In his China Translated newsletter, Robert Wu compiled a telling list of these listings — from GPU and AI-chipmakers such as Moore Threads, MetaX and Biren, to foundation-model developers like Zhipu AI and MiniMax, alongside memory and accelerator players preparing to tap public markets later this year. The compressed timing and breadth of these offerings underscore how China’s AI industry is now moving into a new, capital-market-driven phase.

Among this cohort is Zhipu AI, which OpenAI has previously described as one of China’s “AI tigers” — startups building large language models intended to rival leading Western players. Zhipu listed on the Hong Kong Exchange on Jan. 8, raising HK$4.35 billion and achieving a valuation close to US$9 billion, making it China’s first AI software company to go public.

Compared with some of its peers, including MiniMax, which debuted a day later, Reuters cited Omdia chief analyst Lian Jye Su as saying that MiniMax’s focus on the consumer market appealed more to investors seeking high-growth opportunities, whereas Zhipu’s enterprise- and government-oriented model was perceived as more stable but less exciting in a market driven by hype.

According to STAR Market Daily, Zhipu grew out of Tsinghua University’s Knowledge Engineering Lab and has built a full-stack model portfolio spanning language, multimodal systems and AI agents. By mid-2025, its GLM model series had served more than 12,000 enterprise clients and 45 million developers worldwide, with nine of China’s top ten internet companies adopting its services. In 2024, Zhipu ranked second among China’s general-purpose foundation-model developers by market share — and first among independent developers.

The listing has also brought renewed attention to the personal story of Zhipu’s founder and CEO, Zhang Peng. An engineer trained at Tsinghua University, Zhang spent more than two decades in academia before turning laboratory research into a commercial AI company now valued at over HK$50 billion, according to STAR Market Daily.

Shortly before Zhipu’s IPO, one of my favorite Chinese-language programs, 張小珺Xiaojùn Podcast, released a nearly two-and-a-half-hour, long-form interview with Zhipu AI founder and CEO Zhang Peng. The conversation goes well beyond a standard IPO or founder profile. It ranges from why large-model companies are going public before AGI has been achieved, to how Zhang understands the relationship between capital markets, technological cycles, and long-term AGI research.

Zhang speaks at length about Zhipu’s strategic choices — including its enterprise-first orientation, its restrained approach to consumer products, and why it prioritizes stability and controllability over hype-driven growth. He also reflects on misconceptions surrounding Zhipu as a “to-G” company, discusses comparisons with peers such as MiniMax and Kimi, and offers unusually candid views on commercialization paths, investor expectations, and whether today’s AI boom should be understood as a bubble.

Beyond strategy and markets, the interview delves into Zhang’s personal trajectory: from Tsinghua University’s Knowledge Engineering Lab to founding Zhipu, navigating China’s evolving rules on academic commercialization, and building a company while remaining anchored in long-horizon AGI ambitions. The discussion also touches on talent competition, research-to-product translation, and how Chinese AI founders assess risk, patience, and timing differently from their U.S. counterparts.

Following the episode, the host published a carefully curated written version on the Language Is World WeChat blog. I’ve translated that text into English and am sharing it here.

I’m highlighting this podcast — and others like it — for a reason. I believe stories of how Chinese technology companies are built are still seriously underestimated outside China. Competition in China’s tech sector, both in markets and in talent, is extraordinarily intense, and firms that manage to break through are worth closer attention.

Long-form podcasts provide a rare opportunity to understand how these companies and founders actually think. I’ve previously collaborated with Zhang Xiaojun on introducing the development story of TikTok, and have also published English write-ups of several podcast episodes hosted by Luo Yonghao. If you’re interested, you can find links to those pieces at the end of this post.

01

On Going Public

“I guess I’d just wish everyone good luck.”

Zhang Xiaojun: I was thinking about it, and Zhipu might become not only China’s first large-model company to go public, but possibly the first in the world — moving faster than OpenAI. Why is it that AGI has not yet been achieved, yet companies like yours are already lining up to go public?

Zhang Peng: There are indeed many reasons behind this. I have never believed that achieving AGI would be easy, nor that it could be accomplished in a very short time. It is a marathon — a long-distance race. You have to persist.

At different stages, you have to get through the journey in different ways. For example, at the start of a marathon, if you want to break free from the congestion, you need to speed up a bit to get into the leading pack. In the middle stage, when many people can no longer hold on, you need to go to the supply station, replenish yourself, maintain your stamina, and constantly balance energy expenditure and intake. At different stages, the entire system needs to operate in different ways.

In our planning from the very first day the company was founded, we expected that in about six or seven years, we would be facing an IPO.

Zhang Xiaojun: When did you formally start preparing for the listing?

Zhang Peng: If you count backward based on the three-year performance period, it started around 2022 and 2023 — including how to commercialize, how to generate revenue, how to control costs, and how to grow the team. All of these were carried out simultaneously.

Zhang Xiaojun: In your view, not just for you but for this wave of AI companies going public, what kind of milestone does this represent for AGI?

Zhang Peng: From the perspective of capital markets, when you are still in the primary market, it’s like you haven’t really left school yet — you’re still learning, being nurtured, and growing. After entering the secondary market, you move into a stage that is much closer to the real market.

For the industry, it is also a milestone. It proves that this is not something illusory — not a flower in the mirror or the moon reflected in water. It is something that can truly reach an industrial scale.

Zhang Xiaojun: Is part of the reason that, at this point in time, investors also want an exit and want to lock in their gains?

Zhang Peng: I don’t rule out that some people think that way. But I think many of our investors share the same beliefs and ideas as we do — wanting to continue walking this path together and achieve even greater success.

It’s not that we go public and then immediately exit, cash out, and say, “OK, we’ve made money.”

Zhang Xiaojun: Recently, people often discuss you together with MiniMax, because both of you are competing for the title of “China’s first large-model stock.”

(On the day of the interview, it was still unclear who would become the first.)

Zhang Peng: Mainly because the timing is so close. I’ve seen online analyses, and many of them are quite fair. The two companies each have their own characteristics and their own development paths.

Of course, I won’t comment on MiniMax itself. But at least from our own perspective, the ideals, ideas, and underlying motivations that Zhipu carries are not something that can be clearly understood from a prospectus or a few dozen pages of materials.

Recently, I’ve also spent time talking with many friends, hoping to help people better understand the thinking behind Zhipu and the motivations behind what we are doing, so that unnecessary and one-sided misunderstandings don’t arise.

Zhang Xiaojun: Is there anything you’d like to say to MiniMax CEO Yan Junjie?

Zhang Peng: I’ve spoken with Teacher Yan a bit less recently; before, we talked quite often.

Zhang Xiaojun: Why less recently?

Zhang Peng: Fewer chances to run into each other.

Zhang Xiaojun: So is there anything you’d like to say to him?

Zhang Peng: I guess I’d just wish everyone good luck.

Zhang Xiaojun: How do you view the possibility that OpenAI might also go public?

Zhang Peng: I’ve heard that they are preparing as well. OpenAI is probably another story altogether. In the U.S. environment, it’s what you’d call “high risk, high investment, high return” — the “three highs.”

Zhang Xiaojun: And you?

Zhang Peng: We are relatively more aligned with China’s conditions. In high-risk or high-tech fields, we pursue stability, controllability, and predictability.

Zhang Xiaojun: How do you deal with post-IPO pressure — technical investment, computing-power investment, and pressure from the secondary market? After going public, could you instead become an ordinary, mediocre company?

Zhang Peng: I don’t think so. This is also why I mentioned earlier why we hope, through your program, to let more people understand what Zhipu is really thinking and doing. Many things originate from gaps in understanding between people and from mutual misunderstanding.

Zhang Xiaojun: What do you think is being misunderstood?

Zhang Peng: Some people may think: “Look, they’re just doing project outsourcing, a to-G company, revolving around government.” I don’t think that’s the case. There are many deeper factors involved.

On the surface, nine of China’s top ten internet companies are our clients, and they are all very important clients. About 60% of our clients are enterprises. The government side accounts for only about 20% — actually quite small.

If you say we are a to-B company, that I can accept. To-G is not what truly makes up the majority of our business.

We have always said that we serve enterprises, because enterprises are where productive interests are most concentrated in society and where conversion efficiency is highest. A technology at the level of a productivity revolution naturally needs to land in such places.

This is the most straightforward logic, and it’s something that people with engineering or science backgrounds like us easily arrive at.

02

On Entrepreneurship

“But you’re right.”

Zhang Xiaojun: I feel that you weren’t fully prepared when you became CEO, and then you were pushed into a huge wave. Over the past three years, what has that felt like?

Zhang Peng: How do you know I wasn’t prepared?

…

But you’re right.

Zhang Xiaojun: Why did Tsinghua have you start this company? Who asked you to become entrepreneurs?

Zhang Peng: No one asked us to do it. It was something we wanted to do ourselves.

When I was working in the lab, I was responsible for engineering transformation. Professors led students to do research, and after the research was done, they might publish papers — but I had to deliver it to enterprise clients.

Enterprise clients don’t just want a paper or a prototype. They need a system, a product. I led a group of people to do exactly that.

Zhang Xiaojun: Has Tsinghua always had positions focused on engineering transformation?

Zhang Peng: Our department always has, and our lab especially so. It’s our tradition.

Since my advisor founded the lab, he has placed great emphasis on this. He proposed a concept called P2P — Paper to Project, or Paper to Product. That is, your research results in papers must be transformed into products or systems that can actually be used.

In 2017, we began trying to figure out how to make this commercialization path work within the university system.

At that time, it was not allowed for people within the system to start companies.

Zhang Xiaojun: Were there no precedents before?

Zhang Peng: There were, but not through formal, official channels. A professor might quietly start a company outside, and as long as no one reported it, it would pass. But strictly speaking, this required reporting to and approval from the university.

Zhang Xiaojun: Did you ever think about just doing it quietly and dealing with it if discovered later?

Zhang Peng: That would always leave loose ends. This was an obsession for our group — to take the official route.

The turning point came in 2018, when the state — including the Ministry of Education and several other ministries — jointly issued an opinion allowing in-service researchers at scientific institutions to commercialize the results of their research.

It was like opening a window — people suddenly saw that there was another path outside. But it wasn’t like opening a wide door saying, “Go ahead, do whatever you want.” It still wasn’t easy. We took this policy and talked with the university: “What do we do? We want to do this — how do we proceed?”

The university actually also wanted to do this. That regulation came out in January 2018. Studying the details and completing the entire process, the company wasn’t registered until June 2019 — a year and a half.

We were the first to eat the crab.

Zhang Xiaojun: When you first went out to raise funds and talked to investors, were they excited?

Zhang Peng: Investors didn’t understand at all. They completely didn’t understand. “What is this thing? How do you make money? How do you commercialize it?” These were the questions they asked.

I remember one investor very clearly. We chatted online, and he said, “Can this thing actually become money? Look at how bad the macro environment is right now, how bad the economy is. Why don’t you cut your valuation in half?”

When ChatGPT became popular, it helped us enormously. No one questioned anymore what this thing actually was.

We just said to them: “You know ChatGPT, right? You’ve seen it, right? What we’re doing is moving in that direction.”

03

On Comparison

“He can do things beautifully, but there isn’t much emotional value.”

Zhang Xiaojun: I’ve heard a comment about Zhipu. Zhipu has never really been the most star-like project in the market, nor the one with the highest attention. You have technology and vision, but you seem a bit boring.

Someone described it to me as “like cement” — not very interesting, but very stable. Is that a fair assessment?

Zhang Peng: I think it’s fairly accurate — just like how people describe Tsinghua engineering guys: boring.

Very smart, very capable. If you give them a serious task, they can execute it beautifully. But there isn’t much emotional value.

Zhang Xiaojun: Compared with you, isn’t Kimi a bit cooler? Also a Tsinghua engineering background.

Zhang Peng: Yes. That’s something I really admire about Zhilin. He’s very good at capturing the attention of ordinary people, knowing how to promote things and how to understand users’ needs and thinking. We may not do as well in that regard, and it also relates to our positioning.

Zhang Xiaojun: When did you decide not to go deeply into to-C? That must have been an important decision.

Zhang Peng: It’s not that we decided not to do to-C. We actually do — we developed the Zhipu Qingyan app, and the cloud version of ChatGLM, and we are still working on them.

It’s just that we don’t bet everything on a single option. We look at three or four models simultaneously and see which one can really work.

Zhang Xiaojun: Did you ever buy traffic for Zhipu Qingyan?

Zhang Peng: Of course we did. There’s no need to deny that.

Zhang Xiaojun: How long did it take to realize you couldn’t win that battle?

Zhang Peng: It’s been a while. Later we realized that China’s consumer market has very weak willingness to pay. People really don’t like paying.

We did make some money from Qingyan.

Zhang Xiaojun: Did you ever think about competing directly with Doubao or Kimi?

Zhang Peng: That’s not our style.

Zhang Xiaojun: To-C will always be more attractive to investors than to-B.

Zhang Peng: I don’t really understand where that attraction comes from. Later I guessed one reason: the numbers are easier to calculate. How much is one user worth — that’s relatively straightforward.

But to-B is too complex. How much is a client worth? There are countless variables. It’s very hard to calculate clearly.

Zhang Xiaojun: When I look back now, the first thing that left a deep impression on me in 2023 was that Lao Wang issued a “hero’s call,” and then Wang Xiaochuan (founder and CEO of Baichuan Intelligence） entered the game.

When you saw these very successful entrepreneurs starting over and entering a market you had cultivated for years, what were you thinking? Did you worry about losing in business competition?

Zhang Peng: We had been doing this for a long time, and our understanding was relatively deep. Even though ChatGPT became popular, the road ahead is still long — it’s not that fast or easy.

Xiaochuan was actually nearby at the time — our offices were in the same building — so we often ran into each other downstairs.

He has a habit: when thinking, he would go downstairs to the open plaza in the tech park and sit cross-legged on a bench, thinking with an iPad in hand. Sometimes when I went down to buy coffee and ran into him, we’d chat for a bit.

Zhang Xiaojun: Then in 2024, the protagonists of the market seemed to change, becoming Yang Zhilin (founder and CEO of Moonshot AI) and Yan Junjie (chairman and CEO of MiniMax). How did you view Yang Zhilin at the time?

Zhang Peng: I had interacted with Zhilin several times. After all, he came from our lab. At school, he was the top-student type. When he later started Kimi, I thought he could succeed.

Zhang Xiaojun: How does it feel when fellow students start competing in the business world?

Zhang Peng: Tsinghua people have this trait — we’re all engineering types, quite rational.

When we’re together, we chat happily about being classmates. But business is business. When it comes to competition, you do what needs to be done. Everyone has their own rules and communication style.

Zhang Xiaojun: How do you view Yan Junjie of MiniMax?

Zhang Peng: He’s extremely smart. First, he chose the right direction; second, the right market. On that basis, he knows very clearly what he wants.

Zhang Xiaojun: What does he want?

Zhang Peng: I think he’s aiming directly at commercialization.

Look at what he’s doing — Talkie, voice, multimodal — all moving in that direction. Consumption, entertainment, spiritual value, emotional value. He’s very clear.

04

On the Bubble

“If it’s a bubble, can going public save AI?”

Zhang Xiaojun: I once talked with a founder from the AI 1.0 era, and he said that large-model companies going public now are essentially “escaping.”

Some market views suggest that the AI bubble might burst in 2026, and expectations for 2026 aren’t very optimistic. So at the end of 2025 and the beginning of 2026, if you can go public, you should do it quickly — it might be a favorable window.

Zhang Peng: First, assuming it is a bubble — can going public save us? Or can it save AI?

Zhang Xiaojun: It can save investors’ wallets.

Zhang Peng: That doesn’t save me, does it?

Whether it’s a bubble has no necessary relationship with whether you go public. You’re mixing two things together — I don’t agree with that. Logically, there’s no inevitable connection.

Second, there’s been a lot of discussion recently about whether it’s a bubble. I’m used to asking a counter-question: how do you define a bubble? What is a bubble?

Zhang Xiaojun: Every cycle has bubbles. What people worry about is a major crash like in previous cycles.

Zhang Peng: Why did those crashes happen? Overheated investment —投入得不到相应的回报.

So what’s the bubble now?

Zhang Xiaojun: The internet.

Zhang Peng: Everyone will tell you that the most recent bubble was the internet bubble. But look — even after it burst, what did it leave behind?

Many of the things people use and enjoy today were left behind by that bubble era. Why should you fear bubbles?

Zhang Xiaojun: Because you’re afraid of being the one that gets popped.

Zhang Peng: At the end of the day, it’s still about worrying about the money in your pocket.

It’s about whether you can recover your investment returns in time — not whether what you invested in actually produced real things, real productivity, or lasting value.

Once you look at it from that angle, the problem becomes easier to resolve. From an investment perspective, is investment in the U.S. enough? Is it enough in China? If investment isn’t enough, how can it be called a bubble?

Zhang Xiaojun: People think it’s not enough because AGI is still very far away.

Zhang Peng: Then if it’s far from AGI, should we stop pursuing AGI?

Zhang Xiaojun: Is AGI even achievable under the current technical paradigm?

Zhang Peng: If we don’t invest, will it just naturally happen?

Zhang Xiaojun: It won’t.

Zhang Peng: Then that’s the answer.

This is the general historical trend. The questions I’m asking are logically connected step by step. If you answer them, you’ll see that worrying about this is meaningless.

There will inevitably be bubbles during certain periods. The only question is the size of the bubble. You ask whether investment is enough — many people think it’s not.

I don’t dare say whether the U.S. has enough, but China definitely doesn’t.

Zhang Xiaojun: China has much less than the U.S.

Zhang Peng: Far less — only a fraction, maybe one-tenth or even one-twentieth. And much of that investment goes into infrastructure, scattered broadly rather than concentrated on a few leading players like in the U.S. So the situation is very different.

If you say there’s a bubble, maybe from a capital-market perspective in the U.S., there is one. But in China, it doesn’t exist.

It’s far from enough.

Zhang Xiaojun: I understand that you’re looking at this from a long historical perspective. But from a company perspective — Zhu Xiaohu (managing partner of Jinsha River Venture Capital) has said that the “six little AI dragons” of large models may end up not even as good as the previous generation’s “four little AI dragons.”

You started your companies to pursue a second-generation AI paradigm. So from the perspective of a listed company, what is the fundamental difference between second-generation AI companies and first-generation ones?

Zhang Peng: I’m not trying to refute his view, but I think his conclusion comes too early. The previous generation of AI companies are still alive — some of them are.

We’re still very early. If you count from 2023, it’s only been three years. If you count from our founding in 2019, it’s only been six-plus years.

Isn’t it too early to draw final conclusions?

He made a prediction. We’ll just let time prove it.

05

On Hope

“A pathfinder.”

Zhang Xiaojun: Since going public, are there any interesting behind-the-scenes stories?

Zhang Peng: Let me think. I went to attend Moore Threads’ bell-ringing ceremony. We’ve cooperated with Moore for quite some time, and they invited me. I told them I was going to learn and see how the bell-ringing works.

It really hasn’t been easy for anyone — this wave has been extremely, extremely difficult. Everyone has their own challenges. To make it this far, everyone can be called a hero.

Zhang Xiaojun: The act of ringing the bell seems kind of magical. Will you ring it hard or softly? With how much force?

Zhang Peng: I’ll first see how big the bell is — just kidding, just kidding.

Zhang Xiaojun: What kind of person is Zhipu’s chief scientist, Professor Tang Jie?

Zhang Peng: Professor Tang is exceptionally smart, but also highly execution-oriented and very passionate. Once he has figured something out, he pushes extremely hard, with great passion and focus.

Zhang Xiaojun: What is he pushing hardest right now?

Zhang Peng: Pushing the team relentlessly to keep improving the model’s capabilities. Of course, he’s also very concerned about the IPO.

You see why we always start our story from 2016 — it’s to convey one message: Zhipu isn’t simply about starting a company to make money. Our original intention is to explore what AGI actually is.

We just believe that doing this through a company, within industry, better fits the current stage of AI development — rather than just doing research, or simply making money.

Zhang Xiaojun: If you had to choose between building a company that achieves AGI and a company that makes huge profits, which would you choose?

Zhang Peng: Of course, the one that achieves AGI. No hesitation.

Zhang Xiaojun: Even if Zhipu achieves AGI and then fails — would that be acceptable?

Zhang Peng: That’s too inauspicious to say…

Of course we don’t want to fail. And I believe that if we can achieve AGI, we won’t fail. We would also be a great company. The two are not contradictory.

Zhang Xiaojun: Looking five years ahead, what outcome would leave you dissatisfied?

Zhang Peng: If we only make money but have no technological output or contribution to the industry, I would definitely be dissatisfied.

Zhang Xiaojun: A hundred years from now, if Zhipu appears in the history books of artificial intelligence, how would you like it to be written?

Zhang Peng: From my personal perspective, I hope there would be a line in the footnotes saying: Zhipu was a pioneer in the history of AGI.

We started doing this very early, including many technical breakthroughs. In many cases, we were the first to eat the crab.

Zhang Xiaojun: Being early matters to you.

Why not “innovator,” but “pioneer”?

Zhang Peng: A pioneer is often an innovator. A trailblazer — someone who clears the path. (Enditem)

In the previous piece, He looked back on his early entrepreneurial journey and shared why he returned to build an EV company after financial freedom. He also reflected on XPeng’s brand positioning and the staggering scale of R&D investment he believes an AI-driven car company must commit to.

This time, the discussion turns sharper. He lays out why he expects China’s EV market to shift within five years from a knockout stage to an all-star game with only about five serious players left. He shares his perspective on automotive industrial design, offers a comparison of how autonomous driving may evolve differently in China and abroad, and describes his exploration into flying cars — from early trials to plans for mass production. He also delivers candid views on which Chinese companies are genuinely committed to AI and which are merely paying lip service.

Once again, while I’ve distilled the conversation into highlights, the full three-hour dialogue is packed with insights. If you understand Chinese, I strongly encourage you to watch or listen to the entire podcast — it’s well worth your time.

In the past two weeks, Luo has put out two more episodes. I had expected him to keep bringing on guests from China EV industry, but instead his latest conversations featured Chinese comedy sensation He Guangzhi and Renke, frontman of China’s much-loved folk rock band Wutiaoren.

I haven’t yet decided whether to continue this newsletter series or in what form to present it. Personally, I really enjoy listening to Luo’s podcast, but producing this series takes quite a bit of time—his talk with Renke alone ran nearly five hours.

If you’d like me to keep covering this series, please take a moment to vote in the poll.

About He Xiaopeng

Prior to serving as chairman and chief executive officer of XPeng, Mr. He served at Alibaba Group Holding Limited, a public company listed on the NYSE (symbol: BABA) and the Hong Kong Stock Exchange (stock code: 9988), from June 2014 to August 2017, including serving as the president of Alibaba mobile business group, chairman of Alibaba Games and president of Tudou.com. In 2004, Mr. He co-founded UCWeb Inc., a Chinese mobile internet company that provides mobile internet software technology and services, and served as the president of product from January 2005 to June 2014. In June 2014, UCWeb Inc. was acquired by Alibaba Group Holding Limited. Mr. He previously served as an independent director and a member of the audit committee of HUYA Inc., a game live streaming platform company in China listed on the NYSE (symbol: HUYA) from May 2018 to May 2020.

Mr. He received his bachelor’s degree in computer science from South China University of Technology in July 1999. Mr. He obtained the qualification certificate of senior economist (technology entrepreneur) in business administration issued by the Human Resources and Social Security Department of Guangdong Province in January 2020.

6. He Xiaopeng's analysis on the future landscape of China’s EV market.

Luo: You’ve often compared the auto industry to a knockout stage and an all-star game. In your view, when do you think can we finally see the winners and losers of this game?

He: In China, about five years.

Luo: Who's going to survive?

He: Different companies may have different perspectives. Personally, I lean on the aggressive side. I'd say in China, we’ll probably end up with around five major players. And of course, a few overseas automakers will still last too.

Luo: Which one is definitely going to make it?

He: No one can confidently say it has the ticket. For the industry, it’s both a challenge and an opportunity.

Luo: Globally, Tesla is definitely safe, isn't it?

He: If you’d asked me last year, I’d probably agree with you. But this year, even Tesla’s facing new challenges. In China’s auto industry, the top-ranked new players tend to come across turbulence within 12 to 24 months. For the big, legacy giants, the cycle comes around four to five years. So, honestly, it still feels way too early to make a definitive call today.

Luo: So on the one hand, you’re saying the knockout stage of China’s auto market will settle within five years. But on the other hand, you’re saying not a single company has secured a ticket yet. That makes the whole competition sound even more brutal.

He: But also more interesting.

Luo: Indeed. And XPeng has been around for almost 10 years now, right?

He: 11 years.

Luo: Looking at where we are today, how would you rate your domestic competitors? Let's focus on the positive side, after all we’re not the type of podcast to stir the pot. Maybe just tell us which companies you personally respect or admire, and highlight some positives you see in them.

He: I’d say every automaker has its own advantages. For example, Volkswage, our partner and also one of our investors. It's sure that, right now in China, a lot of companies are getting recognized by the media, by the industry, and by users. People think we’re doing great, and that we can be really strong on a global scale. But honestly, I feel we’re still pretty far from that. Ten years ago, we were a little too lacking in confidence, but now it feels like the pendulum has swung the other way. There’s maybe a bit too much confidence.

Luo: Maybe it's because our domestic new energy vehicle industry have taken off, so people are now swinging to the other extreme and become somehow overly confident.

He: Yes. Take Germany as an example. Can you name a Chinese car brand that's popular out there? Its market is open to us, unlike the U.S., so in theory there should be someone.

So every company’s got its strengths. People love to say things like, “Oh, Volkswagen or Toyota, their software sucks, their user experience isn’t great.” But compared to them, our scale is way smaller. Our ability in areas like management, globalization and building service networks are still in the cradle in their eyes. If you score it out of 100, we might feel like we’ve hit 60 in some areas, but for them, we’re more like a 20 or 30.

That’s why I keep saying no one has the ticket yet. Some companies look really strong, but they’ve still got gaps in key areas. Some others are dominating certain domain, but are too small in scale.

So relatively speaking, Tesla is one of the few companies that can be called "well-rounded", but even they’ve hit ups and downs. Chinese automakers all have their bright spots, but this first knockout round still has about five years to play out. After that, it’s the All-Star Game. Until then, everyone’s got plenty of homework to do.

Take Lei Jun's Xiaomi as anoither example. They've done an amazing job, but they’re also facing challenges. Therefore, the one ultimate principle for us is to move steadily, stay grounded, learn from others, and fix our own weaknesses. That’s the only way to become truly all-around. And honestly, we’re all still on that journey.

7. He Xiaopeng compared the future prospects of autonomous driving in China and the world.

He: I believe in the future, there will only be two kinds of cars. The first kind has a driver, but also has L4 autonomous driving ability, so you could be driving thousands or even ten thousand kilometers ,before you actually need to take control of the steering wheel once.

The second kind won't need a driver’s seat anymore. It drives itself, and any possible override would be operated from distance or on the cloud.

So down the line, cars will split into the man-driven type with L4 and the driverless type also with L4. And I think that shift is going to play out in the next two to five years.

Luo: If fast enough, maybe in two years?

He: Technically, yes. But when it comes to user adoption, I'd say it would take 5 to 20 years. Every country has its own condition and relevant rules and regulations, so as an entrepreneur, the real challege is about figuring out the best development pace for the company.

People in many countries of the world don't even have any clue about autonomous driving. How can you talk them into an L4 self-driving car? So different situations will lead to different development paces.

But from another perspective, I believe that in China and the U.S., we’re probably only 2 to 5 years away from the major turning point, which is going to flip the entire logic of how cars work.

Luo: I’m actually pretty optimistic about China’s tech policy. The government has been pushing the sector strongly, and that makes a big difference.

At first, I used to think it’d be some developed country that would go L4 first, and others would follow after technologies are proved and accident rates drop. But now I feel that the Chinese government might actually be the most supportive one toward L4.

What’s the sense you’re getting from the industry?

He: I have a bit of a voice on this. Over the past couple of years, I’ve been to a number of countries and sat down with regulators to talk about policy and legal changes in transportation. And honestly, what stands out to me is that China’s regulators are both able to keep things under control and, at the same time, among the most aggressive globally in appling new technologies. That’s why I’m confident in achieveing L4 in China.

When I was young, I always thought developed countries had the most open-minded, fast-moving policies to drive technological innovations. But in recent years, I’ve found the reality is the complete opposite. Private companies are not necessarily leading the way in driving technological progress, and governments in advanced economies are also not necessarily be open and eager to push innovation.

That's one of the reasons I think that China’s economy has been able to grow fast. If you go out and compare, you realize our regulators are far ahead of many countries. And that’s something I feel really proud of.

Luo: Especially in promoting technological innovations.

He: I really believe that in China, we're going to achieve L4 in cars both with and without drivers, and be ahead of the whole world in this field.

Luo: That's a confident claim.

He: I'm absolutely confident.

Luo: And it not only owes to our supply chain, but also the whole talent pool of engineers in China. The U.S. has been talking about bringing manufacturing back for a long while, but they can't fill the current engineering talent gap.

In China, making hardware is so convenient, especially in Shenzhen. Any problems with hardware can be solved in a half-day drive in this city. Of course, auto-making is too complecated to be done in such a short period of time. But other hardwards are just a stone's throw.

He: Not just the supply chain. Take Mexico for another example. Suppose we're setting up a factory out there, what do you think is the biggest challenge? Electricity shortage.

We've been doing business in China for so many years, but electricity is something we'd never even thought about.

But in Mexico, when I was there trying to invest in a factory, people there would simply tell me "Sorry, we don't have enough electricity here, and you'll need a lot of money or pull some strings to get your factory powered."

Luo: Yeah, that's something you probably only heard about in China like decades ago.

He: At least in the 90s'. But over the past 30 years we've never heard of anything like this in China.

Yet, many countries in the world are still bothered by this issue. That's why I believe that the high-level infrastructure foundation of China, including things like stable water and electricity supply, broad roads, solid communication network, drainage system and paved lands, makes the fundamental competitiveness of China's supply chain.

China has gone far ahead than other countries in infrastructure, so I firmly beliece that China can get even stronger in the next one and two decades.

Luo: A lot of foreign companies keep talking about moving their supply chains to this or that country, but honestly it’s actually really difficult. It’s not something you can just pull off overnight. China’s well-developed supply chain is the result of decades of accumulation.

He: Yes. And I think a lot of companies that do end up moving out of China will still remain on China's supply chain, which is eventually make our global supply chain even stronger. And I'll say the whole process of transfer may take 10 to 20 years.

8. He Xiaopeng talked about his experience in developing flying cars in China

He: Developing flying cars is a tougher and longer journey, mainly because building an aircraft itself takes a really long cycle, and honestly, its commercial viability hasn’t really been proven yet.

But I’m still confident that in the next era, whether it’s in 3 years, 5 years, or maybe a bit longer, we’re gonna see a major breakthrough in the flying car industry.

Luo: So when can we expect to see your first model of flying car in the market?

He: In the second half of 2026.

Luo: Is our government supporting this sector?

He: Yes it is. China has been strongly encouraging low-altitude economy since 2023. Policymakers have released at least six or seven documents mentioning or emphasizing the development of this sector.

More interestingly, Trump has also said recently that the U.S. needs to get into the low-altitude economy game too, because of China’s influence in this space.

Luo: I've heard that the U.S. also has similar teams.

He: Yes, there are two two publicly traded companies in the U.S. working in this area. But they were originally focused more on electric versions of helicopters to tackle urban traffic issues.

The aviation policies in the U.S. is pretty open, so I believe both China and the U.S. have massive opportunities in the low-altitude economy

Luo: Could you arrange a flight for me of your model if I come to Guangzhou right now?

He: Absolutely.

Luo: How many times have you taken your low-altitude model？

He: Not much, less than 10 times. But we run test flights around 10 thousand times per month.

Luo: Is the test zone still that little test shed wrapped with cloth that you mentioned before.

He: No, in open areas.

Luo: Because of the policy shift?

He: We apply for thousands of test flights in designated areas every day.

Luo: So I can try it out anytime I come to Guangzhou?

He: Definitely OK. I suggest you come over in the first quarter of next year, because starting from this fourth quarter I’ll be personally piloting our new model. So yeah, next year is the perfect time for you to come and experience it.

Luo: You’re flying it yourself? Don’t you need full-on pilot training for this kind of aircraft? Okay, let me throw in a serious question here — throughout your whole low-altitude aircraft development, up to this point, has anyone ever lost their life during the experiments?

He: Not once. But our founder's crashed three times.

Luo: That's inevitable. But not a single casualty during the whole process?

He: Never. We’ve actually been kind of lucky. Our founder, Zhao Deli, has been building low-altitude aircraft for years. And yeah, he’s fallen out of the sky three times and even ended up in the hospital.

Luo: But honestly, without someone like him, this wouldn’t even be possible. This kind of personality is just perfect for the early stage of a startup that’s trying to make innovations.

He: So, if we really want our low-altitude aircraft to become as common as cars one day, we need to make them thousands of times safer than cars. Right now, our target is three thousand times. That means ultra-safe and totally controllable, which is already insanely hard to pull off. Of course, making flying vehicles mainstream is definitely going to take many years.

Luo: But you’ll already be commercializing and selling the very first batch of these aircraft next year.

He: Right.

Luo: I feel like buying one even just to support your idealist spirit. Your pricing isn’t going to be super expensive, right?

He: It should be around 1 million yuan.

9. He Xiaopeng's view on Chinese companies’ real vs. pretended commitment to AI

Luo: When it comes to AI, how exactly is XPeng setting itself apart from the other carmakers?

He: Honestly, I think most companies that say they are "working on AI", they’re not really serious about it.

Luo: It’s more like lip service.

He: Exactly. Like when I first got into this industry about ten years ago, everyone was saying, "Software will redefine the car." But honestly, I didn’t really see them doing anything groundbreaking with software.

And then you’d hear people saying, "Data is priceless." But most of them were simply storing the car data. So I asked, "What are you actually going to do with it?" And they’d say, "These data will be a goldmine someday."

To me, that just complete nonsense.

Luo: Are you referring to those poeple from traditional car companies?

He: To be fair, everyone makes similar mistakes, even us. For example, we've always been saying that designing and styling matters in carmaking. But then Xiaomi came out and gave the whole auto industry a pretty harsh lesson: you guys haven’t been taking designing seriously enough.

So what really matters isn't how a company talks, but what they've really done. What's matter is the time, resources, and processes a company puts in, and ultimately the results they deliver.

For example, at an AI-related conference inside the industry, I asked a room full of companies that how many of them are actually doing pre-training. Out of a few hundred entrepreneurs there, only three or four people raised their hands. That tells you everything.

Luo: So you mean, most of them are probably just doing post-training at best, or maybe not even that?

He: Honestly, I doubt they’ve even done post-training. Let me give you another example. This was a while back, when I was at a really important conference. Everyone there was talking about how amazing AI is. But then, a bunch of people came up to me and told me that they've only heard the buzzwords, but have never actually used AI themselves.

Luo: Are you talking about tech companies?

He: No, they're not.

Luo: Then you mean traditional industries. Somehow I can understand that.

He: So, when we talk about really taking AI seriously, it means actually investing in it. For example, in China, there are tons of cloud computing companies, and the top ones are massive. But if you ask around about how many of them are really building strong AI capabilities on their cloud platforms, I’d say not many at all, and you can easily prove that through their cloud services.

If you're not even applying AI in your business, how can you claim you’re taking AI seriously? That’s why, from my perspective, a lot of companies today are just paying lip service when they talk about AI.

Luo: Also in the new energy vehicle industry?

He: In this industry, among the ones working on autonomous driving, the number of companies actually using massive computing power is just a handful.

Luo: Honestly, you can tell right away if a company is really serious about AI just by looking at how many chips they’ve actually bought for AI training.

He: And the truth is, not many companies have actually bought a lot.

10. He on what really matters in EV design

Luo: How big is your industrial design team now?

He: We’re at around 400 people this year. It’s gotten pretty big.

Luo: That's a lot indeed.

He: Most of them are in Shanghai. People in the industry often say we have technology as the left hand and art as the right. The year before last, I realized that, in reality, the tech side gets hundreds of times more investment than the art side. So clearly, the two "fists" aren’t equally strong.

Luo: When you’re making mass-market products, aesthetics still matter a lot, especially with cars.

He: At the end of the year before last, we finally made up our mind to really invest big in aesthetics, and last year we made a ton of adjustments. Out of those 400 people, a lot are from overseas -- some are Chinese, but plenty are foreigners too.

Luo: You have foreign designers too?

He: Quite a lot. Our head of design is from Europe. I think we need a fusion of East and West, especially since we’re selling a global car. In China, if you’re doing hardware plus software, there are two areas that must become your long suits -- industrial design and AI capabilities. Both have to be strong.

But coupling the two is hard: most hardware companies don’t understand software, let alone AI. And AI companies don’t understand hardware, which involves so much, say design, quality, supply chain, manufacturing, and more. So excelling in both areas is really tough. You know what I mean. You’ve done it before.

Luo: Yeah, right. We’ve done a lot of industrial design. I imagine inside your company, the design team drives most of the decisions, right? Cars are huge projects, so for every model you must go through piles of drafts -- dozens, maybe even hundreds -- constantly refining.

When it comes to the final decision, who gets the say? Your head of design, you, or do you guys actually vote on it?

He: At first, I was the one making the final call. But that caused a lot of issues. If I wasn’t professional enough, or didn’t have a good eye, or only noticed a few things when a car actually has thousands of design details, it was easy to make mistakes. Now it’s more balanced, and we’ve added way more user feedback.

Another thing is we make sure there’s a product manager in charge -- someone who keeps an eye on the big picture. And on top of that, designers need real resources and authority to actually do their job. One more big change is how we handle revisions. Before, when a project started, we’d give designers a bunch of constraints and say, "Here are the rules, now design within them." Now we’ve flipped it: we start with how to make the design great first, and then adjust the constraints to fit it. With this new approach, I’m pretty confident that starting with the XPeng P7 and moving forward, our industrial design capabilities are expected to take a big leap in the next few years.

Like Li Xiang, the Li Auto founder and CEO I highlighted in a previous post, He Xiaopeng represents a generation of entrepreneurs who first made their mark in China’s internet industry before pivoting to new energy vehicles.

Both XPeng and Li Auto belong to the group colloquially known as “Hua-Mi-Wei-Xiao-Li” — shorthand for Huawei, Xiaomi, NIO (Weilai), XPeng (Xiaopeng), and Li Auto (Li Xiang). Alongside BYD, China’s largest EV maker, these firms represent the first tier of China’s new energy vehicle players, often setting the pace for innovation and competition in the world’s fastest-growing EV market.

Given the length of Xiaopeng’s conversation with Luo, I’ve selected 10 highlights — each focusing on a different theme — and will share them across two issues.

In this first part, He Xiaopeng opens up about the ambitions that drove him as a teenager, the missteps and lessons from his earliest ventures, and what ultimately pulled him back into entrepreneurship after financial freedom. He reflects on why he chose new energy vehicles as his next frontier, how he envisions XPeng’s place in the market, and the staggering scale of R&D investment he believes an AI-driven car company must commit to. Together, these stories trace the mindset of a founder who blends bold vision with hard-earned experience.

That said, if you understand Chinese, I strongly encourage you to watch or listen to the full podcast. It’s well worth your time.

About He Xiaopeng

Prior to serving as chairman and chief executive officer of XPeng, Mr. He served at Alibaba Group Holding Limited, a public company listed on the NYSE (symbol: BABA) and the Hong Kong Stock Exchange (stock code: 9988), from June 2014 to August 2017, including serving as the president of Alibaba mobile business group, chairman of Alibaba Games and president of Tudou.com. In 2004, Mr. He co-founded UCWeb Inc., a Chinese mobile internet company that provides mobile internet software technology and services, and served as the president of product from January 2005 to June 2014. In June 2014, UCWeb Inc. was acquired by Alibaba Group Holding Limited. Mr. He previously served as an independent director and a member of the audit committee of HUYA Inc., a game live streaming platform company in China listed on the NYSE (symbol: HUYA) from May 2018 to May 2020.

Mr. He received his bachelor’s degree in computer science from South China University of Technology in July 1999. Mr. He obtained the qualification certificate of senior economist (technology entrepreneur) in business administration issued by the Human Resources and Social Security Department of Guangdong Province in January 2020.

1. He Xiaopeng discussed what motivated him to set the goal of achieving financial freedom at 18, and how he chose from the four paths to it.

He: The first time I took a plane, I picked up the in-flight magazine. You know, these magazines often blend advertising with chicken soup. I read about a woman, perhaps in her late thirties, who had successfully achieved financial freedom. As an 18-year-old, her story deeply motivated me, and it planted the seed for me to work towards my own financial independence.

Luo: Was she an entrepreneur?

He: . No, she was a senior executive at a multinational corporation.

Luo: I see. Kind of like the Chinese concept of a “working emperor” for corporate professionals.

He: Yes. So I got the idea of achieving financial freedom in university, although I didn’t immediately have a clear roadmap.

Luo: But you knew working for others wasn’t the correct path to achieving it.

He: After university, I identified three paths to financial freedom. The first was winning the lottery. I admit, I did purchase a significant number of tickets.

Luo: Oh, really? I wouldn’t have guessed that people in the tech sector would buy them.

He: My very first ticket won me 500 yuan (about 70 U.S. dollars), which led me to believe I might have a knack for it. Regrettably, that initial luck didn’t persist across subsequent purchases, spanning several hundred tickets. In 1999, I graduated from university. It was around that period that I began considering acquiring a property as a second path.

Luo: China’s housing market took off at that time.

He: At that time, housing in China was extremely affordable. However, the primary obstacle was the lack of money. My third path to financial freedom was through stock options in a promising company. I was fortunate to join AsiaInfo, and within my second year there, the company went public. This meant I was one of the first individuals in China to receive stock options from a private Chinese company that achieved an IPO.

Luo: You joined AsiaInfo a bit after the initial wave, but you still made some money, right?

He: In that IPO year, I received an allocation of 1,000 shares. That was only my second year at work. The value of those shares was substantial; had I been able to sell them at that time, I could have purchased two properties in Guangzhou.

Luo: They were worth a lot, indeed.

He: Unfortunately, by the time I left AsiaInfo, the stock had fallen below its initial offering price. I remember the offering price was around 20 yuan or 24 yuan, and it was trading at 4 yuan when I left.

Luo: You would lose money when you sold your shares.

He: Exactly. As a result, I didn’t buy a house, and those shares, in a way, became a lifelong reminder of that period.

Luo: What’s the fourth path?

He Starting a business. How did I have the idea? I learned that a senior executive, two levels above me, was among the top individual taxpayers in Guangzhou. My initial thought was, “Wow, if I could reach that level of tax payment, I’d consider myself successful.” However, upon realizing he was nearly twenty years my senior, I reassessed. It occurred to me that it might take me another 20 years, and even then, there was no guarantee I could surpass him, given his significant achievements at that time. At that time, I felt that working for others wouldn’t work out for me, so I decided to pursue entrepreneurship.

Luo: Which year? Was China in the midst of the PC internet wave or approaching the mobile internet era?

He: 2002. In 2002, both China and the global internet market had just emerged from the dot-com bubble. Subsequently, around 2003 and 2004, the internet saw a resurgence, bolstered by sectors such as SP (Service Provider) and gaming. In fact, at AsiaInfo, we were involved with email and SP. We weren’t directly charging users for things like ringtones. Instead, we functioned as a payment gateway company for China Unicom, so we actually performed quite well during that period.

Luo: Once you decided to pursue entrepreneurship, how did you secure your initial funding? Typically, individuals with technical backgrounds are not as accustomed to engaging with capital or venture capitalists, especially in the early stages.

He: Well, in my very first entrepreneurial endeavor, I followed others into a startup.

Luo: What does that mean?

He: Being a follower means I had a minimal equity stake and was not required to contribute any capital. It was during my subsequent ventures, from UCWeb to XPeng, that I began actively engaging with capital and investors.

2. Luo Yonghao and He Xiaopeng talked about unforgettable experiences in He’s early entrepreneurial efforts, including missing out on precious investment opportunities after being misled and not printing his real title on his business card.

