrity in China, who has undergone many reconstructive and plastic surgeries, is turning 40 years old next month and has been a tech geek his whole career, like many of the other founders we’ve covered on Techbuzz.

Y: He began his career as a developer at Tom.com, which is a media platform from Web 1.0 days in China, for those of you who remember. He then tried to start his own company in 2007, but ran head on into the financial crisis. After that failure, he went to work at Tencent Pay and a social commerce startup before leaving to try his luck at entrepreneurship again by launching SoYoung.com in 2013.

R: According to Jin Xing, plastic surgery is in his blood, because it is his mother’s profession. His mother actually performed his older sister’s double eyelid surgery, although he himself didn’t undergo any procedures until he started So-Young.

[9:47] Y: But one has to dog food one’s own product, right? So he began with some face-slimming shots, and then did some hair transplants, injectable hyarulonic acid, all the while writing about his experiences in his “Beauty Diary” on the So-Young app and accumulating nearly half a million fans. Everyone, by the way, knew that this plastic surgery enthusiast was the founder. It probably helped build trust with users.

R: He even agreed to have some of the procedures filmed as part of a popular entrepreneurship documentary. I mean, the guy is a real advocate for medical cosmetology. He wants to normalize the procedure, because to many, it’s still not an acceptable way to improve one’s appearance.

Y: Jin Xing thinks it’s unfair that if you become prettier through exercise and diet everyone congratulates you, but if you did it through some medical procedure, everyone looks down on you. Everyone should have a shot at becoming more beautiful!

R: The real problem, according to him, wasn’t the procedures, it was the warped market dynamics and information asymmetry that made it expensive, complex, and unsafe to get them done. And that was So-Young’s mission, to make it less costly, simpler, and safer for users to undergo medical cosmetic procedures.

[11:10] Y: So has So-young succeeded at this? Well, maybe. It’s certainly done OK as a standalone business. That’s because so much of the revenues generated by the medical cosmetology industry is going into customer acquisition. How much? About a quarter.

R: In dollar terms, that means in 2018 $4.6Bn was spent on customer acquisition, and what’s great for companies like So-Young is that over half of it was spent online last year. Of course, a lot of it probably went to search engines and the like, but targeted platforms like So-Young would for sure be a preferred channel.

Y: Search engine Baidu by the way, is also a key beneficiary. While I always knew that something like one-third of Baidu’s search revenues come from healthcare, what I didn’t know was that half come from 医美. And So-Young has also grown along with the market. In 2016, So-Young’s advertising revenue was not even $3mm and barely over one-third of total revenues, with the bulk of sales coming from reservation services. Now? The situation has now totally reversed itself.

[12:24] R: Now it’s reservation services that make up one-third of the revenues while advertising gets the lion’s share. As we mentioned, So-Young has just those two revenue sources, and they do exactly what you think they do — advertising which is typically impression based, or via paid article on its social media — and reservations, on which they take a percentage as commission payment, usually about 10%.

Y: So-Young is quick to point out that their definition of commission is quite expansive, and extends to not just the actual online booking, but all bookings made by that particular customer with that particular service provider, for the life time of the user.

R: That’s right, as long as the user got to know the provider through So-Young, then So-Young’s contract stipulates that forever more, all procedures done by the provider for the user is subject to So-Young’s commission rake.

Y: This is obviously important because for many people, medical cosmetic procedures are not one-time occurrences. While it’s true that many users get “addicted” to beautification and get more and more work done, there’s also just the simple fact that a fair amount of procedures, particularly the noninvasive kind, require regular maintenance and upkeep.

R: That’s true, your typical botox and acid treatments are generally only good for half a year. And according to So-Young, 92% of customers return again for additional procedures within 3-6 months.

Y: Most customers cannot accept becoming “ugly” again, so they will happily reach for their wallets, if it worked well the first time. If you ask me, So-young is so very smart to hold onto these recurring revenues.

R: In this way, I suppose it can be argued that So-young is not just doing just pure lead-generation, but has a genuine incentive to have its customers be happy with the service provider they pick. They only win big when customer satisfaction is high. And for a company with nearly 900 people, they only have 22 customer service personnel. Which I’m going to interpret as them providing a pretty good customer experience generally.

