The global economic downturn caused by Covid-19 was always going to hit the smartphone market. But as smartphone makers shifted their conferences online, pandemic conditions eased up in China, making it the only phone market in the world that saw sequential growth in the second quarter of the year.

A ‘new’ 5G Iphone?

Apple’s Chief Financial Officer Luca Maestri told investors on a recent call, “Last year we started selling new Iphones in late September; this year we expect supply to be available a few weeks later.” The new phone may launch on time, but delivery and sales will face delays.

It may well be that Tim Cook isn’t worried about the delay. Last year, even though Apple was forced to accept price cuts and massive discounts, the new Iphone 11 became one of the best-selling phones in China. Alongside it came the revamped Iphone SE, whose strong value for money made it the most popular Apple model in the world. Global shipments of the new Iphone SE reportedly reached 12-14 million units in Q2 2020.

The success of these two phones gives Apple reason for confidence. According to data from market research firm CINNO, in Q2 2020, Iphone sales in China increased 62% year-on-year to 13 million units.

With this momentum, the launch of the 5G Iphone, expected in fall 2020, is hotly anticipated.

5G is becoming an essential selling point in the Chinese market. Statistics from the China Academy of Information and Communications Technology show that domestic 5G mobile phone shipments reached 13.911 million units in July. The data shows that 5G smartphones accounted for 62.4% of domestic mobile phone sales, exceeding 60% of the total for the second consecutive month.

The wave of 5G replacements is likely to build over the next few months. Analysis by research firm Counterpoint suggests that more than 50% of global 5G phone sales this year will come from China.

The survival of Huawei

At the end of March, Huawei rotating chairman Xu Zhijun said that 2020 was Huawei’s most difficult year, and called for the company to come together to overcome its difficulties.

When it rains, it pours.

According to international media reports, Huawei’s temporary reprieve from a ban on importing US technology expired on Aug. 13 this year. There has been no word of a renewal.

Its relationship with the Google Play Store has been severely disrupted. Huawei devices that came with pre-installed Google mobile services can still download and update Google applications through other channels. But newly released phones, such as the P40, cannot use such services.

Huawei is working to mitigate the loss of the Google Play Store. Its phones come equipped with a Huawei suite of mobile services, and a homegrown operating system called HarmonyOS, or HongmengOS in Chinese, is coming to smartphones in early 2021, the company announced Sept. 3.

On the existing foundations of the HarmonyOS ecosystem, breaking into overseas markets may take a while. Few of the world’s most popular apps are available in Huawei’s app store, although some can be installed independently. Richard Yu has predicted that apps like Facebook will eventually join the Huawei app store.

Harder to evade are the US’s new restrictions on the company’s semiconductor supply chains.

Huawei’s executive director Richard Yu said at the China Informatization Hundreds Conference 2020 that due to the second round of sanctions by the United States, Huawei will lose its chip making capacity on Sept. 15. As a result, the company’s smartphone shipments this year might be fewer than last year’s 240 million, Yu said.

The dwindling supply of chips will severely challenge Huawei’s market competitiveness in the phone business. Coupled with the ban on overseas GMS services, its vitality in overseas markets has been struck a heavy blow, and this has cast a long shadow over Huawei’s confident New Year vision.

Xiaomi at ten: a fork in the road

When Covid-19 hit China, Xiaomi’s shipments were already lowest among the four leading manufacturers, which also include Huawei, Oppo, and Vivo.

Despite strength in online sales channels, the epidemic era hasn’t been kind to it. In Q2 2020, the company accounted for only 10.4%, or 9.1 million, of the 87.8 million smartphone units shipped in China, its 21.9% year-on-year drop in sales second worst among the major brands, data from IDC said.

Xiaomi’s setbacks overseas have been worse as it lost production and order capacity due to the virus. In India, one of its strongest markets, Xiaomi’s overall shipments fell 48.7% year-on-year.

Xiaomi models do not have a reputation for value, and it hasn’t come up with an alluring flagship model to attract consumer attention. Its surround-screen model , announced with much fanfare last year, was indefinitely delayed in 2020. The same holds true for chips. After the first generation of its phone chips was released in 2017, Xiaomi hasn’t released any plans for a second generation.