Luo: Could you share any memorable experiences you’ve encountered? For example, as a founder seeking capital from major institutions, did you ever have to deal with stakeholders who presented themselves in an overly proud or even belittling manner?

He: Looking back on those experiences now, I actually believe the issue wasn’t with them, but rather with us.

Luo: Many successful entrepreneurs do often say that in retrospect.

He: Back then, I believed I was misled regarding valuations, which led to a significant misjudgment. We had multiple investment institutions willing to invest, but we felt their proposed valuations were unfairly low. To illustrate, they might have presented another company with a valuation of 100 yuan, while offering us only 50 yuan. We couldn't accept this, as we believed our company was stronger. However, it turned out that the other company’s valuation was actually 30 yuan, and they had exaggerated it to 100 yuan.

Luo: It’s true. People tend to puff up the numbers a bit when they’re presenting their case.

He: Sadly I wasn’t aware of it. My focus was primarily on the presented figures. In the end, I declined the offers from several interested investment institutions.

Luo: You missed out on capital that could have been utilized then.

He: Yes. It was a crucial learning experience from the early stages.

Luo: I recall hearing a widely circulated story from your early days. You had titles like VP on your business cards, but not CEO. Was this indeed the case? And wouldn’t investors find it strange? Did you tell the truth when meeting them?

He: Only when they asked us.

Luo: So, when you went out to discuss business cooperation, you were all Vice Presidents, without a CEO. Didn’t you ever encounter major clients questioning you, like “Why are you all VPs? Where’s your actual CEO?” Did that kind of situation ever come up?

He: We would typically respond by saying, “We need to discuss this internally.” We did this for a good reason. At that time, our professional and social experience was still quite limited. A well-known entrepreneur — I won’t mention his name — once invited one of our founding members to dinner. He booked an entire 1000-square-meter hall for the occasion.

Luo: I can imagine. I’ve encountered similar situations myself.

He: A room of that scale isn’t typical. He’d essentially rented out a large hall, filled a table with an abundance of food, all to demonstrate his financial strength. Then, he pressured us to sign something on the spot. The danger was, if you got swept up in the moment, thinking “This person is incredibly impressive,” and signed impulsively, it could lead to significant negative consequences.

Luo: Yes.

He: That’s why, in such circumstances, making on-the-spot decisions is absolutely ill-advised.

Luo: So, using the VP title became a strategic buffer to make it legitimate for you to discuss things internally. However, when you were genuinely engaging with potential partners for actual collaboration, you would be transparent about your true situation, right?

He: Exactly. As our discussions deepened and the potential partners inquired about our organizational setup, we would readily explain our roles.

3. He Xiaopeng revealed the motivations behind his return to entrepreneurship after achieving financial freedom and his rationale for choosing the new energy vehicle sector.

Luo: The second time you started a business, did you ever consider other options than auto?

He: My initial focus was not on the auto sector, which is why the company was not originally named XPeng. I recognized the significant difficulties in shifting from the internet domain to hardware, especially large-scale hardware. The underlying logic is quite different. Within the internet ecosystem, there was a prevalent mindset fueled by stories of rapid success — companies achieving Series A funding in three years or Series B in five. This created a perception that such rapid growth would be universally attainable. Yet, building a business in hardware is a far more arduous path.

Luo: A further reason was the perception among internet entrepreneurs that they represented the vanguard of advanced productivity. This led them to view engagement with traditional industries as a simple choice: either they would succeed, or they wouldn’t even try. There was a strong conviction that if they did decide to enter these established fields, they would undoubtedly excel. This was a prevalent attitude in the industry years ago.

He: Precisely. When I fully committed to XPeng, I brought in someone from my previous tech sector to guide our auto team on the process of car manufacturing. Frankly, I was taken aback, as he had no prior experience in manufacturing cars. His approach was remarkably straightforward: he brought in a Maserati, parked it at the company, and instructed our auto team leads to replicate it, stating, “Just make it like this. You don’t need to achieve the exact same level.”

Luo: Interesting.

He: Tell me about it.

Luo: Then sell the product at a price one third or one fifth that of a Maserati.

He: He expressed this with an unfounded confidence, a trait common among many in the tech industry then, without truly understanding the practical steps required. This meant that entrepreneurs from the internet background had to essentially grow and acquire new competencies to succeed in hardware development.

Luo: This is a pertinent point when it comes to emerging and traditional sectors. The rise of e-commerce led many to believe that traditional retail was destined for demise. However, the market demonstrated that certain aspects of the retail experience are inherently challenging to digitize, even as e-commerce continues to expand its reach.

He: In reality, for everyone, the most challenging aspect of resilience isn’t about mustering courage and uniting a team to press forward during adversity. Instead, it’s about making sound decisions and avoiding impulsive expansion during periods of extreme success, maintaining a controlled pace. It’s unfortunate, but many businesses ultimately collapse due to these very factors.

Luo: From a human nature perspective, achieving that level of control is indeed exceptionally difficult.

He: Too difficult.

Luo: You started out as an investor in the auto sector. At what point did you make the decision to personally lead a venture? Was it a realization that a promising company you’d invested in was stagnating, prompting you to take the helm yourself, or was it more of a growing passion for building your own business that emerged organically during that period?

He: There were two reasons. In 2013, I recognized that intelligent automobiles were the future. The following year, I established a team and told them that I'd invest as much as they need as long as they were willing to put effort into this sector. Around 2016, my own aspiration to lead a venture finally emerged.

A significant moment occurred when I was discussing the future of the internet industry with a close friend. As he was leaving, he told me that my eyes truly lit up when we spoke about cars. He said that my interest in other topics seemed relatively average, but was uniquely enthusiastic when talking about cars.

Luo: So, in a sense, your friend’s words led you to the auto sector.

He: His words had a profound impact on me because my initial inclination was that I shouldn’t pursue the auto industry. But after that conversation, I began to question whether I genuinely possessed a deep-seated passion for cars that I was perhaps unconsciously resisting.

The birth of my child in 2017 served as another significant catalyst, and prompted me to reevaluate whether to start a new entrepreneurial journey. Around the same time, I received a call from Fu Jixun, a senior managing partner at Granite Asia. He said to me in the phine that he believed the convergence of auto and AI is about to come, and that if I didn’t seize this opportunity soon, the window for this sector would close gradually. He strongly recommended that I step out and build my own company, which once again spurred my consideration of founding an car company.

Following those conversations, I spoke with numerous friends. Many, as you’ve touched upon, had taken long breaks of two to three years after achieving significant financial success. I asked about their future plans on their lives and careers. Upon hearing their words, I became more sure that I'm not the type for professional investing, not the type for living a life of pure leisure and indulgence, or even going for emigration. Ultimately, I made the decision to start up a business once more. While I had several viable options, I deliberately chose the most challenging one: the auto sector, which I viewed as a significantly more demanding undertaking than my previous ventures — perhaps a “200%” difficulty compared to a “100%” baseline.

Luo: Absolutely.

He: My thought was that if I was going to undertake entrepreneurship again, I might as well select a path that presented a greater challenge. So the idea of starting a second business came gradually.

Luo: Furthermore, you were young enough to afford to fight for another one decade or two decades. And importantly, at that time, you were still young enough to commit to a decade or two of focused effort without feeling overly burdened.

He: Not as young as one might think. I was already in my forties.

Luo: When I founded my mobile phone company, I was also 40 years old. Looking back, I was a late bloomer; in my youth, I was more of a literary type. While I had a strong affinity for technology, I never considered pursuing it professionally. By the time I had the idea, I was already approaching 40.

He: I consider that fortunate. You were a literary enthusiast, whereas in our youth, we were more like impetuous youths, which is even more unfortunate.

Luo: Even that, you were one with a background in science and engineering, which means you already possessed an inherent alignment with this industry.

Do you remember your first time driving a Tesla? What was that experience like?

He: For me, the most memorable moment was the actual delivery of Tesla in China. I was among the first owners, though not within the absolute first ten. What impressed me most was how someone coming from outside the traditional auto industry could make such a better car. I was driving a Land Rover at the time, and then transitioning to a Tesla came as a revelation. It felt like a sports car — remarkably fast, incredibly quiet, and featuring a large screen. Previously, I rarely listened to music in my car, primarily because the engine in higher-displacement vehicles was noisy, making it difficult to enjoy audio. However, driving the Tesla, I discovered that listening to music in an electric vehicle could be a truly delightful experience. It fundamentally changed my perception, showing me that creating an excellent car was entirely achievable for those without auto manufacturing experience.

4. He Xiaopeng's brand positioning of XPeng

Luo: So who exactly is XPeng’s target audience? And what feature does XPeng stand for?

He: We went through a lot of detours in defining our brand. In the very beginning, we gave ourselves a really simple definition: we wanted to be a tech company, a company with real technology DNA. But the truth is, as a car brand, we didn’t specify our brand positioning enough. You can stack up all the technology you want, but in the end, it’s still just technology. What really matters is how people see you.

Eventually, the image of our brand comes down to two words: technology and fashion.

In China, our customer base is rather younger. When we first started, most XPeng buyers fell within the 150,000 to 300,000 RMB annual income bracket—young customers who love technology and also care about fashion. And even though we wavered a bit on brand positioning along the way, we’ve managed to hold on firmly to this group of users.

5. He Xiaopeng explained how much R&D investment an AI-driven car company needs in a single year

Luo: In one of your interviews, you mentioned that for a car company to truly lead in AI, its annual R&D expenditure has to reach at least 50 billion yuan (about 7 billion U.S. dollars). I wasn’t totally sure what you meant by that. Are we talking about being ahead across the board, or just leading in one or two key metrics? And the other thing is—if we’re really saying 50 billion every year, where does that money even come from?

He: AI has really become a massive trend today. But for small and micro enterprises, this AI game is kind of unfair to them.

Back in the mobile internet age, the bar to start a business was way lower. An internet startup could survive for years with only a couple million RMB. But now, if you put that same amount into AI, maybe you’ll get somewhere if you’ve managed to nail a very sharp niche, but for most companies though, you can hardly get anywhere.

Luo: Maybe a little chance in vertical AI. But for foundation models? Don’t even think about it.

He: For them, building the infra (infrastructure) is already hard enough, let alone a complete foundation model.

Looking at ourselves, we've actually made a lot of choices about what not to do. For example, we’re not touching digital foundation models. Instead, we’re all-in on the physical world—things like autonomous driving, vehicle VLM (Vision Language Models) which is basically a car’s brain, and robotics. The physical world is where our focus is.

Now, out of the 50 billion yuan R&D budget, I’d say maybe 30 billion goes into AI, and the other 20 billion into hardware and other software. Put that together, and honestly, I already think that’s only a very baisc number. Because if we really want to build foundation models, infrastructure, and applications for the physical world, for me, 50 billion is already a conservative figure.

So why would people say that in the future, only big carmakers can survive? Well, if you want to put 50 billion yuan into R&D every year, you need at least 500 billion in annual revenue, because your R&D budget has to stay around 10 percent.

Tesla only spends less than 5 percent of its revenue in R&D, but most tech companies would spend somewhere between 7 percent to 12 percent. So if you take the middle, that's around 10%.

Having 500 billion yuan in revenue is not unusual among Chinese automakers. Many companies would claim that they're making 300 billion to even 800 billion. But what they’re really talking about is what I describe as "gross weight". It’s mostly the revenue from their joint ventures, and they count that as their own. In my view, that doesn’t really count. What truly matters is the part you actually own, and I compare that as "net weight". If you set the bar at 500 billion of "net weight", there are very few Chinese automakers that can really get there.

And even then, you also have to make sure that your business can make solid profit. Some companies might be able to achieve a shiny sales volume, but their cars only sell for 60,000 or 70,000 yuan each, which leaves them just about 1,000 yuan in gross profit per unit, and sometimes the net profit is negative. That’s basically like selling iron by weight.

Luo: Yeah… it’s basically hell.

He: So this business is not for me.

Luo: How much did XPeng earn last year?

He: Over 40 billion.

Luo: So you’d need to hit four to five hundred billion before you can make sure you’re putting 50 billion a year into R&D.

He: At least. We don’t have this year's number yet, but we've already sold more cars in the first half than the last entire year.

In the next piece, He Xiaopeng looks ahead — offering his take on the future of China’s EV market, his perspective on industrial design, and how autonomous driving may evolve differently in China and abroad. He also talks about venturing into low-altitude aircraft and shares candid views on which Chinese companies are truly committed to AI and which are merely paying lip service. Stay tuned for part two.

Both companies belong to the group colloquially known as “Hua-Mi-Wei-Xiao-Li” — shorthand for Huawei, Xiaomi, NIO (Weilai), XPeng (Xiaopeng), and Li Auto (Li Xiang). Alongside BYD, China’s largest EV maker, these firms represent the first tier of China’s new energy vehicle players, often setting the pace for innovation and competition in the world’s fastest-growing EV market. For background on the rise of China’s podcasting scene and how it compares with the U.S. Ecosystem, Zichen Wang has an insightful write-up at Pekingnology.

Li and He were already accomplished entrepreneurs before venturing into EVs. Yet rather than resting on their earlier successes, they chose to take on the challenge of what has become one of the fiercest business battlegrounds anywhere: China’s electric vehicle industry. Years later, both have secured their own place in this intensely competitive market.

In this edition, I’ve selected 11 highlights from Li Xiang’s marathon conversation with Luo Yonghao, translated them into English and shared them here. Each excerpt explores a different theme.

I’ve long believed that the stories and experiences of Chinese entrepreneurs remain underappreciated in the global business community. They deserve more recognition for at least two reasons.

First, while supportive government policies helped fuel China’s EV boom, the entrepreneurial drive of leaders like Li and He has been just as critical. Listen closely to their conversations and you’ll notice how familiar they are with the legends of Silicon Valley — from Steve Jobs to Elon Musk — yet their ability to adapt to China’s uniquely unforgiving market is remarkable, and worth documenting.

Second, these entrepreneurs — or the products they build — are increasingly likely to show up in your daily life. Whether in the form of cars, robots, or even low-altitude aircraft in the coming decade, their creations will be central to the next wave of global business and tech headlines. Knowing the people and ideas behind them offers a richer perspective than simply recognizing them as “brands from China.”

About Luo Yonghao

Luo, 53, is a man of many hats. He first gained fame in China as an English teacher with a sharp sense of humor, known for his engaging stage presence. He later ventured into the world of entrepreneurship, founding Smartisan Technology, a smartphone company. However, his path to success has been far from smooth. He’s faced significant financial struggles and has publicly shared his debts, which once reached over a billion yuan. Despite these setbacks, Luo’s resilience and candidness have kept him in the public eye.

About Li Xiang

Li, a Millennial, instead of taking China's national college entrance exam, decided to drop out of school at 18 and pursue his entrepreneurial dreams. He founded Li Auto, which went public on the Nasdaq in 2020. Under his leadership, the company has become a major player in China’s EV market.

In their four-hour conversation, Luo and Li, who come from different generations, shared their entrepreneurial journeys and discussed the rapid evolution of China’s tech and automotive industries.

Part 1

Li's First PC and the Early Signs of an Entrepreneurial Mind

Li reveals how his father’s willingness to invest in his first PC sparked his tech journey, while his mother’s tough-love financial lessons taught him the value of money from an early age. Despite not growing up in a business-savvy family, Li’s natural entrepreneurial instincts shone at a young age. (07:01-11:38)

Luo: Let me start by asking about your first PC. I remember reading in the media that your father spent 8,000 yuan (about 1,100 U.S. dollars), which was quite a sum back then, to buy it for you. The story goes that you kept begging him until he finally gave in and bought it for you. Is that true?

Li: Yes, it was when I graduated from junior high. That’s when he bought the computer for me.

Luo: How much was your father earning per month at that time?

Li: At that time, my father had started going out to film [Editor's note: Li's father was a director]. I estimate that our family had around 20 to 30 thousand yuan in savings, so he probably spent about a third of that to buy the computer.

Luo: That’s quite a big deal.

Li: My father was very interesting.

Luo: Was it because he was open-minded and understood these trends, or was it because he spoiled you? Are you an only child?

Li: I’m an only child. Later, I realized that my father was truly exceptional. He never put conditions on me, and I now do the same with my kids. My relationship with them is great too. He believed that when you should have something, he would just give it to you. For example, I was the first one in our neighborhood to own an FC, the Nintendo game console.

Luo: We used to have to go to those old, rundown arcades, where you’d pay by the hour just to play.

Li: Yes, he was in Beijing filming, and he saw how popular it was in the Drum Tower area. He bought one for me and brought it back.

Luo: Was he worried that it would affect your studies?

Li: Not at all. It was quite interesting—completely different from what you might expect. He made an agreement with me that I could play every day, but only for a certain amount of time. Once the time was up, I had to stop.

Luo: So, he actually discussed this with you, right? It wasn’t an authoritarian thing? Li: Exactly, and he didn’t set a strict number for the hours. For example, I decided to play two hours every day at lunchtime, and he let me play for exactly two hours. Kids in our neighborhood would come over to our place to play.

Luo: You really had a lucky family, because Asian parents are rarely like this, especially in those days.

Li: Yes, and I could really stick to it. I would stop playing after two hours. In fact, later, I even told him that I didn’t need to play for two hours and would be fine with just one and a half hours.

Luo: So, his respect and trust in you was also linked to your own behavior. Because many kids would say they’d play for two hours, but end up playing for four, and their parents would certainly stop them after that.

Li: Exactly, but he made me stick to it. It was a long enough period. Since we had to go home during lunchtime back then, it meant I could play until lunch was over, but if I played for too long, I wouldn’t be able to attend class in the afternoon.

Luo: Back then, playing Nintendo was so addictive that kids would skip school just to play. You must have had a strong sense of discipline from a young age, right?

Li: I think it was because I had this kind of approach that I developed discipline.

Luo: So you’re saying it was the way your father communicated with you—mutual respect?

Li: Yes, I think that was really important.

Luo: That was actually quite rare in Chinese families of that era.

Li: In our neighborhood, my parents were the only ones who went to university.

Luo: Their views were relatively ahead of their time compared to the wider social environment.

Li:Yes.

Luo: I see. You mentioned that getting the PC for 8,000 yuan was a smooth process. Did you have to explain a lot to your father, or was he immediately on board?

Li: It was a smooth process, no difficulty at all. My mom had a different way of dealing with things, which I found especially important later on. My mom was very different from other parents. From elementary school, she gave me an allowance on a monthly basis. Most kids got a daily allowance of one yuan, but I got 30 yuan per month. She told me I could spend it however I wanted, but once it was gone, I couldn’t ask her for more. So, in the first month, I spent all 30 yuan in just three days. I went to my mom asking for more, but she didn’t give me any for the rest of the month. From then on, I learned how to manage money. Eventually, I even saved up for a few months and spent over 100 yuan to buy a game card I wanted. It also led to me starting to make money when I entered junior high school because I realized this was quite interesting.

Luo: She subtly instilled basic financial management concepts in you.

Li: Yes, I started making money in junior high by buying comic books. We noticed that the comic books that cost 1.9 yuan were available at wholesale markets for 1.2 yuan, so I bought them in bulk and sold them to my classmates for 1.5 or 1.6 yuan each.

Luo: So, you had a strong sense of business from a very early age.

Li: It wasn’t something I deliberately pursued.

Luo: I know, I know. It might have been something you were born with, or maybe it was your parents’ early education and communication that helped you naturally develop that sense.

Li:You’ll notice that my classmates didn’t have that awareness at all. They just didn’t get it.

Luo: I didn’t have that business sense even at 30 years old. I’ve read many biographies of entrepreneurs, and many of them showed this kind of awareness from an early age, whether it was inborn or guided by their parents.

Li: But my parents didn’t have any special talent for business.

Luo: I think maybe it was their healthy communication style with you that had a subtle, positive influence. You were really quite lucky. We’ve all read Elon Musk’s biography. When he was a kid, he was already showing remarkable intelligence with computers. He once went to a lecture by a university professor, and after the lecture, he stayed up late discussing things with the professor. When his dad came to pick him up, he thought something was wrong, but the professor told him, “You really need to buy him a computer, or you’ll regret it.” After some hesitation, his dad bought him one. But you were luckier than him because your father made the decision on his own.

I still think I was quite lucky growing up. But looking back, I think the environment you grew up in was even better than mine. I had a good foundation in reading, but in other ways, my parents still had a lot of outdated ideas. I ended up seeing a psychiatrist. It was really quite fortunate.

Part 2

From Being Mocked to Mastery

Li Xiang recalls his childhood ambition of becoming a "General Manager," a dream that was met with mockery by classmates and family. However, his path was shaped by external validation, particularly after he got his first computer, which led to a summer of hands-on learning and earning. (14:46-18:30)

Luo: You immediately had this feeling when you first touched a computer, right?

Li: Yes.

Luo: When you were young, you didn’t necessarily think you were smarter than your peers, but did you ever feel like you had some kind of innate sense of purpose? Not necessarily something you’d share with your classmates, maybe out of shyness or because you didn’t want to make them uncomfortable, but did you ever feel like you were meant to do big things?

Li: When I was a child, there was one thing. It was probably when I was in elementary school. Back then, there was a subject called moral education. The teacher asked us what we wanted to be when we grew up, and I said I wanted to be a general manager. Luo: At that time, that was the biggest title. Later, it became CEO, Chairman, Board Chairman—these titles just kept getting bigger.

Li: At that time, being a general manager was the biggest.

Luo: Yes, yes. When we were young, the title of "general manager" was a very prestigious one.

Li: At that time, my classmates would mock me for it. Definitely, because everyone else wanted to be a soldier, a scientist, or a doctor.

Luo: What year was that? Was individual entrepreneurship already common by then? Li: It should have been the early 1990s.

Luo: I remember you were born in '82?

Li: I was born in '81. Anyway, it was around the 90s.

Luo: Yes, actually, in those days, the idea of becoming a general manager would definitely seem strange in the eyes of teachers and students.

Li: But in reality, I didn’t just have this idea because of some innate desire. My decisions and choices were always based on real external feedback, not like when we were kids, where I was born with such a purpose.

Luo: When I was young, it was probably even worse for me than for you. I grew up in a very backward area. You were in Shijiazhuang, right?

Li: Yes, Shijiazhuang city.

Luo: That’s still a big city. I grew up in the mountains of Northeast China. So, when I tried to talk about my ambitions, I was ruthlessly mocked. It wasn’t the classmates or teachers directly attacking me, but the teachers would smile in a strange way. They wouldn’t say anything cruel, but they clearly didn’t think much of it. And the classmates would always give me these weird smiles. The most discouraging part came from my older brother. He said, “You’re clearly a fool, why do you have all these unrealistic ideas?” I asked him, “How am I a fool?” And he said, “We’re all fools, why can’t you see that?” He kept telling me that, but I always felt like I could do something big. That feeling was severely discouraged when I was young, even though my parents didn’t criticize me, they also didn’t encourage me. They thought I was just daydreaming. So, you didn’t have a strong feeling of that kind, and didn’t suffer from this kind of discouragement when you were young.

Li: I was kind of like undergoing intensive training. I always relied on external feedback to build different changes. The first time I felt like I was the best was when I got the top score in an essay contest, even though my grades were generally poor.

Luo: Just the essay?

Li: But the real, stable cycle started after I got the computer, especially that summer before high school. That summer before high school, I completely changed into a different person.

Luo: Because of the computer?

Li:Because before, my computer knowledge was already solid. My computer knowledge was quite strong.

Luo: Just not enough hands-on practice.

Li: But it didn’t take long. Within a day, I had solved most of it.

Luo: I get it, I meant that when you had solid theoretical knowledge but very limited time in the computer lab.

Li: Yes, I had essentially created a really solid base model through pre-training. From then on, my reasoning and thinking process improved significantly.

Luo: You really built a strong foundation.

Li: The most important first feedback I got was from the store where I bought the computer. It was originally a small shop in a street with low traffic. Later, it moved to a large computer mall and did really well because the computers were all DIY, with custom configurations. When I got home, I took the computer apart and rebuilt it. Later, I did something else: I helped that shop assemble computers at the computer mall. The business was booming, and they didn’t have enough staff. I was good at talking, so when I recommended the configurations to others, they trusted me a lot.

Luo: You have a face that inspires trust, so you definitely had an advantage in selling computers.

Li: At that time, I was particularly impressed. I had worked with Intel CPUs, Asus motherboards, and Philips monitors. I’d played with all of them. When a computer was sold, I would explain the price and configuration to the customers. If they needed hardware that the store didn’t have, I would go to other shops to find it and then come back to assemble the computer. Each computer sold earned me 800 to 1,000 yuan, and I would get a commission of 150 to 200 yuan per computer assembled. It was great feedback. During that entire summer, I assembled the most and sold the most, making our store number one in sales at the computer mall. When I started high school, everyone at the school knew that if they wanted a computer assembled, they should come to me. Even writing articles, it wasn’t something I just did casually; I learned from user feedback.

Part 3

The Power of Standing Up

Li recalls his difficult childhood, being bullied after moving to a new city and feeling inferior due to his accent, appearance, and background. It wasn’t until his mother urged him to fight back that he stood up to the bullies, gaining confidence and respect from his peers. (29:08-33:11)

Luo: It all sounds so lucky. Tell me about your childhood trauma, the setbacks and frustrations in your teenage years, maybe even a first love heartbreak. You seem to have had it so easy—did you really not face any setbacks before you turned 18?

Li: When I first moved back to Shijiazhuang, all the kids in the neighborhood bullied me. Luo: Because you had just moved there?

Li: I had a heavy accent from rural Cangzhou. Luo: So they mocked you.

Li: Yeah, kids are like that. When I first joined the school, I was an “insert student,” so I sat at the side of the teacher's desk, not at a regular desk. It was really tough for a while, and the other kids would bully me. The older kids, too. Most of the scars on my face are from when they scratched me in elementary school. They hit me so hard that they scratched my face to pieces. When you're in a new environment, you don't dare to fight back.

Luo: I also got bullied when I transferred schools, but it wasn’t to the point of getting my face scratched off.

Li: Yeah, they were so mean, kids can be unbelievably cruel. When I look at things like school bullying today, we all went through it back then.

Luo: Back then, calling the police didn’t help, unlike now. These days, if you call the police, the parents end up paying.

Li: My mom told me, "You can only fight back yourself."

Luo: Your parents raised you like that, so you had no choice but to follow it. It’s kind of amazing.

Li: My mom said, "You have to fight back, there’s no other way." I was from Cangzhou, Mengcun County. When I was little, I practiced Bajiquan, so I was actually quite good at fighting. Luo: A famous martial arts region. Li: Yes, and my older brother was a martial arts master, so the whole neighborhood of students practiced with him.

Luo: So why didn’t you resist at first? Li: When you enter a new environment, you actually feel a sense of inferiority. They all spoke Mandarin, but when I spoke, they couldn’t understand me. Luo: And they mocked you. Li: At the time, I was really dark from the sun, from my hometown.

Luo: Maybe you had some countryside redness, too. Li: And my teeth were yellow because the water in Cangzhou had a lot of alkali. You feel like you don’t belong there. Luo: You lacked confidence, so when they hit you, you didn’t fight back. Li: After my mom said that, a few months later, I told her, "They keep bullying me and hitting me. Look at what they’ve done to my face!" She said, “You have to fight back." So I started fighting back. I first hit the biggest one, the one who was two years older than me. After that, my mom said, “You can't bully others.”

Luo: When I was young, I remember always being beaten up. In the second semester of my first year of junior high, I got so angry that I ended up fighting back. As they say, even a rabbit will bite when it’s cornered. I wasn’t the kind of kid who bullied others or fought, but when I was pushed too far, I fought back, and I realized something. There were local thugs who used to come to our school to bully us. After I fought back, they started trying to get on my good side. I quickly understood that when they bully you, they’re calculating the risks and costs. If you’re an easy target, they’ll keep bullying you, but once you fight back, even if you get beaten badly like I did, it’s worth it. They know you’ll resist, and they’ll stop bullying you. After that, when the thugs came around the school, the younger kids started calling me “bro,” and the local tough guys, hearing about how I fought back, came over to befriend me. So, one act of resistance worked. Later, when I started teaching, I would tell my students: if you’re bullied, just resist once and it’ll be over.

Li: You’re right. And another thing is, when I first didn’t tell my mom about it, I was worried that if I fought back, the other kids would start avoiding me. But after I fought back, they actually all started becoming friends with me. I became the "king" of the neighborhood kids. Luo: The more you tolerate, the worse they get.

Li: It got worse and worse.

Luo: So when I later talked to my students, I often told them: whether it's school bullying or when you grow up and face bullying in society, you have to fight back fiercely once. I even see it as a rite of passage. Some people are still timid well into their 30s, always getting bullied. I think this is a matter of fate. Some kids, no matter their upbringing or natural instincts, just keep tolerating it.

Li: I was worried that if I fought back, the other kids would isolate me. But I found out that after I fought back, they all started getting close to me. I became the "king" of the neighborhood kids.

Part 4

The Idols Who Shaped Li

Li shares how his admiration for Shigeru Miyamoto and Steve Jobs evolved over time, with Miyamoto inspiring his youth through Nintendo and Jobs shaping his views on design and leadership. Li also shared his love for Toy Story, the Pixar movie. (55:16-1:01:07)

Luo: So, you didn’t start AutoHome because you liked cars, but in fact, you do really like cars.

Li: At first, I didn’t like cars at all. How much did I dislike them? When we were doing the auto website, Fan Zheng had suggested it early on. He was a car enthusiast, and every year we would go to the car show in Beijing. He was always so excited. During the car show, all he would do is look at cars—it was like a holiday for him. I found it super boring and asked, “Why do you guys love this stuff so much?” It wasn’t until 2003, after their advice, that I bought my first car. By then, I had money and didn’t have to worry about fast development. It was just a small business, but I was making money, so I bought my first car, and that’s when I gradually started liking cars.

Luo: So, you began to like cars while working at AutoHome?

Li: Yes, I bought a car first, learned about them, and then started really liking them after deciding to work on AutoHome.

Luo: In the whole process, from thinking about entrepreneurship to actually starting your business, and up until now, did you have any commercial or technological idols or heroes? Back in the day, we all read Bill Gates' The Road Ahead?

Li: I’ve always had two idols. One is Shigeru Miyamoto. I really like Nintendo, and all the games he created.

Luo: Nintendo is such a dreamy company, almost unreal.

Li: Yes, it’s a very unusual company.

Luo: It’s amazing, truly magical.

Li: When I was younger, I always liked Miyamoto. Back then, I bought every Nintendo console. All those game books used to talk about him.

Luo: In my era, all the Nintendo cartridges were pirated. The machines were often knockoffs, so I never used the originals. I didn’t even know what the real ones were like—I just knew they came from a Japanese game company, and the pirated ones had Japanese writing on them. My family finally bought me one when the Famicom had already been around for many years, and by then it was cheap. I didn’t know whether the cartridges were original or pirated—I just bought whatever was available. Later, I realized most of them were pirated. Occasionally I’d get an authentic one, and it felt unreal—it was so beautifully made.

Pirated versions were always “100-in-1” or “200-in-1.” I grew up feeling like we all owed Stephen Chow a movie ticket. I feel the same about my childhood joy—it was all built on pirated games. Later, when I bought a Switch, it was the first time I ever created a Nintendo account. I’ve had it for years now but have probably played less than 10 hours in total. Every time I think about it, I just leave it there. I keep feeling like I owe Miyamoto something.

Li: Yes, Miyamoto was my idol when I was young. Later, as I grew up, it was really Steve Jobs.

Luo: When did you start thinking Jobs was really impressive? Was it with the iPod? Or earlier?

Li: I think it was when the iPod came out.

Luo: Because, after he was kicked out of Apple, for many years he was seen as a joke in Silicon Valley. I found him strange back then. I didn’t know much about him. But when I bought my first iPod, I was shocked. At that time, it wasn’t officially introduced, so it was sold through gray-market dealers at ridiculously high prices. When I first bought it, it was all about the industrial design. It was so beautiful, like a sci-fi product. I plugged it into my computer, transferred some songs, and was amazed. I thought, how could something be this easy to use? It was a thousand times more convenient than playing songs on a computer.

Li: I had bought a Mac earlier, but didn’t feel much about it.

Luo: Back then, Macs had serious compatibility issues and a lack of software ecosystem.

Li: Yes, after buying a Mac, we still had to buy software to install a virtual Windows.

Luo: Did Macs get better to use, or was it more about the iPod that brought in more developers?

Li: Yes, exactly. There’s something else that really influenced me. My favorite movie of all time is Toy Story, and I didn’t realize until later that it was made by his company.

Luo: He was the major shareholder of Pixar.

Li: I really love Toy Story. I felt like I was the cowboy in it. It was just an amazing feeling. Later on, I would watch every Pixar movie with great attention.

Luo: So, your business idols in life, or in terms of products and technology, are Steve Jobs and Shigeru Miyamoto?

Li: Yes, and in addition to watching various videos and analyzing Jobs, I’ve also studied Tim Cook and Jonathan Ive’s interactions. Many times, I feel like what’s written about Jobs isn’t exactly who he was, but when you look at the collaboration between him, Tim Cook, and Jonathan, you get a more authentic picture.

Luo: What exactly do you mean by that?

Li: People often point to the early, rough side of Jobs as an example. But when you look at what Jonathan Ive talks about, you realize that it’s not about being rough or simple; it’s about high expectations that come after trust is built. The problem is, many of us when we were young misunderstood it as just being harsh. But it wasn’t like that. It was about trust first, then high demands. The attitude was a result of those high expectations. If trust isn’t built first, it’s just plain harshness. That’s the fundamental difference.

Luo: Because there is trust, everyone holds themselves to a high standard. If the standard is not met, then people argue. But if there’s no foundation of trust, it only makes things worse.

Li: And he spent a lot of time building that trust, which I think is very important, but many people overlook it. Without trust, things will go wrong.

Part 5

Li Auto's Fundraising Turning Point

Li’s journey through a near-financial collapse took a dramatic turn when, after exhausting all options, the major food delivery and e-commerce platform Meituan’s CEO offered a lifeline. His timely investment changed Li Auto’s trajectory, marking a pivotal moment in the company’s survival and success. (1:37:29-1:45:28)

Luo: So, was your most serious funding issue before or after the release of the Li One?

Li: It was in early 2019.

Luo: When exactly was the release?

Li: We released the Li One in October 2018.

Luo: So, by the time you were ready to mass-produce, you didn’t have enough funding?

Li: Yes, we were facing two major problems. First, Tesla's market value had dropped to just 30 billion dollars, and they were even considering buying back their own company. Everyone was shorting Tesla. The second problem was that NIO had performed well, but after their IPO, their stock price dropped below the issue price—from around 6 or 7 dollars to just over 1 dollar. And this was exactly when we needed to raise funds.

Luo: But at that time, no one wanted to invest.

Li: Exactly. We met with 150 investors, and to make sure we were presenting ourselves well, we even hired Goldman Sachs as our FA. It was an incredibly difficult period. To make matters worse, I was really sick—it was the worst I’d ever been. I pretended to be fine when meeting investors, but afterward, I had to rest for a long time.

Luo: So you were sick throughout the entire fundraising process?

Li: Yes, I vividly remember it. In the end, we couldn't raise the money we needed. It was our Series C round. The biggest investor in our Series B round was Zhang Ying from Matrix Partners. Zhang told us that they couldn't provide the amount of money we needed in the next round because they were a VC, not a PE. So he called us to his office, along with Goldman Sachs' China GM, and after analyzing the situation, they said there was nothing they could do. Then Zhang asked, “How much money do you have left?” I said, “I’ve put everything I have into this, even the money I earned earlier.”

Luo: At that point, you had already invested all your personal money?

Li: Yes, I invested all the money I had earned earlier—basically, I had nothing left. But I felt secure because my shares were bought with my own money, on equal terms.

Luo: What about your early partners? Did they do the same?

Li: They bought half and got half in options. They didn’t have original shares, and I didn’t either.

Luo: So Zhang Ying told you there was no way to raise the money. What did he suggest you do next?

Li: He suggested I go and visit some wealthy friends to see if there was any last chance.

Luo: I’m curious, what happened during those meetings? Tell me some gossip, just don’t mention names. Any interesting stories? We can’t be too serious on this show.

Li: Sure. One of our biggest partners, who we had worked with the most, ended up rejecting us.

Luo: Was it the boss of your business partner?

Li: Yes, he was an important partner, and he eventually rejected us. I also met with Zhang Yiming. They decided to invest, but only 30 million dollars. At that time, we needed several hundred million dollars, but he still recognized our potential and made that investment. However, ByteDance wasn’t as big as it is now.

Luo: I’m curious, what happened during the rejection?

Li: At that point, I was truly desperate. I had already accepted that only a "lucky break" could save us.

Luo: So, was this the biggest "lucky break" in your entrepreneurial journey?

Li: Yes, absolutely. And why was I so desperate? Because at that time, Meituan's stock price had also dropped significantly, even below the issue price. Things were tough for them too.

Luo: They were also struggling.

Li: Yes, they were. So I tried my best to explain to Wang Xing the value we could offer him, especially how we could help if they decided to enter the ride-hailing market.

Luo: Did they have plans to enter the ride-hailing market at that time?

Li: We didn't really think that far ahead, but I was trying to show them how we could provide value, even if it meant helping with logistics or EV production lines. I just wanted to get a foot in the door.

Luo: Where did this meeting take place?

Li: It was at the Hyatt Hotel. It was during the pandemic, so we couldn't go to many places, but I still met him there.

Luo: You didn’t ask for an investment, right? You just wanted to chat with him?

Li: Exactly. I didn’t ask for any investment at that time. We were just talking about potential collaborations. But then, out of nowhere, he asked me, "Can I invest in your company?" I was shocked.

Luo: When was this? How long after you rejected his investment?

Li: It was just a year later, in 2019.

Luo: At that time, how much funding did you need? A few billion yuan?

Li: We were trying to raise 300 million dollars.

Luo: So, that’s around 2 billion yuan, right?

Li: Yes, and he ended up investing 300 million dollars in us.

Luo: Seems like there were a lot of internal disagreements within Meituan about this investment, right?

Li: Yes, there were many people who didn’t want him to invest in us, because they had already invested in other competitors. Some had invested in Weima, others in NIO, and some in Xpeng. So there was a lot of persuasion to try to stop him from investing in us.

Luo: Do you think your fundraising ability ranks high, medium, or low among the top entrepreneurs?

Li: I would say I’m at the bottom, really at the underground level. The reason we were able to raise funds earlier was because I personally invested the same amount at the same valuation, so I was taking the same risk.

Luo: So, when the whole world was pessimistic about your company, it became even harder to raise funds, right?

Li: Exactly. The more pressure I faced, the more I moved forward. When there’s no pressure, I tend to take a step back. But when the pressure is high, I instinctively move forward.

Luo: And that pressure, once you survive it, can turn into a huge turning point, right?

Li: Exactly. When you face adversity, sometimes you have no choice but to push forward. But when you get through it, the breakthrough can be life-changing.

Part 6

China’s EV Revolution

Luo discusses China’s transformation from envy of foreign cars to leading the global electric vehicle market. Li credits strong manufacturing, a flexible talent pool, and government support for this rapid rise. (01:53:51-01:57:57)

Luo: You know, for people like us, at least people from my generation, the cars we envied the most when we were young were the foreign luxury cars on the streets—especially the really impressive ones. Then, when I first went abroad, I saw those cars on the streets and we envied them so much because of the high tariffs in China. I remember hearing from friends who studied or worked abroad about how much their cars cost, and we were so envious we could hardly stand it. Little did we know, in just over a decade, China’s new energy vehicles have become so impressive. Now, when I go to the U.S. on business trips, the streets are still filled with what they call the "best" cars in their market. But when my Chinese friends see those cars, they suddenly remark, “We used to envy these cars when we were young, but now, not even many years later, when we see all these foreign cars, all we think of is ‘foreign junk.’”

Honestly, every time I think about this, I get really excited. The moment I felt the most excitement was last year at the car show. It was all over the internet, and several big names were there, creating countless headlines. At that time, I thought to myself, how could Chinese cars become this impressive in less than ten years? I was so excited. So I wonder, with the full opportunities given to us, how many more miracles can Chinese entrepreneurs create?

Li: There are actually several important factors behind this. I think the first one is that China’s manufacturing base is actually very solid.

Luo: It’s already solid enough to be number one globally.

Li: Exactly. Even the equipment we use today is mostly made by Chinese companies. For example, the stamping machines—everything is made very well. The second factor is that people from all industries in China are willing to enter new fields. For example, people from the tech industry are now getting into car manufacturing. But in the U.S., only Elon Musk is willing to take on this hard work. Others tend to stay in Silicon Valley or Seattle and are only comfortable doing internet and software work.

Luo: They don’t want to do the dirty or tough work. They rely on high-tech, make big profits, and enjoy a comfortable lifestyle.

Li: Right, exactly. That’s the difference. People in China are willing to enter any industry—whether it's retail, manufacturing, or the car industry. New thinking and technology are transforming old industries, and it’s become a huge trend here.

Luo: Yes, new thinking and new technology are revamping old industries. It’s really becoming a trend.

Li: Exactly. The third reason why China’s new energy vehicles have taken off is also closely tied to the country itself. For example, oil in China is relatively expensive compared to the world; it's in the 70th or 80th percentile globally. But electricity in China is the cheapest in the world, and China’s power grid is also one of the best in the world.

Luo: And then there’s government policy support.

Li: Yes, exactly. Let me give you an example you might not expect. In many European countries, if you want to install a charging station, even if the government encourages it, you have to wait in line for nine months just to get one installed. In places like Singapore, if you want to install a charging station, you have a 99% chance that the homeowner’s committee will reject it, and you can’t install it.

Luo: They have the power to refuse it.

Li: In China, if you decide to install a charging station today, it’ll be done in three days. The company that installs it coordinates everything with the property management and the power grid. And in the end, you still get a special deal. These differences are huge. In China, using an electric car costs only one-tenth of the cost of using a fuel-powered car, but abroad, it’s about the same cost, and the convenience is much lower.

Luo: Yes. So, when I go to Europe on business, I can’t help but make some sarcastic remarks. I’ve seen many mediocre people from China who immigrated to Europe for family reasons. These were people I knew back home, with poor abilities and low overall competence. Yet, they end up working in Chinese companies in Europe, enjoying great benefits. We’ve even spoken to their bosses, and when I said, “Your team doesn’t seem that great,” their boss would reply, “You have no idea. The people we hire locally are much worse than yours. Here, they’re seen as top talents.” I really feel like we’re in a bittersweet moment globally. If it weren’t for geopolitics, I honestly think Chinese cars could dominate the world in the next 10 years.

Li: I also think there’s something interesting about China’s education system. We often criticize it, but it’s actually done a lot of good. For example, in the internet boom.

Luo: You mean basic technical education?

Li: From a technical perspective, yes. You see, the main talents behind the internet boom are those born between 1975 and 1995. This generation has excellent skills in STEM, which means they are very good at understanding software, engineering, and the digitalization of systems. And since there’s enough supply of talent, they are able to enter various industries—not just the internet industry, but all kinds of fields. This is an advantage of China’s systemic approach. With the help of the internet, mobile internet, and smartphones, this talent pool has grown, and they’ve become the foundation of digitalization in the automotive industry. However, in countries other than the U.S., where the competition in mobile internet and smartphones is not as fierce, they simply don’t have this kind of talent.

Part 7

Car Choices reveals different mentalities between the "Old Money" and the "New Money"

Old generations of Chinese manufacturing tycoons buy super luxury cars for some problems far beyond transportation, while the internet generation seems to be more frugal in their choices of cars. (02:01:36-02:05:48)

Luo: When a startup first jumps into hardware, of course there’s the challenge of inexperience. But there’s also this other thing: all those tests the big brands run—you simply can’t afford to replicate every single one of them, right?

Li: We ran all of them.

Luo: All of them? I figured you’d definitely run all the safety tests. But I didn’t expect you to actually do all the others too. So why were there still so many issues popping up?

Li: Because we've done something those big brands have never tried before.

Luo: So you are being innovative, while they keep being conservative, staying in their comfort zone.

Li: Yeah, we're doing what they've never done.

Luo: I can get it. I own a Li Auto myself, and I really like it. And you know me, with my kind of extra way of talking, I went around saying that the Li One is the best family SUV you can get under 5 million RMB (around 700 thousand U.S. dollars). Of course, the internet tore me apart for that. But actually there was some context behind what I said.