[14:34] Y: That’s a good point. In addition, I was thinking it’s just all PR, but maybe there is something to the point that Jin Xing makes about this industry needing a more educated staff than many of the other Chinese internet companies and this being a sort of barrier to entry.

R: Right, the product is less standardized because let’s face it, healthcare is a very personal product because everyone’s body is different. But most especially when we are talking about cosmetic surgery, no two procedures are going to be exactly alike. Obviously.

Y: I’m not super convinced that means So-Young’s employees need to be very knowledgeable medically, though that’s what Jin Xing is claiming. But I do believe that if the product and processes were poorly designed, for example, if the experts on the app were not vetted properly and gave really crappy advice, then yeah, So-Young wouldn’t be able to survive for very long. After all, this is an area rife with lawsuits.

[15:33] R: And while So-Young has not been totally horrific at keeping away the quacks and cheats from their platform, it certainly hasn’t succeeded entirely. There are plenty of lawsuits against the company for recommending and endorsing practitioners who are of questionable ability and ethics.

Y: But I do think this is difficult to pin on So-Young entirely, because as long as they have the proper licenses, it doesn’t make sense for So-Young to ban them from the platform, does it? They’re just an app after all, not regulators.

R: Yup, So-Young’s argument is that the user reviews in the app will reveal the bad actors and as long as that process is fair, then the truth will always come through. Sounds reasonable, unless you are one of the victims of such a clinic, where you come out missing a piece of your face, or looking more like Freddie Krueger than Diane Kruger.

Y: Well, going under the knife itself is a huge risk anyway, so I think I’m with So-Young on this issue. But So-Young has many other allegations against it that are far more sinister and harder to shrug off, including many reports of bribery.

R: It’s not uncommon to hear of such issues especially where advertising sales are involved, as we saw in our deep dive on Bytedance, who suffers from some of the same allegations, so I am not too surprised. There are also other allegations of corruption that we won’t bother explaining here, but you can go back to our Episode 36 on the risks of doing business in China to get a good sense of what could be happening.

[17:08] Y: What investors might find more worrisome are accusations that the company is faking its data, such as the time when some reporter exposed one So-Young user ID for having gotten 33 nose jobs, and spending over $100K per month.

R: That is a pretty crappy job at fraud. 33 nose jobs?? Of all the procedures to fake, that’s the one they choose to fake? Seriously? OK, but yes, these allegations do not help the So-Young bears who think that the company’s financials are problematic and that the 92% repeat buying rate we cited earlier is too high. The bears also bring up a good point, which is that if So-Young is doing so well, then why did it need to rush to IPO after raising three separate venture rounds over a period of just nine months last year?

Y: Again, we are not auditors here so we don’t know what the truth is either, and it’s definitely not rare for Chinese companies, especially those growing very quickly, as So-Young has been, to have their numbers come under scrutiny. So take those with a grain of salt. But it’s always good to be skeptical.

[18:23] R: Finally, aside from being accused of faking numbers, So-Young was also hit with a few dozen lawsuits from celebrities who claimed that their image had been used without their permission for marketing purposes. But if you ask me, that is hardly an existential risk for the company. No consumers will be running away because Angelababy comes out and says that no, she didn’t get a nose job through So-Young’s platform.

Y: True. No one cares because everyone knows she’s had so much surgery anyways! So out of all the legal risks we just listed, the first one, where procedures go bad and consumers sue claiming that So-Young didn’t properly protect them from bad doctors, is probably still the most harmful and actually capable of seriously damaging So-Young’s reputation.

R: Honestly, if you ask me, the market is just still growing so fast that So-Young and everyone else in this category can make quite a few mistakes and still make it. And the VCs know it, one of its closest competitors, 更美, which means More Beautiful, also raised more money recently, to the tune of $50mm last summer, led by Meitu, China’s most popular selfie beauty app.

Y: Right, in fact So-Young’s annual State of the Medical Cosmetology Industry Report shows that on a per capita basis, China still has room to grow 6 times before catching up to neighbor South Korea, a leader in artificial beauty. The same report also says that about 20mm Chinese people underwent cosmetic procedures in 2018, and that almost two-thirds, or 64%, were born after 1990. 19% were born after 2000, meaning that they were under 19 years old.

