a16z Podcast - a16z Podcast: China and Tech

Episode Date: March 30, 2014

China has been a tough market to crack for U.S. internet companies. One of the key reasons is China has its own crop of hugely successful and highly innovative companies. Andreessen Horowitz’s Chris Dixon, Connie Chan and Benedict Evans highlight the key players in China, and what non-Chinese companies can learn from them. Where Chinese companies and money are headed next.

Hi, this is Chris Dixon. This is the A16Z podcast. I'm here today with my colleagues Benedict Evans and Connie Chan, and we're going to talk about tech and China. So Connie, you spend a lot of time thinking about China. I think just because a lot of people who might be listening to this don't really understand the landscape there, could you just give like a quick overview? Who are the big companies? What do they do? What are they working on? The big companies people have historically talked about would be they call them. them the back companies. B stands for Baidu, A stands for Alibaba, and T stands for Tencent. But on top of that, there are some emerging companies like Chi Hu that are growing very quickly that are worth

paying attention to as well. I think these three companies are actually quite misunderstood, unfortunately, out here in the West. For example, I read a lot of articles that talk about Tencent, and they say that advertising is their main business model. But people don't realize if you just look at their financial statements, advertising is less than 10% of their revenues. And 80% of their revenues are coming from games and value-added services. So these are like in-at payments on games and things like that? Yeah, yeah. They actually are very active in gaming.

Tencent is the creator of one of my favorite mobile apps called Wei Xing, which in English is called WeChat. It's one of the most innovative messaging apps that I've seen for a long time. that a lot of Chinese now consumers are using to do a number of things outside of just communicating to their friends and family. They're using it to order taxis, to send money, to order food from restaurants, to follow celebrities, to get local traffic, all sorts of things. Alibaba is the other company I mentioned. They have a number of huge properties. T-Mall and T-Mal are probably the two most well-known ones that are massive players in e-commerce.

Allieuing is also a cloud product that they have, as well as Alipay, which is somewhat similar to PayPal here in the States. Baidu is often called the Google of China, and that's because they're dominant in search, also very dominant in maps. In addition to those two properties, they have a couple other ones, but those are the two that they're mostly known for. And the one that I mentioned earlier, Chi Hu, they started in security, but now they're starting to get into search and other mobile products, too. Are there any U.S. websites, web services that are large in China? I mean, you know, Google has obviously hasn't succeeded against Bidu. Yeah, a number of U.S. companies have attempted to go out there. Some are more successful than others.

In the last couple of years, some of the Silicon Valley back startups, such as Flipboard, LinkedIn, Evernote, have tried to go out there. And some of them are doing quite well. Who's doing well there? Well, LinkedIn is a recent player that just launched, and I know they have huge aspirations to hire a lot of people. So that's one that's worth watching. Evernote has found a really good team in Beijing, and I think they really benefited from having a good local partner. They're working with CBC Capital, who is also the same team that brought out LinkedIn. It's interesting, listening.

There's a sort of generalized, sort of slight naive idea that somehow the Chinese are stuck behind the Great Firewall of China and that they're desperate to use Facebook and Google and actually they've kind of got their own internet and it's just as good as ours and actually much more interesting in some ways. So the cynical view though is that they effectively block the US companies and the state their sponsor these successful companies.

Yeah, but if you look at say Japan or South Korea, they're not behind a firewall and those US companies haven't done any better there. I mean, you know, they've got a few exceptions. But it's more that you could turn it the other way and say it's more that where you have a country is actually big enough to sustain real scale businesses and has a fundamentally different language and culture, then it's quite hard for Amazon or Google to roll in, whereas what

happened in, you know, a small European country or, you know, some other part of the world is you didn't really have the scale or the language barrier to allow a domestic company to really grow up. What about, like, Germany or something? Like, they use mostly U.S. services, right? Yeah, but Germany is much, much smaller. Okay. I mean, Germany's half the size of the U.K. in Internet.

I guess, to your point, India has a lot of its own services. Yeah, exactly. India has its own services, but even though it's not protected by language. I see. And I think it's interesting if you think about how you actually define innovation. If you think of it as also business models and monetization, there's a lot of innovation happening out in China. And I think a big mistake that people make is they look at a company and they say, oh, this is the Facebook of China, this is the Yelp of China, this is the Groupon of China or YouTube of China. And most of the time, that's just to some. simplistic of a way to kind of summarize what these companies do. And most of these companies have

multiple business models behind them and they monetize in ways that are very different than their United States counterparts. Do you think that's because they're head of the United States counterparts or because it's a different culture? I think it's, it depends on which products. So for something like messaging, I think they're ahead. Something like logistics, I think they're ahead. Online video, I actually think they're more experimental as well. And then some of it is cultural. And so, for example, messaging their head, what does that mean for U.S. or, let's say, non-China-based messaging? Like, what will be, does that have implications for WhatsApp, for example? I actually think it's a positive that you can learn and see what's working in China, because China's just a land where there's so much experimentation going on.