When I was down south, I had a bunch of friends in manufacturing, and we were hanging out a lot at the time. Most of them were older than me. I was born in the 70s, but some of them were 10 years older than me. And one thing about that generation of old-school entrepreneurs is that everyone had to drive a luxury car.

Otherwise, say the group goes out to play golf. If you roll up in a 3-million car, and I show up in a 5-million one, and another guy drives, let’s say, a BMW that costs just over 1 million—even though it’s still a luxury car—behind his back people will start saying, "Hey, what’s going on with him? Is his cash flow in trouble? Why’d he downgrade to something that cheap?" And that kind of talk could actually affect his business, far more than his pride. So in that circle, everyone’s driving cars in the 3-to-5-million range, sometimes even 10 million or more.

And because I was spending a lot of time with them talking business, eating and drinking, I ended up getting to ride in basically every so-called legendary luxury car out there. And you know what? I found most of them disappointing. But that’s just something I can say and you shouldn’t. Otherwise, you’ll get roasted online just like I did.

My reaction at the time was basically—wait a second, how can a car that costs five million, even ten million, actually be this bad? So I went online and started digging around, trying to find an explanation. And what I found was, once a car sells for several million, it’s not really about being a vehicle anymore—it’s solving a completely different kind of problem.

Like, take a rich kid in a five-million sports car. He pulls up in front of a bar, waves his hand, and then some girls might hop right in. But if you’re driving a 500-thousand car, you do the same thing, and all you’ll probably get is an eye-roll. So yeah, that’s the ‘need’ those ultra-expensive cars are actually built for.

So this is the thing about those entrepreneurs. In that circle, their old-school mindset just doesn't allow them to show up in a 500-thousand or even a 1-million car. You have to drive something that costs five million with one of those world-famous logos on it, so the moment people see it, they know, "Okay, that’s a five-million car." That way, you avoid all the unnecessary social headaches in that group.

Li: I completely understand.

Luo: And all of those, really, is about other functions beyond the car itself.

Li: And it's also the most socially cost-effective way for them. Like if you roll up to a hotel in a luxury car, you can just park it right out front. But if you’re not driving something fancy, they’ll send you straight down to the basement garage.

Luo: So whether it’s for business, vanity, or whatever reason—you realize none of it actually has anything to do with the car itself. That was the conclusion I came to after riding in all those luxury cars of my friends.

And when I told them about it, they just laughed and like, "Yeah brother, we know you’re not into this stuff. Honestly, we’re not that into it either." Most of the time it’s just part of their job—especially for the older generation.

Li: But the funny thing is, in Beijing’s internet circle, you don’t really see that kind of showy culture. Most people are pretty down-to-earth with what they drive.

Luo: Yeah, it’s the same in Silicon Valley, right? Back then everybody was driving Toyota. Even people like Larry Page were all in these cheap cars.

Li: Exactly. Maybe because we were also influenced by those Silicon Valley guys. I mean, look at Bill Gates, Larry Page…. The cars they drove were all pretty ordinary.

Luo: Actually, for the internet generation, if someone really showed up in an eight- or ten-million car, people would find this guy cheesy and laugh behind his back.

Li: The first person I knew to drive the most expensive cars was actually Elon Musk. Back then he bought a McLaren F1.

Luo: That was back when he was still young and had just made it big.

Li: Yeah, then he sold the company and bought that McLaren.

Luo: Every poor boy has his dream car, right?

Li: That car cost him 1.3 million U.S. dollars.

Luo: I bet when you earned your first pot of gold, you'd also bought a bunch of cars, maybe even a flashy one or two, right?

Li: I actually held back, you know. I just went with another McLaren that cost a little over 400 thousand bucks.

Part 8

Li's View on Internet Haters

Li Xiang believes that it's impossible to eliminate all the online trolls in today's traffic-driven internet environment, and improvements in products is the only way out. (02:26:17-02:27:53)

Luo: But why not just bring in a really seasoned PR heavyweight from the industry? I'm not talking about hiring them to throw mud on other companies, but they at least know all the tricks and have strategies to counter other's attack. Have you thought about that? The reason I’m especially curious is that back in the day, I got dragged through the mud myself real bad.

Li: Nobody had really faced something like the Mega situation before. Let me give you another example—take Zhong Shanshan from Nongfu Spring. He studied journalism and communications and was an excellent media guy. His marketing skills were top-notch, and he worked closely with major outlets, including CCTV. But once he ran into trouble, even someone like him couldn’t handle today’s crazy traffic-driven media environment.

Luo: That's today's environment. People are happy with rumors.

Li: But then there’s another side to it. Even if you can’t fully handle these negative online rumors, it's not going to kill you anyway. Sure, you might not have all the answers, but the damage is actually limited.

Luo: Exactly. If you can hold up solid power, all the rest is really just a gust of wind.

Li: If you can’t hold up, it proves your company really isn’t strong enough. And when a new hot topic comes up, all that attention will just jumps to the next thing. I think that’s how the society works today. Look at Elon Musk. He owns X, but those who want to smear him still do whatever they can to drag him down.

Luo: The logic is fine, but when you get roasted online, I'm quite surprised that you just sit there and take it. I can really feel for you, because not only that I own three Li models, but also it reminds me of all those times I got dragged online back when I was doing hardware.

Li: I think it’s fine. Honestly, we know exactly how they try to drag us down—and which companies are behind it all. It’s disgusting, but if I let myself stoop to that level, I feel like my life would be meaningless. I just don’t want to become that kind of person. Even if they come after me, I refuse to become like that.

And the only thing I can tell myself is that if all that hate actually affects us, it’s because our product isn’t good enough, and we need to work harder and make our product better. Sure, plenty of people have given us suggestions like setting up an anti-smear team and so on, but I don’t want to go down that road.

Part 9

Three key abilities to make a successful entrepreneur

Li Xiang believes that the three abilities to make a successful entrepreneur are being able to choose well, choose far, and most importantly, to play faster than others. (02:42:21-02:46:02)

Li: If you spend time on the wrong things, they end up affecting the important stuff. And if the unimportant things go wrong, you’ have to spend more time cleaning up the mess. So I've realized that if someone just focuses on the three most important things every day, that person can become really, really successful. But if they try to juggle ten "important" things in a day, unless they’re a super diligent genius, chances are none of those ten things will get done well.

Luo: Speaking of diligent genius, I think Lei Jun (the founder of Xiaomi Corporation) is undoubtfully among them.

Li: Yeah, there’s no way I can compete with him.

Luo: It feels like he only needs four or five hours of sleep a day.

Li: I’d catch him on Saturday or Sunday, and he’d still be working. And after chatting with me, he’d just move on to another appointment right after!

Luo: So there was this one time when Lei invited me for a chat outdoors at the tea terrace behind Pangu Plaza. It was past nine at night. We got really into talking, mostly about products, and before we knew it, it was morning. Since we were outside, nobody rushed us, and the waiter just waved and left, because Lei knew him.

I stretched and said, "Alright, I’m going back to sleep." He stretched and said, "I’m going back to work." I was like, "Wait… what? No rest?" He said he had a meeting in the morning, but a three-hour nap on the sofa would be enough.

Later, I told people in his company about this, and they said, "That’s just how he is." And that’s why they feel so pressured—no matter how hard you work, you can never match your boss.

Li: These people are not just capable—they’re insanely hardworking too. Which brings me back to what you were just talking about: learning isn’t really the whole truth. I’ve met all kinds of big shots, had deep conversations with them, including overseas folks, and I started noticing some key common traits. I’ve boiled it down to three.

First, everyone will tell you how they make choices, how they gather information, and how they make judgments. So the first trait is this—they choose well. They choose the right big trends. E-commerce, food delivery… the first rule is to choose correctly.

Second, which is a bit counterintuitive, but you hear it in all the success stories—they choose far. They can accept things to take a long time to show results, because things that yield quick results often comes with problems. Look at the really famous companies today—they’ve been around 20, 25 years. So the second rule is to choose far. And that’s not a bad thing. Sometimes projects that could finish in a year or two are in spaces where someone else can just jump in at any moment. The third one comes as the most critical. Honestly, people who can nail the first two are already one in a hundred, but the third is what really sets them apart. Every top entrepreneur I know, the best in the world like Jensen Huang, Wang Xing, Zhang Yiming, they all share this trait.

Most people think, "Okay, pick the right trend, pick for the long run, now we can just slowly work our way through." Wrong.

These people do something completely counterintuitive—they take a path that requires a long time to succeed, and they iterate at an insanely high frequency. It’s absolutely ridiculous.

Luo: The longer the game, the faster you have to play.

Li: Exactly. Most people think the key is patience or trying to be perfect. But that’s not it. The third thing is something almost nobody can do — really, almost nobody. When I was in the graphics card business, it was obvious that NVIDIA could release a new generation every single year, while others needed three years. That’s why they crushed brands like 3dfx Voodoo, and in the end it came down to just NVIDIA and AMD. And when NVIDIA built CUDA, it also took more than ten iterations before it finally worked out

Part 10

What does a Chinese entrepreneur's family look like?

Li's perception about family, his relationship with his wife and his children's education. (03:47:29-03:51:37)

Li: Back when I was running Autohome (An auto service platform founded by Li in 2005), I wasn’t really thinking about family at all. But when I started Li Auto, I positioned it for families—because by 2015, I already had two kids, and later on, even more. That changed my perspective.

Part of it also goes back to my childhood. I didn’t actually spend much time with my parents. In primary school I was raised mostly by my grandparents, and then for middle school I lived with my grandmother so I could be closer to a good school. By 18 I was already starting my first company, and soon after I moved to Beijing.

So in many ways, I only realized what "home" really means much later—after getting married, after building my own family. I used to think I wasn’t missing anything, but now I see that family is one of the most precious things.

Luo: And your relationship with your wife have always been strong.

Li: Yes, we got married in 2008 and had our wedding in 2009. And I’m most grateful for that change among the shareholders, because in the past I used to think all the problems were on my partner’s side — but I don’t see it that way anymore.

Luo: So that experience triggered a reflection that eventually reached into your family life as well.

Li: I think one really interesting thing about my relationship with my wife is that from the very beginning, I told her something very clearly: I need her far more than she needs me. And I genuinely believe that. I’ve always said it to her directly, and I think that’s been a very important part of our relationship. At the same time, she also wants to feel that she’s important to me, that she can actually support me.

What’s also quite interesting is that, even though she has to take care of our family everyday, she has developed a deep understanding of the auto industry. She reads all kinds of news, follows every company’s financial reports, and sometimes she even knows more than I do because I’m so caught up in my own work. Often, it’s her telling me what’s happening at other car companies. I find that fascinating. And she’s also very sensitive to my stress—she can tell when I’m under pressure, but she usually chooses not to point it out directly.

Luo: Some of my old friends from Smartisan still think I married one of my fans. But actually, she almost never interferes with what I do outside, while at home, I listen to her 100%. Sometimes she even jokes with me, saying that when we’re out, she’ll just pretend to be my fan. But that’s really not the case. I feel very lucky about this. Because for many entrepreneurs, if you don’t manage your family life well, then you lose your final safe harbor. And that’s a really tough thing to go through.

Li: Yes. At home, my wife is also the boss of everything. Even the money I earn, I hand it all over to her.

Luo: It actually feels pretty great. You know, during those ten golden years when the mobile internet was booming, a lot of young boys and girls caught the wave, built their careers, and made a fortune. But the truth is, quite a few of them ended up divorced—and the media loves to dig into those stories.

Li: Indeed.

Luo: You’re a very successful entrepreneur now, and you also have quite a big family. Have you ever thought about the possibility of those kind of "family feuds" drama that often comes with wealthy families?

Li: I’ve pretty much left that to my wife. From the time the kids were little, she’s always told them that brothers and sisters should never fight each other. What matters most is sticking together and protecting the family as a whole.

Luo: So you're quite confident in yourself, your wife and your children, right?

Li: These subtle influences actually matter a lot. They really shape the kids. At home they may bicker sometimes, but once they’re outside, especially at school, they stick together as one. I think that’s something you really have to cultivate from an early age.

Part 11

Which Chinese EV boss can be qualified as a super product manager?

Li believes that there's no shortcut to car R&D but time. Only with time, talent and hands-on management combined can someone create "super products". (03:54:27-03:56:19)

Luo: I’d like to follow up with a question: among all the leaders of China’s EV startups, who do you think also qualifies as a super product manager type of founder?

Li: Definitely Lei Jun.

Luo: You are the only two who really understand product.

Li: Or to be able to create "super products."

Luo: Yes, I feel the same.

Li: When it comes to developing a car, there are hardly any shortcuts other than putting in the time. Of course, you need the skills and expertise, but at the end of the day, it still comes down to the time you’re willing to invest.

Luo: Putting time alone isn’t enough. It has to be a fifty-fifty thing. You need to be a genius-level product manager, and at the same time, you have to give yourself fully to the work.

Li: Indeed. In this business, you need to live alongside your design, engineering, and product teams. You can’t just sit back and show up for reviews once in a while just because your're the boss. That simply doesn’t work.

Luo: Maybe that’s really how those old-world ICE car bosses do. When Lei Jun said he was entering the EV game, did you feel any pressure?

Li: Not at all. In fact, Lei even called me for that once. We talked for almost two hours. I actually had a late-night interview scheduled with an overseas candidate, but he just kept me on the line, so the interview kept getting pushed later. He asked me a lot of things, about my view of Tesla, about BYD, about Huawei, and we went really deep.

In the end, he asked me, "If you could only give me one piece of advice, what would it be?" And I told him: "Don’t use any proxies. Just go all in yourself, and you’ll succeed." That was the only advice I gave him. And later on, whenever we faced challenges, Lei Jun and his team really helped us a lot.

Beijing Scroll

A newsletter on the Communist Party and government affairs to help you comprehend major China policies and developments.

By Jiang Jiang

Today's newsletter is about Chinese unicorns. On May 23, Chinese President Xi Jinping chaired a symposium with entrepreneurs and experts in Jinan, Shandong Province, where he posed a crucial question: "What's the main reason for the declining number of new tech unicorns from us?" This underscores his concern about the issue.

To explore further, I want to share an article titled "中国独角兽断崖式下跌，这个问题更值得警惕 The Decline of Chinese Unicorns: A More Worrisome Issue" by Wang Mingyuan, a researcher with the Beijing Reform and Development Commission. The article was published on June 14, from the WeChat blog "Digital Society Development Research Center 数字社会发展与研究," which features insights from Chinese experts and scholars on the development of China's digital technology and its impacts on economy, society and culture.

In today's piece, we have translated and condensed the original article to focus on the key points about the decline in the growth and competitiveness of Chinese unicorns, the factors behind this trend, and potential revival strategies.

The Decline of Chinese Unicorns: A More Worrisome Issue

In 2013, Aileen Lee, a Chinese-American investor, noticing changes in the tech startup industry, coined the term "unicorn" to describe startups valued at over 1 billion U.S. dollars. At that time, there were only 91 unicorns worldwide. However, starting in 2017, the figure grew rapidly reaching over 1,300 by 2022. This far surpassed the number of NASDAQ-listed enterprises with a market capitalization above 1 billion U.S. dollars at the turn of the century.

Unicorns emerged due to accelerating technological innovation, and the combined acceleration of global capital and technology globalization. Unicorns can only appear at the highest stage of globalization humans have witnessed so far. The years leading up to COVID-19 undoubtedly marked the peak of globalization after the end of the Cold War, and also a period when global unicorns increased the fastest.

First, let's look at the geographic distribution of unicorns. If we plot a coordinate graph with the GDP share of each country in the global economy on the X-axis and their share of global unicorns on the Y-axis, we can identify countries where the share of unicorns exceeds their share of GDP. Only seven countries would meet this criterion: the United States, China, India, the United Kingdom, Israel, Singapore, and Vietnam.

Among the top 15 economies in the world, Japan, Russia, Mexico, Italy, and Spain have a much lower share of unicorns relative to their GDP. Particularly noteworthy is Russia, which only saw its first unicorn in 2024. Additionally, large economies with significant populations such as Saudi Arabia, Poland, Bangladesh, Iran, and Pakistan also do not have any unicorns.

Now, let's look at the distribution of unicorns across cities. The cities with the most unicorns are San Francisco, New York, Beijing, Shanghai, London, Shenzhen, Bangalore, Guangzhou, Hangzhou, Boston, Tel Aviv, and Singapore. Except for Sao Paulo, the largest city in Brazil and one of the largest cities in South America, cities with more than 10 unicorn companies are largely located in East Asia, South Asia, the United States, and Europe.

Based on the analysis above, we can see that unicorn companies invariably arise in regions characterized by:

High openness and deep engagement in globalization (especially close exchanges with the global tech hub of the United States in terms of talent, technology, and finance)

Active financial capital (since unicorn startups require substantial initial funding, supported by a well-developed venture capital system)

A relaxed business environment (many innovations face new legal and ethical challenges or may disrupt existing interest structures, so a lenient regulatory environment is necessary to provide ample growth opportunities)

In summary, the number of unicorns reflects a country's depth of participation in globalization and the level of market freedom. Countries with few or no unicorns often have serious problems in at least one of these aspects. For example, Russia lacks economic and technological exchanges with other parts of the world; Japan and Europe do not have developed tech startup markets despite a solid foundation for traditional industries, as they lag far behind the U.S. in financial markets and have more stringent regulations than the U.S.

Current Challenges Facing Chinese Unicorns

Over the past two decades, China has been a key player in globalization, engaging in extensive technological and financial exchanges with the U.S. China has also been an integral part of the global economic and technological landscape shaped by the U.S. post-Cold War. Currently, the Chinese government has been actively embracing globalization, vigorously promoting the development of emerging industries within this global context.

Leveraging its vast market and benefiting from both domestic and international opportunities, China once led the global unicorn boom. From 2015 to 2020, China became the world's most vibrant startup market, with its unicorns growing in number and influence, even surpassing those in the U.S. This underscored China's crucial role in the U.S.-led global technological and economic order, positioning it as a significant beneficiary.

However, since Trump took office in 2017, global economic and technological capitalism has begun to decline. The situation worsened after 2020 as China-U.S. tensions escalated into trade and financial wars. The U.S. implemented strategies to shift supply chains, heightened restrictions on investments and key technology exports to China, and imposed stringent barriers for Chinese enterprises listing on U.S. stock exchanges. Chinese tech startups, once the darling of the world, suddenly found themselves in an awkward position. Globally, the environment deteriorated dramatically; domestically, there were subtle shifts in attitudes toward business internalization and innovation. Consequently, China's unicorns began a downward trajectory.

1. Significant Slowdown in Growth

Chinese unicorns enjoyed peak growth between 2017 and 2022. For example, according to the Global Unicorn Index issued by the Hurun Research Institute, China minted 502 unicorns during this period, averaging over 83 per year. However, in 2023, the number of new unicorn companies in China dropped significantly to only 44, from a high of 120 in 2021. Between 2021 and 2023, the U.S. added over 450 unicorns, widening the gap between the two countries. Although China still holds the second-largest number of unicorns, its total is now less than half that of the U.S.

The global distribution of unicorns is shifting from being evenly distributed between China and the U.S. to being more concentrated in the U.S. Furthermore, economies benefiting from the U.S. supply chain shift policies, such as India, Indonesia, Vietnam, and Singapore, are seeing a rapid increase in the number of unicorns.

2.Significant Decline in Competitiveness

In 2023, among the 10 companies with the largest decrease in valuation, five were based in China while only two in the U.S.; among the 10 companies with the fastest-growing valuations, five were from the U.S., while only two were from China. Notably, the valuations of OpenAI and SpaceX alone jumped over 900 billion yuan (about 124 billion U.S. dollars), almost surpassing the total valuation growth of all other unicorns globally. The rapid decline in valuations has also significantly affected Chinese unicorns' market capitalization at the time of their IPOs. In 2021, the average market capitalization of unicorns on the first trading day stood at 110 billion yuan, but the figure plunged by more than 80 percent, to 24.7 billion yuan in 2022.

Recently, an article published by the WeChat blog "IT桔子 IT Juzi" went viral. The article pointed out that both China and the U.S. saw huge falls in the number of new unicorns. Admittedly, the global tech startup markets are shrinking, as the article claimed, amid rising global conservatism. However, the problems in China's tech starup market are more severe than in other countries. Although the growth of unicorns in the U.S. has also significantly slowed in the past year, the U.S. tech startup market remains a bright spot, with major breakthroughs in key areas further strengthening the U.S.'s technological advantage. More importantly, the U.S. tech startup market is grappling with local and temporary difficulties. In contrast, Chinese tech enterprises are navigating a comprehensive and highly uncertain external environment, putting them under far greater pressure than their American counterparts.

3.Significant Lag in Soft Technology Development (in terms of industrial structure)

In recent years, it has been suggested that China underperforms in hard technology, while its soft technology is overly abundant, leading to "overcapacity" and excessive occupation of social resources, which disrupts the normal economic order. However, a comparative analysis of the industry distribution of unicorn companies in China and the U.S. offers a different perspective. American unicorns are predominantly concentrated in four sectors: enterprise tech with a focus on AI and big data, financial technology, blockchain, and biological medicine, all associated with soft technology. Contrastingly, China has an edge in hard technology, boasting a strong presence in advanced manufacturing, automobile technology, and intelligent hardware.

In the advanced manufacturing sector, for example, the U.S. had 25 unicorns by the end of January 2023 while China had 68, accounting for nearly 40 percent of the global unicorns in this field. In enterprise tech focused on AI and big data, China only had 40 unicorns, compared with 443 in the U.S. On the whole, Chinese unicorns are weak in soft technology yet strong in hard technology.

The differences can be attributed to the distinct development realities and industrial policies of each country. Practically speaking, China, currently in the stage of industrialization and urbanization, naturally excels in manufacturing and consumer goods. This is common in the industry distribution of unicorns in developing countries. The concentration of unicorns in these industries has also been boosted by the country's industrial policies over recent years.

Last year, China's semiconductor, chemicals, machinery, and automobile sectors garnered investments worth more than 400 billion yuan, accounting for about 70 percent of the total in the equity investment market. This brought the total investments in hard technology to over 500 billion yuan. In stark contrast, investments in digital technology, AI, and the internet sectors were merely 85 billion yuan, not to mention that the financial technology sector received 6.7 billion yuan in investments — a record low. If the investment market was overly concentrated in the "soft technology" field before 2020, it now seems to have swung to the opposite extreme.

How to Revive Chinese Unicorns

The recent changes in unicorns over the past two to three years reflect challenges faced by China's technological innovation. These challenges are unprecedented, testing our ability to cope with evolving global dynamics. In response, the following measures are crucial for maintaining entrepreneurs' confidence and ensuring a favorable environment for business growth.

1.Properly Balancing National Interests and Participation in Globalization

Chinese enterprises currently face unfair treatment in the global market, leading to calls for retreat from globalization and a return to self-reliance. Nonetheless, it is crucial to recognize that all emerging tech sectors are highly internationalized. Without prompt information and talent exchanges, a company would be isolated from the global mainstream system in R&D and production, struggling to keep up in just two to three years. Without market globalization, a company would find it challenging to grow into a global industry leader. Given the complex international landscape, the challenge is to safeguard national interests and counter international bullying while fostering a favorable external environment for Chinese businesses and industries.

2.Properly Balancing the Healthy Growth of Capital with Addressing Market Irregularities

In recent years, the capital market witnessed a misallocation of resources in a desperate bid for short-term profits. We must understand that a mature and robust capital market is essential for the development of the tech startup market. Over the past three years, however, the capital market has seen a significant contraction, with venture capital (VC) and private equity (PE) investments plummeting from approximately 1.4 trillion yuan in 2021 to 692.8 billion yuan in 2023, a decrease of over 50 percent. This has lead to a lack of essential funding for innovation projects. Therefore, while rectifying market chaos, it is crucial to prevent the capital market from shrinking. Moving forward, China should continue to proactively encourage the development of VC and PE, especially fostering patient capital critical to the long-term success of startups.

3.Balancing Sound Regulatory Frameworks with Stable Business Confidence

A sound regulatory framework is necessary for an industry to achieve sustainable development. In creating a new regulatory framework, it is essential to avoid drastic and unpredictable policy shifts to help businesses develop market expectations and build market confidence. As Professor Lu Ming, a member of the 14th National Committee of the Chinese People's Political Consultative Conference (CPPCC), emphasized at the "two sessions" this year, negative and restrictive policies should be cautiously introduced to avoid irreversible damage to industrial development, especially under economic downturn and intensifying China-U.S. competition.

4.Balancing "Soft" and "Hard" Technology Fields

In many "hard technology" sectors, China faces constraints imposed by the U.S. and must overcome these bottlenecks to avoid long-term dependency. At the same time, China must not neglect the “soft technology” fields. Future industrial competition will be increasingly determined by emerging industries based on AI, blockchain, data analysis, and fintech—soft tech sectors. The swift rise of OpenAI serves as a compelling example, and recent breakthroughs in large language models in the U.S. reveals the growing disparity in emerging sectors between the two countries.

China has made some achievements in the developing soft tech sectors in the past few years, producing several world-class internet companies, but it does not imply an overabundance of development in soft tech. Quite the contrary, China still trails the U.S. in this area. Moreover, developed soft tech is a prerequisite for advancing hard tech. For example, China's burgeoning new energy vehicle sector has thrived partly due to the sophisticated digital infrastructure laid down over the years. Looking forward, China should enhance its support for soft tech innovation while focusing on hard tech development, instead of favoring the latter and neglecting the former.

In conclusion, China should continue to cultivate more unicorns as the future of the world lies in the hands of young, outstanding entrepreneurs and their emerging businesses. If economic development stalls for too long, a steep downturn is likely to follow. The same holds true for innovation. Therefore, reviving unicorns is an urgent priority.

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Today, I want to share an article from a WeChat blog. The piece is by 宁南山 Ningnanshan, a WeChat blogger writing about China's industrial structure and related topics. I've shared some of his articles previously due to his perspectives that starkly contrast with Western views on China, often leading to heated debates. Moreover, some have even claimed that Ningnanshan’s blog was widely read in China’s policy circle.

The original article titled “产能过剩”与中国的使命 "Overcapacity" and China's mission", which received more than 100,000 clicks (“10万+”) from readers online in China, is quite lengthy, so we have translated only the first half, which focuses more on electric vehicles.

In early April, during a visit to China by U.S. Treasury Secretary Janet Yellen, "overcapacity" became a hot topic on social media after she raised concerns over the so-called "overcapacity" in China's green industries, particularly electric vehicles (EVs), solar panels, and lithium batteries.

To get a better understanding, I reviewed the Chinese and English versions of Yellen's talk in China. To be honest, my first impression was that the U.S. is once again trying to set China's development direction.

Let’s talk about the auto sector. In 2023, China surpassed all other countries in automobile exports. However, most of the vehicles exported from China were fossil fuel-powered vehicles.

According to data from the China Association of Automobile Manufacturers (CAAM), China's auto exports surged 57.9 percent year on year to a record high of 4.91 million vehicles in 2023.

Out of these, traditional fossil fuel vehicles made up 3.707 million units, growing by 52.4 percent and accounting for 75.5 percent of the total. New energy vehicles (NEVs) reached 1.203 million units, growing by 77.6 percent, constituting 24.5 percent of the total.

Obviously, China saw massive growth in the exports of traditional fossil fuel vehicles and NEVs, with majority still being traditional fossil fuel vehicles.

Yet Yellen emphasized Chinese overcapacity in NEV sector.

In fact, China’s exports of traditional fossil fuel vehicles also grew rapidly, with their growth rate even exceeding that of NEVs last December. The exports of traditional fossil fuel vehicles and NEVs for December 2023 increased 60.3 percent and 36.5 percent year on year to 388,000 units and 111,000 units, respectively.

China's automobile industry is still primarily focused on traditional fossil fuel vehicles. CAAM data showed that China produced 30.261 million vehicles in 2023, including 9.587 million units NEVs.

To give some perspective, Japanese auto giant Toyota sold 11.233 million vehicles in 2023, while Volkswagen, Germany’s biggest car manufacturer, sold 9.24 million vehicles.

In other words, China's NEVs output in 2023 is equivalent to just a leading car manufacturer in Germany or Japan, and it is much less than the output of traditional fossil fuel vehicles in China.

The U.S. seems to ignore the overcapacity of traditional fossil fuel vehicles, focusing instead on China's NEV sector. The fundamental reason lies in the much stronger competitiveness of China in new energey industries.

Different from its position in the market of traditional fossil fuel vehicles, China is much more competitive in the NEV sector. Chinese manufacturers have significant strength in key components, including electric power systems (power battery, electric motor, and electronic control system), in-vehicle system, and autonomous driving.

In 2023, China's battery giant Contemporary Amperex Technology Co., Ltd. (CATL) generated revenue of more than 400 billion yuan ( about 55 billion U.S. dollars),marking a 22.01 percent increase. The company's net profit attributable to shareholders topped 40 billion yuan (around 5.5 billion U.S. dollars), representing a 43.58 percent growth.

In contrast, it would be much more challenging for China to have parts suppliers in the traditonal fossil fuel vehicle sector that can compete with companies like Continental AG, ZF Friedrichshafen AG, Denso Corporation, Aisin Seiki Co., Ltd., and Robert Bosch GmbH. China relies heavily on foreign products in core auto parts and components.

Moreover, Chinese brands also have a much weaker brand power.

Additionally, the emergence of EVs has also brought a reshuffling of auto brands.

Leading brands in the fuel vehicle sector, whether foreign or domestic, hold a much smaller brand advantage in the EV sector as it is a brand new playing field.

So today we rarely hear names like Toyota, Honda, General Motors, Ford, Mercedes-Benz, and BMW in news stories about NEVs. Instead, Tesla, BYD, NIO, Li Auto, and AITO are main players making headlines in the EV industry.

China's EVs are getting increasingly attention from internationally renowned automotive media outles. The UK-based "Carwow", for example, which resembles domestic automotive websites, has 9.15 million followers on Youtube. In February 2024, they published a video comparing the Tesla Model 3 with the BYD Seal, which garnered over 3 million views.

We can see that the prices of Tesla Model 3 and BYD Seal in the UK are almost the same.

Tesla, the world's largest EV manufacturer outside China, produced half of all its EVs in 2023 at its factory in Shanghai. Of the 1,845,985 cars at all Tesla factories in 2023, 957,700 came from its Shanghai plant, accounting for 51.88 percent. Another key metric, delivery volume, shows a similar pattern, with more than half of Tesla's global deliveries coming from the Shanghai factory.

Of the Tesla's Shanghai-made vehicles produced in China, over 90 percent of the parts and components are sourced locally. Though this is by quantity, not by value; key components like chips and certain software still come from outside China.

It is clear that the U.S. is aware of China's strong competitive position in NEV sector, so they pointed out that China faces overcapacity in NEVs.

I think the U.S. has actually served as a "lighthouse" to guide China in recent years, often targeting its best-performing industries. In the past, domestic opinions were divided on the future development of new industries in China, but the U.S. has highlighted the direction, through tech wars and public opinion warfare, leading to unprecedented consensus across the country.

I have always believed that choice is more important than effort. Over the past several thousand years, the Chinese nation has been very diligent and hard-working. But why did the Chinese nation suffer periodic collapses in history? During the Jin Dynasty (266-420), China experienced a decline in its strength; the Southern and Northern Dynasties (420-589) were a period of continuous division and turmoil; starting from the Song Dynasty (960-1127), the Chinese empire was continuously invaded by nomadic tribes; in the late Qing Dynasty (1644-1911), the Chinese civilization was defeated by foreign powers for the first time due to technological backwardness. The root cause was that the ruling groups at those times failed to guide such a large country and nation in the right direction.

The truth is, the Chinese nation has had an overwhelming demographic advantage on a global scale since the unification of Chinese nation over 2,000 years ago. Throughout human history, no other nation has had maintained the world's largest population for such a long period, around 2,000 years. Other empires, such as the Roman Empire and the British Empire had ruled over large populations, yet neither had a single dominant ethnic group. As a result, these empires lost the possibility of reuniting once they disintegrated. What makes the Chinese nation unique is not only its demographic advantage, but also its hard work ethic and emphasis on education.

So the Chinese nation is bound to be powerful as long as it moves in the right direction.

In recent years, the U.S. has helped China pointing the way forward in a unique way. After the U.S. lauched a trade war against China in 2018, it also began targeting Chinese telecom equipment maker ZTE with extreme sanctions using chips as a weapon. This ultimately led to massive advances in China’s semiconductor industry over the following six years, driven by external pressure.

For the average Chinese people, the production of more high-tech products in China is the only way they can have a better life. Taking China’s NEV sector for example, salaries are generally high in the industry, and the leading companies are quite profitable. It is also natural for the lagging businesses to be knocked out of the market by competition.

In the past few years, EV makers like NIO, Li Auto and Xpeng Motor pay much higher salaries than their conventional counterparts. The regional economy has also benefited from the development of EV manufacturers. Last year, CATL saw its net profit exceed 40 billion yuan (about 5.5 million U.S. dollars). With two of its plants in Ningde, east China’s Fujian Province, and Yibin, southwest China’s Sichuan Province, the two cities have each become a big contributor to local economy.

Since the EV boom, BYD reaches its highest net profit since its establishment, with 30.041 billion yuan in 2023, far surpassing the figure in the era of fossil fuel vehicles. When fossil fuel vehicles dominated its sales, BYD reported the highest net profit in 2016, at 5.05 billion yuan. Today the new profit level represents a sixfold increase.

In 2023, BYD recruited 31,800 fresh graduates, with 60 percent of them holding at least a master's degree. This has significantly alleviated the employment pressure at that time when the national economy was impacted by the pandemic, causing numerous businesses to scale down their recruitment.

Sungrow Power Supply, a Chinese renewable energy company that specializing in solar inverters and energy storage systems, according to its earnings preannouncement, is expected to generate a revenue of 71 to 76 billion yuan in 2023, representing a year on year increase of 76 percent to 89 percent. The expected net profit is between 9.3 billion and 10.3 billion yuan, representing a year on year increase of 159 percent to 187percent.

Earlier I wrote articles about the Fortune Global 500. There aren't many companies worldwide whose net profit can surpass 1 billion U.S. dollars. Of the 500 largest companies in the 2023, only 355 reached that mark.

To be eligible for the Fortune Global 500, a company must earn more than 30 billion U.S. dollars in operating revenue.

In U.S. dollar terms, BYD's net profit last year exceeded 4 billion U.S. dollars, CALT's exceeded 5 billion U.S. dollars, and Sungrow's topped 1.3 billion U.S. dollars. In recent years, the popular photovoltaic maker Tongwei saw its net profit increase from a few billion yuan to over 10 billion yuan as illustrated in the chart below.

Companies like BYD, CATL, Sungrow, Nio, Xpeng and Li Auto, the jobs they offer are popular among Chinese college graduates.

Below is my understanding of the new energy industry:

1. In general, the new energy industry is advanced, emerging, and high-paying. Making it a priority to continually develop this sector should be a steadfast mid- and long-term goal for China.

2. In the long run, demand for new energy is on the rise, both globally and in China, which means our production capcatiy in this field must grow substantially to satisfy the long-term needs at home and abroad.

In an earlier article, I mentioned China's energy demand will undoubtedly increase significantly when its per capita gross domestic product (GDP) reaches 40,000 U.S. dollars. The figure was just around 13,000 U.S. dollars in 2023.

Article title: TSMC consumed power equivalent to 7% of Taiwan’s power output in 2022: Advances in energy technology and the future of China and the West

Even in China, where EVs are highly advance, the NEV penetration rate (the proportion of NEVs in all car sales) was just slightly higher than 30 percent in 2023.

In the U.S., the world's second-largest automotive market, the figure was merely 9.3 percent in 2023. If only the U.S. would open its market more to Chinese NEVs, it would be a boon. It's not reasonable to ban Chinese NEVs from entering the U.S. market while claiming that China has an overcapacity issue in the EV sector.

3. The development of new energy is a process when structural overcapacity will occur during some periods, though that's not necessarily a bad thing. Then what should China do? Maintain the normal competition order in the market, without subsidizing and supporting tail-end companies that are phased out in normal market competition. Only when supply exceeds demand in the market will there be a chance to force out lagging capacity.

We could imagine a market where demand always exceed supply with no surplus and all companies making a profit. Then the worst performing firms could still survive even if they do not actively seek improvements, make low-quality products with low competitiveness, and pay employees low salaries. When sold domestically, their products would bring poor consumer experiences and even threaten consumer safety; if sold overseas, they would only harm the reputation of Made-in-China.

This reminds me of a middle-aged woman who sells fruits from a stall in the neighborhood of my hometown county. She always cheats buyers by giving short weight; when the buyers find out, she would even abuse them, yet the woman has not been eliminated from the market even after so many years. During the Spring Festival holiday this year, I found she was still selling fruits there, which means that the county's consumers continue to suffer.

Amid increasing demand for new energy in the long term, Chinese manufacturing will advance to a higher level after outdated capacity gets knocked out following a periodical excess. By then, the market share and profit of high-quality companies will increase.

Consumers are discerning. That holds true even for big brands. AITO backed by Huawei technologies is a good example. In March this year, AITO sold 31,727 vehicles with the M9 accounting for 6,243 units, the new M7 for 24,598 units, while the M5 only a few hundred. Even though the AITO M5, first unveiled by Huawei in December 2021 as the first vehicle under its brand, was once a major seller. This fully demonstrates that products with poor competitiveness would only be squeezed out of the market.

4. Tesla offers a prime example. At the end of 2019, Tesla with leading advantages in brand power and product competitiveness started mass production in China as the Shanghai Gigafactory began operations. The Shanghai plant has contributed to an increase in China's NEV production capacity and Tesla's output in China has rocketed in the past two years. Instead of leading to overcapacity, it stimulated the local NEV makers to bolster their competitiveness, producing a catfish effect.

Huawei has had a similar effect through its entry into the EV sector in the past two years. AITO is emerging as a powerful rival, pushing China's EV startups to innovate and unveil new features. Enditem

Some of you might notice that a think tank report titled "China-EU Cooperation on Environment and Climate: Progress and Prospects" was released globally on Friday. The timing of this report, released before Xi Jinping's visit to Europe, I believe is not coincidental, and it also echoes some of the content in Ningnanshan's article.

Today's newsletter features a speech by Tencent CEO Pony Ma at the firm's annual meeting at the end of January. I've chosen this piece because, despite Chinese tech companies entering a phase of cost-cutting and efficiency enhancement, shedding some of their former glory, they remain among China's most noteworthy enterprises. As the helmsman of one of these leading firms, Pony Ma's insights into the company's current strategic direction and future planning are particularly deserving of attention. I believe they offer a glimpse into the broader trends within China's internet industry and, by extension, some aspects of the country's current economic landscape.

Please note that the translation of the speech has not been reviewed by Tencent.

Briefing:

Tencent held its annual meeting at the Shenzhen Bay Sports Center on January 29. Pony Ma, Tencent's CEO and chairman of the board, reviewed the development of Tencent's businesses over the past year in detail and put forward plans for the future during his 35-minute speech. At the same time, he also pointed out some internal management problems. Power Plant obtained the transcript of Ma's speech on the day of his presentation.

Ma mentioned that he had toured the country advancing Tencent's transformation since he put forward the "Internet +" in 2015 and "930 Transformation" announcing “Take root in the consumer Internet and embrace the industrial Internet” in 2018. But in the past four years, he's rarely seen in public instead and concentrated on internal management and product development.

With regard to regulating the development of Internet platforms, Ma believes that it can also be regarded as an examination for Tencent, and he hopes that Tencent’s employees can take a moderate position on it. "When problems are found, we must correct them with a positive mindset. Let's be more optimistic, and I'm still very confident in the long-term development of the future." Ma said.”

Ma also said that confidence now is most absent from the political and economic environment. In January 2024, the Beijing Municipal Commission of Planning and Nature’s official website disclosed that Tencent got a plot of land in Haidian District of Beijing for more than 6.4 billion yuan (about 890 million U.S. dollars), which seemed to be an action of confidence boost. But Ma said that getting the land was not only to boost public confidence but also a deliberate decision. “Actually, we’ve deduced before we got the land in Beijing. This plan was ever delayed due to our concerns about our fiscal capacity and risk tolerance when other companies were decreasing cost for profit increase. Billions of investments is not trivial, and we have to think well of the rationality and running direction, or we will bottom out. Until last year, when the overall environment became clear to us and our business has been developing relatively stable, we decided to take the land in need."

Returning to the interior management, Ma once again stressed that each employee of a product-oriented company should spend more time to use and try its own products, it’s the only way to feel the users’ subtle experience. No one can success if he just focuses on development management instead of using and experiencing by himself the products made by his company. “Let all of us return to the product itself, the service, and the details. Think about whether we have tried our best by action or just made polished PPT reports to leaders. It is not enough to just manage up or down. Let all of us be down-to-earth, and no employee can be qualified without using his own products.”

Ma also remarked on business segments:

WeChat: Video Channel lives up to expectations, full development of Live E-commerce 视频号不负众望，全力发展视频号直播电商

This is Tencent's strongest platform for the whole ecosystem with the largest DAU, already 12 years old. The duration from prosperity to decline to the next transformation time for QQ is 12 years as well. Therefore, it may turn out to be a big problem for Wechat, an old tree, to send out new shoots.

Among BAT companies, it seems that we’re the only tree having a chance to send out new shoots while the other young trees thrive, which stresses us out at the same time.

[Note: BAT is the acronym for China's three largest Internet companies: Baidu, Alibaba and Tencent]

A year ago, I said that Video Channel is "the hope of the whole penguin factory (Tencent's nickname)". After development for over a year, it has lived up to our expectations and surprised us so much in the process of its growth. Therefore, we’re geared with effective equipment again after our loss in a short video in the past. The most important thing is that we are not doing the same thing as others, but combining our own characteristics and making short videos of acquaintance socializing.

Although our user group’s consumption power is very strong, the e-commerce knowledge we lack of should be learned by us timely. Therefore, we will fully develop Live E-commerce on Video Channel as E-commerce and advertising are complementary.

In addition, for Wechat, many “new shoots” are about to sprout, such as mini programs, mini games, search and so on. It is worth pondering how to make our products and services evergreen.

Game: Can't lie on the credit of our past success. Game going overseas is our company’s greatest prospect for internationalization 不能躺在功劳簿上，游戏出海是公司国际化最大希望

Game is our ace business and we currently claim to be the world's largest gaming company, as if we are lying on the credit of our past success. However, in the past year, we’ve been greatly challenged by the proliferation of new game companies and their new products, game trend shifting from gameplay to content, which made us a fish out of water suddenly. Actually, we also launched new products, but it wasn’t as good as we expected and seemed like we were not doing anything at that time. In the last two months, to join the market competition, we launched Dream Star, a new leisure party game designed for families. Although we are late to the competition, it’s not only a game for us, but has a social function as well, which is the core of our business so that we must go all out and combine all businesses for joint development.

Game going overseas is indeed our company's greatest hope for our company’s internationalization at present. Over the past few years, we’ve played to our strengths and built up a reputation in mobile games’ research and development and network operation of overseas big IP game companies. We strive to do a thorough and solid job in software and game development instead of being an enemy of other game companies or hardware manufacturers. It is more crucial that we should locate exactly our main business and focus on it so as to have a better chance of thriving.

Now let’s be revitalized and restored to the process where we stepped up from ranking a dozen to the top. Recall the difficult process of entrepreneurship that grants us the will to fight. Keep moving and never lie on the credit of our past success.

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Tencent PCG (Platform and Content Group): “Incredibly tough” “特别难”

PCG is a collection of all our classic businesses, it's incredibly tough. Our biggest request to it last year was to survive. I hope that QQ can locate exactly its products in the future including the new test channels, some intelligent bodies maybe, making them widely known. In fact, many of QQ's products and services are good but unknown outside its user group. I suggested we encourage the users to return and lower the threshold so that users can even be login-free as anonymity. Lots of services and content can actually be consumed in QQ. We have to open our minds and be widely known, helping most of our products go global and serve in a different way.

PCG also has a lot of classic businesses, such as long videos (serials). Last year, Tencent Video rose abruptly based on its accumulated strength with three outstanding serials, "The Long Season", "Three Bodies" and "Blossoms Shanghai" making in the past few years. We prefer to make exquisite serials rather than common dramas, even though they costs more but it is worthy, especially for its reputations in public. The key to holding up the whole long video membership is a few big serials at least one per quarter or month. In the past, the common dramas cannot hold up, just serving as a pole to post ads with little value. Now what we need is a product able to hold up and the best product is the channel.