R: OK, that’s a little terrifying, I mean, aren’t you still riding out the tail end of puberty at that point? As Chinese people like to say, 脸还没长开呢, your facial features are still in flux, there’s lots of baby fat going on, it’s a bit crazy to me that the percentage those under 19 getting surgery went up from 15% to 19% from 2017 to 18 in China.

Y: That makes me sad because they’re going to look back at those days and realize how beautiful they are years later. Or maybe not. So-Young’s report also showed that most people were either supportive or neutral towards plastic surgery. Only 16% were vehemently opposed, with another 18% professing that they don’t care, and 25% who were avid supporters. The rest were OK with these elective procedures as long as they weren’t “overboard,” and 5% were courageous enough to consider invasive surgeries.

R: I’m with the 84% who are neutral or supportive. It’s not my face or body … why do I care if everyone else is simply trying to be more beautiful? I mean, hey, maybe it really gives them the confidence they need. A recent survey claimed that plastic surgery ranked #7 on the 8 major ways Chinese females build confidence. Of course, that survey was sponsored by SoYoung, so I would put a big asterisk next to those results.

[21:47] Y: I agree, everyone should be able to make their own decisions. But it is worrying when looks become such an established part of society that it isn’t just part of dating, which most people can accept, but formalized into hiring processes. And that’s something we want to highlight is happening, or is still happening in China today.

R: It’s getting better, but pretty normal to see job ads that have, as part of the job requirements, good looks. I mean, it might be euphemistically put forth as 五官端正, which can be loosely translated as “having a pleasant appearance,” but everyone knows that they’re really saying “be as good looking as possible.”

Y: Yes. There was a stink raised around tech giants having such language in their job ads last year, but if you are walking around China, you’ll see that lots of ads for restaurant or hotel staff posted on the windows will say not only “pleasant appearance,” but have age and height requirements as well. This is what South Koreans call “look-ism” in their own job market. In Chinese, people call it 颜值经济, or “appearance economics.”

R: And this isn’t a crazy assertion. In 2015, surveys showed that 49% of plastic surgeries were for 工作需要, or “needs of the job.” Now it’s possible this survey was super unscientific but assuming basic survey protocols were followed, that’s a very high number of “job-necessitated” procedures, more than double the next most popular reason, which was “making my partner happy” at 23%.

Y: Sounds awful, right? Well, the good news is that in just three years, attitudes have changed. When the same survey was given in 2018, the number one response at 57% was “to make myself happy.” Now, I don’t know if that’s the right way to go about it, and I’m not sure that’s healthier than doing it for your job, but some have interpreted this as more empowerment, especially for females, who still do make up the bulk of customers.

R: Yes, we are still the bulk, but men are catching up! Men make up 11% of 医美 clients but spend almost three times as much on average. I’m actually not surprised by that. Hair transplants, by far the most popular procedure for men, are expensive!

[24:19] Y: What might surprise you is the income distribution of the customers. You’d think that this is market for the highly affluent, but again, if so many young people are doing it, and as we’ve already said, there’s rampant “beauty discrimination” even in, or should we say especially in, non-desk non white-collar jobs, then maybe you won’t be shocked by the statistic that almost 50% of 医美 customers are making less than $1500 a month, which is a very average income in urban China.

R: Barely middle class, really, but maybe that’s why they’re so incentivized to spend a few thousand dollars on themselves, because it has the capacity to change their lives.

Y: Speaking of changing lives, I do think we should mention that “changing my fate” is the reason given by 4% of patients in SoYoung’s survey last year, down from 12% in 2015. It’s a small percentage of people, but it is nonetheless a strong consideration for many Chinese.

R: How can plastic surgery change your fate, you ask? Well, in Chinese culture, there is the belief that your face, 面相, as in the literal distribution and shape of your features, the contours of your face, the placement of blemishes or beauty marks … well these can all determine the trajectory of your life. It’s just one of those lingering superstitions with no logical basis but plenty of people subscribe to it.

[25:52] Y: Yeah, this is a real thing. Rui downloaded So-Young this week to do research for this episode and they have this camera function called a “face test” that’s pretty hilarious. It detects where all of your features are and gives you the ratios, for example, of the distance between your eyes and nose, and lets you know what your score is in terms of how “smart” you look, how “mature” ie old you look, and how “distant” ie haughty you look.