Xiaomi also lags its peers in R&D spending. In 2019, Oppo and Vivo both increased their R&D spend to RMB 10 billion ($1.46 billion) . Xiaomi only invested RMB 7.5 billion in 2019, and plans to reach RMB 10 billion this year.

Lei Jun, Xiaomi’s co-founder and CEO, has pursued business diversification for a while. But despite growth in IoT sales prior to 2020, Xiaomi remains a smartphone company. Its handset shipments account for 50.1% of its total revenue.

Internet of Things (IoT) products have performed well in recent years. But even in this market, Xiaomi is slowing down, weighed down by excessive reliance on hardware sales and the complicated supply chain logistics of selling hundreds of products. Its Q1 2020 earnings report shows little growth in IoT.

Oppo is diversifying

Meanwhile, Oppo has increased its investments overseas and established a semiconductor company called Zheku Technology.

Zheku may be Oppo’s way out. The company has always focused on marketing and offline channels and has suffered a lot during the Covid year. Its eye-catching advertisements—often seen on other manufacturers’ gadgets—are increasingly unable to cover up performance shortcomings. These are now compounded by anti-China sentiment in India, which sent shipments to India plummeting in the second quarter by 51% year-on-year. Oppo has lost more than any other of the top five brands in India.

For Oppo, this year may be the most difficult since it got into smartphones. This is despite Oppo’s accomplishments in 2019: reorganizing its product line, strengthening finances, establishing an independent chip department, developing independent sub-brand Realme, and launching IoT products; it also began to increase R&D to compete with its rivals.

A painful readjustment is now necessary. In the face of these challenges, Oppo recently announced that OnePlus founder and CEO Pete Lau (who will remain founder and CEO of OnePlus) has returned as senior vice president of shared parent company Ouga Holdings, and is fully responsible for the Ouga ecosystem’s product planning and experience, including Oppo.

In desperate times, Oppo is rallying its troops, and wants to reorganize its product line by bringing back veterans of the brand, strengthen differentiation, guard its market share, and regain the attention of its customers—who have very much glanced away.

This week, our friends at Ran Caijing bring you an eye-opening look into the effects of the Covid-19 outbreak on Chinese tech stocks. Turns out the hardest hits were to US-listed companies, while the few firms listed at home on China’s STAR Board rose during the virus period.

From the data: Chinese tech firms are in a sorry state as stock markets plummet

Li Ming, (edited by A Lun)

Ran Caijing, March 17

Global stock markets have suffered historic losses, with US shares sliding twice in a week. Stock guru Warren Buffett himself has never seen anything like such carnage. 

China’s new and rising sectors have not been spared. Since the coronavirus outbreak began in late January, share prices have dropped by an average of 20%, and as much as 64%. If you invested in China shares in mid January, you have likely lost capital. 

A few examples: Fashion platform Mogujie and social media platform Renren have both dropped 55%, credit provider Qudian has lost 40% of its value, Luckin Coffee 34%, and Meituan 20%. Even Alibaba fell by 15%.

The first wave was the week when the epidemic began to spread in China at the end of January, and the second wave was the week when the epidemic spread overseas in early March. Between the two, we saw share price recovery. In the second wave, US stock markets melted down.

This means Chinese tech stocks listed in the US have been burnt twice by this epidemic.

Stock speculators got cold feet, and non-speculators ran from their chance to witness history on the stock exchange. The only comfort is that against the backdrop of a collective global plunge, Chinese A-shares have performed better than US shares, which have fallen by 20 points; and Hong Kong stocks, which have fallen 17 points. At a drop of just 7 points, they really stand out. 

At this historic juncture, how much of the crash is down to China’s new economy companies themselves? We let the data speak.