Tencent News has turned loss into profit through transformation and adjustment of organizational structure. At the same time, the browsers, Yingyongbao, Tencent's application download platform, etc. are being adjusted, as well as ReadWrite, Tencent Music, Huya, etc. have decreased cost and increased efficiency actively in the past year. It’s very effective.

Tencent Cloud and Smart Industries Group (CSIG): Projects besides crucial strategic products and basic inputs must deliver solid performance ASAP

除了特别重要的战略性产品和基础性投入，必须尽快上岸、浮出水面

Internet business services are very difficult in the rat race. We haven't even started yet while others are pouring in, including Huawei. Last year, we took the lead in proposing that we do high-quality development instead of low-quality one.

We ranked fourth in revenue and third in profit in the Internet platform business. Many people feel quite frustrated. However, quality and sustainability must come first. It can be the key that we have “new buds”, not the “old leaves”. As a result, we should think about each business of us: firstly, new business is not so easy to plow and we have to consider how to be evergreen in our own field; secondly, consider whether there are any new buds from your own branch, not from others’.

Many friend companies support seven or eight “brothers” and get along well with each other when their businesses run well while conflicts arise and the brothers feel that the money given is less when the businesses run bad. They have not yet woken up and are still spending a lot of money. I heard that Enterprise WeChat has been profitable. Congratulations! To B market is not easy.

Now we still have many products not surfacing, and they must land and surface ASAP besides crucial strategic products and basic inputs, which is an inner pressure at the same time. Now we must focus on our own strengths and productions, catching the gross profit of the three supply chains, SaaS, PaaS, IaaS, to the extreme and doing well in standardization.

We've recently caught a lot of CSIG and PCG's in anti-fraud. Especially CSIG, many of them are going for orders and hospitality, which is inefficient and non-transparent and really not suitable to us. Therefore, we must still focus on productions. We are being integrated while others buy our standard products to sell that our internal management is very clean.

The bigger impact on profits is FinTech Internet, which covers a large scope, the most important of which is payment as a big share of our business. It is the only one of our businesses that we have been asked to reduce our share, but we are also explaining that half of our so-called share inside which is direct debit from bank cards and half of it is transfer, not payment. As a result, we must avoid risk in the future as well as do some transformation on our products to show that we actually are cooperating with the bank. We just serve as a channel only, not a competitor. As for other financial products such as lending, insurance, etc. by Internet are our brand-new businesses. These products are young but I believe that there is a lot of room for development. Of course, we must pay attention to risk as well.

Other industries’ problems will affect our products. We are supposed to underwrite while many people think that we don’t need that legally. I think that obeying laws is important, but we also should shoulder the social responsibilities and obligations that we must be aware of risk. Financial products should compete with each other for safety, definitely not for speed that the faster the more dangerous.

AI: Not the lead, but at least not too far behind 不算最领先，至少没有太落后

Last year, AI was not only a core business for us but also for the whole industry and even the world. We can finally keep up with the first AI array. Although we aren’t the lead, but at least not too far behind. I think that we should also apply our AI big model Tencent Hunyuan to various scenes combined with different senses. There may not be a big pure native AI application born within one or two years, still needing combined with all of our products to enhance efficiency, etc. It is a great opportunity, I think.

After making a conclusion on the main businesses’ development in the past year, Ma returned to the interior management issues again and put forward some requirements and viewpoints on recruitment, layoff, reporting, and anti-fraud.

He thinks that Tencent should attach importance to small team spirit for management because it seemed a little embarrassed as the departure of many employees has brought a great impact on their families in the past for company’s cost reduction and efficiency. Therefore, he asked the managers to be more careful when recruiting because layoff has both advantages and disadvantages which can impact on the employees’ families. It is improper to hire people when the business runs well, then fire them all after two months’ probation period. He thinks it is irresponsible to do so. Recruitment and management should be implemented carefully. Just try in the small team first if it is not considered clearly. Don’t rush.

He also cited an incident at PCG as an example. There were three referral teams in PCG originally, which later merged into one team, including the search team. He also wanted to integrate it with the other search teams in the company. It's important to combine forces to make it work and not just about saving costs. It's about minimizing the moron index, otherwise you'll look like a moron, and that's the biggest insult of them all.

At last, Ma talked about anti-fraud. He said that Tencent announced lots of anti-fraud cases every year, but there were still some people involved in it. Now Fujitani system can half help find the fraud by its digitization ability, which has found half of Tencent's anti-fraud cases by its digital management of various vendors and documents automatically.

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Recently, there has been a widely circulated article on WeChat titled “卷王”经济学 The Economics of "King of Involution", which is about the reflections of Will Shen, a German investment and M&A professional in the automotive and new energy sectors, upon returning to his home country China. Will discusses the intense competition and the future of China's manufacturing industry in the new energy sector.

Will’s article receives over a hundred thousand views (a popular view count on social media in China). Then, another article titled 为什么卷王经济学是断头路 Why is the Economics of "King of Involution" a Dead End came out and presents a different perspective. It suggests that the price war resulting from such intense competition harms both labor and capital, and emphasizes the importance of a healthy competitive environment in the industry to ensure a reasonable profit margin for all stakeholders.

The article was written by Bob Chen, a seasoned investor at Mangrove Capital 沣源资本, a China-based venture capital fund specializing in software and globalization-themed investments.

Before discussing these articles, it is important to clarify the concept of "involution," which is the English equivalent of the Chinese buzzword "内卷" (Neijuan). In China, "involution" refers to the phenomenon of the rat race, burnout, and diminishing returns, where putting more into something only results in getting less back. Based on this concept, "卷王" (Juanwang), or "King of Involution," refers to those who are most avid or leading in the involution.

In 'The Economics of the "King of Involution",' Will argues that the pressure of 'involution' spurred rapid growth in the automotive and new energy sectors. He suggests that once COVID-related restrictions were lifted, Chinese companies, dubbed the 'kings of involution,' dominated the global market. Meanwhile, in 'Why the Economics of the "King of Involution" is a Dead End,' Bob expresses concerns about the sustainability of this model.

The following are the summaries of key ideas and highlights from the two articles.

Part 1 - The Economics of "King of Involution"

1. Living in Germany, the author worked at investment, mergers and acquisitions in automobile and new energy sectors for over twenty years, and he observed that the competition in China's energy and automobile markets is the most intense on a global scale.

1. 比如说，某光伏企业，1GW签了约的订单在朋友圈里显摆的时候把背景里的客户公司logo忘了P掉，第二天就被对手以1分钱的差价抢走。

1. For example, photovoltaic (PV) company lost a 1 gigawatt (GW) order to its rival simply because an employee forgot to hide the client company's logo when celebrating the deal on WeChat Moments one day before finalizing. The competitor's offer was just one fen (one hundredth of a yuan) lower.

比如说，某充电桩制造商，新一代产品研发出来刚准备上市，竞争对手50KW直流快充就做到了跟7KW交流桩一个尺寸。

For instance, an electric vehicle (EV) charging pile manufacturer, in the process of preparing to launch its next-generation products, discovered that its competitor had already rolled out 50KW DC fast charging piles, all within the same dimensions as the 7KW AC charging piles.

比如说，储能电池产能暴增，价格暴跌，部分280Ah出货价格跌至0.25。

For another instance, the price of energy storage batteries plummeted amid a surge in output, with some 280Ah battery cells priced at 0.25 yuan/Wh.

2. However, with a surge in production capacity and a subsequent slump in prices, companies within the sector are experiencing a sharp decline in profits.

我带的老德在东南某省的某企业谈判的三天内，同时在现场考察和谈判的还有印尼，中东，意大利和韩国的另外四批客户。公司海外市场销售总监在各个会议室之间跑来跑去，忙的鸡飞狗跳。 During the business trip, I spent three days helping a Germany company negotiate with a Chinese company in a Southeast China province. Joining us were representatives from Indonesia, Italy, South Korea, and a Middle East country. The director of overseas sales for the Chinese company was busy running between conference rooms during our visit. 由于这些海外客户远较国内客户慢得多的项目进度，预计形成大规模销售的时间大多在2024年下半年乃至2025年上半年。 Given that projects with these overseas customers are progressing at a much slower pace than its domestic customers, large-scale sales are expected to come by the second half of 2024 and even by the first half of 2025.

但该公司的三季报却是上市以来最烂的。 But the company just reported the worst quarterly financial results since it got listed.

国内市场销售的产品2023年价格暴跌，导致公司销售额持平的同时，利润更是大幅下跌。营收账款增加，负债增加，同时研发支出和资本支出同样大幅增加。结果就是股票今年跌了将近50%，投行金融机构纷纷看衰。 As domestic sales prices slumped this year, the company suffered a sharp decline in profit while keeping sales flat. At the same time, account receivables and liabilities increased while R&D and capital expenditures grew significantly. The consequence was that its stock prices fell by almost half this year, leading to bearish forecasts from various investment banks and financial institutions.

与此类似的企业还有一大批。 A lot more Chinese firms are experiencing a similar situation.

3. Despite financial challenges, companies still invest heavily in R&D and capital expenditures. Why? In fact, this signals their navigation through a transitional phase, which is the real story unfolding for many Chinese companies during the transitional period of the Chinese economy.

下图是一项新的技术和产品的价格和产能随着供需关系变化的一般状态。在一个充分竞争的市场上，企业会在这个周期的第一阶段处于亏损，而在第二阶段处于盈利。对于大多数企业而言，都希望以最快的速度突破第一阶段进入第二阶段。

The figure below illustrates how the price and output of a new technology or product changes as supply and demand change. In a fully competitive market, a firm suffers a loss in Phase I before gaining a profit in Phase II. Most firms wish to shift from Phase I to Phase II at the fastest speed.

解决的方案有两个：或者大规模投入产能，通过大量资本支出形成规模效应；或者大规模投入生产工艺的研发，通过生产技术革新提高制造效率。这两者都会使得企业在产品销售困难且利润微薄的第一阶段同时需要负担沉重的资本投入。这会造成企业的损益表和资产负债表同时恶化。

There are two ways to do that. Businesses can either invest heavily in production and scale up through massive capital expenditures, or invest heavily in manufacturing process R&D and increase manufacturing efficiency through technological innovation. Both will require hefty capital inputs in Phase I when a firm has difficulty selling its products and makes a meager profit, causing its income statement and balance sheet to deteriorate simultaneously.

...

这就是中国经济所谓“转型期”的真实状况。在这样的快速技术革命和迭代的“卷”时期，大量的企业面临着损益表和资产负债表乃至现金流量表的三重打击，从金融和财务投资的角度来看那就是哀鸿遍野。但企业总体而言却维持乐观情绪，因为普遍预期回报丰厚的第二阶段将随着市场的成熟而快速到来。因此企业在研发支出和资本支出两方面（更多的是资本化了的研发支出）仍然在大肆投资，PMI整体向好，工业用电量才屡创新高。

This is the real story unfolding during the transitional period of the Chinese economy. Facing fierce competition in an era where new iterations of technology take off quickly driven by the ongoing technological revolution, numerous enterprises report weak results in their income statement, balance sheet, and even cash flow statement. Pessimism should have been widespread from a financial and investment standpoint, but businesses remain broadly optimistic, expecting the highly rewarding Phase II to come quickly as the market matures. This explains why they are still investing big in R&D and capital expenditures (more being capitalized R&D expenditures). Industrial power consumption is hitting new highs again and again only because of improving PMI data.

4. Some concern that these intensive capital expenditures will result in massive waste of resources. Such worries are unnecessary, because in knowledge intensive industries, most of the investments are directed towards R&D rather than raw materials, which means they will not be wasted once the old capacity phases out, but will contribute to developing new capacity. Also, excess capacity does not compromise the profitability of new capacity; in comparison, the latter loses out entirely in terms of cost and efficiency.

今天企业的资本支出大量投资于高技术含量的自动化生产线和高精密装备。而这些装备供应和制造正在大规模国产化。高精密装备制造是一个知识密集型行业。电池制造商花几千万上亿买的化成分容线，其中可能超过50%的部分是自动化厂家以及更上游的装备制造商雇佣的数千名工程师的工资。里面真正原物料的含量如若穿透到最底层，可能都不到30%。这样的资本支出其实就是变相的对整个供应链的研发投入。这些设备可能最终会在短期内被淘汰，造成企业资产负债表上的潜在巨大窟窿，但其实质却是大量研发人员和工程师累积的经验以及形成的各种各样的知识产权。

Today firms’ capital expenditures mostly go into high-tech automated production lines and high-precision equipment. And these equipments have been domestically manufactured and supplied on a large scale. High-precision equipment manufacturing is a knowledge intensive industry. For a battery formation and grading system that can cost a battery manufacturer hundreds of millions of yuan, more than half of the cost is thousands of engineers hired by the automation manufacturer or upstream equipment manufacturers. The raw materials contained therein may account for less than 30 percent. Such capital expenditures are in fact R&D inputs to the entire supply chain. In the short term, these devices may be replaced and generate potentially gaping holes in a firm’s balance sheet, but they actually represent the experience accumulated by R&D personnel and engineers and all sorts of intellectual property rights.

...

随着技术迭代和工艺提升，老旧技术和产能是毫无竞争力的。

As new iterations of technology emerge and manufacturing process improves, old technology and production capacity would completely lose their competitiveness.

比如，2023年全球形成的光伏电池总产能约新增402GW，超过800GW。而全球光伏装机约446GW。但实际上，其中TOPCON和HJT电池产能有约500GW，其他大多是老旧的PERC电池。与TOPCON或HJT电池比较，老旧的PERC在成本和效率上毫无竞争力，对于真实市场而言完全属于无效产能。

For example, global new solar PV capacity is forecast to reach 402GW in 2023, bringing the total capacity to more than 800GW, and the global PV new installations are expected to reach 446GW in 2023. But in fact, about 500GW of the 800GW total capacity comes from TOPCON and HJT batteries, while the remaining mostly comes from old PERC batteries. Compared with the former, the latter is not competitive at all in terms of cost and efficiency, and is useless capacity for the real market.

5. A key condition enabling this unique "involution" was the country's stringent pandemic control measures, which led to an isolated, yet gigantic market that spawned stiff domestic competition. In this setting, the speed of evolution within China's industrial ecosystem far surpasses that of overseas counterparts. Coupled with other factors such as strong localization and marketing strategies, Chinese companies hold substantial advantages when expanding overseas.

由于我们国内市场巨大且较为封闭，在极度激烈的竞争环境下，我们的产业生态进化的速度比境外要快几个数量级。同时，由于我国又存在南北东西部的地域和发展水平的差异，因此我国市场孕育的企业往往能够提供符合多个天差地别不同生态系统的产品。

Extremely stiff competition within an isolated, yet gigantic Chinese market prompts China’s industrial ecosystems to evolve several orders of magnitude faster than overseas markets. At the same time, due to the regional disparities in both geography and developmental levels across the country, enterprises nurtured by the Chinese market are often capable of providing products tailored to diverse ecosystems with different customer needs.

在这个过程中，我国企业的产品在国内完成快速迭代进入阶段二的时候，海外市场往往还处于阶段一的不同位置。在这个时期，海外竞争对手还在艰难增加投入尝试规模化，而客户可承受的价格还远在高位。因此当中国企业和产品通过合适的本地化配合优秀的营销策略和并开发可行的销售渠道进入一个市场时，就直接将这个还处于阶段一的市场变成了阶段二。这也是我们今天看见中国电车在海外开始攻城略地的原因。

As Chinese firms enter Phase II after fast product iterations in the domestic market, overseas markets are usually still in Phase I, albeit at different levels. During this period, overseas competitors struggle to increase investment to expand the scale, while the prices customers consider to be acceptable are at high levels. So when a Chinese firm steps into an overseas market with a proper localization strategy, coupled with an excellent marketing strategy and a viable sales channel, that market will directly move to Phase II. This is how Chinese EVs grab market share overseas.

三年疫情恍如隔世，而今年是汽车和新能源领域中国企业王者归来的一年。汽车和能源是全球工业领域价值最高，产业链最长，覆盖领域最广的两个，完全可以称得上是人类工业化的皇冠。国之有幸，在于当我们基础工业和积淀基本完成的时候，恰如其时的进入了新一轮能源革命带来的全球变革之中，使我们能够将人口，体量，规模和产业集聚效应等所有因素发挥的淋漓尽致。这是未来50-100年中国工业和经济维持全球领导地位的基本保障。 So many changes have taken place in the past three years. This year has witnessed Chinese firms’ comeback in the auto and new energy sectors. Across the global industrial sector, auto and energy, which have the highest value, feature the longest industrial chain, and cover the widest fields, can be regarded as the crown jewel of industrialization. China is lucky to embark on a new round of global energy revolution just in time after the country has laid a solid industrial foundation, enabling it to take the most advantage of all factors, including population, size, scale, and industrial agglomeration effect. This will help ensure China’s industry and economy maintain a global lead in the next 50 to 100 years.

在这个无比坚实的基础之上，那些所谓的金融市场也好，汇率市场也罢，货币政策还是财政政策，真真假假的外资在我们的资本市场上出出进进的忙里忙外，对于我们而言不能说是无足轻重，只能说是毫无影响。 Based on such a solid foundation, China will be immune to fluctuations in financial and foreign exchange markets, monetary and fiscal policies, and flow of foreign capital into and out of the country, whether real or not.

6. It's worth noting that China's manufacturing industry shows a promising upward trend, as evidenced by the substantial increase in energy consumption — a vital indicator of the nation's industrial prowess. As a key metric for China's manufacturing-driven economy, its energy consumption is on the rise.

刚刚过去的2023年10月，能源消耗大涨8.4%。工业能源消耗更是连续5年增长，即使在疫情管控最严格的2020和2022年都毫不退缩。

China’s energy consumption is growing wildly, with a whopping increase of 8.4 percent in October, for example. Industrial energy consumption rose for five consecutive years, even during 2020 and 2022 when the toughest pandemic controls were in place.

...

最后附一张在推特看见的2000年至今中国发电量增长的图。

The figure below shows the growth of China’s power generation since 2000 (The figure was posted on U.S. social platform X, formerly known as Twitter).

其中红线为美国的全国能源消耗，绿线为德国的全国能源消耗。

The red line represents total electricity consumption of the U.S., while the green line indicates total electricity consumption of Germany.

中国的发电量在2010年才超越美国。今天，中国的发电量是美国的用电量的两倍。换句话说，中国自2010年以来的新增电力需求等于美国的总消费量。这些新增的发电容量产生的能源有超过60%流向了工业。

Looking back, China’s power generation didn’t surpass that of the U.S. until 2010. But today, China’s power generation is double the electricity consumption of the U.S. In other words, China’s newly-added electricity demand since 2010 equals the total electricity consumption of the U.S. Of the new power generation capacity, more than 60 percent has ended up in supporting industrial activities.

而从人均来看：作为世界人口第一（今天已经是第二）大国，我国的人均用电量去年超过了德国。

At per capita levels, the per capita electricity consumption in China with the world’s largest (now the second-largest) population surpassed that of Germany last year.

Part 2 Why is the Economics of "King of Involution" a Dead End?

[Note: Bob Chen, the author of the second article, possesses significant expertise in investing in Chinese enterprises that are expanding globally, often referred to as 'Go Global 出海' companies.]

1. Involution within China's new energy sector causes damage to both workers and the running of companies, and a healthy competitive environment within the industry is imperative in ensuring a reasonable profit margin for all stakeholders.

文章给出了两个闪光点，认为是内卷带来的红利。第一，培养了大量的工程师和人力红利。第二，面向全球化竞争的时候会横扫国际市场。

The Economics of "King of Involution" presents two dividends brought by involution. First, China's new energy sector has cultivated a large number of engineers and a labor dividend. Second, the sector holds substantial competitive advantages that it can sweep the international market upon accessing it.

第一点，我充分认同，但我并不认为这是一个值得这些人力资源自己高兴的事儿。红利的反面是剩余价值压榨。通过压榨人力资源获得全球价格优势的企业，并不会因为全球的市场份额扩大，就愿意把更多的利润让给人力资源，何况今天内卷得连企业家都赚不到钱。所以培养是培养出来了，但不太值得人力骄傲，倒是很适合去海外享受工资差红利。

Regarding the first point, I totally agree, but I don't think it's something the labor should be happy about. The flip side of the dividend is the exploitation of surplus value. Businesses that use labor exploitation to obtain a global pricing advantage will not increase wages for their employees even if their market share grows internationally. Not to add that, in this day and age, involution prevents even entrepreneurs from making money. Therefore, even though there is a labor dividend, labor itself shouldn't take pride in it; instead, working abroad will allow them to benefit from the pay gap dividend.

第二点，作为一个投资出海赛道的投资人，我们更多看到中国企业在互相倾榨，用价格来战胜对方，而对品牌文化投入售后渠道等建设，以及最重要的一点，赚取利润，似乎都不很在行。

Second, in my experience as an international investor, Chinese businesses are increasingly undercutting one another by offering low costs. They performed poorly, though, when it came to spending money on post-sale support channels, brand culture, and—above all—making money.

...

中国会是一个非常巨大的经济体。但内部的企业可能是没有利润的，因为透支了所有劳动力。而且这些企业需要不断去投入投资，把产线建了又拆，拆了又建来不断做技术迭代，甚至来不及折旧就报废（这也正是内卷经济学文章所描述的情形）。最后，劳动力和资本这两种要素都没有赚到钱。

China will be an enormous economic entity, but businesses inside the country cannot profit due to overextending all available labor. Furthermore, as The Economics of "King of Involution" explains, these businesses must continually invest in building and dismantling production lines for ongoing technological innovation, occasionally scrapping before depreciation. In the end, neither capital nor labor components profit financially.

只有当中国的企业愿意让自己赚钱，或者说不以内卷为目标，而是相对有序的竞争，国民收入，企业利润才能真正的提升。

Only when Chinese businesses are willing to make profits for themselves, abandoning the goal of involution in favor of more orderly competition, will national income and corporate profits truly rise.

2. The steady increase of China's per capita income results from investing resources, comprehending production line construction, learning new technologies while working with OEMs, and having entrepreneurs find products that fit the market. Price wars, one-dimensional investments, or repetitive investments related to the involution are not the cause.

有人以拼多多海外Temu的成功举例，说是内卷在出海的胜利。这是错误的。拼多多即使在国内也是通过挖掘下沉市场的差异化之路后起追赶阿里，而非简单重复。在海外，更是把中国的电商经验输出，一路上整合了大量的上游工厂、质控能力，对链路上各个履约环节进行跨国的“中国化”打造。他们甚至在美国的末端物流这一最传统、板结的领域，都找了外人很少见到的区域性美国企业，去深扒对方的成本结构和区位优势，尝试整合进自己的履约网络。

Some claim that the success of PDD's overseas expansion (Temu) is proof positive of involution. This is untrue. Rather than just copying Alibaba's business model, PDD, even at home, sought to set itself apart by reaching out to a customer base with less purchasing power. Through the integration of multiple upstream factories and quality control capabilities, they exported China's e-commerce experience abroad, resulting in a transnational "Chinese-style" transformation for different stages of fulfillment. They looked for regional American businesses that are seldom seen by outsiders, even in the most conservative and traditional field of last-mile delivery in the United States. They investigated the competitor's location advantages and cost structure in great detail, trying to incorporate them into their own fulfillment network.

几乎没有前人在全球市场做过类似的实践。即使Shein，都没有这样深入的把中国供应链经验进行全球化输出。

In the global market, few predecessors have adopted such practices. Even Shein has not fully globalized China's supply chain experience, despite its widespread presence.

3. The main reason Chinese companies are willing to compromise profits is primarily rooted in the government's encouragement of investment and export-oriented mechanisms, leading companies to pursue marginal cost competition, neglect fixed costs, and engage in global markets through low-price competition to meet global consumer demands.

投资创造GDP所以地方政府通过让渡土地税收等优惠方式，鼓励大家投资创造当期的GDP。中国并不缺乏资本，反而缺乏创新能力。而缺乏差异化竞争和思维能力的企业家，最好的方式就是跟着先行者，跟着老大的技术路径，节省自己的创新成本，规避创新风险。

Investment creates GDP, so local governments encourage investment by offering preferential measures such as land and tax concessions to generate immediate GDP. China is not lacking in capital; rather, it lacks innovation capability. For entrepreneurs lacking in differentiation and strategic thinking, the best approach is to follow pioneers, adhere to established technological paths, save on innovation costs, and avoid innovation risks.

因此，即使你做到了行业老大，你也不一定能够赚钱，因为中小玩家会以边际成本来市场上跟你竞争。

Therefore, even if you become the industry pioneer, there is no guarantee that you will make a profit, as smaller players may compete with you in the market based on marginal costs.

在市场经济理论中，当市场竞争到了极致，人们卖的每一个产品的定价都等于生产这个产品的边际成本，但这个是极少见的，因为边际成本是可变的，它可能只等于零，或者接近于零，因为你额外生产一个商品，特别是工业产品，在流水线上的成本接近于零。

According to market economy theory, at the peak of competition, the price of every good equals its marginal cost of production. This is extremely uncommon, though, as marginal costs can be variable or even close to zero, particularly in the case of increased industrial product production where assembly line costs are almost zero.

一旦大家卯足了劲，用边际成本去生产，完全忽视了之前投入的建厂成本、固定资产投入成本去拼价格，这是十分可怕的，但这就是我们在中国很多行业最后会碰见的情况。即使是出海，大家也会用这种方式去抢占市场。

Once everyone exerts full effort, producing based on marginal costs and completely overlooking the previously invested factory and fixed asset costs to compete on price, this becomes extremely concerning. However, this is a situation encountered in many industries in China. Even when expanding overseas, companies may employ this approach to seize market share.

最后就变成了全球消费者们的狂欢，尤其是可以用手头的美元来换取我们制造能力的国家。

In the end, it turns into a global celebration for consumers, especially for countries that can use dollars to acquire our manufacturing capabilities.

4. In addition to overseas consumers, who enjoy the dividend of involution include: few entrepreneurs, especially if they go public and profit from the appreciation of equity; players controlling upstream raw materials, benefiting from the highly monopolistic nature of the industry.

What are your thoughts on these two differing perspectives? We welcome and encourage your comments!

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I'd like to give you a heads-up about an upcoming event. On June 13th, my friend Yaling will host a Twitter Spaces session with the theme "What do you need to know as a China watcher in 2023 (tips and tools)". Many China watchers, including the CEO of Bigone Lab, Robert Wu, whom I had a podcast episode with three months ago, will participate in sharing their insights. I'll try my best to join in it as well if time allows. This promises to be an exciting event, so feel free to mark it in your calendar if you're interested.

Today's newsletter will focus on technology. For one, tech self-reliance has been one of China's major themes in recent years. Additionally, I've noticed that my previous posts comparing Chinese cities have been quite popular among some readers, so today's issue will present a comparison of the two leading tech hubs in China.

Beijing, the capital and a northern city of China, and Shenzhen, in south China's Guangdong province, are set in a race for the country's most innovative city - yet on very different tracks. Numerous universities and research institutions in Beijing are the cradle of technological breakthroughs, whereas big private enterprises in Shenzhen are wielding their investment powers.

Now perhaps is the time to showcase who's got the upper hand, as the contest heats up with technological wonders such as ChatGPT and Starship. Beijing and Shenzhen will be put on a close justaposition in terms of national strategy, R&D expenditure, and innovation patterns. The author of today's piece, for a start, seems to side with Shenzhen, commending it for being the "the most diverse region in China in terms of new technologies and business models".

The following piece comes from an article on Guominjinglue [国民经略, "state strategies"], a WeChat blog with a particular focus on prefectural and provincial development in China. Check a previous popular article from this account posted by GRR: Top dogs, rat race, leapfrogging -- A look behind provincial GDP figures in China.

Recently, a delegation of the Hong Kong Special Administrative Region government and the Legislative Council comprising of more than a hundred people visited the Pearl River Delta area. It is the first joint visit to the mainland after the full resumption of normal travel between the mainland and Hong Kong, and the largest in scale to date. The delegation was reported to have toured Shenzhen, Guangzhou, Foshan, and Dongguan, and visited technology enterprises such as BYD, Tencent, Huawei, and DJI.

So, what's the implication?

01

Why these cities and enterprises?

As an international financial hub and shipping center, Hong Kong has long relied on finance, trade, professional services and tourism.

Hong Kong's high-end service industry has a global competitive edge. However, the secondary industry in Hong Kong has almost reduced to non-existence, with the share of manufacturing in GDP dropping to about 1 percent from a peak of over 20 percent; information technology industries such as the internet are practically nil.

The world today is going through profound changes unseen in a century. Faced with changes in the geopolitical, international and globalization landscapes, Hong Kong is pushing for "Re-industrialization" to stimulate new growth.

Due to the decline of manufacturing, the "Re-industrialization" has aligned itself with "technology innovation", targeting high-tech industries and technological innovation instead of traditional industries.

"Re-industrialization" has its practical basis. Hong Kong has five of the world's top 100 universities and numerous research institutions, such as the Hong Kong University of Science and Technology, in addition to open access to the international market and finance.

But without the support of advanced manufacturing clusters and large technology enterprises, "Re-industrialization" will always be a castle in the air.

The four major cities that have come under the focus of the Hong Kong delegation are precisely the key members of the Guangzhou-Shenzhen-Hong Kong and Guangzhou-Zhuhai-Macau science and technology innovation corridors, which, together with the U.S. Highway 101 and Route 128, form the most important innovation belts in the world.

The Guangzhou-Shenzhen-Hong Kong and Guangzhou-Zhuhai-Macau innovation and technology corridors Source: Guangdong Province Territorial Spatial Planning 2020-2035

Shenzhen, which is just across the river, happens to be the most complementary sister city to Hong Kong.

Shenzhen is not only the newly promoted No. 1 industrial city, having surpassed Shanghai for the first time to rank first in China in terms of industrial added value (IAV), but also the No. 3 city in the digital economy after Beijing and Shanghai.

In a nutshell, Shenzhen is one of the few comprehensive cities that integrates hard and soft technologies, and is in the lead in the two mainstream tracks of advanced manufacturing and digital economy.

The destinations of the Hong Kong delegation -- BYD, Tencent, Huawei, DJI, etc. -- are all leaders in their fields and significant influencing powers inside and outside the industry.

"BYD is a model of real economy and Tencent is a pioneer of digital economy, both of which are also the current focus of Hong Kong's economy", said Sun Dong, Secretary for Innovation, Technology and Industry of the Hong Kong SAR Government.

The weak point, though, is that as a national innovative city, Shenzhen's higher education is seriously mismatched with its economic strength. Only one university in the fourth most populous city of China is included in the "double world-class project” [an initiative launched in 2015 to develop world-class universities and first-class disciplines, in which selected universities enjoy increased financial and other resources]; and the number of university students is only about 1/10 of that in cities such as Beijing, Shanghai and Guangzhou.

Because of this, the burden of innovation in Shenzhen falls almost entirely on enterprises, especially large technology enterprises.

According to PATENTSCOPE, the World Intellectual Property Organization (WIPO) database of International Patent Cooperation Treaty (PCT) applications, 12 Chinese enterprises rank among the TOP 50 global patent assignees, among which Shenzhen alone accounts for seven, including Huawei, Tencent, DJI and other enterprises visited by the Hong Kong delegation.

The 2022 rankings of R&D funding of private enterprises by the All-China Federation of Industry and Commerce (ACFIC) also placed Huawei and Tencent, both Shenzhen-based, in first and third place respectively. This goes to show the city's overwhelming power of innovation.

In this regard, there is much space where Shenzhen and Hong Kong can complement each other to facilitate the Greater Bay Area as a national or even global highland for science and innovation.

02

Which city is the most innovative one in China?

Behind the interaction between Hong Kong and Shenzhen is the implication that the Guangdong-Hong Kong-Macao Greater Bay Area is becoming one of the most popular science and technology innovation highlands in the country and even the world.

How innovative a region is boils down to two parameters: 1) national strategy and international ranking; 2) the intensity of innovation.

The concept of "national principal cities" is widely-known in China. Sitting on top of the pyramid of the national urban system, these cities assume the important role of the "outpost of national strategy, executor of national mission, leader of regional development, partaker of international competition, and representative of national image".

Accordingly, comprehensive national science centers and international centers for science and technology innovation are at the top of the pyramid of China's technology system. They represent China's core competitiveness in the global science and technology arena, the former focusing on basic science and the latter on science and technology innovation.

As of today, China has designated five comprehensive national science centers, three international centers for science and technology with global influence, and three science and technology innovation centers with national influence.

Only Beijing, Shanghai and the Greater Bay Area are awarded with two titles, becoming genuine "dual centers" of national and international influence.

Hefei, in contrast, is only a comprehensive national science centre; Wuhan and the Chengdu-Chongqing economic circle have only the title of "science and technology innovation center with national influence".

Although Xi'an is in a sense a "dual center", its "national influence" title is inferior to the "international" hierarchy occupied by Beijing and Shanghai.

Of course, titles are not everything. Whether these cities can actually live up to their names depends on real innovative powers, which is measured in part by R&D expenses and intensity.

China's R&D expenses have maintained double-digit growth for seven consecutive years. The frontrunners are, invariably, major city clusters such as the Beijing-Tianjin-Hebei region, the Greater Bay Area and the Yangtze River Delta.

Judging by R&D expenses, the top 10 cities with the highest R&D expenditure in China are Beijing, Shanghai, Shenzhen, Suzhou, Guangzhou, Hangzhou, Chengdu, Wuhan, Chongqing and Nanjing.

But the expenses measure only the sheer scale of innovation. R&D intensity (R&D investment/GDP), on the other hand, is a better indicator of innovation intensity, industrial transformation, and overall research capability.

In terms of R&D intensity, the top 10 rankings are somewhat different: Beijing, Shenzhen, Xi'an, Shanghai, Suzhou, Hangzhou, Tianjin, Nanjing, Hefei and Wuhan.

Of course, different cities have different resources, and thus different forces of innovation. Some come from enterprises, some from research institutions, and some from universities.

03

In the field of science and innovation in China, two cities are hard to ignore: Beijing and Shenzhen.

Whether considering innovation intensity, national science, and innovation systems, or the international technology matrix, the "Beijing-Shanghai-the Greater Bay Area" region is the leading force in science and innovation, with Beijing and Shenzhen serving as pioneers, bearing the responsibility of driving innovation in their respective regions and even the entire nation.

However, as Beijing is a city known for education and scientific research, while Shenzhen is a hub for technology companies, their fundamental differences determine that there are some disparities in their innovation models, but they also complement each other in certain aspects.

The first difference is that research and development (R&D) investment in Beijing mainly comes from universities and research institutes, while in Shenzhen, it almost entirely comes from enterprises, with other cities falling somewhere in between.

According to statistics on science and technology funding, out of Beijing's 260 billion R&D expenditure, the proportion coming from research institutions and universities is as high as 55 percent, which is the highest in the country, while the proportion coming from enterprises is 43 percent.

In contrast, over 94 percent of Shenzhen's R&D budget of over 170 billion yuan comes from enterprises, and the investment in R&D by enterprises has ranked first in the country for several consecutive years.

Furthermore, there is a saying in Shenzhen called the "Four 90 percent"

[Over 90 percent of R&D personnel are concentrated in enterprises, over 90 percent of R&D funding comes from enterprises, over 90 percent of R&D institutions are established in enterprises, and over 90 percent of job-related invention patents come from enterprises.]

According to the article "Why is Tencent's Growth So Steep?" published by South Reviews, a biweekly politics and economics magazine based in Guangzhou, China, Tencent has applied for over 62,000 patents since its establishment, ranking second among global internet companies, only behind Google.

It is worth noting that Tencent's innovation curve has a striking similarity to the innovation curve of Shenzhen city.

This illustrates how enterprises and cities grow together. The innovation of numerous technology companies enriches the entire city's innovation matrix, while the city's technology, industry, and talent environment, in turn, drive the explosion of enterprise innovation.

Tencent, together with many other technology companies such as Huawei, BYD, and Ping An in Shenzhen, have created a legend of enterprise innovation in Shenzhen.

04

The second difference is that Beijing's innovation is more strategy-oriented, while Shenzhen's is based on market demand and the needs of enterprise competition.

Beijing, with approximately one quarter of the country's first-class universities, one quarter of the national key laboratories, one fifth of the national engineering research centers, and more than half of the academicians in China, has an abundance of scientific and technological innovation resources and unparalleled advantages.

Precisely because of this, Beijing must shoulder the responsibility of basic science and technological innovation in critical areas, making it the main venue for the country's new system of tackling key core technology challenges.

In contrast, Shenzhen has relatively few top-tier universities or research institutions. Its innovation relies on more than 20,000 high-tech enterprises and dozens of private companies listed in the top 500 of China.

Innovation in enterprises is funded internally and therefore must be subject to market rules. Any innovative results must face market validation.

In other words, enterprise innovation cannot be trapped in a patent bubble. It must be guided by problems and based on the market. The key is how to transform and implement the technological innovation results and produce stronger shared innovation effects.

Who could have imagined that the artificial cochlear implant and Tencent Meeting are both products of the same technological innovation - AI noise reduction?

Similarly, it is hard to imagine that unmanned mining trucks, which have freed drivers from this high-risk industry in Ordos, the largest coal-producing city in China, are also based on “Immersive Convergence”, an innovative model that integrates the digital economy and the real world.

This technological breakthrough from Tencent can be applied to both games and the metaverse, as well as providing strong support for industrial transformation and upgrading.

This is the most "magical" aspect of enterprise innovation, which economist Fan Gang calls "shared innovation".

05

The third difference is that the emphasis of innovation of Beijing and Shenzhen is different, but they are not mutually exclusive.

One focuses on fundamental and original innovation (from zero to one), while the other focuses on technological innovation (from one to ten) and industrial innovation (from ten to infinite), but the distinction is not always clear-cut.

The stage from zero to one is the most difficult, as it involves tackling the toughest technological challenges with self-reliance. Clearly, it is not something that can be shouldered by just one enterprise or a few research institutions, which makes a new national innovation system necessary.

In fact, as a city with the most abundant scientific and technological resources, Beijing also has the highest investment in basic research.

Data shows that in 2021, Beijing's basic research funding exceeded 40 billion yuan (about 5.6 billion U.S. dollars), accounting for nearly a quarter of the national total.

In comparison, the existence of a large number of technology companies in Shenzhen has made it the most diverse region in China in terms of new technologies and business models.

However, as industries deepen and technology companies grow and become more competitive internationally, innovation has become more profound and abundant, including fundamental and technological innovation.

Huawei's numerous patents in the 5G field and Tencent's solid reserves in AI and VR/AR have already touched the most fundamental core of innovation and established an innovation chain from theory to technology and finally to application.

Today, basic research funding in Shenzhen is also maintaining high growth rates.

Data shows that in 2021, basic research funding in Shenzhen reached 12.2 billion yuan, a year-on-year increase of 67.4 percent, ranking third after Beijing and Shanghai for two consecutive years.

According to Guangdong Province's plan for the comprehensive national scientific center in the Greater Bay Area, Shenzhen will be the main base, with Guangming Science City, Songshan Lake Science City, Nansha Science City, and other areas as the main carriers.

Clearly, Shenzhen is not only a highland of industrial innovation, but also a significant source of original innovation in the future.

06

Recently, two technological products have become popular globally, one is ChatGPT, and the other is Starship.

These two products represent the highest levels of artificial intelligence and carrier rockets, respectively, and together they have refreshed people's understanding of the new round of technological revolution.

Interestingly, the creators of these two products are both from the private sector, highlighting the importance of enterprises in technological innovation.

In fact, in China's scientific research and development, enterprises are the main force.

Data shows that in the R&D expenditure of around 3 trillion yuan nationwide, the contribution from enterprises accounts for 76.9 percent, while that from government-affiliated research institutions and universities is 13.3 percent and 7.8 percent, respectively.

Of course, in some core areas involving key technologies, universities and research institutions still play a major role, but the role of enterprises is becoming increasingly important.

The first meeting of the Central Commission for Comprehensively Deepening Reform under the 20th the Communist Party of China (CPC) Central Committee recently focused on technological innovation, emphasizing the principal role of enterprises in innovation, and actively encouraging and effectively guiding private enterprises to participate in major national innovation initiatives.

It is evident that there is a great deal of room for technological enterprises in terms of encouraging innovation.

The whole society is pleased to see the emergence of more and more private enterprises in the tide of technological self-reliance and self-strengthening.

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Almost on the same day of Feb. 2023, Google and Baidu, the largest search engines in the English and Chinese worlds, both officially announced their own "ChatGPT-like" chatbots, named "Bard" and "ERNIE Bot", respectively. They all seem to know the importance of conforming to the trend of times and making a brave investment and wise reform in newly emerged things.

Over 20 years ago, Naspers, a small publishing company in South Africa, also made a proactive transformation and a smart investment in a Chinese startup on innovative instant messaging, which later became the world-leading internet and technology company -- Tencent. It turned out to be its most successful bet seen today.

Today's piece introduces the story behind the successful bet of Naspers on a Chinese internet giant Tencent at its early stage. At the dawn of the millennium, when the dotcom bubble burst, it took great courage and keen insights for an investor at the end of its tether to bet on a cash-strapped Chinese internet company nobody wanted. The secret to Naspers' success may have always been its bravery to bet on the new and take progressive transformation since its founding as a traditional print media company, then to a set-top box giant, and finally an internet hunter like a lucky slot machine.

The piece was posted on Jan. 13 on the WeChat blog named 远川研究所 "YuanChuan Institute", a company-run blog that claimed to be an independent financial think tank serving the public and committed to "bridging the gap between professional research and public cognition", integrating global in-depth research supplies, and providing customers with high-quality analysis and information. The original title of the article is Betting against the times: Who made 1 trillion HK dollars on Tencent?.

Even pigs can fly when placed against the wind, but as the original author says, no one can guarantee that the industry they are in will always be on top of the trend. When a new technology or a new model is destined to shatter the traditional format, instead of involuntarily transforming itself, it is better to bet on the top companies in the sunrise industry.

[Note: Data not clearly indicated in the article is provided by the original author for reference only.]

Today, when people look back on the adequate atmosphere and flourishing conditions once in China’s internet industry, the first thing that comes to their mind is still the love-hate relationship between Chinese entrepreneurs and top U.S. dollar venture capitalists (VCs).

The VCs from Silicon Valley, led by their Chinese partners, searched Zhongguancun Street for China’s Google, Yahoo, and Amazon. Amid the unprecedented investment frenzy, SoftBank Group founder and Chief Executive Masayoshi Son, invested 20 million U.S. dollars in Alibaba, which generated a 2,000x return. Today this success story remains reminiscent of the apex of the Korean-Japanese VC investor in the Silicon Valley, while igniting people’s imagination of investment returns.

Flights between China and the US across the Pacific Ocean and investment and financing figures on U.S. dollar funds recorded the glory days of the internet in the past.

However, until 2022, when Tencent announced that its major shareholders had made selldown in their holdings, nobody knew that the biggest winner in the fortune-making campaign was actually on the African continent far from the spotlight.

Naspers, a South Africa-based media group, has never made any influential reports about China, yet somehow became the institutional investor that understood China better than Masayoshi Son.

In 2001, Naspers bought a 46.5 percent stake in Tencent for 32 million U.S. dollars. The investment yielded a return of more than 7, 000x in the past two decades, during which Tencent shares surged after the firm went public in 2004. Tencent dividends to Naspers alone reached 25.2 billion Hong Kong dollars for a period of 15 years. When Tencent was in its prime, the shares held by Naspers reached as high as 2 trillion Hong Kong dollars in valuation; even when Tencent’s market value plunged later, the shares held by Naspers were still worth 1 trillion Hong Kong dollars. At any time, this investment can be considered the most successful investment story in human history.

“Tencent is the gemstone on Naspers’ crown, and also the sharpest arrowhead in the arrow bag. If Tencent coughed, Naspers would develop pneumonia,” said Ton Vosloo, former chairman of Naspers.

The success is too shining that even the reason which Naspers claimed was behind selldown in its Tencent stake sounded like humblebragging. According to Bloomberg, Naspers had long felt upset about the gap between its valuations and that of its Tencent stake, and the move was an attempt to narrow that gap.