R: I got the “goddess face,” which sounds good, but is really saying you score sort of in the middle for all three, ie old but not too old, smart but not too smart, and just a little approachable, those three being the primary attributes that I guess Chinese women care about.

Y: You can then click on any of the other faces that you want to look like more, for example, a wanghong or internet celebrity face, a Korean style face, a Japanese style face, whatever, and then it will show you the procedures it recommends and also show you what you’d look like post-surgery.

R: And this being China, one of the options is 好嫁脸, or “very marriageable face.” Another option is 变聪明, or “become smarter,” by which I believe they probably mean not actually altering your IQ but just looking like you did. According to the app, I only have to have three surgeries to look smarter, but they suggest seven for capturing a husband. Guess I’ll be dumb and single for a while!

Y: You guys might be laughing but this is a popular marketing tactic. Apparently there are specific facial features that are more likely to bring you a prosperous life, or if you are targeting females, maybe you focus on their partner instead, by selling them a 旺夫脸, roughly translated as “a face that gives your husband a prosperous life.”

R: Guo Jingjing, a multi-time Olympic champion diver, who married very rich, is well known for having such a face. Her continued good luck in life literally had people going to clinics asking to look like her for good fortune, even though she’s not considered super attractive. But enough about silly superstitions already. It’s time to wrap up this episode and summarize exactly what is going on with the crazy world of medical aesthetic procedures in China. What did we learn today, Ying-ying?

[28:27] Y: We learned today that this is a multi-billion, we are talking about at least an $18Bn market in China alone. In addition to plastic surgery, this sector also includes noninvasive procedures such as botox, and even less technical procedures like permanent makeup. Basically, anything that uses any kind of medical knowledge or expertise for the purpose of making someone more beautiful.

R: It’s also incredibly fast growing, with the entire industry projected to grow at least 20% and up to 40% every year for the next few years. And because most of it, like 95%, is still occuring offline, the opportunity to capture the online medical cosmetology market is actually tremendous. No wonder then that several dozen companies addressing exactly that were founded in the last few years, with a few of them, like So-Young 新氧 and iGengmei 更美 raising hundreds of millions of dollars and So-Young even going IPO last week on NASDAQ.

Y: Most of the demand for these procedures are being driven by young females — particularly the under 30s, who make up almost two thirds of customers. Males are fast growing but still make up just over ten percent of customers. Either way, surveys show that society has become more and more tolerant of such procedures, and that the primary reason people undergo them is to make themselves happy.

R: Well then, Shanghainese people must be very happy, because they top the list for procedures done in China, followed by Beijing, and then third … Chengdu, home of pandas and spicy Szechuan food. I find that a bit odd because Chengdu has always been known as the land of pretty girls, but maybe there is pressure to uphold the stereotype.

Y: Or they are just doing it for their jobs. At least in China and neighboring South Korea, where many people think career success is correlated with beauty, leading to what you can either call “lookism” or “appearance economics” in the two countries.

[30:44] R: Are apps such as So-Young part of the problem or part of the solution? CEO Jin Xing, whose own mother is a plastic surgeon, thinks that one day when So-Young is so successful that everyone is able to undergo whatever procedure they want because it’s become so cheap and easy to be beautiful, the world will actually then be more fair. Because everyone is beautiful, there will be less discrimination.

Y: So-Young does claim that out of the 400 procedures it has on its app, online costs have decreased an average of 29% over the last 3 years. That’s because So-Young has made the market a lot more transparent, so unscrupulous service providers cannot take advantage of information asymmetry. What do you think?

R: Do you agree that So-Young is indeed making the world a more equal place? Vote on our Twitter poll and let us know what you think!

Y: OK, that’s all for this week folks! Thanks for listening. As a reminder, episodes will now be available every other Friday instead of Wednesdays. We really enjoyed putting this together, and we are always open to any comments or suggestions. You can find us on twitter @thepandaily, @techbuzzchina, and my personal Twitter account is @GINYGINY.

R: And my Twitter is spelled @RUIMA. TechBuzz China by Pandaily is powered by the Sinica Podcast Network. Pandaily.com is an English language site that tells you “everything about China’s innovation.” Our producers are Shaw Wan and Kaiser Kuo. Our interns are Wang Menglu and Mindy Xu! See you in two weeks!