• More than 80% of China stocks have fallen 
• For 60% of newly listed companies, shares have dropped below issue price

We have selected the timeframe of Jan. 21 to March 13. Although Wuhan’s lockdown was put in place on Jan. 23, share prices had begun to fall two days earlier on Jan. 21, following epidemiologist Zhong Nanshan’s statement on CCTV that there was “human-to-human transmission” of the new coronavirus. The Hang Seng Index fell 2.8% the next day. Our data comes from eastmoney.com.

Look at US-listed stocks first: Overall, of 100 new economy companies listed in the US, 85% of stocks lost value, 15% rose, and the average fall was 20%. These 20 new economy companies tumbled hardest.

From the data, it can be seen that the stock prices of seven companies have fallen by more than 50%, and their market capitalization has been cut. Among them, 3 are from Internet finance. In addition, the ninth city, Mushroom Street, and Renren.com are all companies that were once brilliant and well-known, but now they have fallen or faded out of the media’s vision, and they are easily affected by the fluctuations in the environment.

Although education has been relatively untouched by the epidemic, there are three education companies on the list, Rise Center, Puxin Education, and Liulishuo for which shares fell more than 39%.

In general terms, the new economy stock market rout has been led by small cap companies valued at under USD 600 million, out of reach of unicorn status.

In Hong Kong, these have been the biggest losers to date:

US shares have fallen far harder than Hong Kong shares. Only six new economy firms listed in Hong Kong have fallen more than 30%, while of the 30 US stocks with the biggest losses, none have lost less than 30%. At the top of the Hong Kong list is 51 Credit Card, losing 40%. Software publisher iDreamSky saw its stock price fall by just 11%.

In Hong Kong, even the giants have not avoided calamity. Apart from Tencent, which fell by only 8 points, Alibaba, Meituan Dianping, and Xiaomi, worth over USD 10 billion, are all in the top 20. Lenovo, Alibaba Pictures, and China Literature also make the list.

Since the start of 2019, a total of 28 new economy companies have listed on US and Hong Kong stock markets. As of last Friday’s closing, 18 (64%) of these have seen their value fall below issue price, and eight have fallen more than 50%. Ruhnn Holding, So Young, and Douyu are among them. 

Online education bucks the trend

Online education was a breakaway success during the outbreak. Of the 20 companies with rising stock prices, six are in the online education industry. 51talk rose 56%, leading the way. NetEase Youdao, Tedu Education, Genshuixue, and New Oriental Online all rose by 20%.

ToB services have also done fairly well since the epidemic began. These include Borqs Technologies, 21Vianet, iClick, and Youzan. Due to specific industry and business characteristics, these companies also did well during the epidemic.

The rise and fall of stock prices has led to some changes in China’s internet landscape. Let’s take a look at the 20 internet companies that now have the highest market capitalization in China.

China’s top five internet companies are now Alibaba, Tencent, Meituan, JD.com, and NetEase. Pinduoduo ranks sixth, while Baidu ranks seventh. Alibaba is China’s top US-listed internet company and Hong Kong-listed internet company, with Alibaba Health also in the top 20 in China.

Finally, let’s take a look at how large domestic listings performed against the background of the outbreak and the meltdown in US stocks.

Because China’s new economy companies are mostly listed on US and Hong Kong stock markets, and A-share [translator: in essence, domestically-listed] companies are few, we can present the data of all A-share companies:

Star Semiconductor, which led the rise among domestic-listed companies, saw its stock price rocket by a factor of 10 during the course of the outbreak. Going public on Feb. 4, it hit 23 daily upper price limits, rising from its list price of RMB 12.74 ($1.8) to RMB 163, before falling back to RMB 142. However, the company’s auditors—Lixin Certified Public Accountants—have already received five letters warning of alleged violations.

Rockchip, second highest on the list, saw its stock price increase by a factor of six since listing on Feb. 7, hitting 14 consecutive daily upper price limits. Bestore went public on Feb. 24, hitting 15 consecutive upper price limits to reach 4.5 times its issue price.

32 companies doubled their value in the period examined. The company losing out most saw its shares fall by only 49.6%. 

Compared with tech companies listed in China, new economy companies listed in the US and Hong Kong lost far more during this time. 