In fact, with support from Tencent, Naspers, which started as a newspaper seller, has created a share price curve totally different from other traditional media groups after becoming public.

Comparison of cumulative returns of four media groups (Naspers, New York Times, News Corporation, Gannett Company) after listing

The question is, how did a publishing company in South Africa make its most successful bet on Tencent?

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01 A South African investor that reaped nothing; a Shenzhen company nobody wanted

In the early autumn of 1995, the first commercial web browser Netscape staged an initial public offering (IPO) in the US, its shares skyrocketing at a pace that shocked the Wall Street fuddy-duddies. In August 1995, the Wall Street Journal reported, “It took General Dynamics Corp. 43 years to become a corporation worth today's 2.7 billion U.S. dollars in the stock market. It took Netscape Communications Corp. about 1 minute.”

Netscape set the IPO template for modern tech companies. With investor enthusiasm running high during the bull market at the end of the 20th century, the earliest fortune-making in the internet industry began. Investors bought into the time machine theory (The theory believes that every other country will go through the same technology transition as the US in different stages) of Masayoshi Son. Countless overseas VCs turned to China, hoping to find an IPO opportunity.

At the time, the most popular internet projects in China, including NetEase, Sina, and Sohu, were all simply named, compared with the trendy names of new entrants after them, from BAT (Baidu, Alibaba, Tencent), TMD (Toutiao, Meituan, Didi), to PKQ (Pinduoduo, Kuaishou, Qutoutiao), taken from the 26 Latin letters.

In 1998, NetEase became the highest-ranking website in Chinese internet. “Wall Street investors scrambled to invest in NetEase, which only had ten employees,” NetEase founder and CEO William Ding recalled. When Sina sought a listing, it selected Morgan Stanley as its partner. The big bosses of investment banks didn’t understand the internet, let alone Chinese internet. They caught up on early internet slang like “click-through rate” and “IPC” only ten minutes before having a meeting. But that didn't matter at all. The important thing was they could make a fortune in the ".com" business.

A digital screen outside the building of Nasdaq that read “Nasdaq Welcomes SINA.com” when Sina went public on the Nasdaq Stock Market in 2014.

Naspers far away in South Africa sniffed out an opportunity and set up an office in Hong Kong. Naspers employed the “spaghetti strategy”, where it threw a lot of pasta at the wall and believed that some would stick, given the size of the Chinese market.

Compared with Walden, Barings, and RSCO, which successfully bet on the three major Chinese web portals (Sina, Sohu, and NetEase), Naspers was walking on pins and needles after it came to China. The then inconspicuous South African company not only failed to secure a seat at the negotiating table for good projects, its “spaghetti strategy” didn’t work either.

In the late 1990s, Naspers invested in a lot of projects in China, including VNET Group, Sportscn, maibo.com, and iyfw.com. At the same time, Naspers served as a strategic investor, splashing out to help attract western senior executives to those enterprises. But in the end, the investments fizzled out as a result of the company being unaccustomed to the market climate in China and failing to find the suitable profit pattern. Naspers lost more than 80 million U.S. dollars in China.

The point was, Naspers didn’t make any money, but kept losing it.

As the Nasdaq Composite Index declined from its all-time high of 5,048 in March 2000, the dotcom bubble burst. Soon, Masayoshi Son lost 95 percent of his assets, and Naspers saw its share price shrank by 90 percent. Naspers ushered in a brand new century with negative results in its annual financial statement for the first time. With the bursting of the dotcom bubble, Naspers was beset with troubles both internally and externally.

While Naspers was considering how to get rid of those Chinese projects which had become a heavy burden in the Hong Kong office, in the Saige Technology Park across from the Shenzhen River, a small company was desperate for investments to find a way out of its plight. That was Tencent.

The first office of Tencent in the Saige Technology Park

In December 2000, Tencent released its latest version of OICQ and the software name was formally changed to QQ (nickname for OICQ). The number of users increased by 500,000 on a daily basis. The business seemed set for a flourishing future. But the question was QQ never turned a profit. The increasing servers counted on a continuous influx of money, so much so that even IDG Capital, an early backer of Tencent, considered quitting.

IDG Capital invested in dozens of internet firms. Almost all of them suffered heavily from the bursting of the dotcom bubble and were in urgent need of surviving by selling their shares. Instant messaging became a margin business surrounded by uncertainty. So IDG Capital began searching for other investors to take over Tencent.

But to be honest, there were few VCs to choose from. When all the professional VC investment managers of China in the late 90s dined together at the LN Garden Hotel Guangzhou, Mr. Xiong Xiaoge, founding Partner of IDG Capital, found they couldn’t fit the seats of even one table. IDG Capital approached big companies such as Sina, Yahoo, and Lenovo for the takeover, but all in vain.

As IDG Capital was sincerely searching for a successor, Wang Dawei (real name: David Wallerstein), vice president of China business at Naspers was wandering across China. He visited many internet cafes. Wherever he went, he could see a QQ icon on the computer screen, and some managers even printed their QQ number on their business card. Curious about Tencent, he entered its office.

Then a frustrated South African company and a cash-strapped Shenzhen firm accidentally met each other, by fate.

As Pony Ma, founder, chairman and chief executive officer of Tencent, briefed on his company, Wang was shocked that the users of QQ in China had far surpassed that of internet users across entire Africa. He excitedly explained his plan to invest in Tencent at a Naspers meeting, but it met opposition from almost all the senior executives. They didn’t agree to spend more on China, citing previous failures.

But Wang’s instinct told him he should persist in getting the deal done. Finally Naspers’ South Africa CEO Koos Bekker made a decision to invest in Tencent against all the odds. With 32 million U.S. dollars, the only cash left, Naspers purchased a 46.5 percent stake in Tencent from IDG Capital, PCCW and Tencent’s major founders, becoming its largest single shareholder.

02 Newspaper and set-top box giant, internet hunter

Yes, the company that played the role of VC in the early stage of China’s internet development actually specialized in the media business in the first place, and in the most traditional sort of media - newspaper. But continued efforts in VC, rather than its “proper business”, have turned Naspers into a growth stock.

In 2014, the market value of Naspers’ shares reached 44 billion U.S. dollars, 200 times higher from two decades ago (In 1994, Naspers went public at a valuation of roughly 200 million U.S. dollars). In comparison, its industry peer The New York Times had a market capitalization of approximately 2 billion U.S. dollars, with stock prices unchanged from the mid-1980s levels.

[GRR's note: In consideration of the article length and theme, a part of this section from the original article is omitted here. It looks back on the founding story of Naspers and its smart and timely transformation from traditional newspaper media to set-top box giant and now an internet hunter]

03 Lucky slot machine

The Johannesburg Stock Exchange (JSE) is the largest stock exchange in Africa. Since its investment in Tencent, Naspers has had a most special presence in the exchange.

With so many investment managers relying on the exchange traded funds (ETFs) and other passive index-related instruments, both these shares now underpin the savings industry of South Africa, according to David Shapiro, chief global equity strategist at Johannesburg-based Sasfin Securities. Naspers used to have around 20 percent weighting on the JSE benchmark index, equivalent to the weight of Kweichow Moutai (a partial publicly traded, partial state-owned enterprise in China, specializing in the production and sales of the spirit Maotai baijiu) plus five Contemporary Amperex Technology Co., Limited (CATL, a Chinese battery manufacturer and technology company) on the CSI 300 Index (a capitalization-weighted stock market index designed to replicate the performance of the top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange).

Riding on the booming internet wave in China, Naspers became the core asset navigating the economic cycles in the South African market.

In early 2021 when South Africa was struggling with nationwide restrictions and large-scale unemployment amid the COVID-19 pandemic, the share prices of Tencent far away in China were moving to a record high of 775 yuan. Accordingly, the share prices of Naspers stayed firm, even sending the entire JSE upward against the headwinds of a flagging domestic economy, with all the stock indices rising 11 percent year on year.

“Naspers is essentially a holding company for a big investment in Tencent,” JSE investment managers agreed.

In addition to its stake in Tencent, Naspers has also put money into global assets that span internet finance, food delivery, and technology, among others. Some of them have proved successful. For example, educational technology startup BYJU'S, backed by Naspers along with Tencent and other corporate investors, has developed into the largest online education platform in India; Delivery Hero, an online food-delivery service based in Berlin, claims to top the Asia-Pacific region in terms of GMV (gross merchandise volume); Russian technology company mail.ru invested in by Naspers before the Russia-Ukraine war broke out is Russia’s second largest web browser.

Overview of Naspers’ investment presence in 2022 (Source: Prosus Annual Report)

Judging by the rate of return, Naspers has also reaped handsome profits from some companies. From selling some of its e-commerce activities (Flipkart and Allegro) in 2018, Naspers got a good return (Flipkart at 3.6x on and Allegro about 1.6x).

But many of the internet businesses in which Naspers has interests are still under the curse that growth comes only after an influx of money. Their profit pattern fluctuates and share prices fall and rise on a roller coaster ride. Take Delivery Hero where Naspers takes a 27 percent stake for example. Delivery Hero faces competition from emerging delivery companies across Asia. The company saw its share prices plunge 40 percent following a disappointing earnings report for 2021.

The only top student that can provide stable returns has always been Tencent.

In 2017, Tencent’s revenue grew at a rapid rate of 50 percent. At the same time, the value of dozens of other investments and businesses (including media, e-commerce, and pay TV) backed by Naspers had fallen to minus 340 billion rand in the past two years. One year later, Naspers abandoned its pledge of “holding Tencent stake for 10,000 years” and sold 2 percent of its holdings in Tencent.

The deal added 10 billion U.S. dollars to the cash reserves of Naspers, most of which went to online classifieds, food delivery, payments, and education technology. That is, Naspers took advantage of Tencent to support other disappointing projects.

Thanks to Tencent, Naspers can try its luck everywhere despite the possibility of failure. Transitioning from a media company to an equity investment company, Naspers has distinguished itself from many other media companies that are struggling to survive while being caught in the merger and split dilemma.

Fate often depends on some mysterious moment.

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Regarding COVID-19, many China watchers have discovered evidence that might suggest China is entering a new phase in terms of COVID-19 control efforts.

Your Ginger River will not be surprised if more information about the policy's optimization becomes available in the coming days and weeks.

Today's piece is about another major topic that may have gotten lost because of the above-mentioned news -- the destiny of TSMC (Taiwan Semiconductor Manufacturing Company), which is caught between China and the US.

Taiwan's leader Tsai Ing-wen resigned as head of the Democratic Progressive Party (DPP) last Saturday after her party suffered heavy losses in recent local elections. While the major opposition party, the Kuomintang (KMT), won 13 out of 21 city mayor and county chief seats, DPP only secured five. Tsai's resignation is a response to DPP's poor performance in the election, according to Taipei Times.

The midterm elections were not the only topic of discussion in the region. TSMC's plans in the United States also generated a great deal of disappointment.

"The US is turning the 'TSMC' 台积电 (Taiwan Semiconductor Manufacturing Company) into 'ASMC' 美积电 (American Semiconductor Manufacturing Company)," said Joyce Huang, a TV Taiwanese commentator, adding that no political leaders in Taiwan dare to say no to the US.

According to Central News Agency, on Nov 21, TSMC founder Morris Chang said that the company planned to bring its 3-nanometer process technology to the US in the future. When reporters sought confirmation later, the company gave no further information.

In a press conference that day, when asked about moving advanced semiconductor technology out of Taiwan, Chang said that the company is building a factory in Arizona to produce the 5-nanometer chips, adding that 5-nanometer chips are the most advanced ones in the US now, but TSMC is able to produce 3-nanometer chips in Taiwan. A reporter then asked him whether TSMC would bring the 3-nanometer technology to Arizona too. Chang responded: “Yes, after the fab begins producing 5nm chips."

Back in April, during an interview with the Brookings Institution (a think tank based in Washington), Chang noted that compared with Taiwan, the same product costs 50 percent more when manufactured in the U.S. and the U.S. product is "not nearly as profitable as the Taiwan product." He also mentioned a lack of manufacturing talents in the US, and that TSMC's investment is "at the urging of the U.S. government."

TSMC founder Morris Chang

So why would TSMC involve itself in a business hardly profitable?

Many believed TSMC built the Arizona plant to satisfy the U.S. government's request. Besides, the US passed the "chip bill" worth 52 billion U.S. dollars in August. But in Chang's view, the subsidies were far from enough. The US will produce more semiconductors, he said, adding, "but all of that will be very high-cost increase, high unit cost." Chang argued that the US will still be uncompetitive in the world markets.

Under the circumstances, building fabs in the US means higher costs and lower profits for TSMC. It is unlikely that TSMC didn't see the red flag, but the company embraced the US anyway. Therefore, some deeper reasons may lie behind the decision, including those mentioned by Business week, a weekly magazine based in Taiwan.

First, TSMC needs to better serve its U.S. customers, so moving closer to them is reasonable. Among the top ten revenue contributors, eight are from the U.S., including Apple, which accounts for over a quarter of TSMC's operating revenue. Moreover, Tesla is reported to replace Samsung with TSMC for the next generation of Full Self-Driving (FSD) chips. If confirmed, Tesla would be among the top seven customers of TSMC in 2023.

Second, TSMC needs to build a diverse manufacturing landscape. At present, many chip design companies wish to distribute the chip manufacturing in different places to reduce supply chain risks. Thus, the relocation may assuage customers' concerns.

For example, Apple plans to have some of its chips produced in the U.S. and will also purchase chips from European foundries. According to Bloomberg, Apple's CEO Tim Cook once said that 60 percent of the company's processors come from Taiwan. "60 percent coming out of anywhere is probably not a strategic position," he commented.

As reported by Reuters earlier this month, MediaTek, another big client of TSMC, has realized that some large equipment manufacturers will require their chip suppliers to have multiple sources. "I think in those cases, we will have to find multiple sources for the same chip if the business warrants that," said Rick Tsai, CEO of MediaTek. His words echoed with an announcement the company made in July, saying it has formed a strategic partnership with Intel and planned to produce some chips in Intel's fabrication facilities.

Third, TSMC's advances in the US may be connected with its current operating conditions, as suggested by Caijing Eleven.

Over the past month, the chip giant has seen major order cuts from its top clients, such as Apple, Qualcomm, Nvidia, and MediaTek. MediaTek has reportedly reduced 20 percent of its orders, while Apple has canceled 40 to 50 percent of its orders of A15 and A16 high-end chips. Due to order cuts, TSMC has encouraged employees to take vacations and shut down four extreme ultraviolet (EUV) lithography machines to cut production.

The market is indeed at a low ebb: According to Jefferies, a U.S. investment bank, the launch of iPhone 14 failed to save the dimmed market, and the sales of iphone in China fell by 27 percent (in the week of Oct. 24), a third successive week of increasingly steep drops. In the third quarter, Both Samsung and Xiaomi saw their global shipments drop around 8 percent year on year, Oppo and Vivo suffered a decline of more than 20 percent, and Honor's shipments in the Chinese market also fell by 17 percent ...

So even TSMC has reported record-breaking quarterly revenue growth for the third quarter, the market sentiment remained gloomy. So far, the market capitalization of TSMC fell from over 700 billion U.S. dollars at the beginning of 2022 to over 400 billion U.S. dollars now, a drop of over 40 percent. According to Barron's, a magazine published by Dow Jones & Company, Goldman Sachs kept a Buy rating, but it has removed TSMC from the firm's Conviction List, and analyst Bruce Lu cut the price target on TSMC's ADRs (American Depositary Receipts) from 126 U.S. dollars to 89 U.S. Dollars. The move was reported to reflect TSMC's weakened profit outlook and rising uncertainties in demand.

"The company won't be in full production in the fourth quarter, as compared to the same period over the past three years," said Wei Zhejia, president of TSMC, on the day TSMC announced its financial earnings for the third quarter of 2022. Wei also predicted that the semiconductor industry will enter a downturn in 2023.

With gloomy expectations in 2023, TSMC is under even more pressure. Clients from North America make up over 70 percent of TSMC's revenue, while only eight percent of the revenue comes from China's mainland. Therefore, TSMC doesn't really have a big say when negotiating with the U.S. government and the U.S. customers. As a commentary by AloTRay (a tech company based in Beijing) pointed out, TSMC can't push back even during a strong stage, which means leaving Taiwan for the US will be inevitable when the company enters a downturn.

How did the transfer turn out so far?

In a recent cover story titled "First-hand from TSMC's chartered flight, A disclosure of U.S. semiconductor war 直击台积电300人包机，揭开美国淘晶战争," Taiwan's Business Weekly reported that TSMC sent 300 employees and their families to Phoenix, Arizona. They were just the first batch of engineers, and another six chartered planes will send more than 1,000 engineers from Taiwan to Arizona in the future, according to Business Weekly.

"People are circulating a screenshot on PTT(the largest online bulletin board system in Taiwan)," said Buyidao (a WeChat account affiliated with the Global Times), adding that the first batch of TSMC engineers to the U.S. found out that they were reduced to "second-class citizens" once they started working in the US.

Screenshot of a post on PTT. PTT is also seen as Taiwan's equivalent of Reddit (Translated by GRR)

Compared with their U.S. counterparts, engineers from Taiwan have fewer vacation days, more workload, and fewer salaries, as shown in the screenshot.

Before the Arizona plant started operation, a bunch of U.S. engineers were sent to TSMC's plant in Taiwan for a year of training. When they returned to the US, many Taiwanese employees also expressed their dissatisfaction on the website, according to Buyidao.

Some complained on PTT that the U.S. engineers earned more, even with less workload and less education background. When the U.S. employees ran into tech problems, all they knew was to turn to Taiwanese colleagues. Some local employees thus called their U.S. counterparts "grown-up babies." There were also posts saying that though TSMC banned smoking indoors, American engineers did it anyway, so "the area from the dormitory to the food storage room was full of smoke."

How did different sides view the transfer?

When former U.S. House of Representative Speaker Nancy Pelosi visited Taiwan in August, Morris Chang told her in stark terms that Washington's efforts to rebuild chip manufacturing at home were doomed to fail, said Financial Times in an article published in late October.

Frank Huang, chairman of Powerchip Semiconductor Manufacturing Corporation (PSMC) and former chairman of Taiwan Semiconductor Industry Association, didn't believe the US would be able to reconstruct the semiconductor supply chain either, according to Business Today.

In his interview with the magazine, Huang said that Taiwan would remain a pioneer in the industry, as the labor cost is much lower than that of the US. He noted that Taiwan has a large number of engineers dedicated to hardware, adding, "this is Taiwan's advantage that makes it irreplaceable because the semiconductor industry is more than burning cash and buying equipment."

Taiwanese officials and analysts have claimed several times that although TSMC are building fabs in the US, Taiwan still has an edge in semiconductor technology. Wang Mei-hua 王美花 , a senior officer in charge of economic affairs in Taiwan, said that TSMC's plant with 5-nanometer process won't start mass production until 2024. However, TSMC has done a pilot of 3-nanometer chips mass production at the Southern Taiwan Science Park, and a plant with 2-nanometer process technology is under construction in north Taiwan's Hsinchu, and relevant departments have gotten the land ready for TSMC to build a plant with 1-nanometer process technology.

"We will keep TSMC's most advanced technology on the island," Wang said.

Joanne Chiao 乔安, senior semiconductor analyst with TrendForce Corp estimated that Taiwan will account for approximately 48 percent of global wafer production capacity and 58 percent of the world's capacity for advanced process chips in 2022, which means Taiwan still remains a global leader in advanced semiconductor manufacturing processes.

But some media questioned the arguments above.

"The US is to swallow TSMC like a crocodile, but the Democratic Progressive Party (DPP) is too weak to fight back, so it treats TSMC as a bargaining chip," commented China Times, one of the largest newspapers published in Taiwan. According to other Taiwanese media, the U.S. sells Taiwan out-of-date arms, but the DPP offers the US the most advanced 3-nanometer process technology in return, which blatantly betrays Taiwan to fawn over the US.

Hong Kong China News Agency pointed out on Nov. 22, TSMC will be "Americanized", and no one knows for sure that the US won't decouple Taiwan from TSMC one day.

"In the face of the 'chip war' launched by the US, China's mainland is striving to achieve high-level self-reliance in science and technology, which would provide wide space for the development of the semiconductor industry," said the official WeChat account of Reference News, a Chinese newspaper run by Xinhua News Agency. The article also pointed out that TSMC and the semiconductor industry in the China's mainland could have complemented each other well. But now TSMC turns a blind eye to such an enormous market close at hand, and chases something far away instead. "The move would hurt the company and definitely not a wise call," Reference News commented.

"The U.S. is eating up TSMC step by step," according to Buyidao. Urging TSMC to move some of the semiconductor manufacturing onshore is a step the US took to decouple the semiconductor supply chain with Taiwan. The article said that the US clearly places its own geopolitical interests before Taiwan.

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Where does the road lead?

How would an increasingly "Americanized" TSMC and the U.S. strategies aimed at bringing in semiconductor talents affect the chip industry of China's mainland?

Caught up between China and the US, there is little strategic room for TSMC, an expert told Buyidao.

TSMC understands clearly the close connection between China's mainland and the global semiconductor industry and supply chains. In the semiconductor industry, no company could ignore China's mainland due to its unique position.

Buyidao noted that as the US keeps raising questions of national security in the chip sector, more companies will face TSMC's dilemma, and then it will inevitably weigh on the chip industry in China's mainland. But no matter how the external environment changes, the mainland should focus on ensuring and further optimizing existing technology and investment plans. This is the key to overcoming challenges and securing sustainable growth.

As the US steps up the ban on semiconductor exports to China's mainland, adding the unique geography of Taiwan Island, there might be a lot more storms for TSMC to sail through. Enditem

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Please note that GRR’s articles do not represent any official document or views, as this is just a personal newsletter. If you find any errors, please send me an email: jjiang.sisu@hotmail.com.

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Leaders of the APEC economies issued a declaration and the Bangkok Goals on the Bio-Circular-Green Economy on Saturday. Xinhua published a commentary on the same day saying that the APEC’s long-term blueprint of building an "open, dynamic, resilient and peaceful Asia-Pacific community by 2040" is “highly compatible with China's proposal of building an Asia-Pacific community with a shared future of openness and inclusiveness, innovation-driven growth, greater connectivity, and mutually beneficial cooperation.”

Ginger River believes that the recent G20 summit in Bali, the APEC meetings in Bangkok, and the Qatar World Cup 2022 all seemed like good ways for the world to end a rough year.

Today's post discusses the new Twitter CEO and sole director Elon Musk's vision for “Twitter 2.0.” Musk sent a companywide email to the remaining employees of the social media business on Wednesday, demanding they commit to working “long hours at high intensity” or receive “three months of severance,” if they did not consent to these conditions, or support his vision for “Twitter 2.0”, according to CNBC.

For people in the US and maybe most western countries, online services are scattered in different apps. People do business with clients over emails, hail a taxi on Uber, share their lives on Instagram or Twitter, and the list just goes on. While in China, almost everything can be done on one single app — WeChat. From workplace to social space, from booking flight tickets to paying vendors on street corners, WeChat is the go-to app. And almost everyone got their health code checked on WeChat before entering a public building.

Screenshot of one of WeChat's user interfaces (English version)

It's not that people don't use other apps or there are no other vertical apps in China. It's just that online services are generally more compact, and WeChat is an iconic "app of everything."

Therefore, when Twitter's new owner Elon Musk said, "buying Twitter is an accelerant to creating X, the everything app," many believe Musk got his inspiration from WeChat.

Elon Musk wants to offer Americans an ‘everything app’ like China’s WeChat. One hurdle? Habits -- Fortune

For months, the Tesla and SpaceX CEO has expressed interest in creating his own version of China’s WeChat — a “super app” that does video chats, messaging, streaming and payments — for the rest of the world. At least, that is, once he’s done buying Twitter after months of legal infighting over the $44 billion purchase agreement he signed in April.

Elon Musk’s plans for Twitter may take inspiration from Chinese super apps -- CNBC

Musk may be hinting toward so-called “super apps” which are popular in China and other parts of Asia and pioneered by the likes of Chinese technology giant Tencent.

Chinese app WeChat, run by Tencent, is the biggest super app in the world. Musk previously called WeChat “great” and said there is an opportunity to create an app like that outside of China.

Technically speaking, putting multiple functions in one app is not something hard. The truly tricky part is how to get people actually to use the functions.

Hitherto, Internet giants like Meta and Google have tried to make the super app, but with little success. So the question is, how come there is never a successful "all-round" social media platform like WeChat in the US? What does Musk need to notice when turning Twitter into a super app? Why would he be so determined to take this uphill battle?

The struggle of "super apps" in the US

"Elon Musk is thinking about a super app like WeChat Pay," said Catherine Wood, the founder of ARK Invest at the Web Summit in Lisbon, Portugal, on November 2. She further explained that Twitter might be more like a "digital wallet" in the future.

A few years ago, Facebook founder and CEO Mark Zuckerberg also openly praised WeChat's powerful functions.

Mark Zuckerberg says he should have listened to earlier advice about learning from WeChat (Mar. 11, 2019)

Facebook founder Mark Zuckerberg said he regretted not taking note of China’s super-app WeChat sooner after his social media empire announced a shift to private messaging last week amid a privacy crisis, in a move that copies features of China’s dominant social media platform.

“If only I’d listened to your advice four years ago,” Zuckerberg wrote on Facebook on Friday in response to Jessica Lessin, founder of tech media The Information, who highlighted a March 2015 article she wrote that suggested Facebook should learn from WeChat.

Zuckerberg announced last week that Facebook planned to transform itself into a privacy-focused platform. With a focus on private messaging, it would “build more ways for people to interact on top of that, including calls, video chats, groups, stories, businesses, payments, commerce, and ultimately a platform for many other kinds of private services,” according to Zuckerberg’s post on Thursday.

In addition to Facebook, Instagram, and Twitter, other social networking platforms such as LinkedIn and Reddit are also popular in the US. Each has unique features and targets different users. Despite being the cradle of many internationally famous social networking platforms, the US has never had a "super app" like WeChat.

The Global Times special correspondent interviewed people randomly on the street in the US. Some believed that considering the US already got a bunch of mature social networking platforms, Musk's "WeChat plan" might not stand out unless he does something extraordinary.

"Google, Snap, TikTok, Uber and others have also tried to jump on the super app bandwagon, expanding their offerings in an effort to become indispensable to people as they go about their day," the Associated Press commented, pointing out that none have set the world on fire so far.

Why is it so hard to build a successful super app in the US? "The primary reason may be 'the pioneer's curse'," said Wang Xin 王昕, Ph.D adviser of Adverstising School of the Communication University of China, and deputy director of the National Institute of Advertising, in an interview with Global Times.

"The earlier a country or region adopts new technologies, the harder it will be for the place to "accept subsequent life changes led by technologies," Wang explained, adding that as the cradle of the Internet, the US was the first to enjoy the convenience of extensive Internet connectivity, which also "formed relatively fixed user habits." As a result, people would subconsciously reject changing their habits as technologies upgrade, according to Wang.

"Old habits are hard to break, and people in the U.S. are used to using different apps for different activities," said Jasmine Enberg, principal analyst at Insider Intelligence.

Moreover, Wang thinks that the basis on which the Internet-based social service system operates is different in China from that of the US. For example, in the US, people rely on e-mails to communicate with others in the workplace. But China just leapfrogged the era where Internet connectivity is done via computers, and went straight into mobile apps. Therefore, the chatbox of WeChat beats e-mails to become the number one communication tool in the workplace. It also dominates private social networking.

The third reason are the barriers set by other Internet giants already in the game. The Internet-based social service system is developed in the US, with a dominant player in each market segment. These companies dive into different sub-fields and have different business models. There are clear boundaries between their businesses. If one is to build a super app, he must break the current business landscape and rewrite the game.

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Musk's move may reshape the competitive landscape

"Twitter has its own strengths. It entered the industry early, and stay focused. So, Twitter is still very influential in the political realm in the US," said Xiang Ligang, director-general of Information Consumption Alliance, when discussing the development of Twitter in an interview with Global Times.

"But compared with Facebook and Instagram, Twitter lags behind in aspects like technological upgrade," said Xiang, adding that judging from the standard of its Chinese counterparts, Twitter's integration capability is far from satisfactory.

In contrast, WeChat's rapid advance in China owes credit to the "social networking plus" strategy. It fostered user habits through social behaviors, and built user stickiness.

Then, by providing information and payment services through social networking, WeChat gradually connected itself to more and more consumption scenarios. In Wang's view, WeChat's accomplishment is not directly related to new functions that its Parent company Tencent has developed. But WeChat captured the pain points in user experience and customer needs. And the product managed to creatively meet the customer needs that were not fully satisfied.

Therefore, Wang doesn't think Twitter should copy WeChat's functions directly. The point is to figure out what needs in the US are not satisfied yet. Otherwise, Twitter's transformation would provide nothing more than a juicy story at the dinner table.

"If a super app does take off in the US, it would be tantamount to having 'babarians at the gate' in the Internet industry, which means the landscape, business divisions, and target users would all be reshuffled," said Wang.

In addition to technologies and the underlying logic, Musk should also take cultural mentality into consideration when he builds the "super app." For example, Both Musk and Zuckerberg extol online payment services, and there're many online payment apps available in the US, but the number of people using the service is quite limited. Many Americans today still prefer checks, because they have doubts over the security of e-payment. Moreover, Americans are more sensitive to financial privacy, and concerned that an "omnipotent" app will expose their information to third parties.

"Transforming Twitter into a WeChat-like super app would be a massive undertaking for Musk," said Enberg in an interview with ABC News, according to Business Insider, "Changing consumer behavior is hard — something that Meta (then Facebook) quickly discovered during its own super app ambitions."

"Twitter probably accelerates X by 3 to 5 years," Musk tweeted in October, "but I could be wrong." CNN also pointed out that the transformation of Twitter would be an "uphill battle."

Paving ways for an ecosystem in the future

As for Musk's intention to buy Twitter, many believe there are political unertones, including restoring former President Donald Trump's banned account. But in a recent tweet, Musk hinted that the ban on Trump's account would not be reversed before U.S. midterms.

According to Financial Times, Musk made efforts to appease nervous advertisers. In a letter entitled "Dear Twitter Advertisers," he wrote, "Twitter obviously cannot become a free-for-all hellscape where anything can be said with no consequences!" Despite Elon Musk’s attempt to hold onto advertisers, brands including L’Oreal, General Motors, and Audi have withdrawn from Twitter in recent days.

Musk first announced his bid to take over Twitter in April, according to Marketing Week, and he also wanted to reduce the reliance on advertising. However, as the billionaire learned more about the platform, his attitude towards advertising seems to be softening.

Advertising has been a major source of revenue for Twitter and most other social networking platforms in the US. In Twitter's second quarter (Q2) financial results released in July, advertising revenue accounted for over 90 percent of Q2's total revenue. In the fiscal year of 2021, the company generated around 4.5 billion U.S. dollars of advertising revenue, accounting for nearly 89 percent of the total sales.

Thus Musk cannot ignore the importance of advertising to Twitter. However, the fierce competition in the industry and the high inflation rate in the U.S. put tremendous pressure on the digital advertising business of social platforms.

"Ad sales figures from the likes of Snap and Meta would suggest that this tightening has begun to take place," said Marketing Week, pointing out that advertisers face a lot of uncertainty in the future.

Wang believes that in addition to explicit political purpose and commercial interests, the greatest value for Musk's takeover is to prepare for the future intelligent ecosystem. In the era of the Internet of Things and intelligent media, Twitter may continually bring companies user data collected from users' social behavior. Meanwhile, Twitter can become a platform where other products from Musk's business empire exchange user information and resources. For example, Twitter can be a default app in the networking of cars and Starlink, the satellite internet constellation operated by SpaceX. In this way, Twitter may become the hub connecting different systems.

Co-hosted by China EV100 中国电动汽车百人会 and the government of Jiangning District in Nanjing, the capital of east China's Jiangsu Province, the "2022 Conference on Innovated Global Supply Chain of NEV and ICV " kicked off on September 6.

Miao Wei 苗圩, the deputy director of Economic Affairs Committee of the Chinese People's Political Consultative Conferencee (CPPCC) and former head of Ministry of Industry and Information Technology addressed the event.

Today's piece is a translation of Miao's speech at the conference.

In the speech, Miao expressed his concern over the operating system (OS), calling it "a more urgent and fatal issue than chips, and it is the key to success for intelligent vehicles and Vehicle-to-Everything(V2X)," adding that though the landscape of global intelligent vehicles is still up in the air, the window left for China is about three years, five years at most.

Miao also elaborated on the relationships between chips and OS, and talked about how progress made in OS may help China out of the current semiconductor predicament.

Beware that the following speech was notes taken by guancha.cn, a Chinese news site, at the event, and the content and GRR’s translation have not been reviewed by the speaker.

The topic of my speech today is "on Key Issues Facing the Automobile Supply Chain."

Due to the impact of COVID-19 and geopolitics, the supply chain of NEVs and intelligent connected vehicles (ICVs) has undergone a sea change in recent years. The change will deepen further, as shortening the supply chain and suppliers participating through block chain will be the future. The supply chain is no longer an economic issue. It is under the influence of multiple political factors. However, whatever the changes, the supply chain will remain close to the market and close to factories.

China is the largest automobile market, with annual production and sales accounting for about one-third of the global total. And for years, more than half of the total NEVs are produced and sold in China. Therefore, we are fairly confident in building the supply chain of NEVs and ICVs in the country. This landscape will not bend to the will of certain politicians. After all, the law of economics is the deciding factor here. In terms of NEVs, China's production and sales both exceeded 3.5 million from January to June, about 1.6 times higher than that of last year. We thus predict that the figure will reach 5.5 million at the end of 2022, up 56 percent year on year. Previously, our mid- and long-term goal for the industry was to reach a penetration of 20 percent by 2025. Now, it seems that this target will be achieved this year, three years in advance. Meanwhile, the automobile industry is experiencing the biggest change ever since its birth a century ago. In fact, the industry is nearly 140 years old.

How will the change take place?

As for vehicles, I personally think the main direction lies in the transition to electric vehicles and intelligent vehicles. Why the V2X is left out? Because for NEVs and intelligent vehicles, V2X is a tool to empower the products and to promote the transition, and China will catch up with Western developed countries if we set a common goal and work towards it. For example, we got advanced 5G services for ICVs, and the biggest setting for 5G services is for Business (B2B) rather than for consumers (B2C). As for B2B, the largest market is the Internet of Vehicles (IoV). So we should make full use of our advantages in this respect.

As for smart cars, other countries don't have [favorable] conditions and all the problems must be solved by car makers themselves. Equipping all vehicles with cameras so that at every crossroad the cars monitor the surroundings is neither economic nor efficient. If we build Road Side Unit (RSU) at a crossroad, it will be more effective and reduce the cost of application for the whole society. Indeed, we have to face investment in the early stages. But our strength lies in the V2X, as China is able to cooperate roads with vehicles. Local governments and companies from different industries may gather around to solve problems in the transition to intelligent vehicles, instead of tossing everything to car makers like some western countries do.

In promoting NEVs, the construction of public charging piles help us solve the difficulties of charging, and local governments at all level played a vital role. If it weren't for their efforts, we couldn't have built over 2.6 million charging piles, especially over 1 million public charging piles, in such a short time. Of course, this is not enough. We must keep exploring this path, a path proved by past practice that it is to our institutional advantage. So we must carry it forward in future development.

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For the supply chain of NEVs, let's pay attention to chips first.

Regarding the development of chips, chips for consumers hold high standards and the biggest demand for advanced chips, with chips used in smart phones as an example. However, smart cars are equipped with chips only secondary to ones for military use. They must operate in a worse environment compared with chips for consumers and chips for industrial use, and must have a longer lifespan. Moreover, in addition to the general standards, automotive chips must adapt to a series of automobile standards. For example, to test the reliability of chips, we usually use the AEC-Q100 standard, which is generally used in North America. To control the failure rate, we must establish a quality control system for chip makers, in other words, the IATF-16949 standard. This is a standard that automotive chips must meet as we are in line with the international standard now. For functional safety, ISO 26262 is another standard needed for certification. Therefore, there are more requirements for automotive chips, and the time needed for certification is longer.

In addition to chips, I would like to talk about software. In the era of computers, the Wintel alliance dominated the industry. Most PCs around the world operated on the Windows operating system. In the transition from traditional phones to smart phones, Apple Inc. created a closed-source operating system called iOS. In response, Google Android, an open-source operating system free of charge. Thus, in the era of smart phones, Apple occupies 10 to 20 percent of the market share, while the rest of the world's mobile phone companies go with the Android system.

In the past, I saw no problem in using an open-source operating system. However, the US began to clamp down on Huawei two years ago. Besides ceasing the chip supply, it also restricted the use of Android operating system. Instead of restricting Huawei's access to the Android OS, the US limited Huawei's use of apps that are operating on Android OS. As a result, Huawei had to equip smartphones with its HarmonyOS, an operating system originally for industrial use. In this way, Huawei managed to continue the service for customers. Otherwise, it couldn't maintain its customers even in China. But Huawei still lost huge swathes of the overseas market.

From the lack of OS for mobile phones, we are keenly aware that in the transition to intelligent products, without [reliable] OS, no matter how advanced the chips or automobiles are, the gains would be like a mirage. But if we don't overcome the challenge of chipmaking and building an independent OS, we cannot go fast or far.

For the second part, I'd like to share my views on the development of the automotive chip supply chain.

Let me briefly introduce China's chip development in recent years. In terms of design, manufacturing, packaging and testing, chip design companies have made the fastest progress these years with the development of smart phones. Hisilicon 海思 of Huawei has made it to the world's top ten fabless integrated circuit companies. As I remember, it ranked fifth in its best record. Spreadtrum Communications 展讯 and RDA Microelectronics 锐迪科 also ranked among the world's top ten at one time. [GRR: It is Unigroup that made it to the top 10 in 2017. But Unigroup acquired Spreadtrum and RDA in 2013 and 2014 respectively.] Unfortunately, after the US began to suppress Huawei, Huawei cannot make it to the top 10. Even if chips can be designed, no company provides tape-out and manufactures the chips for Huawei. Nevertheless, it's an indisputable fact that we have made fast progress in design capabilities.

In terms of countries, the US ranks first in chip design, with a market share of 68 percent, according to last year's statistics. Ranking second and third are China's Taiwan region and the Chinese mainland, with market shares of 16 percent and 13 percent, respectively.

As for packaging and testing, China has a strength, and the smallest gap with the world's leading level. Of the world's top ten packaging companies, five are located in Taiwan, and three in the Chinese mainland. The three companies are JCET Group 长电科技, TongFu Microelectronics 通富微电 and Tianshui Huatian Technology 华天科技. The other two are located in the United States and Singapore.

We have met resistance in the tape-out of advanced chips. A solution is to package different types of chips together, which would address our weaknesses in advanced chips to some extent. This is also the mainstream of the international chip industry.

Tape-out is the process that we are left far behind. The best we can manufacture is 14 nm process chips. And because the US ordered the Dutch company not to export EUV lithography machines to China, we are hampered in making more advanced chips. Although advanced chips are important, its current market share is still small in the global market distribution. The chip shortage that we suffered in recent years are mainly chips with 28 nm process and above, ranging from digital electronics, analog electronics, power semiconductor devices to sensor chips. Therefore, we must consolidate existing advantages first. Since we are not only curbed in the development of advanced chips, the insufficient production capacity for 28 nm chips and above is also a problem. Therefore, we are investing heavily to scale up the production of 28nm and more mature processes

Regarding automotive chips, a small number of AI chips are need in CPU and GPU. It's best to have advanced chips. But if not, there remain other solutions. In terms of the total amount, only a small proportion of automotive chips are advanced chips, and the majority is chips manufactured at mature nodes.

For vehicles, with the development of NEVs, the electrical/electronic (E/E) architecture shifts from decentralized ECU control to a newly designed platform that has centralized domain controller. Looking ahead, we will move towards building Central Vehicle Controller (CVC) on the basis of domain controllers. And every step towards centralization will promote the efficiency of automotive chips. Many chips cannot give full play to the on-board computing efficiency due to decentralized control and domain controller. Therefore, the future of vehicles is about marching towards the centralized computing architecture from domain controller. The trend has already been brought up a few years ago, and it's an upward slope.

On this basis, China must make forward-looking overall planning for cloud control platform. Many chip companies participated in the discussions this morning. I said that we all pay attention to the automotive chips used on automobiles. Recently, the U.S. Department of Commerce imposed restrictions on Nvidia's export of GPU chips to China. Why GPU chips but not Nvidia's Orin chips? Yu Kai [the founder and CEO of Horizon Robotics] later told me that Nvidia's GPU chip is vital for training AI systems, so the US is targeting the vitals. What I'm trying to advocate is that other than focusing on automotive-grade AI chips, we also need to draw attention to training AI chips in the cloud.

Regarding the coordinated development of car companies and automotive chips, I think that car makers should shoulder the responsibility of the "chain leader". This morning, a speaker mentioned this issue. Car manufacturers basically didn't care about chips in the past. And the chip selection and matching were accomplished by first tier and second tier suppliers. The matching of system-level chip used in our power system is also finished by world-renowned parts suppliers according to the system. Therefore, a car company is basically a user. Nowadays, a car company does not necessarily have to make chips, but it must understand chips. Car companies must have overall thinking on cross-industry alliance and cooperation for companies' development and chips' future. Only in this way can we build a healthy environment for the industry.

Above is some thoughts on automotive chips I'd like to share with you.

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Third, I would share my views on the development trend of automotive OS.

As mentioned earlier, the electrical/electronic (E/E) architecture of the vehicle witnessed a change from distributed architecture to a centralized one. The software on cars has also evolved from the embedded software to the full-stack software development. The OS links the internal management and external interaction.

The development trend of the full-stack OS is crystal clear. Some car makers are dedicated to creating their own full-stack OS. I think it is all right for some capable car manufacturers.

However, I'll use the smartphone example again. Back then, Samsung had its smart phone OS, and Nokia had Symbian too. However, almost all mobile phone manufacturers in the world choose the open-source and free Android OS except for Apple. Now, Android is marching into the vehicle system of smart cars. Next, it will further penetrate into the operating system and the chassis system. I'm worried that the smart phone industry's today will be the tomorrow of the automobile industry in several years to come. Smart cars all over the world will be equipped with an open-source, and free OS. Once the ecosystem is in shape, the industry will operate under the Law of the jungle where the winner takes all. As in the mobile phone industry, there will be the number one and number two operating systems and no others. Tesla has decided to ditch AutoSar. It writes its own codes to build a closed-source OS, as Apple did years ago. Apart from Tesla, there will be one to two companies at most. Without the producing and selling millions of vehicles, neither autonomous driving software nor apps for customers will adapt to your niche OS. Companies will prefer large OS with the largest number of users. That's how things work and there is no other way around. Google is not offering pro bono services. Though it does not charge users directly, all apps operating on the system must be certified by Android and pay some fees. This is the logic of the Internet.

Nothing comes for free. Therefore, building OS is more urgent than making chips for the automobile supply chain.

Chinese car companies are fully aware of the serious impact of chip shortage on development, but few realize that the lack of OS will be fatal too. But the bright side is that we may achieve the decoupling of hardware and software through OS. An OS can adapt to several heterogeneous chips, not to mention homogeneous chips. It can adapt to the same type of chips produced by different manufacturers. This decoupling at the underlying layer of OS won't be a problem. As multiple devices can be plugged into computers, the future is the same for chips. Therefore, developing OS may help us with the predicament of advanced chips to some degree. Fortunately, the global landscape of intelligent vehicles is not settled yet. The time window for China is about three years, or five years at most. If we fully understand the importance here and put in three years of efforts to build an independent OS, an open-source and preferably free system controlled by us, China will form its own industrial ecosystem. After all, China accounts for one third of the world's NEV production. If we expand that figure to more than half of the world's total, then every move from China will have a global influence on industry. Let's dream big, China may have the opportunity to lead the global automotive OS, as we did with 5G.

There is another important issue when it comes to OS and chips. For a long time, there is a lack of coordination between software and hardware in the development of electronic information, chips and software. People focusing on hardware and those on software never really communicate with each other. When a problem arises, each side points a finger of blame at the other. Let’s take a look at the international development trend. In the age of computers, there was the "Wintel alliance." In the age of smartphones, there were Android and ARM Alliance. Thus, in the age of automobiles, we must address the problem that has been long ignored, which is the coordination between software and hardware from the outset. Two sides complementing each other will bring us to a win-win situation.