And there are lots of startups going after every single industry. And if you look at the companies that are going into messaging and China, Wei Xing is obviously the biggest one, but there are a couple other players, too. Every single one of them is coming up with something innovative that I haven't seen in a lot of messaging companies in the U.S. yet. So, like, if you had to predict then, if WhatsApp were to copy them, what would they do to monetize? Well, WeChat has a number of ways they can monetize in the future, right? And I think part of it is linking that application with all the other services.

Okay, so link it to the taxi app and the games and kind of think of it almost as its own operating system. Well, that's the weird thing about WhatsApp. It's the biggest and it's the only one that's not trying to do any of this stuff. So obviously, WeChat is the standard bearer for trying to create, use the messaging a platform, messaging as a platform to do lots of other cool stuff, which Facebook did on the desktop. And Lyme is trying to do globally as well.

But WhatsApp very deliberately said we're not going to do anything other than this extremely narrow and extremely deep focus. But I think, to Connie's point, what the Chinese example suggests is that you can do, you can layer on monetization in a way that doesn't annoy people. Yeah, I think there's a big point around, you know, what is the right channel for getting this stuff to people? Is it going through Google? Is it going through Facebook? Is it going through the app store? Is it going through some sort of social messaging system? Right. You know, Facebook built on the desktop, but they haven't really built that on mobile. And some of those apps, for example, we chat monetizes in the U.S. by selling sticker packs.

And I know stickers aren't necessarily as successful out here than they are in a lot of the Asian countries, but it is one way that they're monetizing users here. Yeah, it's like Asians like stickers and Westerners like filters. Let's just kind of divide. Well, I also think that a lot of the stickers I see in China are very innovative, actually. So rather than just sharing a single expression, that moving animated GIF actually captures an entire phrase. So it's not just someone looking sad. It's someone looking sad because they're hungry. It's someone looking sad because they're tired.

And so the emoticons, I actually think, are even more creative out in Asia than they are here. So a lot of these companies now seem to be interested in entering the U.S. U.S.? Can you talk about that? Yeah. There are a number of them that are coming out here, and in several different ways, too. One way is actually just straight up investing in a lot of U.S. companies. And so a lot of... Yeah, we're seeing a lot of that, like in our investors, seeing them as co-investors.

Yeah, and so that interest is coming... And they're pitched entrepreneurs is we can help you enter China and teach you about what we've learned from China? Yeah. Yeah, mostly. But that interest is coming from not just the major strategics like the Tenson and Alibaba and the Chihou's, they are very active out here. But it's also coming now I see from China VCs and actually even sovereign wealth funds around Asia.

There's just a lot of interest in diversification in getting more learning from the United States and being in close to relationship with a lot of these companies. So one of the things that I think seems to be going on now is that you're having a kind of a sort of a war in mobile between the bat companies. and so they were all kind of aggressively moving into each other spaces and it seems like you're getting some bleed out of that into the rest of the world

so obviously we had 10 cent who was it that took a stake in tango I can't remember now Alibaba yeah so Alibaba took stake in tango because 10 cent is strong in messaging it seems so this is kind of they had another messaging product already that wasn't doing as well so are these guys going to the back company's going to try to come into the US and go head-to-head against, is Baidu going to try to take

on Google in the U.S.? Are they going to come in that strongly? I don't think that's necessarily that strategy, but in terms of learning and investing in the states, I do think that all of these companies will round up that effort. More of a scouting mission, and not an invasion yet.

I wouldn't call it an invasion, but I do think there's a lot of ways to find mutual cooperation or mutual learning. And it's funny, actually, when I go to China, a lot of my friends out there, they read tech crunch and they read Pando Daily and they read a lot of the tech blogs

we read out here because a lot of those articles get translated into Chinese almost immediately and it just shocks me how many people out in Silicon Valley don't do the same in reverse because there are actually a lot of companies we can learn from in China. What would you recommend that English-speaking Americans

read? The English sites, there aren't that many but tech in Asia is one that I like. Tech Node is another one. So those are two that are in English that have daily coverage. But like you were saying earlier, a lot of the Chinese companies are coming out here.

Sometimes it's to invest. Sometimes it's actually to bring U.S. hardware products out to Chinese consumers. So that's a growing trend as well. And anything that we see out here, for example, like a jawbone, the upband is actually very popular in China. And so there are a number of commerce companies in China that would just love to be distribution partners for hardware companies out here. I mean, the interesting from part of China from the sort of point of view of the broader mobile ecosystem is that although Apple is present in China and is selling, doing well selling iPhones and iPads, obviously, clearly by far the biggest smartphone platform in China is Android, but it's Android without Google. So you have even Samsung and even, I actually used a Motorola phone a couple of weeks ago that was being sold in China and had no Google services on it at all. So you've almost got two androids. There's two thirds of Android, which is the one that Google gives numbers for, is outside China.