Finally, under the premise of opening up, we should not seek 100 percent independence, as it is unscientific, uneconomical, and impossible. We must step up in opening up to the outside world, and welcome foreign OEMs (Original Equipment Manufacturer), chip companies, and software companies to invest in China.

We shall work together to share the dividends of China's automobile development. Indeed, we cannot carry on the previous practice of voluntarily integrating into the global development, and participating in the international division of labor after we joined the WTO, as the US won't stop curbing and suppressing China. So we must have a plan B. We do not pursue 100 percent "made in China", but we must prevent a lethal blow against our fastest growing industries and most promising enterprises at critical moments. So we must take precautions in building an independent OS, and pursue a development model that combines both hardware and software. Moreover, car companies should take the lead in the process.

That's all for my speech today. Thank you!

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Earlier this month, Xinhua News Agency released an English commentary arguing the U.S. chip bill is good for no one in response to The Chips and Science Act signed by U.S. President Joe Biden on August 9.

Today's post brings you a piece on the "chip battle" between China and the US. The original article was posted on Aug 16 by 巨潮WAVE, a Wechat blog dedicated in offering investors information. In four parts, the piece shares some ideas about how China's chip industry thrived in the past decade, what role Taiwan plays in the battle, what moves the US has made against China, and where the future lies for China.

The original title is 中美芯片，围剿与反围剿 The battle over chips between China and the US.

The anti-corruption campaign is making huge strides in China's chip industry. Related figures, including the current and former general managers of large foundations, heads of departments, and even many senior executives of Tsinghua Unigroup are under investigation.

Meanwhile, the global chip industry is also going through turbulent days. U.S. President Joe Biden signed the CHIPS and Science Act of 2022, the most important document in this eighty-year-old man's life. According to the act, the U.S. government plans to pour 52.7 billion U.S. dollars in chips.

The US made it clear that it will continue to reinforce its "dominance in science and technology", and it will curb and even halt China’s technological progress. "And that's going to help America win the economic competition of the 21st century ... " said Biden on the same day.

Just a week ago, U.S. House Speaker Nancy Pelosi visited Taiwan, casting a shadow over the region. In her hurried trip, This "No. 3 figure in U.S. politics" arranged a meeting with the chairman of TSMC, underscoring the importance of the world’s largest chip manufacturer.

As you can see, chip is the “atomic bomb” of this era, the high ground that great powers fight over, and the battleground of the tech war.

At present, the international situation is fickle. The U.S. chips bill foreshadows the accelerated decoupling of participants in the global industrial chain, of which the chip industry is an example.

Chinese chip, together with the nation's fate, reaches the crossroads of the times. This is a grand war without smoke.

01

Eight years of thriving

The "Big Fund" (China Integrated Circuit Industry Investment Fund) was established in 2014. After eight years of painstaking efforts, China's chip industry has made huge progress.

The "Big Fund" is the largest industrial fund in China by far. It initially raised 138 billion yuan (about 20 billion U.S. dollars) and was mainly spent on IC design (integrated circuit design) and wafer manufacturing. The second phase of the fund raised over 200 billion yuan in 2019, focusing more on components of the upstream, such as equipment of semiconductors and materials.

Compared with the chip subsidies proposed by the U.S. government, the Big Fund runs under the investment guidance of "market-oriented operation and professional management." Besides supporting many competitive Chinese chip enterprises in sub-segments of the chip industry, the fund also made considerable investment returns.

Not long ago, the Big Fund gradually withdrew from its first-phase projects, and invested in second-phase projects, forming a virtuous circle. This confirms that many chip companies have passed the early stage when they needed a “helping hand”.

For example, GigaDevice 兆易创新 is now ranked as the third largest NorFlash enterprise in the world and dominates Hefei Changxin 合肥长鑫, the leader of DRAM (dynamic random access memory) manufacturing in China. GigaDevice earned a place in the mainstream market, and is no longer a marginal player.

Memory chip has always been a weak spot for China’s semiconductor industry. Yangtze Memory 长江存储 and Hefei Changxin 合肥长鑫 made the first step in making memory chips. At the end of 2020, Yangtze Memory became the world’s seventh largest NAND Flash maker. Moreover, according to the expansion plan, Yangtze Memory will raise its market share to six percent. Thus breaking the monopoly is just around the corner.

SMIC and Hua Hong are the fifth and sixth largest chip foundries in the world, respectively. Combined, the two companies take up nearly nine percent of the market share. While the semiconductor industry moved into a downward phase, the performance of SMIC was the best in its history. In the first half of 2022, SMIC achieved revenue of 3.745 US billion dollars, a year-on-year increase of 53 percent. Its net profit assigned to the parent company was 962 million US dollars, growing by 14 percent compared with a year earlier. In the second quarter, revenue from the Chinese mainland and Hong Kong accounted for nearly 70 percent of the total. Domestic substitution and the rise in the price made SMIC swim against the tide.

SMIC is the pillar of chipmaking in the Chinese mainland. The technology for producing 7-nanometer chips is already in place, the only piece missing is the Extreme Ultraviolet Lithography (EUV) machines. However, due to a lack of high-end lithography machines and EDA (electronic design automationsoftware), SMIC is limited to the 14 nm process or less.

Therefore, chipmaking in the Chinese mainland needs a breakthrough in domestic semiconductor equipment if any progress is to be made. Recently, Shanghai Micro Electronics Equipment 上海微电子 said that it has the hope of deliveribg domestic lithography machines for the 28nm process this year. Though still generations behind the 7nm process and the 5nm process, progress is visible.

Furthermore, the Big Fund has also invested in JCET Group 长电科技, the world’s third largest packaging and testing company, domestic equipment leaders NAURA Technology 北方华创, and AMEC 中微公司, two companies from which Yangtze Memory purchased etching, heat treatment, and other equipment.

After eight years of efforts, China’s chip industry chain has thrived. Domestic substitution is steadily underway, and great strides have been made in corporate competitiveness and performance. The Big Fund plays a significant role in these achievements.

Therefore, no one can deny its accomplishments despite drastic changes in the personnel of the Big Fund and chip manufacturers. The rise of China's chips will not be impeded. The future ahead is bumpy yet promising.

Meanwhile, we should be soberly aware that compared with the United States, Japan, South Korea, and the Taiwan region, the mainland's capability in the chip industry is still weak. The gap is still wide, especially for high-end chips.

But little steps will accumulate over time to build big things. At this moment, we must remain faithful, no matter what happens.

02

The indispensable Taiwan

The significance of chips produced in Taiwan Province can be seen from the import and export data.

In 2021, the Chinese mainland bought 1.6 trillion yuan worth of goods from Taiwan, of which chips accounted for 62 percent, reaching more than one trillion yuan.

Taiwan has always been the largest source of chips for the mainland. Last year, the mainland's integrated circuit imports reached 439.7 billion U.S. dollars, among which Taiwan is ranked first, accounting for more than one-third (about 36 percent) of the imports. South Korea is ranked second with one-fifth of the imports, followed by Malaysia, Japan, Vietnam, the US, and the Philippines.

The mainland may be geographically close to Taiwan Province, but they are poles apart in terms of their respective status in the global chip industry.

The global chip market is basically dominated by the US, Japan, South Korea and the Taiwan region. Taiwan's semiconductor output value is second only to that of the US. Taiwan is the undisputed number one in the world in terms of foundries, packaging and testing, the runner-up in IC design. Its prosperity in chips is attributed to the flourishing of the whole industrial chain. In particular, Taiwan Province is the absolute leader in the most difficult and most exquisite manufacturing process.

TSMC dominates the foundries, occupying 54 percent of the global chip manufacturing market share. Such a market share can almost be called a “monopoly” in any market-oriented industry.

In the field of advanced semiconductor device fabrication, TSMC is an absolute leader. Only TSMC and Samsung are capable of producing chips with transistors of 5 nanometers or less, and 92 percent of the world’s chips with a process of 10nm and below are provided by TSMC. TSMC chips are used in the products of tech giants such as Apple, AMD, Qualcomm, Nvidia, and Intel.

Morris Chang [the founder of TSMC] once “insinuated” that the mainland could never make high-end chips, and this is the key reason. SMIC, the most advanced chip manufacturer in the Chinese mainland, has been putting off the mass production of 7nm chips, while TSMC has began the adventure into 2nm process.

In addition to TSMC, Taiwan’s chip foundries include UMC 联电, Powerchip 力积电 and Vanguard International Semiconductor 世界先进, which rank 3rd, 7th and 8th in the world, respectively. Together, they account for 64 percent of the world’s market share.

As for IC design in the upstream, Taiwan is second only to the US, with MediaTek 联发科, Novatek 联咏 and Realtek 瑞昱 ranking fifth, seventh, and eighth in the world, respectively.

As for testing and packaging, half of the world's top ten companies come from Taiwan, including ASE Group 日月光 (including SPIL 矽品), Powertech 力成, King Yuan Electronics 京元电子, ChipMOS Technologies 南茂, and Gubang Technology 顾邦科技. Together, they occupy 41 percent of the world’s market share.

As we know, China is heavily dependent on chip imports, purchasing 60 percent of the chips produced globally every year. The Chinese mainland and Taiwan are naturally separated by a narrow strip of water. As the world’s largest semiconductor market, the mainland has a strong demand for the electronics industry, and needs a complete chip industry chain. And the economic development of Taiwan Province also needs the firm support from the mainland.

Last year, the food, fruits, and other goods imported by the mainland from Taiwan only accounted for 0.11 percent of the island's production. The tropical fruit imports and aquatic products suspension is rather symbolic, which will not affect the big picture. The key remains in chips.

The chip industrial chain in the mainland and Taiwan Province are so closely connected yet so far apart. Due to the US's attempt to curb China's technological progress, TSMC is unable to supply high-end chips to Huawei.

In the face of the brutal reality, China’s chip industry must be prepared for a long-term war, and must also adopt a wiser strategy to deal with the forces that try to keep China’s chip industry down.

03

The pressing “counter-encirclement”

Chip is the “nuclear weapon” the US have in hand to crackdown on China's technology. At present, the US begins to launch all-round encirclement, and plans to play “three cards”.

The first card is to block China from key areas that the US is good at. Three days after the signing of the chips bill, the US officially announced that it would impose export controls on EDA software designed for the development of integrated circuits with Gate-All-Around Field-Effect Transistor (GAAFET) structure, and the fourth-generation semiconductor materials including Gallium Oxide (Ga2O3) and diamonds.

As a successor to FinFET, GAAFET technology approaches are key to scaling to 3 nanometer and below technology nodes. For example, TSMC plans to introduce GAAFET technology to the 2nm process.

In other words, this move is intended to restrict China’s advances in the chips with transistors of 3 nanometers or less, and block China's fabless semiconductor companies efforts into conquering 3nm process.

On August 8, SMIC is rumored to have suspended its new 12-inch wafer CIM localization project because the contractor could not meet the demand of CIM software localization. The blockade of EDA software imposed by the US turns out to be a precisive strike.

The second card is to establish a chip alliance and batter China, as the chips bill only serves as an “appetizer”. The US attempts to build a so-called "Chip 4 Alliance" with Japan, South Korea and Taiwan, so that China will be isolated.

In her visit, Pelosi met with Mark Liu 刘德音, the Chairman of TSMC, aiming to nudge TSMC into the "chip alliance" with every means, and hinder China’s industrial upgrading from the source.

The third card is the “carrot and stick” policy that the US has always followed. In the CHIPS and Science Act, the US plans to invest 52.7 billion US dollars, of which 50 billion U.S. dollars will go to chip manufacturing over the next five years, coupled with tax credit for companies that invest in the semiconductor industry.

In addition to chips, the U.S. government will spend 200 billion U.S. dollars in the coming decade to promote scientific research on artificial intelligence, robotics, quantum computing, etc.

As for the "stick", the US resorts to various means to win over chip companies through its own “supremacy” in the political, capital, and scientific fields.

For example, the bill makes special mention of China. Subsidized companies must notify the secretary of commerce if they have substantial plans for the expansion of semiconductor capacity in China (exept for legacy semiconductors). Otherwise, the US will make a decision whether to withdraw any subsidies.

It is noteworthy that the act also plans to spend 200 million U.S. dollars on fostering talents, and it will broaden participation in microelectronics education for elementary school, middle school, high school, undergraduate, and graduate students. And the chip industry will lay a foundation for the work of the next generation in the US. As the Chinese saying goes, "It takes ten years to grow a tree and a hundred years to bring up a generation of capable people". The US is also well aware of the importance of “the development of semiconductors must start with the kids”.

According to Pat Gelsinger, CEO of Intel, the bill is perhaps the most important industrial policy introduced by the US since the end of World War II. Some even consider the bill as the modern version of Wassenaar Arrangement.

Looking back on history points out direction for the future. The global history of integrated circuits is an intricate economic war with ups and downs. Semiconductor technology was born in the United States. With the support from the US, Japan caught up, then it was overtook by South Korea and Taiwan. Thus, no country or company can remain invincible in this industry forever. The stories of ferocious competition are both striking and cruel.

In the face of the encirclement, it is pressing for Chinese chips to fight back. Independent research and development is the undoubted priority. Take Japan and South Korea as examples. They have pooled nationwide efforts to develop the chip industry. And huge investments were still made even when the industry was at a low ebb, which brings them the current success.

In 2021, 55 percent of the world's investment into the R&D of semiconductors came from the US, while merely 3.1 percent came from China. Therefore, strategic investments at the national level, mainly via the Big Fund, can only be strengthened, not contracted.

In the past decade, China has witnessed its chip industry heading onto the right track. If we continue with the industrial policy support, capital accumulation will become increasingly mature, and a sufficient number of talents will join the industry. Small changes will amount to a sea change eventually.

Second, we must rely on cross-border tech acquisition and international cooperation. Though the encirclement is hard to break, in Europe, Israel, and even Southeast Asia, there must be light in the cracks.

Despite endless meddling by the US, chip companies around the world don't want let go of China, which is the world's largest chip market. This is the basis for China to get an upper hand in the global chip battle.

For example, ASML was unable to export high-end EUV lithography machines to China, but the company was unwilling to ban the sale of DUVs in the field of mature process nodes. "They’re a very significant supplier of the global markets. So, we just have to be careful what we are doing," said Peter Wennink, CEO of ASML. Despite various obstructions, ASML delivered 21 DUVs to the Chinese mainland in the first quarter of 2022.

A notable matter is that when Pelosi visited South Korea not long ago, South Korean President went on a vacation to “avoid meeting her” It can be seen that not all chip powerhouses are willing to be pawns for the US. Therefore, great uncertainty hangs over the so-called “Chip 4 Alliance”.

04

Epilogue

"We might be benched for a decade." As a cutting-edge industry that requires the uttermost efforts of generations and the hard work of the whole nation, accomplishments can only be made if we let go of short-term interests and aim for the bigger picture.

Someone argued that in the 1960s, China went all out to develop "Two bombs, One satellite", and benefited tremendously from it. In the 1970s, no such effort was done in semiconductors, and it turned out to be a great loss.

When the “historical opportunity” was wasted in the 1970s, China missed the golden opportunity for development in the 1980s and 1990s under the wrong ideas of "buying beats manufacturing, and renting beats buying." As a result, China’s chip industry was merely a huge market and a source of profit for foreign investors over several decades.

The signing of the chips bill indicates to some extent that the future global chip industry landscape will shift from free market competition to an arms race, from a global division of labor to domestic circulation.

The encirclement around China's chip industry is increasingly tightening. To succeed in "counter-encirclement", the country must pull together and work hard.

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The European Union (EU) announced plans earlier this year to only allow zero-emission new vehicles to be registered from 2035, though the proposals need approval by lawmakers in the EU Parliament and the EU Council before they come into effect.

The island of Hainan in southern China also plans to ban the sale of fossil fuel-powered vehicles by 2030, and more provinces are likely to follow suit.

In addition, A previous GRR piece on Huawei's master plan for electric vehicles has illustrated the very delicate line that Huawei treaded between being a "Tier-0.5" supplier and a full-fledged automaker.

As high-voltage batteries make up more than 40 percent of the cost of new-energy cars, it has increasingly become a consensus that building supply chains centered on car batteries and expanding the related market represent a new height of profit.

Against such a backdrop, China’s Contemporary Amperex Technology Co., Ltd. (CATL) 宁德时代, the world’s largest car battery manufacturer, grabbed the limelight earlier this month when it announced a largest-ever investment in Hungary, by building a battery plant in Debrecen in the eastern part of the country.

Today’s GRR newsletter is composed of two parts.

In the first part, GRR presents an analysis by Guancha.cn's Chen Jishen 陈济深 posted on WeChat on August 15, which explained the factors behind CATL’s investment as well as its impact on the European EV market. The original title of the article is 宁德对决LG,中国如何再赢一次？CATL vs LG, how can China triumph once more?

The optimism, however, is not shared by all. In the second part of this newsletter, GRR offers a note of barriers, such as growing protectionism in Europe as well as in America, that Chinese battery companies must overcome in order to succeed beyond their home court, excerpted from an analysis by Zhang Zhidong 张之栋 posted on the Wechat account of iautodaily on August 16. The original title of the article is 全球动力电池：欧美期待本土“宁王”的出现 Global automotive batteries: Europe, U.S. look forward to their own CATLs.

Some key takeaways:

* Europe is the world’s second largest new-energy vehicle market, only behind China in market size.

* The supporting industrial chain for the burgeoning new-energy vehicle sector is, however, not as prepared as it should be in Europe.

* There are increasing signs of overproduction of EV batteries in China

* LG constitute a real competition of CATL in Europe.

* Compared with LGES, CATL has deployed throughout the battery industrial chain.

* CATL is on par with LG in terms of ternary lithium batteries, but it leads significantly in LFP batteries, high-nickel batteries and sodium-ion batteries.

* Growing protectionism is headwind for Chinese battery firms to go globally.

Part I CATL vs LG, How can China triumph once more?

On August 12, Peter Szijjarto, Hungarian Minister of Foreign Affairs and Trade announced that China’s Contemporary Amperex Technology Co., Ltd. (CATL) will build a battery plant in Debrecen of east Hungary.

“We are proud of it,” said Szijjarto on his social media account.

CATL released a statement on the same day, confirming its plan for the Debrecen battery plant, with a total investment of up to 7.34 billion euros (around 50.86 billion yuan).

As the world’s largest automotive battery producer, CATL’ move has put itself under the spotlight. Why is the company focusing on Europe this time?

European vehicles need Chinese batteries

Europe, once a major manufacturing base of fossil fuel cars, is barreling into a new energy era. Sales of new-energy vehicles increased by nearly 11 percent to 1.0898 million units in the first half of 2022. It is undeniably the world's second largest new-energy vehicle market, trailing only China in terms of market size.

The supporting industrial chain for such a burgeoning sector, however, is not as prepared as it should be in Europe.

According to market forecasts, global automotive battery capacity is expected to exceed 1,000 GWh in 2025, with the European market accounting for 462 GWh of the total.

While conventional fossil fuel vehicles have a fully mature industrial chain a century after their inception, new-energy vehicles are a different story in Europe. Local battery enterprises do exist, such as Northvolt in Sweden, Verkor and ACC in France, InoBat Auto in Slovakia, Britishvolt in Britain, Freyr and Marrow in Norway, Itavolt in Italy, and ElevenEs in Serbia. However, they are unable to meet the continent's high demand for automotive batteries. A significant market gap must be filled.

If Chinese enterprises do not try to occupy the European market, they will leave this market to other players. Take Hungary as an example. South Korean electric vehicle (EV) battery maker SK began building plants in the country in 2018. Three SK facilities have helped Hungary rise to the world’s fifth-largest producer of car batteries and establish itself as the primary battery supplier of European automakers.

If one checks the global leaderboard for installed EV battery capacities, one will find that Chinese and South Korean companies dominate the top ten positions. In particular, China’s CATL has held the top spot for the past five consecutive years. [GRR: According to SNE Research, 15 Chinese companies ranked among the top 20 battery corporations in terms of installed capacity in the first half of 2022, with a combined market share of 61.88 percent. Among the 12 firms that grew more than 100 percent throughout the time, 11 are from China. ]

Thus in terms of production capacity and battery quality, South Korea's SK and medium- and small-sized European battery companies all lag far behind the main battery producers led by CATL.

Expansion into Europe has become a must for CATL, and a must for the further development of all Chinese EV battery firms.

Chinese firms also need Europe

Following leapfrog development over the past few years, there are increasing signs of overproduction of EV batteries in China. Venturing overseas is the only option for enterprises to release their congested capacity. Europe is believed a crucial market for their further growth.

[GRR: According to Shanghai Auto News, if the top five domestic battery manufacturers can successfully raise funds as what they have planned, they would have a combined capacity of over 2,450 GWh by 2025, more than 20 times what it is now (125 GWh), or eight times the lithium-Ion battery market (324 GWh) in 2021.

If 1 GWh can power 20,000 electric vehicles, 2,450 GWh could be translated into an installed capacity for 49 million electric vehicles. However, according to BloombergNE, global EV sales (including BEV and PHEV) are estimated to reach 20.6 million units by 2025. The figure was 6.6 million in 2021. Therefore, the installed capacity planned by Chinese battery firms would be enough to power 2.5 times of the projected EV sales in 2025.]

Whoever expands internationally first and successfully seizes the European market will gain the upper hand in future competitions and rework the high-speed growth miracle of Chinese EV batteries.

The pivotal moment is now. Following a peak in order placement between 2017 and 2020, earlier models of major automakers have entered the scale production phase. We are now at a critical juncture for another round of signing of fixed-term contracts from the auto sector. Whoever locks in new contracts is able to shape in the market landscape for the next five years.

To obtain such contracts from global car makers, especially from the European markets, Chinese companies must change course. They must pursue quality development, engage in the competition of quality, and shun the rate race that results from the competition of price.

Exploring the European market therefore involves more than just contests of technology, scale production, and industrial chains. Whoever can achieve better localization and low-carbon emissions will be able to gain the upper hand in this competition. This also puts forward a new requirement for Chinese EV battery companies to continue leading the world, i.e., globalization.

Recent CATL moves in Europe are an epitome of how the Chinese EV battery giant’s accelerated globalization drive.

In April, CATL said that its first overseas plant at Thuringia, Germany, was officially licensed to produce 8GWh battery cells. The factory is less than 300 km away from Tesla’s Gigafactory.

The Debrecen plant, CATL’s second Europe-based plant, is located at an industrial ark in the southern part of the city, covering an area of 221 hectares in the heart of Europe, right next to the vehicle plants of Mercedes-Benz, BMW, Stellanti and Volkswagen - all are CALT’s clients. Once completed, the Debrecen plant is expected to supply battery cells and module products for European carmakers.

In the first half of 2022, CATL's installed EV battery capacity neared 16.5 GWh outside the Chinese market. This figure more than doubled from the same period last year, putting the company third in the leaderboard for overseas installed capacity, trailing LG Energy Solution (25.6 GWh) and Panasonic (19.9 GWh). CATL's international business has clearly picked up speed.

CATL keeps up the offensive

For CATL, the true rival in its latest market expansion in Hungary is not SK, though the latter also had factories in the same country. LG, which is actively expanding in Poland, is the real competition.

According to SNE Research, global installed EV battery capacity totaled 296.8 GWh in 2021. CATL ranked the first with an installed capacity of 96.7 GWh, or 32.6 percent of the market share. LG ranked the second, with an installed capacity of 60.2 GWh, and 20.3 percent of the market share.

Latest data shows that in the first half of 2022, CATL had a larger global market share than the top three Korean battery suppliers put together.

Among them, LG took 14 percent of global market share, a decrease from 24 percent during the same period in 2021. Samsung SDI's market share dipped from 6 percent to 5 percent, while SK ON's rose from 5 percent to 7 percent, making it the world's fifth-largest manufacturer of EV batteries.

Top three Korean battery manufacturers, including LG Energy Solution, had a combined market share of 26 percent in the first half of 2022. This was still 8 percentage points lower than CALT’s alone.

But for CATL, being No. 1 of the industry has never been an honor that indicates that it is able to win in a breeze. Instead, it means facing constant pressure and challenges from rivals.

Early this year, LG spun off its battery subsidiary LGES and raised 10.7 billion U.S. dollars, setting off a fresh round of seething undercurrents of turmoil in the global EV battery market.

LGES' prospectus indicated that the company got its largest chunk of revenue from European and American clients. In the first three quarters between 2018 and 2021, its European operation brought it an revenue of 39.9 billion yuan, 50.6 billion yuan, 68.8 billion yuan, and 73.8 billion yuan, representing 24 percent, 37 percent, 42 percent, and 49 percent of its annual revenues.

Like CATL, LG and SK are also astute enough to realize the opportunities in the European market, and they have taken Europe as their main arena in the new era.

In July, LG Energy Solution announced to double its production capacity in Poland. This has started a new round of competition in the European EV battery market.

Will CARL follow suit? For the world’s largest automobile battery manufacturer, this has never been a real question.

Offensive defense is the best defense. In response to LG’s strategic pivot, CATL decided to take the initiative, venturing deeper into Europe and triggering another round of market reshuffle.

CATL still has enough cards to play even without its home court advantages when competing outside China.

Its client roster included not only Volkswagen, BMW, Mercedes-Benz, Renault and Volvo, automakers that are in cooperation with LG, but also Jaguar Land Rover, PSA Peugeot Citroen, Nissan, Honda and Toyota. It is safe to say that CATL has its sales ensured by virtue of such a large group of clients.

While LG looks to secure its upstream resources through strategic partnership and long-term agreements, CATL has made a wider range of deployments in this regard, covering from the upstream production of nickel, cobalt and lithium, to the production of four key components of batteries (anodes, cathodes, separators, and electrolyte) and lithium battery equipment, and to the manufacturing of EV batteries, charging infrastructure, vehicles, and automotive control units in the mid- and downstream of the industry. The Chinese company is working to further integrate its industrial chain to maintain its competitive edge even when lithium is in short supply globally.

In addition to building a leading edge in resources, CATL has juxtaposed multiple battery technologies, which provides carmakers with more options when compared with LG which concentrates solely on ternary lithium batteries.

Currently, CATL is on par with LG in terms of ternary lithium battery capacity. But it leads significantly in the fields of LFP batteries, high-nickel batteries and sodium-ion batteries. [GRR: LG's first LFP battery line is expected to go into production in LG's China factory as early as next year.]

According to CITIC Securities, CATL's production capacity is estimated to reach 800 GWh by 2025, way ahead of the 450-GWh capacity of LGES. The sheer advantage in his regard is likely to have an even larger scale effect.

As CATL’s plans gradually turn into reality in Europe, South Korean businesses would lose their first-mover advantage to their Chinese rivals. The European EV battery market may undergo another wave of restructuring.

Can Chinese firms win again?

It is fair to say that CATL had managed to become the world champion of EV batteries thanks to the resonance between historical opportunities and enterprise characters. But how to retain that title and continue with high-quality growth in the future’s commercial competition, is a question that put the wisdom of CATL, as well as that of other Chinese battery companies, to test.

Signs of an industrial revolution to usher in an “EV era” have been increasingly clear. Victory and defeat have been determined in the Chinese arena, but the situation is far from clear in the global industrial chain - the outcome of the EV battery sector will be determined by competition in the European arena.

Whoever dominates the European market first would be able to continue leading the industry. More importantly, it will be well-positioned to reap the industrial benefits produced by the restructuring of the energy and traffic systems.

At present, six of the world’s top 10 EV battery manufacturers by installed capacity are Chinese. However, all of the remaining four - Panasonic, Samsung, SK, and LG - have already begun expansion in Europe.

These erstwhile moguls have been knocked out of the top position in the EV battery leaderboard, but they have never stopped growing. They are biding their time for a comeback on the strength of the European market.

Fortunately, Chinese enterprises have a clear understanding of this: if you want to grasp the future, you cannot afford to rest on your past laurels.

The latest adventure of CATL into Europe is also the epitome of an “Era of Voyage” started by Chinese EV battery enterprises.

Looking back on the evolution of the Chinese EV battery market, we can see how Chinese enterprises led by CATL gradually closed the gap with their Japanese and Korean counterparts, eventually dethroning them.

Fortunately, the Chinese industry is not falling behind this time. Rather, they are in a leading position.

Chinese enterprises are able to chalk up another victory in the European market. Period.

***

Part II Guancha.cn’s optimism, however, is not shared by all.

Below is an excerpt from an analysis titled “Global automotive batteries: Europe, U.S. look forward to their own CATLs” carried by iautodaily, a Shanghai-based WeChat account on August 16.

The piece offers a note of barriers, such as growing protectionism in Europe as well as in America, that Chinese battery companies must overcome in order to succeed beyond their home court.

Rising trends of “protectionism” in the European and US markets are bringing new variables to the global EV battery landscape.

Data shows that enterprises from China, Japan and South Korea have a combined market share of more than 80 percent, painting a landscape that the article has described earlier as a tripartite split of the global market. But governments across the globe have begun to employ macro-control means to construct a cover to shield their own battery industrial chains.

At the forefront of this trend are none other but the European and North American markets, who have always trumpeted liberal economy.

The European market adopted a regulation concerning batteries and waste batteries in March to beef up local industrial chains. As of July 1, 2024, only EV batteries and rechargeable industrial batteries with a carbon footprint declaration are allowed to be placed on the Union market. All battery imports into EU, including those produced locally, are required to obey the new regulation.

Simply put, Europe has set a higher threshold for foreign EV battery enterprises. Despite citing so-called "carbon neutrality" as their justification, their ultimate goal is to maintain control over the entire battery manufacturing process.

The United States, for its part, is more straightforward. According to the Inflation Reduction Act that passed the Senate on August 7, new-energy vehicles must have their final assembly made in North America to enjoy a subsidy of up to 7,500 U.S. dollars. Meanwhile, their battery materials and “crucial minerals” must come from the United States or countries with which the United States has a free trade agreement.

Moreover, the Act made it rather plain that a new-energy vehicle will not qualify for subsidies if its battery is sourced from other countries. So who does the Act target? It is something self-evident.

CATL postponed an announcement on a factory in North America. Market rumors attributed the postponement to strained Sino-U.S. relations as a result of Nancy Pelosi's trip to Taiwan on the one hand, and uncertainties brought about by the Act on the other hand.

It is not difficult to see that the United State enacted the Act for the same purpose with the EU - to support local industrial chains of EV batteries, at least enterprises that invest in and build plants on its own soil.

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People often say that Alibaba’s breakout, the rite-of-passage moment happened in 2003, during another epidemic. When an employee contracted SARS in May 2003, the whole company was forced to work at home, precisely around the time when Taobao was scheduled to be launched. Despite the dire situation, Alibaba still managed to launch Taobao on May 10, 2003, at a pre-mobile internet stage when “remote working” was not yet a word. Then, in the crisis lay a golden opportunity. Locked at home, many Chinese consumers flooded to newly born Taobao to make their first e-commerce purchase, making Taobao a huge success. To commemorate this dramatic period, May 10 was chosen as “AliDay”, a special event on Alibaba’s corporate calendar.

Now, almost two decades later, on another AliDay, Alibaba has entered another watershed moment. Can Alibaba turn crisis into opportunity again? Ginger River believes in times like this, the market should especially pay attention to what CEO Daniel Zhang has to say.

The following article is a discussion of Zhang’s AliDay speech by 裴培 Pei Pei, a tech KOL and ex-chief TMT analyst of Sinolink Securities, on his WeChat blog 互联网怪盗团 Internet Phantom Thief Legion.

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The original title is

逍遥子在阿里亲友日上的分享值得重视

What Daniel Zhang shared on AliDay deserves to be noted

***

Every 10th of May is "AliDay", a day when Alibaba opens up to employees' families. There would also be a grand mass wedding. Senior executives, including the chairman and CEO would attend and officiate the wedding himself. Forums would be held where employees' questions get answered. In the past, though the day was important for the company itself, not much attention was drawn by external investors and media. The reason is affluent exchanges Alibaba had with the outside, Investor Day and Yunqi conference in every Fall, the quarterly performance online meeting etc..However, this year remains an exception. Everyone has too many crucial and timely questions for Alibaba's executives to answer.

• In 2021, 逍遥子 Daniel Zhang put forward three major strategies: domestic consumption, cloud computing and globalization. A year has gone by, and the macro environment has undergone drastic changes. So are there any adjustments concerning the three major strategies?

• The ongoing pandemic cast a shadow over e-commerce. How does Alibaba view the changes brought by Covid-19? Are there any new demands for the e-commerce platform in the context of the pandemic?

• At the end of 2021, Alibaba has reorganized, setting up the China Digital Commerce division and International Digital Commerce division. And there are shifts in division leaders. So, what is the underlying logic behind it? What is management's opinion on Alibaba's current corporate culture?

• Voices like "Alibaba's organization has already aged and its efficiency is dropping" keep turning up. Some believe that Alibaba cannot keep up with the new trend and new business model. Is that true? How should Alibaba prepare itself for the increasingly intense market competition？

It is praiseworthy that on this year's AliDay, Daniel Zhang had a candid conversation with the participants. He has not shunned away from challenges facing Alibaba at present, and logical solutions have been offered. Therefore, his words deserve attention and would be a useful guide for investors, e-commerce people, and for people whose work is related to the internet industry.

First, when it came to COVID-19, Daniel Zhang believed that much of the business Alibaba had done this year was “保供” "supply assurance", which can be seen as "atypical work", but it is a social responsibility that a company must shoulder.

I think that the logistics pressure caused by the pandemic is perfect proof that Alibaba did the right thing as we have invested heavily in logistics contract performance over the recent years. From 菜鸟 Cainiao, 蜂鸟 Fengniao to 丹鸟 Danniao, from 盒马 Freshippo to 淘鲜达 Tao Xian Da, even the acquisition of RT-Mart, all complied to the basic concept of "building high fulfillment capabilities". In Zhang's own words, "with the backdrop of the pandemic, any consumer service without adequate fulfillment, is kind of rogue. If we merely find suppliers orders, but cannot deliver them, that would be a tricky problem."

So the recent pandemic is a major test of Alibaba's e-commerce fulfillment capability. Some parts are commendable, but problems are also exposed. For example, in Shanghai, Freshippo has managed to achieve high delivery efficiency, while other e-commerce sub-branches in the Alibaba family have pale in comparison. It's not a big deal that problems surface. The key lies in improvements. Back in 2020, Amazon also experienced a significant drop in delivery capacity, which prompted it to further strengthen its logistics investment and local retail capacity. I believe that Alibaba will be more committed to improving fulfillment capability for products of all sorts in the future. And an efficient and complete delivery system will be built, covering one-hour, half-day, next-day and multi-day delivery services. This is what Daniel Zhang has always attached great importance to, ever since he took office as Alibaba's CEO in 2015.

Second, Alibaba makes it clear that the general direction of three strategies (domestic consumption, cloud computing and globalization) remains unchanged. At present, in the international situation's fickle climate, many people think this is a rough time for Chinese companies to go overseas. Such view is speculative and short-sighted. However the situation changes, two things are certain in my view: first, the world cannot do without China, and second, Chinese enterprises cannot survive without overseas markets either. Moreover, opening up and communication are the main themes of human development. Therefore, as one of the largest Internet companies in China, it is not an option to abandon the globalization strategy for short-term reasons.

According to Daniel Zhang, "Globalization boils down to two categories, namely globalization of consumption and that of cloud computing." Both of them rely on local ecosystems, so we need to think from a local perspective, and find an angle where Alibaba could make a difference. Instead of copying what we have done in China abroad." This might be the explanation for Alibaba's new International Digital Commerce division, and why it is placed at the same level as its China Digital Commerce counterpart.

By the way, I think that the market has underestimated AliCloud's global strength. According to data from Gartner, in 2021, the market share of AliCoud reached 25.5 percent in the Asia-Pacific region, ranking first, equivalent to the total share of Amazon and Microsoft. Last year, AliCloud has launched local data centers in Indonesia, the Philippines and South Korea, and the construction of local teams and ecosystems is underway. In the quarters to come, we may not see the impact of AliCloud's globalization on financial reports. But give it a dozen quarters, a pivotal effect could appear.

Next, regarding the competitive landscape of the Internet, Daniel Zhang gave an insightful speech to me, quote:

"At home or abroad, black horses easily grab our attention, and we follow them like playing a game of Whac-A-Mole. No matter how Alibaba analyzes its competitors, we are different after all ... The worst is that one product goes viral today, so we dive in immediately. Tomorrow another one takes off, then we would like a slice of the pie too. The market itself is big enough for you to pull off magic, and the key point is what product we want to present.

Over the past few years, China's Internet industry has been flooded with copycats. Some indeed have succeeded in following the trend. But generally speaking, the larger a company gets, the less likely it is to get an upper hand in following suit. The more mature a market segmentation is, the less room is left for imitators. People often ask: Why didn't Alibaba learn from Pinduoduo? Why not learn from Douyin, Kuaishou, Meituan and so on. In fact, the questions are problematic. Studying competitors is what all Internet companies would do, but Alibaba's products should not be led by the nose by its competitors. Just as the famous saying of 齐白石 Qi Baishi [Qi Baishi (1 January 1864 – 16 September 1957) was a Chinese painter, noted for the whimsical, often playful style of his works] in his later years: "Those who study me live, but those who copy me die."

One thing we must understand: From the perspective of customers, no one needs a second Pinduoduo, Douyin, or Meituan. Taking e-commerce as an example, users have different demands, including price, cost-effectiveness, authentic product rate, product abundance, fulfillment capability, social factors, etc. E-commerce platforms' job is to group these demands, to find a distinct and suitable place, rather than chasing the tide. Coping may be good enough for some small platforms that join the game late, but definitely not for platforms as big a scale as Alibaba.

In the bull cycle of the capital market from 2020 to 2021, some Internet companies (names that I will not point out here) have done too much useless business and inefficient investments just to fawn over the capital market. When the tide turned, all the efforts ended up a wild goose chase.

"She was still too young to know that life never gives anything for nothing and that a price is always exacted for what fate bestows. "― Stefan Zweig, Marie Antoinette: The Portrait of an Average Woman. Not blindly following the hot spots of the capital market spares companies, investors and employees of such unnecessary prices.

Finally, Daniel Zhang also talked a lot about corporate culture, which is quite relevant and raises much attention from the outside. Due to space reasons, I won't go over the details here. However, there is one sentence that left me with a deep impression: "I believe that Alibaba's corporate culture must be built from senior management. Do we make decisive choices and trade-offs on matters of principle? This trade-off trumps talking about culture 100 times. Practice as said, put ourselves in others' shoes, and start with ourselves first."

As a former financial practitioner who has served many large institutions and worked in an organization with a scale of tens of thousands or even hundreds of thousands (Daniel Zhang used to be a senior executive of PricewaterhouseCoopers’ Audit and Business Advisory Division in Shanghai earlier at his career), I can't agree more with these words ——In an excellent organization, senior management must take action first, which means the superiors have the courage to take responsibility and set an example for the subordinates. Only in this way can we talk about good corporate culture and drive employees to work hard for a common goal. With great power comes great responsibility, "senior peers" shoulder responsibility voluntarily rather than dodging, the organization is already halfway towards success. Of course, we can only wait and see if this kind of good philosophy can be implemented well.

All in all, from Daniel Zhang's speech on AliDay, we find it more about "keep the status quo" than "changing". That's the right thing to do! It has been proven correct to improve fulfillment, build local retail capacity, and continue to develop cloud computing. They should be carried out thoroughly in the long run, even though globalization has experienced some setbacks in the short term. The key is persistence, and not let short-term trends lead the company by nose. After all, tides ebb eventually, but those more fundamental, long-lasting things stand.

***

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Ms. Zhang Jun (email address: benitazhang2021@163.com), is a Chinese business story writer. She has long followed Chinese tech companies such as TikTok and writes ambitious reports. Most of her stories are 15,000 to 20,000 words long. Through exclusive interviews and special storytelling, she has established a unique style in Chinese business reporting. You could follow her on Linkedin.

Ginger River has heard that Part 1 has created some stir among some investors overseas. In Part 2, you will glimpse into the ruthlessly effective growth strategy of TikTok, how TikTok went through its magnificent growth and the even more magnificent political crises in U.S. and India in 2020, the great lengths TikTok went through to become the most internationalized Chinese company with the most localized operations, and the organizational balancing acts TikTok played to placate its uniquely multi-cultural workforce.

You can also download the full story (Part 1 & 2 combined) and share it with your friend.

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07

Lave No Gaps, Absolute Suppression

Sitting at the easternmost corner on the top floor, Zhang Yiming saw internationalization as a key project. In early 2020, Zhang Yiming redistributed the power structure of the company - he handed over China and appointed 张利东 Zhang Lidong and 张楠 Zhang Nan as China chairman and China CEO, respectively, while he himself took a big step upward and acted as global CEO. The "three Zhangs" constitute the center of power.

At this time, on Zhang Yiming's bi-monthly OKR (objectives and key results), there was a line that wrote: "不留空档 Leave no gaps." Some who are close to the power center told me that this was a actually a code for "不留空档、全面压制 Leave no gaps. Absolute suppression." These 8 characters from this reserved and unaggressive-looking boss represented the supreme command to TikTok.

Under this 8-character command, TikTok adopted an unwritten rule, that no matter in which region, as long as its competitor went there, TikTok must go in to snuff it out. As soon as competitors rank higher anywhere, TikTok team must defeat them at whatever cost within a week. Even if it was a Pyrrhic victory, as long as it delivered a victory, any cost was acceptable.

The User Growth (UG) 中台 middle office (middle office is an organizational structure where certain resources, such as data and algorithms, are centralized, supporting various business and product lines (front office) at the same time) was vanguard executing the supreme command, headed by 赵祺 Zhao Qi. With a Ph.D. in computer science from Peking University, Zhao is a well-mannered man with black-rimmed glasses and was the co-CEO of a startup called “车来了” "Car is Coming", which was not a successful venture for him personally. But big companies are so strange - sometimes they favor people with entrepreneurial experience, even if it is a failed one, to take the lead. Perhaps it is the hints of tragedy surrounding them, their bold experience in managing a complex project, or just the words of truth after someone has gone to the bottom of a business, that always helps them win the heart of a [big company's] CEO, with a heart to heart pity.

At ByteDance, his colleagues call Zhao Qi "the person who spends the most money in China’s Internet". To put it simply, the UG middle office headed by Zhao spent money on user growth to make the product grow, and the commercialization middle office headed by Zhang Lidong earned money back by selling the product. At this time, for TikTok, spending a lot of money to promote growth was the top priority while considering commercialization was too early for the company.

TikTok set out from China, stretching across the world like the feet of an octopus, in an ever-expanding globalized landscape. They classified the world into four levels: S, A, B, and C, and the strategic priorities are in descending order (with changes every two months):

S-class: the United States, Japan, the UK and India (later banned)

A-class: Germany, Brazil

B-class: between 15-20 countries, generally including Western European countries such as France, Italy, Spain, the Netherlands, Eastern European countries such as Russia, Asian countries such as South Korea, other populous countries such as Indonesia and Mexico, and other developed countries such as Canada and Australia. (Note: usually B-class countries are either countries where Facebook has attained high ARPU (Average Revenue Per User), or has big population, or has high mobile penetration rate).

C-class: between 20-30 countries, including Thailand and Vietnam in Southeast Asia, Saudi Arabia and the UAE in the Middle East, Egypt in [North] Africa, and Argentina in South America. (Note: C-class countries are generally “weaker” than B-class ones)

Other: the remaining 160-170 countries. (Note: these countries need no placement budgets and only rely on [cultural centers] to radiate. For example, when you purchase traffic in Russia, the traffic in Ukraine will go up. When you purchase traffic in France, the traffic Switzerland will go up)

Just like Toutiao’s first attempt at internationalization, developed countries was TikTok’s key targets. For cultural products, once key hubs are conquered, and then radiation to other regions comes naturally in a cultural 降维打击 dimensionality-reduction attack. [Ginger River: this widely used term came from Chinese sci-do fiction The Three Body Problem, in which a high-dimensional civilization use advanced weapon to obliterate low-dimensional civilization without the latter party even understanding it, in much the same way a high-dimensional human crushed an ant] (Douyin is also implementing this idea in China, starting from first- and second-tier cities.)

Source with the knowledge told me that among the global placement budgets, the U.S., the UK, Germany, Japan and other developed countries took the majority of the money. India won strategic funding because of its large territory. Latin America and Russia had to be funded because the competitors 快手 Kuaishou and Likee (owned by JOYY) went to these two markets, respectively, and TikTok has to stick to its four-word policy of "leaving no gaps" (Russia was originally in C-class, but was later promoted to B-class).

The energy from the cultural dimensionality-reduction attack was too great. Southeast Asia was at the downstream of Chinese culture, and so TikTok topped the Thai App Store with only a small number of placements and won the number one spot on both App Store and Google Play in Vietnam. "It just came up so suddenly." In the Middle East, TikTok only placed in Saudi Arabia and the UAE while influence the surrounding countries simply by natural radiation. For example in Iraq, TikTok had never spent a penny. But during the pandemic, TikTok Daily Active Users (DAUs) [in Iraq] surged to 6 million, while Iraq's total mobile Internet population was about 25 million, so the DAU penetration rate was 24 percent, and Maily Active User (MAU) penetration rate was up to 40 percent.

"Everyone is stunned," the above employee concluded, "The biggest difference between TikTok and Kuaishou and Likee is that it manages to occupy developed countries. It has a public pool in which the U.S. contents supply to the markets across the world and Douyin's contents supply to East Asia and Southeast Asia. The power is really strong."

In contrast, the internationalization of Kuaishou has taken a lot of detours. Former Kuaishou employees say they used the so-called "horse racing mechanism" and changed their names in various regions - Kwai, Snack Video, Zynn (closed). These small teams took root like bamboo shoots, fighting independently. The person in charge has been changing non-stop. 仇广宇 Qiu Guangyu (Tony), who just announced his departure, originally came from Didi and was already the fifth generation of leadership.

Qiu tried as much as possible to gather and focus during his term. They also thought about whether they should learn from TikTok to unify their name, but had been wavering, and in the end shelved this thought. For one thing, Kuaishou’s cash pile was not as plenty as ByteDance. For another, their content was not as potent as TikTok in terms of radiation across geographies. They only managed to keep some volume in the Brazilian market.

To help to illustrate TikTok’s path of developments in different countries, it is necessary to introduce some concepts. Generally speaking, TikTok needs to go through four stages, in which “inflection point” is the most beautiful moment.

• The first is mainly about reckless spending. Douyin proved the extraordinariness of this business story. So TikTok simply replicated this same playbook every where it went. This is the so-called “简单相信、傻傻坚持 Simply believe it and persist like a fool.”

• The second stage is building up of the content ecosystem. In this stage, operations would try to reach out to cooperate with all KOLs from YouTube, Instagram, Pinterest, etc. If the competitor’s price tag was 10K, then TikTok offered twice the amount. At the two ends of the device are users and contents. The users kept growing on one end, and KOLs kept coming in on the content side. A great chemical reaction was thus formed, creating a fly-wheel of user experience.

• At the third stage, a milestone moment came: the inflection point. ByteDance has an Inflection Theory, and pays special attention to the metric “DAU penetration rate.” The higher the DAU penetration rate, the higher the user stickiness. The previously low retention rate that had both bugged TikTok while let Facebook misjudge, gradually went up. According to their experience, when a DAU penetration rate hit 20 to 30 percent in any country, the inflection point would be hit.

  The inflection point is a moment of magic. Once this point has been hit, the spread of an app will grow naturally through words of mouth. The ratio between acquired traffic and natural traffic will move step by step from acquired traffic as majority to natural traffic as majority. Looking globally, acquired traffic used to account for 70 to 80 percent of users. Now it is only about 20 to 30 percent. “A natural, healthy growth has been achieved.”

• The final stage is brand building and monetization.

The S/A/B/C classification system would not stay fixed. Any country can be placed on the “elevator.” The determinants were complex, not only related to hard factors such as population, per capital GDP, internet penetration rate, market ceiling for digital advertising, but also had to do with soft factors. TikTok is a mirror for different cultures.

Indonesia once belonged to B-class, but was promoted to A-class for some time due to strong desire to self-express of Southeastern Asian people. TikTok’s publishing rate in Indonesia was as high as 10 percent, compared with less than 5 percent of Douyin in China, and only 2 to 3 percent in Japan. “People in East Asia tend to be more reserved,” said a person in charge of country strategies.

South Korea belonged to A-class in the beginning, but was downgraded to C-class due to lack of DAU growth, and was elevated back to B-class later. Some employees speculated that this may have to do with “xenophobia of South Koreans.” “Look, Samsung and LG occupy 85 percent of South Korea’s smartphone market. They don’t use Chinese phones. They don’t use Apple either.” Another possible reason may be that “South Koreans really have too many options for entertainment.”

Thus, TikTok hammered out a moat with speed and cash. Someone close to strategy-making told me that from 2018 to 2020, TikTok spent huge amount of cash into four directions: marketing, growth and branding took $5 billion, subsidies for content buildup took $2 billion, server bandwidth cost $1.5 to $2 billion, and the rest went to staff costs. According to this tally, in total $10 billion was spent (equivalent of valuations of 10 unicorn companies combined).

The above-mentioned source believes that for any other platform to create a competing product, the user transfer cost would be at least twice or thrice that much, which would be between $20 to $30 billion. This is a hefty sum that will create big hesitation for whichever big player out there.

Zhang Yiming was daring enough to spend this amount of money. But he also relied on the assistance of Zhang Lidong, who sit downstairs from him at AVIC Low-rice. Zhang Lidong was the “cash generation machine,” the “money god” in this company. He stuffed the coffers of the company through monetization at Toutiao and Douyin.

08

Big Political Adventure

However, the joy of exponential growth was quickly drowned in the political storm.

Back in 2016, the EU adopted the General Data Protection Regulation (GDPR). It was interpreted by outsiders as the strictest bill ever, with a staggering maximum penalty payment - 4 percent of global annual turnover or €20 million. At the beginning of the implementation of GDPR, the relevant authorities immediately targeted Facebook, which suffered a fine of €10 million in 2018. The adoption and implementation of GDPR triggered countries to pay attention to personal privacy, and global data networks began to move from commonality to fragmentation under increasing regulation.

TikTok has also experienced "the first shot" of political censorship as economic growth in the West declines, populism rises and local protectionism becomes prevalent.

At the end of 2019, then U.S. President Donald Trump, cited ByteDance's acquisition of Musical.ly without filing with The Committee on Foreign Investment in the United States as a reason to put the company in a difficult situation. In response, Zhang Yiming stayed in the U.S. for several months [trying to solve the issue].

In fact, Zhang Yiming recognized the situation in advance. It was before the political storm knocked on the door. In order to prevent data risks, TikTok's overseas "localization" action began in an orderly manner. A TikTok person told me that, at the beginning of 2019, ByteDance started to evaluate the isolation risk internally and make a plan. From the third quarter, "localization" action was officially launched. The campaign was never as simple as a technology switch, but [a switch] for the audit, operations, servers, and then technical product staff. The ponderous process took more than a year.

Facing the quiet switch, the staff involved were hit hard. The first wave was affecting the auditors. A former ByteDance employee said that more than 300 people were laid off from the auditing team at this time. These employees were mostly bilingual workers specializing in minor languages, and although they were allowed to transfer to other jobs, they were limited by the type of their previous work and had little chance of winning.

In the first quarter of 2020, just as the pandemic gloom spreads globally, TikTok embarks on a second wave of migrations targeting operations staff. Their duties were to seek out talent and control the style of content and pictures. Overnight, power was transferred from China to overseas in many regions, such as the China-based team for European market that the operations team was nearly disbanded, [team members] were transferred or left the company. Only those China-based operation teams for regions that do not involve geopolitical risks, such as the team for Southeast Asian region, can remain in the company.

Among the people who left, there were a lot of people who had made a difference, including two girls of Musical.ly headed up operations in Western and Central Europe after Musical.ly merging into TikTok. The general manager of TikTok Europe, named Rich Waterworth, ordered the two to quickly hand over their work to the European team within a week. "The two girls felt particularly wronged. 'We have worked hard here for three or four years and you asked me to hand over in a week with all our team cut and work being handed over there'." A person who has contacted them said that the two later switched to other sectors in the company, one doing games, another doing public welfare.

After the first two waves of "localization" were completed in earnest, the epidemic in the U.S. intensified. Around March 2020, Zhang Yiming, staff of his president's office, and Liu Zhen returned to China on a chartered flight. By this time, Zhang Yiming was already a highly visible global technology mogul, making headlines with every move he made. He entered the country and was quarantined in a hotel, directing the company in storms via video.

After returning to China, Zhang Yiming soon had further actions. In May 2020, ByteDance (Global) announced a high-profile personnel appointment, and the Chinese and American tech circles were in an uproar. Kevin Mayer was the first American to gain supreme power at ByteDance, not only being COO, but also CEO of TikTok. Mayer's past career achievement was built in Disney. In the kingdom of Mickey Mouse, he led the major acquisitions such as Pixar Animation and Marvel, and launched the streaming service Disney+, with a strong track record. Zhang Yiming is counting on his American identity and local influence to help ByteDance broker its way through the intricate forces in America.

Meanwhile, the "localization" had moved to its third phase, with the migration targeting the servers. It looks like the Trump administration is already seeing TikTok as an obstacle on the way to re-election, and the drumbeat of the political storm has intensified.

A participant in TikTok's biweekly meeting recalled that Zhu Wenjia, who is in charge of algorithm technology, said: "It will take two months to complete the algorithm code decoupling." "Can it be done in 15 days?" Zhang Yiming couldn't wait. The answer is yes. And the fourth and final wave of migration is for product and technical staff. TikTok executives, including Zhu Wenjia, were transferred to Singapore.

2020 was a year that ByteDance suffered a political failure. The pandemic has taken TikTok on a wild journey while also ripping it apart. No sooner had the U.S. crisis subsided than their other S-class country, India, fell. Just after Mayer first took office in June, the Indian government issued a blocking ban.

Within days of the incident, Mayer called an all-hands meeting, which became the most rushed plenary meeting in ByteDance's history. In less than five minutes, Mayer told everyone not to worry, that the Indian team was actively communicating [with the Indian authorities] and that the situation was not yet under control. But he went back on his word.

The second-ranked short video app in India is Snack Video, a subsidiary of 快手 Kuaishou. With the banning of TikTok, Snack Video saw a rapid climb, with its Daily Active User (DAU) surpassing 150 million. But the joy didn't last long, as Snack Video was also banned in India five months later.

Back on TikTok's U.S. side, the critical situation took a sharp turn - in July 2020, senior U.S. government officials stated that they would block TikTokl In August, Trump issued a 45-day ultimatum ordering TikTok to divest its U.S. business or shut down. Zhang Yiming was forced to negotiate a sale, with potential deal targets including business giants such as Microsoft, Oracle and Walmart, as well as ByteDance's U.S. investors. Zhang Yiming was ostensibly involved in the spin-off negotiations, but secretly upheld the wish to keep every piece in one body.

Less than three months after taking office, Mayer suddenly announced his departure. Some say his plan was to sell TikTok's U.S. segment in conjunction with shareholders, which seemed to be in his personal interest. Others say he was not that capable and was simply "intimidated." Vanessa Pappas, general manager of TikTok North America, became the interim CEO.

During this period of time, the three words that the company talked most from top to bottom were: geopolitics, China-U.S. confrontation, and Force Majeure. In fact, 99.9 percent of the people [of the company] do not know what the company is going through, and they do not know what their individual fate will be. The uninformed middle and senior management comforted the uninformed grassroots, saying, "Do your best and leave the rest to God's will."

Zhu Jun (Alex), the "Internet poet" and already head of ByteDance Strategy, gave a speech: "In this era of [some countries] erecting walls, TikTok's mission is to go and build bridges so that people around the world can connect with each other and have fun." This generous speech has inspired a group of people.

The confusing crisis finally eased after Trump's campaign loss. "What does the whole thing look like? I lay there without any movement and feel like they're going to 'die' one day and they're really 'dead'." A veteran of the industry who closely followed the event said that a slight misstep could lead to ByteDance losing its entire U.S. assets. Zhang Yiming's negotiations objectively extended the time of the whole process, which help ByteDance survive the U.S. election. After the new U.S. President Joe Biden came to power, the blocking ban was lifted and ByteDance thus avoided a disaster.

He believes that this incident is much tougher than ByteDance's previous efforts to "escape the hunt from giant companies" in China. ByteDance has been active around the giants and went together with them, but it has never swung to any camp, and it has developed the skill of "sitting on the fence and benefiting from both sides." But in the TikTok incident, ByteDance was facing a more passive situation, and the object of the game was much bigger, "It's like a leaf floating in the sea." The person used the analogy of a car driving into a narrow 胡同 hutong in Beijing (a hutong is a lane or alley formed by traditional courtyard compounds lining both sides. Hutongs range from little alleys 40 centimeters wide to streets 10 meters wide), which no one expected: "It went through the hutong once, drove in again this time, and came out again."

Governments have different controls on data security. In order not to put themselves at risk again, ByteDance has set up exceptionally strict isolation mechanisms. According to legal sources who know about this, for sensitive data such as personal accounts, addresses, social security cards, and consumption records, the general principle is that "Data in China is [kept] in China, and data overseas is [kept] overseas." TikTok has data centers in the United States, Europe, Singapore, etc. Data from different parts of the world will be transferred to the data center according to laws and then according to the principle of proximity. For example, in the United States, where the crisis happens, data will not flow out of the U.S. border even if other data centers are more geographically advantageous.

"It's a huge project." A source close to ByteDance's senior management said the company spent a lot of money perfecting the matter, isolating data at all levels, encrypting it and designing highly sophisticated authentication mechanisms so that people with different permissions "could both support the work and not look at the data."

Then ByteDance has become the Chinese tech company with the most localized operations. "There is no Internet company in China that relies on local people so much," said one employee. Even the 中台 middle office that relies on headquarters has to be localized, such as the user growth middle office that holds the key to growth, which is actually very difficult to recruit overseas. But ByteDance has local growth strategy teams in the United States, the United Kingdom, Japan, Brazil and Germany. Some markets have also had teams from both sides [the team in China and the local team] compete with each other for some time.

The purpose of doing so is not to compete, but to use competition as a way of training and let the Chinese help the locals grow. And here is where it hurts the most. The Chinese team grows the market, builds up the methodology, and then they recruit the local team themselves to pass on the skills. Knowing full well that the result would be 乱拳打死老师傅 "the apprentice learns the skills and beats the master," "We worried every day if it was going to happen to us," said one of the employees involved in the process, "but it was a slow infiltration."

"They work far less diligently than the Chinese, generally "965" (start at 9 a.m., finish at 6 p.m., work five days a week)." Chinese employees complained, "We do what the locals don't do, and we have to clear up the messy situation when they get into trouble." And now the situation is "TikTok basically doesn't recruit people in China, and only those who can't be recruited abroad are recruited at home."

Globalization has squeezed the job opportunities for the Chinese. The powerful "localization" has created a situation where a Chinese citizen has about three options to get on top of the big ship of ByteDance's internationalization: One is to change the permanent location to Singapore, Los Angeles, etc., so as to access local data. The second is to get a U.S. green card and access local data via VPN, but with restricted access. The third is to move from the core department that has access to data to a department that does not have to rely on data, relatively away from the decision-making center.

After the political adventure, although they (the Chinese employees) knew that localization was the right path and the way to go, they were still the sad ones on ByteDance's fleet. Shortly afterwards the sad ones disembarked.

09

The Fleet through the Waves

After coming back from the political valley of death and waking up to the fact that the appointment of Kevin Mayer was a mistake, Zhang Yiming further mulled over his globalization fleet. Organizational construction is a delicate job. It is all about subtle measurement of human nature.

After May 2021, the head of TikTok was neither the Chinese nationals like Zhang Nan or Zhu Jun (Alex), nor American managers like Mayer or Pappas. Zhang Yiming handpicked 周受资 Shou Zi Chew, who has Chinese heritage, Singaporean nationality, British and American education background, and a handsome and friendly oriental face, as TikTok's general manager. Many employees told me that this was the result of careful consideration and an all-around "balancing act.""It's a balance between the West and China."

After being on site, Zhou delivered a speech at the all-hands meeting, and his handsome appearance and elite background captured the hearts of the people. Employees who were not present at the meeting watched it on video, and in the comment section there were lines like: "So handsome," "Face blast," and "Enlarge the picture to the maximum for me." "Shou Zi is so perfect," one employee said.

Some employees shrugged and said he was just talking about "cliche." "I've heard it three times."

The script is always the same: going school in Singapore, joining the army, going to university in the UK, an opportunity to befriend the world-famous Russian boss Yuri Milner, investing in Chinese companies such as Xiaomi, Didi and Alibaba during his five years at DST, then receiving an offer from Harvard Business School, and returning to school despite Yuri's request to stay. Chew even expressed envy and regret about the mouth-watering deals Yuri invested in during Chew's departure. "A little bit of 凡尔赛 Versailles [Ginger River: popular Chinese internet slang, a way of show-off by complaining], but not really annoying." He focused, of course, on how he met Zhang Yiming [in the speech]. The speech was also laced with a dash of personal anecdotes of meeting his life partner, feeling even better.

Chew sit atop the chain of command of the fleet. The two most important admirals under this commander-in-chief are 朱文佳 Zhu Wenjia, a Chinese, and Vanessa Pappas, an American. Zhu is in charge of product and development, while Pappas manages the regional general managers (GM), who in turn are focused on local operations.

Or more simplistically, Zhu is in charge of majority of Chinese employees, while Pappas is in charge of most non-Chinese ones. Chew sits above these two people and plays a balancing act between Chinese and non-Chinese with his elegant multi-cultural background.

Now let's look at the left hand side of this fleet's org chart.

Zhu Wenjia, with dark skin and black-framed glasses, is a veteran employee of ByteDance. He first reported to 杨震原 Yang Zhen Yuan, who is in charge of Data IES (interactive entertainment community). This technical executive, who has been nurtured by the ByteDance culture, has a similar temperament as Zhang Yiming. He once said in an internal sharing session that he could not drive because he thought it was too much of a waste of time. He takes a taxi to and from work. During the hour and a half round trips day after day, Zhu Wenjia would sit in the back seat of the cab and study papers. Every two weeks, he is able to read a good-quality doctoral dissertation. A doctoral dissertation is more systematic and in-depth than [usual] documents, and contains full English reading of more than 100 pages.

In the managerial ladder of ByteDance, it was Douyin that made Zhu take a big step forward. When Douyin was far from its soaring success, Zhu, as a middle manager, brought his team in to make its recommendation algorithm and achieved a growth that was "armed to the teeth." When Douyin's DAU broke 100 million, he got the highest performance "O" (outstanding). Only those who have made outstanding contributions to the company could win this award, and the year-end bonus was said to be a hundred months - many colleagues mentioned this and thought it would be a sky-high number that would make people gulp. Next, Zhu boldly asked for transition to become a product manager, acting as CEO of Toutiao. Everyone knew that Toutiao's growth had already stopped long ago. The surge of Douyin even cannibalized Toutiao. But on this training ground, Zhu transformed from a simple technical manager of recommendation algorithms to a leader with both product and tech capabilities. In February 2021, already a legend, Zhu moved to TikTok.

As the chart goes further down the hierarchy, there are several key individuals reporting along the solid or dotted line to Zhu Wenjia, namely:

• 梁宇明 Liang Yuming, the head of R&D (former head of Hulu China data and advertising team), reports to 洪定坤 Hong Dingkun, the head of ByteDance Engineering Middle Office on the solid line, and to Zhu on the dotted line.

• 徐劼 Xu Jie, the head of recommendation algorithm, reports to Zhu Wenjia.

• 谈斯奇 Tan Siqi, the head of product (formerly worked for 火币 Huobi and 小红书 Little Red Book), reports to Zhu Wenjia.

• 王率丁 Wang Shuaiding, who is in charge of content style, reports to Zhu Wenjia.

• 王赢磊 Wang Yinglei, head of live-streaming, (had startup experience and worked for Snapchat). Wang reports to 韩尚佑 Han Shangyou, the person in charge of ByteDance Live-streaming on the solid line, and to Zhu Wenjia in the dotted line.

• 刘涵宇 Liu Hanyu, head of growth (worked for Baidu and Tencent), reports to 赵祺 Zhao Qi, the head of ByteDance's User Growth Middle Office on the solid line, and Zhu Wenjia on the dotted line.

Coming from Zhu Jun's era, TikTok had two coveted product leaders: Wang Yinglei (Adam) and Tan Siqi. Wang was in charge of strategy at TikTok, which included "country" [strategy] and operational products [strategy] (content understanding and content style). Tan Siqi was in charge of product features.

ByteDance is a company keen to promote young people. Wang and Tan can represent the typical portrait of such people - born in the 1990s, winners from the education selection systems, returnees from famous overseas schools, smart and nimble. Even more importantly, they have a sincere heart for the company, and are also obedient.

Among them, Wang Yinglei single-handedly built a "country" product manager team, accommodating more than ten people, playing the role of a bridge. The team crossed the bridge between China and the regional GMs, channeling divisions and emotions, and carrying business targets on their shoulders. However, this team was like an intermediate form of power transition from China to overseas, and already existed only in the name when Zhu Wenjia arrived. Currently, Wang Yinglei is responsible for TikTok live-streaming. Wang Shuaiding took over the rest of his operational products functions (content understanding and content style).

Now let's look at the right hand side of this fleet's org chart.

Vanessa Pappas, is a tall woman with short blond hair and a powerful aura. "She has an aura that makes you think she's a Hollywood star." With her strong personality and meticulous style, she is one of the few American professional managers who works hard and can swallow the bitterness of the "996 culture" of Chinese companies. ByteDance scooped her up from YouTube.

The employees recalled that in the U.S., once at nightfall, the huge office on the first floor which could accommodate one or two hundred people, was almost empty. In the end, the only people left in the big, empty house were three people: a Chinese employee, Pappas and the security guard. "It had been like this for almost seven or eight days straight. She really took the lead in front of her troops and left work as late as nine or ten o'clock," lamented the Chinese employee who also fell alone. "Americans really do not mind their bosses. Not a single GM left, but the subordinates were all gone."

Under Pappas, most of those reporting to her are local GMs, who hold local jurisdiction

• Pappas herself serves as GM for North America.

• Rich Waterworth, GM of Europe (excluding Eastern Europe), is a white man with dark-framed glasses and a stout build. In late 2020, he posted an open letter in the UK's Evening Standard saying that [ByteDance] had over 100 million MAUs in Europe.

• The GM for Australia is Lee Hunter, who has worked at Google for more than a decade as head of global branding for YouTube and was also the CEO of an ASX-listed company.

• Yoichi Sato, GM of Japan, is a Japanese national who has worked at Google and Yahoo for many years and is a veteran who has witnessed the changes in Japanese marketing.

• Qi Xiangqian, GM of Eastern Europe, is one of the few Chinese among the GMs, with experience in Russia and was the head of Alibaba's culture media in Russia.

A special exception on the TikTok fleet is Erich Andersen, an American with white hair and over half a century of age. He serves as ByteDance's global general counsel, in charge of legal affairs, government relations and public relations. Andersen has a halo of mystery. One employee specifically pointed to his name and said to me, "He's the one who can go straight to Zhang Yiming."

At ByteDance, Andersen did not immediately show his talent. He benefited from the political storm, as he helped Byte sue the U.S. government and thus won Zhang Yiming's trust. Andersen worked for Microsoft before, rising from a legal officer to the top as chief intellectual property counsel. People who know him say that Andersen, based in New York, is an authoritative yet benevolent leader who tends to be understanding and encouraging to his employees. He is more experienced in the global perspective than 柳甄 Liu Zhen as he had helped U.S. companies enter the Chinese market in the past, and now was helping Chinese companies to try to expand into the U.S. market. He may be able to act as a ballast for the fleet when it is going through huge waves.

In addition, TikTok's commercial head Blake Chandlee and CSO Roland Cloutier also reported to Chew. Before 2021, TikTok did not emphasize commercialization metrics such as ad load and focused on growth. After 2021, TikTok accelerated monetization, which has led Chandlee to play an increasingly important role. His global sales team is analogous to the Zhang Lidong's team in ByteDance China.

In this delicately sculpted structure, ByteDance has set up, with good intentions, some additional mechanisms to both balance human nature and speed up the operation of this giant fleet.

In the past two years, ByteDance has emphasized the mechanism of "solid and dotted line reporting." Among them, the balance between the middle office and each business line is the most important. Take the user growth middle office as an example - the head of European growth, reported to Zhao Qi, the head of user growth middle office, along the solid line, and reported to Rich Waterworth, the general manager of Europe along the dotted line, so that "Rich can feel safe."

An analyst who has researched on TikTok said that the essence of ByteDance's globalization management is to “管得住、放得开” "keep control and let go." For example, TikTok has basically done [products that covered] all the minority languages in India. This can only be done by local people - it requires both organizational tolerance and the ability to correct mistakes.

The practice of PMO (project management office) has also been all the rage in the last two years in ByteDance. PMO is a means to counteract the rapid expansion of companies, departmental walls and miscommunication. Project management personnel works for specific project services, management project planning, scheduling, and plays the role of "firefighting captain" in case of emergencies. They are like the small motors on the fleet, the lubricant on the main engine. After Zhu Wenjia's arrival, a PMO department was established and more than 20 project teams were set up.

PMO enables flexibility in business warfare. In April 2021, when Kuaishou witnessed a big surge after generous spending, TikTok set up a specialized task force to support its user growth middle office. They closely monitor rankings in different countries, and spent heavily to execute the command of "Absolute Suppression" [on rankings]. Gradually, TikTok regained its advantage.

Nonetheless, no matter how high they are in the fleet's command structure, the power they have is still limited power. The person with actual power surrounds himself with a delicate kind of security by implementing an information tier system.

It looks like that the GMs are in charge in their respective territories, but they actually have no access to check which of the S/A/B/C classes their territories belong to, especially when theirs fall under the categories of B/C/Others. More importantly, the company does not let them know how many budgets have been allocated to other countries. These differences can only create troubles for the management. So ByteDance manages to tear down any barriers with an iron fist in order to ensure smooth operation, but it also has another fist to bury down [a different kind of] barriers, putting power under the control of a selected few.

10

Plaid Shirt, Mooncakes, and Cosmic Tiao

On this outbound fleet, Chew was the fifth person at the helm. Zhang Yiming always knows what kind of people should be employed at what stage.

There are many professional managers - Zhou Jingjin and Liu Xinhua tried and tested for him on the road to internationalization. Liu Zhen helped him build early contacts. Zhang Nan and Zhu Jun alternated to straighten out the products for him. Zhu Jun, especially, stitched up part of the cultural divide. The company hoped to use Mayer's American identity to smooth out the U.S. government, but the plan fell through. Pappas temporarily filled the position in the crisis. Employees have long been accustomed to the senior management team coming and going, summarizing it as "completing the task of a stage." Now, the fleet is in Chew's hands.

At first, the working staff were worried that Chew only understood finance, strategy and investment, and lacked business understanding, but after a period of time, they found that [he was] "a little beyond expectations." Moreover, Chew has a very high level of emotional intelligence. After he arrived at ByteDance, he made imperceptible changes.

One of the most notable was that he immediately downgraded from his suit-wearing CFO style at Xiaomi - to a plaid shirt. One employee even told me accurately that the change happened in his second month on the job. Because in the first month, the company was counting on him to get the company to the hall of capital markets like he did at Xiaomi. But in the second month ByteDance urgently announced that the IPO plan was cancelled and delayed indefinitely, and so he immediately changed his style. "Like a chameleon."

To fit into Zhang Yiming's culture, many employees have observed that Chew has quietly emptied his Twitter and Instagram accounts, "He's mimicking and fitting in with the executives over here." His former employer, founder of Xiaomi, Lei Jun, was an enthusiast who liked high-profile publicity. Zhang Yiming was the opposite. Chew saw this through.

He rarely comments on operational details. Last year, though, he proposed a key direction of change -- "depoliticalization." "[TikTok] should become a pure entertainment product," said a person close to TikTok.

Another thing he has repeatedly thought about is how to further adapt the organization to reduce the cultural shock in the framework of globalization.

Among Chinese companies, ByteDance has become the content platform company that accommodates the most foreign staff. ByteDance is not like Huawei and Xiaomi who are hardware companies that internationalize by sending Chinese people to leave their hometowns and cross the ocean, and then comforting them with lucrative salaries. For content products with cultural attributes and regional genes, ByteDance [needs to] recruit a large number of locals. This has led to a constant culture clash between Chinese and foreigners - even a few boxes of mooncakes can cause strife.

Should only Chinese employees be given mooncakes for the Mid-Autumn Festival (a traditional Chinese festival), or should they be given to all employees worldwide without discrimination?

In the past, ByteDance chose the first option. Then a group of foreign employees complained about the unfair treatment. Later, ByteDance learned to be smart and sent out questionnaires in advance, allowing overseas employees to voluntarily choose whether they want mooncakes or not. This approach was beyond reproach - sending warmth while leaving room for detours. Unexpectedly, another group of employees, led by Americans, came forward and questioned, "This is spreading Chinese culture." The company later managed to placate them.

Chinese people are more like collectivists and more likely to obey; Americans are raised to be individualistic and have a strong sense of individuality. This forced TikTok to do spiritual massaging on the one hand to subdue "demons" and on the other hand to conform to the unique culture and values of each country on its journey of overseas expansion - the latter was a brand new issue for most Chinese companies.

Some employees said that ByteDance employees overseas, especially in the U.S., mentally believe they worked for TikTok, not ByteDance. A sign was that their LinkedIn pages generally only showed TikTok jobs and did not mention ByteDance.

Therefore, ByteDance paid extra attention to the management of overseas personnel. All-hands meetings in TikTok China were sometimes postponed for various reasons, but the all-hands meetings in the U.S. were always guaranteed on time. At the same time, ByteDance had internal communication staff in each region. Overseas employees often asked questions about corporate responsibility, human rights, gender equality, and racial equality, and the communication staff had to coordinate and embellish answers according to local characteristics. To meet the challenges of global management, in 2020, Zhang Yiming added a new article to ByteDance's cultural code: diversity and compatibility.

"TikTok is an excellent example of globalization," an analyst at a leading brokerage firm told me, "And many overseas users don't necessarily understand from which country TikTok comes from."

The ByteDance internationalization team does not have a headquarters. Although there have been frequent leaks in the press that they were considering a new headquarters, it has been slow to materialize. "It's not set in stone yet, and there probably won't be a headquarters." An employee said. Even Singapore -- where Chew, Zhu Wenjia, and key product and research staff are based - has no claim to a headquarters. Like Chew's adhesive effect, Singapore is a place of balance between Eastern and Western civilizations.

Step by step, TikTok has grown into a giant virtual network of unseen nodes, hovering over the world.

In terms of data, TikTok used to struggle to catch up with Douyin. When TikTok was just to get close, it was suddenly blocked in India and DAU went back down to little more than 100 million. It took more than a year for TikTok to catch up again. According to a number of people familiar with the matter, as of early 2022, TikTok's DAU had exceeded 700 million, and "the growth rate was still very fast." For Douyin, the past year has seen very little growth, with about 670 million DAUs, so TikTok has surpassed it as expected. With the two combined, this product suite broke 1.3 billion DAUs worldwide. At the same time, its download volume surpassed Facebook, ranking the first globally among social products.

In terms of organization, Bytedance is undergoing a change from 中台驱动 middle office-driven to 事业部驱动 Business Unit (BU)-driven. In the context of diluting the middle office and strengthening the BU, 赵祺 Zhao Qi, the head of User Growth (UG) middle desk, handed over the mature task of growing domestic business to various BUs and only led overseas growth himself. At the same time, he took over the commercialization product, 穿山甲 “Pangolin,” and incorporated himself into 张利东 Zhang Lidong's system. "The head of a department that spends the most money is beginning to do commercialization, with UG becoming into a secondary department." A source close to the commercialization of ByteDance believe that this is not only in line with the current trend of reducing cost and improving efficiency, but also a reflection of the evolution of the commercial stage of TikTok.

After jumping over the most exciting "inflection point" in the four stages of business, TikTok is no longer dependent on UG middle office, and the growth flywheel can spin naturally, and has come to the final stage: accelerated commercialization. At present, TikTok commercialization still has a lot of potential. According to foreign media reports, TikTok may reach $11 billion in revenue in 2022. A source mentioned above said that there is a more aggressive internal target in the range of $11-20 billion.

The biggest risk for TikTok is still geopolitics.

Looking back, after the birth of Douyin (TikTok's Chinese equivalent) and TikTok, the volume of ByteDance employees grew explosively from 3,000 to over 130,000 (including outsourcing), up more than 40 times. The valuation rocketed from $11 billion to nearly $400 billion, up almost 36 times. It "took off" from the low-rise building where it could park a helicopter. The company, which constantly proclaims its intention to shrink ego, has a spectacular name: 宇宙条 Cosmic Tiao (a nicky name developed from 头条 Toutiao).

In mid-2021, ByteDance held a small celebration party due to the promising performance data of Douyin and TikTok. Sources close to the situation said that during a presentation to U.S. shareholders, the president's office brought up a small cake with a lit candle on it. Although Zhang Yiming does not like this cheesy situation, he still came over to blow out the candle.

After completing a major global expansion at a high rate, Zhang Yiming has stepped down as CEO and retired to the second line at the end of 2021. 梁汝波 Liang Rubo, the current CEO of ByteDance, started businesses with Zhang Yiming when they were in the university dormitory and is a more modest, introverted, and low-key co-founder than Zhang Yiming. An insider reminded me of the fact that Liang Rubo has a technical background, which is good for ByteDance's global brand image. His English has improved a lot and he can answer up to every question from foreigners. Moreover, his [Chinese] accent [in speaking English] is quite weaker than Zhang Yiming's.

Finally, as we turn back the clock to twelve years ago when Zhang Yiming and Liang Rubo had just founded the company 九九房 99fang, and 2010 was the company's second year. Zhang Yiming on that Christmas watched the movie that influenced a generation of mobile Internet entrepreneurs - "The Social Network." The young and famous founder of the social network in the movie, like Zhang Yiming, was born in 1980s. Mark Zuckerberg is even one year younger than Zhang Yiming.

After watching the movie, Zhang Yiming clicked on the 豆瓣 Douban App (a Chinese social networking service platform that allows users to record information and create content related to film, books, music, recent events, and activities in Chinese cities) and wrote a short review, "The most impressive word about The Social Network is paranoid." He gave the movie a four-star recommendation (movies can be rated from one-star to five star on Douban).

One year and three months later, Zhang Yiming founded ByteDance. For many years afterwards, Facebook remained buried in his heart. Now, however, he no longer mentions the company that often.

It is true that Zhang Yiming led TikTok out against the waves. In this world, if you are not swallowed by desire, perhaps you can swallow desire in one bite. Enditem

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Ginger River finds this story, which was posted on Wechat on April 25, really fascinating. It helps to explain many big questions about who exactly is this global behemoth from China that is barely 5 years old. Here are some highlights:

1. TikTok was no accident. Nor was it some kind of conspiracy from China. It was the fruit of an anxious and failure-ridden quest for more growth when ByteDance's original flagship Toutiao app hit its bottleneck.

2. Zhang Yiming, CEO of ByteDance, is a calculated, precise man with no limits to his vision and ambition. It was also not surprising for Facebook to suffer so badly from TikTok's sudden emergence, causing the largest daily evaporation of stock value in the history of stock markets. In fact, Zhang had his eyes on Facebook from the very beginning. Although ByteDance's early attempts at overseas growth were also held back by the Facebook-Google duopoly, TikTok later systemically exploited Facebook's carelessness toward this opponent, until it was too late.

3. From TopBuzz to TikTok, the name of a product was a crucial business decision, some even involved top-level decisions from Zhang himself.

4. An often-used strategy of ByteDance is to find some product shell and plug in its strong middle office providing advanced recommendation algorithms, user growth, and monetization systems. In this sense, the acquisition of Musical.ly came at a most opportune time.

5. Zhang's early insistence on going after high-stakes markets such as the U.S. and Japan, combined with a sophisticated and dynamic country-tier system, contributed to TikTok's wildfire-like growth across the globe.

6. ByteDance became the Chinese company with the most localized operations, to cope with data regulations around the world.

7. The selection of 周受资 Shou Zi Chew, former DST Partner and Xiaomi CFO, as TikTok's head was a calculated balancing act bridging the East and the West.

This post will come in two parts due to the size limit. You can also download the full story (Part 1 & 2 combined) and share it with your friend.

Below is the full text (Part I):

TikTok内幕：张一鸣的巨浪征途

Inside TikTok, Zhang Yiming's great voyage through the waves

Right as the political storm surrounding the disposal of North American business loomed near, Mr. Zhang Yiming, founder of ByteDance, bought a painting about waves.

It was the beginning of 2020, and he was in the United States. After high stress and long sitting in the face of the sudden political maelstrom, his chronic back pain was re-ignited, causing excruciating pain.

For many, this is a [stereotypical] Chinese entrepreneur, full of pragmatism but lacking artistic taste. So the artwork he purchased was quite surprising for some people. According to those close to him, he purchased it out of his particular liking for California.

In the last 6 years, ByteDance (parent company of TikTok) has gone through a road of internalization paved with uncertainty and difficulty. Today, TikTok commands monthly active users (MAU) of over 1.2 billion, and its Daily Active User (DAU) was rapidly catching up to Douyin (TikTok's Chinese equivalent), which is consistently above 600 million. This means that every day there are over 1 billion people on this planet who opens the short-video app from China.

The sudden emergence of Douyin and TikTok has brought about a 36-fold growth in ByteDance's valuation. More importantly, this marks the first time that a content platform from China goes deep into the heart of western culture, and has set up a new paradigm for Chinese enterprises going overseas.

The artwork about waves is not just a reflection of Zhang's international ambitions, but also an actual depiction of the challenges he has to face in the growing wave of de-globalization.

01

Zhang Yiming's pure personality

The port from where Zhang led the team on their global voyage was a short, nondescript building at No.Jia-48 of Zhichun Road, in the Haidian District of Beijing, dubbed as 中航矮楼 the Avic Low-rise. Starting in 2016, employees and managers alike moved to this short building with only two floors and a creamy white facade. This was where the old Aeronautics Museum used to be. There is even a helipad on its rooftop.

Zhang, usually a humble person, reminded all staff members in an internal message: "We are one of the very few companies setting up shop at Zhichun Road, the heart of Beijing.

At that time, Zhang Yiming was keen on handling administrative affairs and was particularly pleased with the short building with a mere 14-meter height and a spacious interior. This founder knows a thing or two about office space: "Many companies atrophied when they move to a good headquarters." Citing SUN, Yahoo, and Evernote as examples. He said that environment changes the state of mind, and that luxurious and comfortable headquarters not only stifle innovation but also breed comparison - for example, some company executives actually want individual elevators. "Very 俗气 cheesy," he wrote.

In the beginning, there was only one separate office room in the entire company. It was Zhang's own office, located on the top (second) floor on the east side of the building. Employees often saw him going in and out of the elevator, wearing a T-shirt and jeans, with his head down while walking and swiping his phone. At mealtime, he would take the public elevator to the cafeteria on the lower ground floor, enduring his hunger, carrying the rice tray, and waiting in line for a delicious meal with his staff.

On the northwest and south sides of the 2nd floor, near the center, sit 陈林 Chen Lin and 张楠 Zhang Nan, respectively, who played the roles of the CEO's right-hand people. At this time, ByteDance's business was simple, with only two product lines - one was Toutiao, which Chen Lin was in charge of, and the other was Interactive Entertainment, which Zhang Nan was in charge of, with 内涵段子 Neihan Duanzi and 火山小视频 Volcano Small Video in the incubation stage, and Douyin was not yet born.

Sitting on the 1st floor is 张利东 Zhang Lidong. He is the second person to be granted the privilege of a standalone office room, although it was small and converted from a storage room. The employees call Zhang Lidong “二老板” "Boss No.2" and his duty was to bring cash to the company to help it build a solid financial backbone.

In 2016, in the eyes of many people, the company then called 今日头条 Toutiao was just an information platform that started with low-quality content, crawling third-party information and algorithmic feeding. What's worse, the news apps had long been the most competitive of the competitive markets.

Zhang Yiming, who came from a background in software engineering, is less than 5'7 feet tall, has small eyes, wears glasses, and smiles at people. He speaks in a lumpy way. Many people hold him up as a data-oriented, machine-rational spokesman. Such a statement reflects a pure line of technocracy, but ignores the human side of him. He is a gentleman who looks sincere, simple, and harmless. But he also has a high level of emotional intelligence embodied by a pure personality. People who are familiar with him tell me that Zhang Yiming is good at understanding human nature and can quickly convey goodwill and make the other party aware of it. "People who have come in contact with him tend to think the young man is nice and are willing to help him."

Earlier in 2014, Toutiao faced a PR crisis. Zhang Yiming came to media agencies' doors to communicate. A source close to the fiasco recalled to me that the respected media veteran was at first furious about meeting the controversial tech newcomer, but in the second half of the conversation, the plot took an uncanny turn - the other side actually started to put himself in his shoes and to make suggestions for him.

On the other hand, Zhang Yiming does not easily get emotionally involved. He is extremely precise with people and things, and can't stomach any greyness and sands to his eyes [Ginger River: an expression for not accepting compromises to one's principles]. This makes him exude a kind of ruthlessness. In the early days, he sent the person who took away the company's code to jail.

02

The hidden side

For Zhang Yiming, Facebook was at the same time an idol, an enemy, and a company to emulate. In [TikTok's] voyage overseas, Facebook always loomed largely.

Once, Zhang requested his employees to explore social media products, including a product called 飞聊 Feiliao. One of [its] product managers told me that, at the internal meetings of Feiliao, Zhang frequently mentioned phrases like "We can become another Facebook!" "Why don't we create another Facebook?" "Why don't we learn from Facebook?" According to this product manager, Zhang mentioned Facebook so many times that he is pretty sure that Zhang adored and even envied Facebook.

Even before having a strong footing in the domestic market, Zhang Yiming has already cast his attention on the overseas market. In fact, TikTok, the rising star, was only a 明线 "public side" for ByteDance's internationalization. There was also a 暗线 "hidden side" that was buried between 2015-2016. It was News Master, the overseas version of the news aggregation app Toutiao. It was later changed to the name TopBuzz. Afterward, they also launched Buzz Video, which was the overseas equivalent of 西瓜视频 Watermelon Video.

The idea of internationalization originated from the expectation that Toutiao might soon reach its growth ceiling. It is well known that Zhang Yiming is a quintessential worshiper of data. According to early members of the international team, an internal assessment at the time concluded that the total market size for China's newsfeed market was around 240 million DAUs. If one supposed winner took all, and it would occupy half of the market, then there was a ceiling of just 120 million DAUs. Zhang Yiming [could] instantly grasp the worry behind this data.

This assessment was confirmed by later facts. Toutiao saw an explosive growth in 2016, reaching 30 million DAUs mid-year and exceeding 100 million DAUs during the Spring Festival of 2017 [around the end of January]. But this transient miracle was soon followed by a long and steady decline (the DAU today is about 100 million, compared with the peak of 120 million). "When you face pressure to grow further, you are inclined to think about the international markets. This is just one of the paths [you can take]"

As for target markets, Toutiao first picked the U.S., Japan, and Latin America. "I directly asked Zhang Yiming," said a former mid-level person at ByteDance, "At the time when Chinese companies expand overseas, the usual picks are Asia or Africa, but [why did] ByteDance start from the U.S. and Japan? Zhang said markets in Asia and Africa were too under-developed. Even if they managed to succeed, success would be too small. Although it's harder to develop in the U.S. and Japan, if we can take a small slice, the slice will be huge. Therefore, we have to start from first-world countries. We go to whichever market that's bigger."

But which market is bigger? This is a complex question to answer. Zhang Yiming not only looked at DAU, but would also ask subordinates to estimate maximum commercial value by multiplying DAU with potential average revenue per user (ARPU).

Zhang also never placed limits on his thoughts. "Yiming believed it's feasible to directly challenge Facebook and Google," according to another manager for one overseas market. "For him, the goal is to gain a firm footing and to take down those giants [in the end]. He would tell us, 'we are going to take this market,' 'If we want to be bigger, we have to...'"