And then there's another third of Android, which is in China and doesn't have Google Play on it or Google Maps on it. And yet it's still potentially in a market. So you've got these Chinese app stores that are starting to look at whether they can get foreign developers to come in and sell to Chinese consumers. Yeah, and that brings up a great point that I think is another thing that a lot of Silicon Valley entrepreneurs should be aware of, which is that just by putting your application on Google Play doesn't mean you're getting distribution in China. There are a ton of other app stores, and even the top strategic companies all have their own. own as well, that you need to have close relationships with and have special promotion partnerships with if you want your apps to get distributed. Google Play, I believe, is less than

10% of Android app downloads. You main gave a number of 6% of the installs on their network. Yeah, yeah. So all of my friends, for example, who are born in China who use devices, none of them are using Google Play to download apps. They're all using these third-party services. And that's not even a piracy issue. It's just the nature. of the UK system there? Yeah. I mean, it's a function of a lot of the Chinese developers are directly giving their applications

to those companies instead. And those are often the app stores that get preloaded on a lot of the devices that get sold in China. Because just like you said earlier, a lot of the devices that are sold, it's not preloaded with Google services. So they don't have Google Play to use.

They have to go separately download it if they even want it. And therefore, oftentimes consumers will just use whatever app stores preloaded on that particular device. And it also makes sense that I think Google services aren't readily available on those devices because, to be quite honest, a lot of Google products are difficult to use when you are in China. They're either slower to load or, for example, the maps, I believe they don't have the correct

license right now. I'm not 100% sure on that. Yeah, I think Apple is so Apple is licensed maps in China. It's kind of weird because if you look at China on an iPhone from Apple, outside China, you see like one road in the whole country. But if you're in China, then you see these really, really good maps. They don't have the rights to send their, do their satellite imagery. But then when, it's not even the satellite, it's just the street maps.

But then when you're in China, you get really, really good maps for China that Apple's licensed in China. But then you don't see any roads anywhere else in the world. So they've got this kind of weird licensing thing going on. And, of course, for some strange reason, the Chinese didn't want Google to drive its cars all over China to build her in math. so Google doesn't have its own kind of Grand Truth Maps for China so they'd have to license them as well. But even on the mapping front, while Baidu as the market leader there,

I looked at Tencent's mapping product recently and their street view was phenomenal, phenomenal technology. I mean, it's an interesting thing, interested to see if you agree with me, but I kind of have the impression that the function of having these three internet giants in China is that whereas outside you have, you know, Amazon is one economy, us and Facebook one social and Google one maps and search and nobody else is even trying to do maps really i mean the apple's trying but you know not on the web whereas in china you've generally got two or even three companies are doing something pretty good in most spaces so it might be

that they're not necessarily as quite as good as google maps might be in san francisco but you've actually got a lot more competition going on is that kind of a fair view i do think there's more competition in china and it's around every single every single possible business opportunity It's also just a function. There are more people there. There are more startups there, right? And I do also see this changing, though. I mean, as you look at all the acquisitions that Facebook has been making recently,

you can easily foresee them acquiring more things that don't naturally seem like they're social on the outset. Certainly it happened with Google, and it seems like it might be having with Facebook now, but, like, Google, you know, five years ago you predicted by a thermostat company? Like, no way, right? Right. So they've become much more like the GEs of technology. or something. Right, right.

Conglomerates. So let's end up maybe with a, do you have a few predictions you'll make about the Chinese companies or the future? Well, I think there are a couple of areas that China's really innovating on. And I do think some of the newest, coolest features will come out of Asia, particularly around logistics. I've seen a lot of same-day delivery companies try and create startups around Silicon Valley. around San Francisco, but I look at logistics, and that's a problem that China's been tackling for same-day delivery for the last five, five-plus years, right? And so logistics because... And who's the big logistics company there? Is it only Bob? Well, there are several, and a lot of the

e-commerce players have their own logistics teams as well. So, for example, a lot of people talk about Jingdong because they can do same-day delivery within a handful of hours, sometimes as quick as four hours, within a large city like Beijing. But I think logistics is one area that China can be really innovative in because they've been forced to. If you look at populations in Beijing and Shanghai, those cities are so densely packed. And they also have the added benefit of very low labor costs. So they can be very experimental in figuring out the best customer experience. And whether or not they should, for example, take an area of a map and break it off into squares

or are circles actually more efficient than squares? because there's overlap. These are all things that they've been tackling over the last five years. And so in that area particularly, I think there's a lot of learning to do from China. E-commerce is another one where I think it's going to be really interesting to watch because something that's misunderstood about China is that the second and third-tier cities are very different than the first-tier cities. And oftentimes, if you go to a third or fourth-tier city, they don't have a local mall, a local drugstore that's within driving distance or walking distance. some of those places they're really skipping and going

not from just having a village and they're going to a mall but they're skipping the mall portion and going straight to buying online and so just online adoption and then the logistics challenges around that I think are going to be really interesting to watch messaging I mentioned earlier as an area I think that Asia's just going to be very innovative and education is another one education of mobile payments that I those are two areas that I'm starting to look at China for innovation too all right great thanks