Once, in an internal discussion, Zhang Yiming made a serious analysis: "Facebook fights from high to low, and we fight from low to high." This means that Facebook starts as a social network product. Whoever is at the core of social networks has the power to influence others. This is "high to low." ByteDance, on the other hand, is an algorithm-based recommendation product. The algorithms work in tandem with the people. As long as more people are using this App because of algorithms, then they can defend their base, expand the base and finally surround Facebook. This is "low to high."

At the end of that year, when ByteDance formulated its 2017 strategic roadmap, there were only two strategies that fell in the P0 (highest priorities) categories: interactive entertainment and internationalization.

In the next three years, when people were astounded by the tremendous growth of ByteDance's interactive entertainment business in the form of Douyin, they often overlooked another fact, that ByteDance had never stopped its internationalization efforts. In fact, they seized their second and third growth trajectories at the same time.

03

Failure

Every Sunday, Zhang Yiming walked out of his 2nd floor east office to the conference room and found a good seat. In 2017, he attended the Internationalization bi-weekly meeting on time, keeping the number of people at 20, with only middle-level and above participating. Most of the time, he ran his hand over his touch-screen Surface computer, listening to the meeting, typing, and not talking. One of the middle-level people who presented at the meeting recalled to me that among the sparse words Zhang Yiming left behind, only one lingers in his mind to this day.

Zhang Yiming said: "The most important thing is to run fast."

But soon, they found problems came in one by one.

The first head of ByteDance's overseas business was named 周晶锦 Zhou Jingjin, who was a No.1 science student in a county-level city in China's Zhejiang Province, and Zhang Yiming pulled him in early. Chinese Internet companies believe in the concept of "new people doing old business" and "old people doing new business." So Zhou volunteered for running the international business.

Copyright is the first big hill to climb. In the U.S. and Japan, copyright protection is extremely strict, so they could not rely on the old way of direct crawling in the country. An industry source said, there generally are two sets of policies in this area: for the contents that obviously come from big-league players (such as Disney), one can enable the "red flag" mechanism, which is to purchase its IP obediently. If the copyright party appears weak and not very litigious, one can use the "safe harbor" mechanism - basically use "third-party" accounts to distribute, thus avoiding the responsibility of the platform. But this classification system all relies on guesswork, and it is easy for guesswork to go wrong, leading to endless lawsuits in the early days of ByteDance.

Zhang came to realize that for this internalization project to succeed, he would need a mature manager with rich experience in this field. In mid-2016, he recruited 刘新华 Liu Xinhua as the person in charge, with Zhou Jingjin reporting to him. Liu Xinhua was formerly the CMO of Cheetah Mobile, and had already gained fame and financial freedom. Zhang Yiming gave this second-generation head very high authority - from the first day he came, he was given the courtesy of a 事业部 Business Unit (BU).

The Internationalization BU is ByteDance's first-ever BU, short-named as "i18n" (like the word "internationalization," which starts with "i" and ends with "n," with 18 letters in between). It enjoyed complete autonomy, which was unprecedented in the history of ByteDance, and had not been seen in the following years. Unexpectedly, this BU setup turned out to be a constraint since the whole group operated around a strong 中台 middle office at the time [中台 middle office is an organizational structure where certain resources, such as data and algorithms, are centralized, supporting various business and product lines (front office) at the same time].

After Liu Xinhua took office, he quickly promoted four things - building an offshore structure, setting up local operations, and downplaying copyright disputes. In addition to that, he led the renaming of News Master, the overseas version of Toutiao. Their research at this time found that the news product users in the U.S. were people over 45 years old. To rejuvenate the product, it was necessary to downplay the color of serious news and position itself as light-weighted information. The American slang word Buzz, which stands for something that generates buzz on social media, can refer to information and gossip, while TopBuzz refers to the best of the buzz. After the name change, TopBuzz transformed from PGC (professional-generated content) to UGC (user-generated content) creator economy and wanted to be an upgraded version of the American blogging platform Medium.

An operations director of the product believes that in developed countries, the ultimate dilemma for information products is growth. He told me that there is a world of difference between Chinese and foreign mobile Internet channels for growth and monetization - in China, the cell phone pre-installation market is large, the exposure channels are scattered, and the overall price is fair. The overseas ecology is that user growth and monetization are in the hands of two duopolistic giants: Facebook and Google. "The project is competing with them. The users come from these two, and the monetization channels also come from these two, and so the growth model is a dead-end cycle."

He gave me a calculation. Toutiao could find cell phone manufacturers to do pre-installation in China. For each user, they can earn around RMB 0.3 yuan (about 0.05 U.S. dollars) per day, so in 50 days of a user life cycle, you can earn 15 yuan, while pre-installation costs only cost 5 yuan, which makes them profitable ("life cycle" means how many days will the user uninstall the App after getting a new phone). The numbers in the overseas markets are very different. For example, in the United States, a user costs $3 to acquire, but can only earn close to $1 in revenue over the full 30-day life cycle. "You can not earn back the money. It turns out that you are effectively paying taxes to [the channels]," the above-mentioned operations director concluded. "In overseas markets, if you want to do content or social products, your ceiling is Facebook. It is a giant."

ByteDance spent 2017 in anxiety, as they were running out of sexy new stories [for growth]. In July, the strategy department wrote a report and submitted it to Zhang Yiming. The report showed that there was little hope for the internationalization of information products, and transformation was urgently needed. But Zhang Yiming could not accept retreat - "Yiming firmly believes that vigorous efforts can produce miracles." i18n BU employees said that, in Zhang's mind, since the model was proven in China, it should be able to go global. The project persisted for another year.

On the other hand, Liu Xinhua thought that the big trend of 图文 text and picture-based products had gone, and his interest became few and far between and he shifted his energy to video. According to people close to the top, Liu went to Japan and found that there were strong products for Japanese information and the chances were slim, so he gave up on text and picture-based products and just did Buzz Video, which saw good growth early on. Short videos gave him a taste of sweetness. However, the drawbacks of the BU, essentially an independent kingdom, were becoming increasingly apparent, as it became difficult to pull resources from the middle office. Liu wanted to do video, but this was not in line with Zhang Yiming's expectations of him, and there already had been people working on videos in ByteDance. So, due to these difficulties in cultural integration and product direction, Liu left to join 快手 Kuaishou after only one year in office.

At the 2018 project discussion, the bigwigs sat down around a square table with the middle-level managers sitting around behind them. On normal days, Zhang Lidong, who held the money tap in his hand, often spoke with great weight. He was a former journalist who rose to the rank of vice president of the 京华时报 The Beijing Times. He is more sentimental than Zhang Yiming, but his judgment is often cold and decisive. People at the meeting relayed to me that on that day, Zhang Lidong, with a hoarse voice, suddenly spoke: "We should give up on this project. It can not earn money..."

At once, the room was filled with silence. No one dared to speak.

"This project still has a future. We can still take another look at it." Zhang Yiming took over.

After Liu Xinhua left, the i18n BU was carved into several pieces. Product and operation were taken over by 陈林 Chen Lin and 赵添 Zhao Tian, who were in charge of the corresponding lines at Toutiao at that time, while the algorithm and technology team reported back to their respective middle offices. Later, 康泽宇 Kang Zeyu joined ByteDance from Baidu and took over the internationalization products. Here he incubated the India-based social product Helo.

It wasn't until August 2018 that the company resolved to cut off the internationalization of information products. TopBuzz, with its obsolete product format, ended badly under the heavy pressure of copyright and growth problems. ByteDance's first BU came to an end. The only fruit it left behind, Helo, did not escape the fate of being banned by the Indian government later.

Neihan Duanzi and Volcano Small Video, both under Zhang Nan, also tried to go overseas. They also failed.

No one has ever seen the color of sulking creep onto Zhang Yiming's face, as if he was an emotional insulator. But the attendees of the meeting heard him say, "I will not have any angry emotions now. My biggest negative emotion for a person is disappointment."

04

Black T and White T

Zhang Yiming is a pragmatic guy, focused on return on investment (ROI). So he normally will not care that much about a name, as long as it performs well according to data. The name 抖音 Douyin stemmed from a combination of A/B testing and some fortune-telling.

But when it comes to TikTok, it is called TikTok directly because of the personal decision of Zhang Yiming.

A key figure that went through the beginning stage of TikTok has told me that at the time the team was undecided after many proposals and A/B tests. They were on the verge of kicking out "TikTok" among an army of cool English words. TikTok was the name of a popular song in 2009 in the West, and was taken from tick tock, depicting the ultimate nightclub revelry. What made the team hesitate was the fact that although this was a popular song, it was also quite vulgar in American culture. It has a few advantages, chief among which is, that it is easy to pronounce. Of course, picking a name is often serendipitous. When ByteDance first launched the internationalization of short videos, it focused on Japan and South Korea. In these two countries, TikTok sounded good, with a hint of playfulness.

"Yiming felt this was it!" And the team thought, since there was no obviously better choice, they would just use it. They could change it later anyway. Nobody foresaw that this meaningless phrase could become so contagious -- "it can be pronounced in every corner of the world, in every language, in much the same way!" --- It went viral throughout the world.

For a content-based application, ByteDance's decisive weapon is its recommendation algorithm. It tends to find a product shell and put its long-trained algorithm into it and supplement it with the systemic combat ability that integrates user growth and commercialization. As I explained in 《抖音内幕，时间熔炉的诞生》Inside Douyin, The Birth of the Time Furnance, ByteDance, whether it is about its recommendation algorithm, user growth, or commercialization, was always supported by a strong middle office. One can say that these three sets of capabilities were confirmed to work and accumulated on Toutiao. But if it stops right here, this company will just be another news app provider.

Musical.ly came in at an exceedingly opportune time. For ByteDance, Musical.ly provided a second product shell and an ocean of contents as fuels [for its algorithm]. Spectacular energy was generated after its marriage with Bydance's strong algorithms. But the two companies went through a period of struggle on the eve of this combination.

[The following part was abbreviated due to the word limit. It covers the merger between TikTok (the Black T) and Musical.ly (the White T)]

05

Facebook's carelessness

On the left-upper corner [on the facade] of the Avic Low-rise, there used to hang 4 big Chinese characters 今日头条 Jinri Toutiao. In mid-2018, the company took them down and put up a new blue sign similar in color to Facebook's - "字节跳动 ByteDance". That year, Douyin was on fire, with DAUs breaking 200 million, surpassing that of Kuaishou.

This company has entered a new era. It is now competing with Facebook in the same swath of ocean.

Nine months after the acquisition of Musical.ly, ByteDance consolidated a 400-strong team from Musical.ly. At the same, ByteDance started to plug its algorithm into Musical.ly. The growth would be re-ignited, but not so fast.

At the same time, Zhang Yiming started the campaign to change Musical.ly's name, as promised [to Musical.ly's management]. There was a backup plan as proposed by Musical.ly's team, which was to continue with the "ly" tradition to the name Vedio.ly. But after some A/B testing, the data performance was worse than TikTok. So, the name TikTok was finally adopted for all overseas versions of Douyin. In August 2018, ByteDance announced the comprehensive integration between Musical.ly and TikTok with great fanfare.

In the decision-making chain, changing name is a big deal that requires concentrated effort. A huge user base has already known Musical.ly. So a forced integration not only could cause loss of users, but it would also take a considerable amount of cash flow to rebuild the new brand, so it may 陪了夫人又折兵 "lose the wife and the troops" [Ginger River: an idiom from the Three Kingdoms describing an act costing twofold failures]. An ex-member of ride-hailing giant Didi's internationalization team said, when Didi acquired 99Taxis in Brazil, Didi hesitated for a period of time on whether to unify the brand names, but for complex reasons, they finally gave up on this thought. Bytedance's choice presented a stark contrast to Didi's. In Zhang Yiming's eyes, on his map of the world, TikTok has always danced around one byte, as part of one big chessboard.

There are some [notewothy] details in this integration. Black T and White T did not really combine their product packages. They changed the logo of Musical.ly to TikTok but preserved Musical.ly's icon in the corner. The tagline was also changed to "TikTok-including Musical.ly." It was only over half of the year after the new brand gained a foothold in the user's mindshare, was the phrase "including Musical.ly" taken away. Yet later it was found the White T actually performed better than Black T, so they let every app adopt the product package of White T. This shows that the new TikTok we see today is really a combination of co-evolution of ByteDance's algorithms and Musical.ly's products.

Next, a splendid money-spending spree took place. Big cash-spending campaigns have long been a mainstay in China's fierce Internet jungle, not to mention that the initiator now was ByteDance, who is used to stirring up this kind of storm. So it's not surprising [for them to spend a vast amount of money to expand]. Only this time, they are bringing this war overseas. What was so dramatic was that for a period of time, Facebook not only did not obstruct TikTok but also regarded the latter as its most valued customer.

After the integration was completed, TikTok gave an order to enter the frenzy of spreading money, spreading money, and spreading money like crazy. Their most important placement channel was, of course, their old [presumed] enemy Facebook. "From the third and fourth quarters of 2018 to the first quarter of 2019, TikTok's promotion budget grew by more than 100 percent every quarter," a person close to Facebook told me, " Facebook's revenue in Greater China was about $5 billion a year, and TikTok was planning to contribute about $1 billion for three years."

The entire industry chain is swept up in this money dance. The salesperson in charge of Facebook Asia Pacific was a Chinese national, who, thanks to TikTok, added glory to himself and became the global sales champion. At the end of 2018, the company gave him an excessive year-end bonus, "Probably in the millions." "Colleagues in Singapore and Hong Kong are saying that he stepped into a s**tload of luck." -- At this moment, Facebook was not raising enough alarm.

The reason for Facebook to let its guard down was simple: TikTok's retention rate was really too bad. "Is this company stupid? Facebook's internal view is: I'm directing traffic to it, but since it can't retain users anyway, it doesn't pose any threat," said a Facebook internal source. In early 2019, 柳甄 Liu Zhen, then senior vice president in charge of ByteDance's internationalization function, took a special team to Facebook and signed an annual strategic cooperation agreement with its Greater China executives.

In fact, the cost-effectiveness of buying traffic on Facebook was extremely low. At this time in the U.S., to acquire a user, the amount was as high as $10. However, ByteDance, a company that is good at accounting, has quietly upgraded its strategy. People close to ByteDance told me that they were no longer obsessed with how long it takes to earn back the cost but instead chose to observe the ARPU value. Simply put, it's how much money you can earn from a daily active user.

This is where the cunning of business warfare comes in. ByteDance set its targets not by empty design. They were targeting Facebook dead-on. ByteDance paid high salaries to poach a group of management from Facebook, and some of them brought business data from Facebook with them. The numbers were very granular, some of which were not disclosed in the earnings report. For example, how many DAUs and how much money Facebook could make in each country ... ByteDance even produced a beautiful table covering more than 100 countries accordingly. They then cleverly used Facebook ARPU as a target to work backward on how much money needed to be spent on placements.

What Facebook failed to see was that, unlike social networks, video content can cross borders. A short video from the U.S. can be consumed in Europe, Japan, and Latin America, inherently sitting on scalability. Moreover, the product is just too human-friendly, which imposes another layer of magic on it. Plus, a global product has a camouflaging effect. If you look at the data of each country alone, it may not be outstanding. But for ByteDance this is a strategy of divide and conquer, and the cumulative effect of eventually bringing together more than 100 countries can be astounding.

One of the reasons why TikTok and TopBuzz's fortunes were so different from each other was that the former was able to grow naturally. What's more, the business jungle has forged this company to be quite savvy. They soon knew that they had to reduce their dependence on Facebook as fast as possible.

In the first half of 2019, after completing a beautiful sneak attack, TikTok shifted its placement position to Google and Snapchat. According to people from ByteDance, this was to prevent Facebook from potentially "doing small moves in the dark" - including but limited to, snooping data, secretly raising the cost, and artificially causing inaccuracy in recommendations. In the TikTok budget chart, Facebook's share has been slipping month by month, from 20 percent to less than 10 percent, and Google, Snapchat, Apple Search Ads, Twitter, and some local apps were all ahead of Facebook.

Then Facebook finally woke up from its slumber. It was now already mid-2019, and TikTok had reached over 100 million DAUs globally. Facebook tried to block TikTok with Lasso, a short-form video app in Mexico and the U.S. However, it didn't take long for a black swan event to hit the world.

06

Up 110 million bi-monthly!

-- "Don't be complacent" "We are just [flying] pigs in a draught"

Apart from Zhang Yiming, if we have to name another core member of TikTok, employees would not hesitate to vote for Musical.ly's co-founder 朱骏 Zhu Jun. He is known internally by his English name, Alex.

Zhu Jun has built up influence in ByteDance at a slow pace, and he is a rare manager who I have not heard employees show negative emotions [when being discussed]. Just after the acquisition, the company constantly adjusted Zhu Jun's role. He initially reported to Zhang Yiming, but was in a marginal position, and Zhang Yiming was said to be uncomfortable with his Western style until his product capabilities were recognized. After a period of time, Zhu Jun reported to 张楠 Zhang Nan, who was in charge of Douyin and TikTok. in June 2019, Zhu Jun briefly took over as head of Douyin, nominally reporting to Zhang Nan, who continued to be responsible for overseas business. In the above three stages, Zhang Yiming was not very happy with the development of TikTok.

It wasn't until October 2019 that the company was restructured once again - Zhang Nan was in charge of domestic business and Zhu Jun fully took over the overseas business, reporting directly to Zhang Yiming - an elevation of his influence. TikTok saw a period of rapid growth.

Zhu Jun is older than most executives in ByteDance and was born in 1970s. With a goatee beard, he has an exquisite demeanor and speaks standard English. Zhu Jun is a native of east China's Anhui Province, graduated from Zhejiang University, and worked in the field of corporate services. He is also a man of nature who loves to drink and recite poems. He often wears a gray shawl in the office, with loose hair and wooden clogs on his feet. "Like a practitioner."

Legends of him circulate internally. "I often meet him on the subway. He rides the subway in Shanghai, a man who has reached financial freedom," said an operations staff, "In the company, it is rare to see a man with gray hair like him, holding the door for female colleagues in the elevator room, letting others go first." "A kind old man," says a product manager (employees of ByteDance are mainly born in 1990s, making the ones born in 1970s "old" in the company), "Alex likes to drink, and when he wasn't so busy, he would take us out for drinks." "Alex has been in the U.S. for many years, and the company was a blend of East and West with him joining us," said a mid-level employee, "Listening to what Alex spoke in the bimonthly summaries was a treat. His English is particularly authentic, and he can explain Chinese culture in English. Wow! It's really great!"

At the moment he took over, antagonism pervaded TikTok's Chinese and foreign employees, so Zhu proposed [TikTok's] mission, vision, and values. According to employees, "Alex constructed poetic expressions." "Foreign employees are especially BUY IN," Here is how Alex put it, "TikTok is commerce, a bridge, and windows."

Zhu Jun's (Alex) appointment came at the right time. He took the pilot's seat, held the team together, and sailed the globalized fleet into the dark night. In early 2020, TikTok had less than 250 million DAUs. The people in the boat are unaware that a massive storm is approaching.

The novel coronavirus quickly spread - A global pandemic, as well as an outbreak of TikTok, swept the globe.

First, at the end of February [2020], an overseas interview blew up in the senior group of ByteDance. "The growth numbers are faster than we've ever seen." Facebook COO Sheryl Sandberg said in an interview mentioning that TikTok's growth rate worried her. What TikTok felt [regarding Sandberg's words] was not joy, but trepidation. Zhu Jun called an emergency meeting: "Sandberg is already concerned about us."

Immediately afterward, the virus spread rapidly around the world, giving TikTok a shot of catalyst. "From March to April 2020, TikTok's DAU went up by 110 million in one bi-monthly period," one TikTok source told me, "It was crazy." (The amount was pretty much the equivalent of getting the entire country of Japan on an app in a month)

However, the rapid rise in numbers made the senior management of ByteDance more and more worried. One day at noon, Zhu Jun formed an online discussion group including several key executives on the enterprise software 飞书 Lark, which is developed by ByteDance. People close to the management told me that Zhu Jun asked in the group, "What is the risk to us if we remove the Facebook SDK (software development kit)?" The situation was so urgent that he asked the group to hurry up and evaluate the situation, and the discussion was finished at 1 p.m., and the feedback had to be given to him at the end of the day at the latest.

The most important question hanging over their heads is: should the Facebook SDK be removed immediately? Once the Facebook SDK was installed, it was like Facebook had placed eyes in TikTok. Information such as the number of users logged in every day and the numbers of users forwarded [a video] was all in sight of Facebook. But if the access was denied, TikTok user experience would be harmed. These endpoints were like milk-feeding machines.

As expected, all departments assessed that there would be a loss - removing the Facebook SDK would result in not getting accurate personal profiles when acquiring users, affecting the growth and realization efficiency. Zhu Jun asked everyone to further clarify how much the user experience would be harmed. The team came to the conclusion together that it was no more than 20 percent.

Zhu Jun then ordered: cut it off immediately.

Finally, it took less than a week for TikTok to unplug all the Facebook login interfaces without a single one left. They decided to "wean."

The uneasiness did not dissipate. At TikTok's bi-monthly summary meeting, Zhu admonished managers, "Don't be complacent" and "We are [flying] pigs in a draught [meaning just riding the tide]."

Just when Zhu Jun was making efforts to help TikTok climb the globalization wave, his old partner in Musical.ly, 阳陆育 Yang Luyu, ran to ByteDance's education sector to continue his dream of education - He led the team to develop the "Dali Intelligent Learning Lamp." He cut off his original small curly hair and had a buzz cut.

"What was TikTok's key development point?" An employee who has worked at TikTok for almost two years gave the answer without thinking, "It's the pandemic. TikTok accomplished a sudden soar to the sky."

***

Due to the size limit, Ginger River will deliver Part II of this article later. Part II will cover Bytedance's expansion strategy, how Zhang's early insistence on going after high-stakes markets like the U.S. proved prescient, how Bytedance became the Chinese company with the most localized operations, and why the selection of Shou Zi Chew, former DST Partner and Xiaomi CFO, as TikTok's head was a calculated balancing act bridging the East and the West.

Stay tuned!

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The article below is written by 宁南山 Ningnanshan, a popular blogger that writes extensively on China's industrial policy. The original title is 从财报看华为2022年现状 Understanding Huawei's 2022 from their financial report

The blogger's real identity is not known, but he is generally understood to be a middle-class worker based in Shenzhen, with a background in engineering. In 2018, he wrote a widely-circulated article titled 作为一个中产阶级，我对国家有哪些不满意 As part of the middle-class, what gripes do I have about my country, in which he identified education inequality, distorted real estate and land policies as well as low and unbalanced birth rates as the biggest challenges for the country. The drastic regulatory changes on real estate, education, and birth control since then closely reflected some of his policy proscription in that article. Some have even claimed that his blog was widely read in policy circles.

This translation has not been reviewed by Ningnanshan. The highlights are from both Ningnanshan and red_wallstreet.

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Understanding Huawei's 2022 from their financial report

Huawei announced its 2021 earnings on March 28, with revenue of 636.8 billion yuan (about 100 billion U.S. dollars), down 28.6% year on year, with the Chinese domestic business down a little more, to 30.9%. Net profit increased to 113.7 billion yuan, up 75.9% year-on-year. This makes 2020's revenue of 891.4 billion yuan Huawei's historical peak. Similarly, the 2021 net profit of 113.7 billion yuan for Huawei is also the peak of Huawei's historical net profit.

But this outrageously high net profit is mainly related to the disposal of 荣耀 Honor (mobile phone business) and 超聚变 XFusion (X86 server business). The "gain on disposal of subsidiaries and businesses" in the chart below amounts to 57.431 billion yuan in 2021. In addition, Huawei's selling and administrative expenses decreased by 9.3 billion yuan in 2021, which also contributed to the increase in net profit.

Huawei signed an agreement to sell Honor in November 2020. Then, Huawei's consumer business in 2021 achieved sales revenue of 243.4 billion yuan, down 49.60% year on year. A large part of this decline should be coming from the sale of Honor. If we take into account this factor, [actual] decline of Huawei's consumer business was not large.

CINNOResearch announced that Honor's sales in the Chinese market in 2020 were 43.8 million units, while Honor's sales overseas were also large. For example, in Russia, Honor's share in 2020 was 15%. It is not difficult to calculate that Honor is a large company with revenues of tens of billions or even hundreds of billions yuan. So missing this business line of course affects Huawei's overall revenue.

Also worth mentioning is that Huawei's wearable devices, including TWS (True Wireless Stereo) headphones, smart screens, etc. achieved revenue growth of more than 30% in 2021.

In fact, what is brought to my mind here is still the chip problem. Why can Huawei still achieve revenue growth in 2021 for these smaller products? Isn't it true that Huawei can't buy chips anymore? I think the main reason is that these products are not shipped in large quantities.

Take TWS headphones as an example, according to the report of 旭日大数据 Sunrise Big Data, the global TWS headphone shipments in 2021 stood at 490 million pairs. Excluding white label headphones, branded headphone sales were only 323 million pairs.

And among the branded TWS headphones, Huawei's sales are not high, the 2021 Q4 share is only 3.48%, ranked eighth in the world, while the No.1, Apple, is up to 42.76%. If you look at Huawei's shipments in this quarter , there were only 2.84 million pairs.

Therefore, compared to the 200 million Huawei cell phones that were sold before the sanctions, the chip inventory for these products may be more than adequate.

In addition, these products are not as important as cell phones. The chips used in this products have low process requirements, and there is also the possibility of the U.S. approving parts of the supply. After all, the U.S. has only banned Huawei's cell phones from getting 5G-supported chips and parts, but allowed Qualcomm to sell 4G chips to Huawei.

The U.S. goal is not to kill Huawei, but to maintain Huawei at a low-tech level, while still generating revenue for the U.S., just like any other companies in China that have focused on buying U.S. chips, operating systems, industrial software and other high-tech products and then specialized in assembling them for three decades.

I think this also reflects the U.S. goal for China in general. Complete annihilation of China is not possible, but goal is to maintain China at a low level of technological capability, so China can keep working for the U.S. and providing markets [for U.S. products]. This is just like how landlords in feudal society needed peasants. After all, someone had to do the dirty work, you can' t let the landlord plow the land himself, right? Besides, the high-tech products made in the United States need to be bought by someone in foreign markets.

In addition, 鸿蒙操作系统 the HarmonyOS was Huawei's key mention in [their product] launches.

On June 2, 2021, HarmonyOS 2.0 officially landed on cell phones, tablets, smart watches and other applications.

Huawei's annual report shows that by the end of 2021, the total number of HarmonyOS-equipped devices reached 335 million, including more than 220 million Huawei devices, and 115 million units of 鸿蒙智联 HarmonyOS Connect products [third party products supported by HarmonyOS].

The reason why Huawei wants to emphasize the installed base of HarmonyOS is because it is valuable. On Huawei Mall's official website, there is a special area for HarmonyOS Connect, from small appliances, smart door locks to motorcycles. [When] these third-party manufacturers of equipment support HarmonyOS, Huawei is able to collect money from it, as not all manufacturers have the ability and willingness to build their own software team.

Huawei relies on HarmonyOS to both make money, and also to avoid the problem of chip shortage.

And then we come to 超聚变 XFusion. A year after Honor announced its disposal, the shareholder of Huawei's Xfusion business, which is responsible for [development of] X86 servers, changed to Henan XFusion Technology Co. in November 2021, with a current equity share of more than 70%.

X86 servers currently comprise the mainstream of the global server market. Besides them there are ARM-supported servers. Taking Q4 2020 as an example, according to data from IDC, X86 server revenue grew 2.9% to about $23.1 billion [globally]. Non-X86 server revenue declined 9% year over year to $2.8 billion.

Huawei's enterprise business achieved sales revenue of 102.4 billion yuan in 2021, up just 2.09% year on year. This had to do with the disposal of the X86 server business, although Huawei did not disclose the exact effect of this.

So Huawei's 28.6% [revenue] decline in 2021 is needed to take into account the sale of Honor and XFusion.

After selling Honor and the X86 server business to gain cash flow, what about the businesses of Huawai that are still growing consistently?

Huawei's business highlights from 华为云 Huawei Cloud and 数字能源 Digital Power,

At the earnings conference, Huawei said Huawei Cloud in 2021 has achieved sales revenue of 20.1 billion yuan, an increase of 37% year on year, ranking second in China. According to industry leader Alibaba Cloud's financial report, the profitability of the cloud business is not very good. This should be similar for Huawei Cloud. However, for Huawei, the cloud is a growing market . When Huawei Cloud subsequently achieves scale, it is possible for Huawei to bring more profits.

Huawei also announced that Digital Power has achieved business growth of more than 30%. The scale of this business compared with Huawei Cloud is also quite large. According to the information currently available, such as the speech of Huawei executives, in 2019 the sales revenue of Huawei Digital Power (then named "Huawei Network Energy") has exceeded 30 billion yuan, with a year-on-year growth of 40%, and in 2020 also they announced that it had gained growth, so it is reasonable to estimate that its 2021 revenue is already at least RMB 40 billion or more, in other words RMB 40-50 billion, and should also be more profitable than Huawei Cloud.

On June 7, 2021, Huawei Digital Energy Technology Co., Ltd. was established with 胡厚崑 Hu Houkun as its legal representative and a registered capital of RMB 3 billion. The company's sole shareholder is Huawei Technologies Co., Ltd.

In the context of carbon neutrality, Huawei's Digital Power business, which includes data center energy, electric vehicle power, photovoltaics, etc., is expected to continue to grow. This is advantageous for Huawei, and can give it different options [for this business line].

The first option is to sell it [/sell down shares], but it does not seem like a good idea to sell a business that continues to grow.

The second is to go public independently. With such a quality business, going public can help to get cash flow, but at the same time can bring returns to the shareholders and the company. Although Huawei has historically insisted not to go public, this is a different time we live in.

At least in my opinion, going public is a better option than selling. Either way, a business that has tens of billions of RMB and is still growing is certainly good for Huawei, and it gives it more options in the future.

In addition to the growth of Huawei Cloud and Digital Power, Huawei is also fighting to invest in a new business with a broader market space: electric vehicles. Truth be told, in 2021 Huawei's business of selling parts to electric car manufacturers has not seen much of an uptick, as shown by the tepid sales of 塞力斯 Seres and 北汽极狐 BAIC Arcfox, which are both equipped with Huawei hardware and software.

But in this business Huawei has shown its resilience to invest continually. I think doing hardware and providing parts is actually what Huawei is better at, and it is expected that Huawei's EV business will see growth in the future.

Huawei said in its annual report, "We are continuing to increase investment in intelligent automotive components, as they represent long-term strategic opportunities for Huawei. In 2021, our investment in intelligent automotive solutions reached one billion U.S. dollars and our intelligent automotive solution R&D team reached 5,000 people."

At the same time, Huawei said this year, the new HI version of the BAIC Arcfox Alpha S, 长安阿维塔 Changan Avita 11 and AITO 问界 Asking World M5 (Smart Choice version) will be delivered in mass production, of which AITO is a brand launched by Huawei itself in cooperation with Xiaokang Co.

Huawei's core fundamental is [still] its carrier business, its deepest moat. With a variety of patented technology standards, they are the most powerful, the most well-organized, with the most complete level of 国产化 localisation.

A typical feature is that all of Huawei's executives have a deep background in communications business, and have a global experience of business success and failure. Conversely, no one at the top of Huawei comes from the background of software business, which means that Huawei's transition to the software business will not be smooth, and they will certainly pay some learning costs.

In fact, for any business [to develop well], it is important to have someone on top who understands you, something I think some of you may appreciate.

If Huawei loses the communications business, it will lose its soul, and to see the rise and fall of Huawei is to look at its carrier business, so to speak.

Huawei's revenue from the carrier business entered a plateau after reaching 290.5 billion in 2016, and stabilized between 290-300 billion yuan for four consecutive years from 2016-2019, breaking through 300 billion to reach 302.6 billion yuan in 2020.

And in 2021 it was 281.5 billion yuan, down 7.0% from the previous year.

But the decline was not large, while Huawei announced its own highlights when it said that in 2021 its carrier business overseas revenue [still] accounted for more than 50%.

[Then] I checked the capital expenditure of Chinese operators.

The largest was China Mobile's capital expenditure in 2020 is 180.6 billion yuan, including 102.5 billion yuan of 5G-related capital expenditure.

The capital expenditure guidance for 2021 was 183.6 billion yuan, including 5G-related capital expenditure of 110 billion yuan, and there is no significant decline, so at least the scale of the Chinese market is still stable.

As for why the operator business is in decline, as Huawei did not publish the data for each sub-market, there is no way to judge.

But theoretically, as the chip inventory becomes gradually depleted, it is likely to lead Huawei to stop expanding new business in some non-key customers, or even strategic contraction.

In addition, some customers may consider this as Huawei's weakness when signing a three-year or five-year contract for long-term supply stability, and that will affect their final choice.

In short, the 7% drop in operators [business] can be considered to be the beginning of pains, but not yet devastating.

But a challenge for Huawei is that 2022 will be the last year of China's 5G construction peak, "5G investment is down slightly this year compared to last year. From next year onwards 5G investment is also no longer growing and will be on a gradual downward trend." said Yang Jie, chairman of China Mobile. In other words, the three years from 2020 to this year was the peak period for 5G investment.

Of course, at least in 2022 the big customers will still make investments [in capital expenditures].

Anti-cyclical R&D investment

In fact, I think this is the biggest highlight of Huawei's financial report. 2021 R&D investment was 142.666 billion yuan, compared to 141.893 billion yuan in 2020. Despite the significant decline in revenue, R&D investment actually increased by 0.5%, and the percentage of R&D over revenue rose significantly from 15.9% to 22.4%.

And for the main areas of investment, Huawei in the financial report reads: "We continued to invest in business continuity as well as future-oriented research and innovation in technologies such as cloud, artificial intelligence, intelligent automotive components, and foundational software technologies."

2022-2023 will be the most difficult winter for Huawei, but simply put, Huawei has done a lot of preparation for survival:

1: From the perspective of Huawei's three core businesses: first of all, the carrier business as Huawei's core foundation began to be affected in 2021, but overall situation was still stable. Even assuming another 10% decline in this year, 2022 can still bring Huawei more than 250 billion yuan in revenue.

For Huawei's consumer business, although the smartphones are certainly not able to grow because of lack of chips, but as for the wearable products such as TWS headphones, smart screens and other products, they still have room to grow because the sales are not large [now].

Another is the growth of the installed base of HarmonyOS, on not only Huawei's own devices, but a variety of third-party manufacturers. This will achieve the interconnection of everything, and will also be able to bring revenue for Huawei.

Huawei is currently engaged in the whole house intelligent products. If you are curious about technology you can go to Huawei's store to actually see for yourselves. So Huawei's consumer business will continue to bring cash flow to Huawei despite the decline.

But overall, because the smartphone business is the big one, the core, so whether it's HarmonyOS or various wearable products, they can't make up for the decline in smartphone revenue.

[Consequently] Huawei's consumer business revenue of 243.431 billion yuan in 2021 is expected to shrink to less than 200 billion this year.

Huawei's enterprise business is the focus of its efforts to achieve growth.

Huawei has made changes in its business model in 2021, establishing the 煤矿军团 Coal Mining Legion, 智慧公路军团 Smart Highway Legion, 智能光伏军团 Smart PV Legion, 港口与海关军团 Ports and Customs Legion, and 数据中心能源军团 Data Center Energy Legion, as well as issuing documents at the end of 2021 to establish ten reserve legions, including 互动媒体（音乐） Interactive Media (Music), 运动健康 Sports and Health, 显示芯核 Display Chips, 园区网络 Campus Network, 数据中心网络 Data Center Network, 数据中心底座 Data Center Base, 站点及模块电源 Site and Modular Power, the 机场轨道 Airport & Rail, 电力数字化服务 Power Digital Services, and 政务一网通 Government One Network.

At Huawei's 2021 annual report launch, Huawei's rotating chairman Guo Ping said.

"Huawei's product line is relatively long, and the technology is also more and more complicated. Through the 军团 legions, which have short chain of operation and management authorization, we make it easier for our customers to do business with Huawei. We hope that this approach can create a new win-win business model for both customers and also for Huawei. "

In other words, a legion is primarily a customer-oriented sales organization.

I looked at the names of the fifteen legions. They are classified by industry such as coal mining, ports and customs, but also by product, such as intelligent PV, display chips.

One particularly interesting part is the display chip legion. This legion is responsible for the driver chip for OLED display panels. Its customers are BOE, Huaxing photoelectric and other display panel companies.

The market share of domestic manufacturers in the display chip sector is very low, while the market is occupied by manufacturers from South Korea and Taiwan. The process requirements of the display chip is not high, in the 28nm, 40nm or above. Huawei must have seen this as a market with large potential. In general, the 28nm and above sector will be the first for our country to achieve 去美化 de-Americanisation.

We are all very concerned about when the chip can achieve de-Americanised production. In fact, judging from the fact that Huawei has set up this display chip legion, it means that Huawei has already started to expand its display driver chip business, showing that Huawei is optimistic about the expectation of achieving de-Americanised production. Generally speaking, the sales staff of each company will start to expand their business six months to a year before the product is listed for mass production, and if they start to expand their business, that means that the time for mass production is not far away.

Huawei's first batch of display driver chips are estimated to be 40nm, and the first will begin production on the de-Americanised chip production line, and then the next step will be full localisation.

2: The disposal of Honor and XFusion brought a huge cash inflow, making the net profit of 2021 of more than 100 billion. And the 57,431 million disposal income in 2021 of subsidiaries, may not be the entire earnings from sale of Honor and XFusion. If this assumption is correct, then the disposal of these two businesses will also contribute to the net profit in Huawei's 2022 financial results.

3: Huawei still has Huawei Cloud and Digital Power, two fast-growing business, and their scales are not small.

2021 Huawei Cloud has achieved revenue of 20.1 billion yuan, and Digital Power has achieve revenue of about forty-five billion yuan. The overall market sizes of both the cloud and energy businesses are also developing rapidly, which is beneficial for Huawei. [If they can] maintain the growth rate of these two businesses to achieve more than 100 billion yuan of revenue in 2023, then it will be very beneficial to Huawei.

I can give an example here. 阳光电源 Sungrow, which is an photovoltaic inverter company listed on A shares, achieved 15.374 billion yuan for the first 3 quarters of 2021 and it is estimated that the whole year revenue is about 20 billion yuan. Its market capitalization is more than 150 billion yuan, which is despite the current downturn in the A shares market. At the same time, Huawei Digital Power's revenue and profitability are much stronger than that of Sungrow.

Likewise, Alibaba, the domestic cloud business leader, has made the development of Alibaba Cloud a highlight of its financial report, which obviously helps its share price.

For a fast-growing business, Huawei can choose whichever way that can help to maximize Huawei's interests, whether to continue to hold, sell shares, or publicly list the business for cash flow. This proves the proverb 发展才是硬道理 development is the hard truth.

Huawei also has a lot of small businesses with lower revenues, such as Huawei intelligent security business . Despite entering the market for a few years, the gap with Hikvision and Dahua is still very large and has not shown explosive growth yet.

For these non-core businesses, if they can not achieve rapid growth, they are also likely to be considered for sale.

4: Electric vehicle components and software business (e.g. autonomous driving, automotive software) is Huawei's largest future market, but it has not entered harvest period yet in 2021.

Electric cars are high-value products. A Huawei cell phone sells for around 5,000 yuan, while for an electric car Huawei can provide parts and software worth over 50,000 yuan.

When this business scales, Huawei can earn big money even just from selling autopilot software and HarmonyOS intelligent cockpits. Let's see whether Huawei's electric vehicle business can have a good performance in 2022.

5：Huawei also has other potential revenue streams. For intance, 华为商城 Huawei Mall is actually Huawei's e-commerce business. Huawei can earn commissions from selling third-party products sold over there.

Another example is licensing fees and royalty from patents. This is a business with extremely high margin.

On the afternoon of March 16, 2021, Huawei released its Innovation and Intellectual Property White Paper 2020 in Shenzhen. Huawei said to the public that in order to promote openness and transparency with the application of 5G technology and balance innovation protection with industry development, Huawei will start charging royalties on 5G patents from 2021, and will offer a reasonable percentage rate applicable to the selling price of 5G phones, with a license fee cap of USD 2.5 per unit.

But I think although this will bring more revenues for Huawei, it will not be its main source of revenue. For details please check my previous article: 聊聊华为能收到多少5G专利费 Let's talk about how much royalties Huawei can earn from 5G

Since it suffered sanctions in 2019, Huawei has generally fulfilled its social responsibility relatively well.

This can be seen from two figures.

One is that its number of employees in fiscal 2021 is 195,000, which is only slightly lower than in 2020, while still higher than Huawei's 194,000 employees in 2019.

The second is that from 2020 to 2021, Huawei will recruit roughly 26,000 fresh graduates. This is actually also very important. Huawei is a major recruiter of fresh graduates from 985 and 211 universities every year. If the number of fresh graduates recruited is significantly reduced, it will greatly squeeze the job market of fresh graduates. Huawei said in a press conference in 2022, Huawei plans to recruit more than 10,000 fresh graduates, which means that Huawei is trying not to affect the employment of fresh graduates.

Finally, let's talk about chip localisation. In fact, we are not very far from breaking free from sanctions and manufacturing [our own] chips.

First order of business is to achieve de-Americanisation in our production lines. We should use equipment and resources from Europe, Japan, South Korea, China Mainland as weill as China Taiwan to achieve de-Americanisation before achieving localisation. It is very difficult for China's local equipment and resources to completely supplant similar products from all of the developed markets. But it's relatively easier to first use products from non-U.S. developed markets to replace U.S. products. So [I] expect de-Americanisation to come before localisation.

At the same time, de-Americanisation does not have to start from 28nm [chips]. It can start at 40/45nm with lower technical difficulties, as seen from Huawei's efforts in display chips.

Of course, even if we build de-Americanised chips in 2022-2023, it does not mean that the problem is solved. [We still] need to achieve full localization in the future, while also maintaining technological edge over global peers. This will be a long-term process. That is, even if Huawei is expected to solve the problem of supply of low-end chips in 2022-2023, it will still face a long-term problem of using only low-end chips and international competition. Huawei will still face a long-term test.

This is especially true for high-performance chips such as smartphone chips. [The world has gone] as far as 5nm. To achieve de-Americanisation or localisation on this level, it is obviously not feasible in the short run. This is why Huawei is focused on expanding the large market of electric vehicles at the moment. With a bigger size [of the product], one can achieve higher performance through system designs.

This can also be seen from Huawei's overall strategy, as it's moving towards "large-sized products" such as Digital Power and EV parts, and "software" such as HarmonyOS, AI and Huawei Cloud. This is because it is only possible to achieve de-Americanised production of 45nm/40nm/28nm chips in the next 2 years. And it will take more time to achieve 5nm.

Fortunately, communication equipment, Huawei's traditional strength, is also a "large-sized product". Better performance can be achieved through excellent system design and algorithms.

As soon as China achieves its first step towards de-Americanisation, not only can the global market increase its confidence for Huawei and even the whole China, it will also be a shock for the U.S. Because that will mean 4 years after the 2018 trade conflict, it actually have no impact on China. And if the sanctions on chips are also ineffective, U.S. will have fewer and fewer options for controlling China's economic and technological development.

Out of economic interests, in the beginning, China just wanted to be part of the global supply chain. But U.S. forced China to do everything, build everything on her own. This is actually not good for the U.S.

I have always believed that the U.S. sanctions on ZTE in 2018 and on Huawei in 2019 are good for China in general. Even though there are adverse impacts on Huawei and ZTE, the bright side is general advancements across the whole supply chains. From 2018 to 2022, hundreds of thousands of jobs were created in the nation's chip industry. The salaries have also increased significantly. When one local chip equipment maker starts to recruit fresh graduate hires for 2022, for example, the annual starting salary can be as high as 300,000 yuan [about 47,000 U.S. dollars]. This is much better than before.

This mode of development is actually better for Huawei. It used to only act like a lone wolf in a no-man's land, [now they may enjoy a broader supporting industrial eco-system].

The circumstances also forced Huawei to resolutely enter hitherto untouched areas. HarmonyOS is a telling example.

Above are some simple analyses and thoughts on Huawei's financial report.

***

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