1. New economy companies listed in the US have been hit twice, first from Jan. 21, followed by a correction, and then from Feb. 24. 
2. Hong Kong stocks were also shook from Jan. 21 onwards, but did not experience the same plunge US stocks did.
3. A-shares have followed their own path, and throughout the epidemic to date, have not been hit hard.

US-listed Chinese new economy firms have fallen as much as 60%, while among Hong Kong shares the biggest losses are around 40%. The 20% gap is explained by a plunge in the US stock market. From Feb. 24 to March 13, the S&P 500 fell by 20%.

Investors have seen a major evaporation of their wealth. If you had bought any of the top 30 stocks listed on the worst performing Chinese shares list a few days before the outbreak, you would have lost at least 34% on your investment principal. Even if you had expanded your investment to all China stocks, you would have probably lost at least 20%.

All fundamental company analysis has failed. Everything is down to broader market conditions. And those who chose to increase their positions during the correction between late February and early March have been hit twice.

This roller coaster-like experience has frightened many investors. As one investor said, “The market will definitely rebound, but the key is that you do not know when all this will end.” 

In short, in this wave of plunging prices, China’s new economy companies fell sharply. As for when stock prices will return to pre-epidemic levels, it is still unknown. We should maintain that investing based on company value is not wrong. All bull markets come to an end, but they do return. 

Sitting in a locked-down block in Beijing’s hutongs, I’ve come to miss the dozen or so delivery drivers who regularly leave packages for me and my neighbors in the courtyard. Fang zai zhuozi shang—put it on the table—is probably my most often said Chinese sentence every day.

I read an interesting question the other day: Imagine you had to draw a delivery person. What would they look like?

So, did you imagine a woman?

It turns out I’m not the first person to ask myself, where are the women? The question above was first asked by Huxiu back in December 2018. According to the article, data from one large takeaway service in 2019 found that women account for only 10% of delivery drivers. In my experience, even 10% seems high. The chances of meeting a female delivery rider on the street, even before the present lockdown, was next to null.

People explain this away. If you asked a local cab driver or shopkeeper here, they’d probably say kuaidi or delivery people have such a physically demanding job that women can’t handle it. And they think it’s unsafe. But for some women, delivery is the only way they can achieve other more important goals in their lives. Huxiu found Zhang Ning riding a food delivery e-bike in Tianjin, and spoke to her about how she chose the job.

Zhang and her husband told the magazine that decided to become delivery riders as the job was relatively flexible. When they first entered the depot, Huxiu reports, her boss simply said, “I just want to recruit a female rider to see which of the men is less enthusiastic than you by the end of the month.”

The online article gives some backstory about the rider. Zhang, from Xinji in Hebei, is a mother of two, and the only woman in her cohort of 20 deliverers. She used to run a nail bar in Xinji, but when her elder daughter Xuan Xuan got sick, she moved her family to Tianjin in August 2017 so her child could have stem cell treatment at Tianjin Cancer Hospital.

Food delivery is certainly not an easy job. One thing is the urgency of making money fast, because each delivery nets so little. Then there’s all the climbing. It’s tough juggling orders—weighing up and optimizing delivery routes. Zhang said that the community in Tianjin where she works has lots of old-fashioned residential buildings, with not an elevator in sight. She’s exhausted every time she gets home, late, from the evening take-away rush. But she says the hard work can be a kind of relief, that the fast pace of work forces her to stay focused and fight for every order.

As Zhang told Huxiu, “Before Xuan Xuan’s illness, I had trouble sleeping. Now when I lie down I fall asleep immediately. I have no energy to think of anything else.”

But Huxiu also describes some pressures a man probably wouldn’t face. Zhang tells the magazine that she worries too little effort goes on tending to her younger daughter. She wonders whether performing on Douyin might be better for the family, because then at least she would also be at home with the kids.

Delivery drivers get just two days off a month. On a rare trip to her hometown last November, Zhang visited her mother and gave her some shoes she’d bought online. Her mother asked about Zhang’s future plans. “I don’t know, I haven’t thought about it yet,” Zhang Ning replied after a pause. Should she continue doing deliveries, to pay back those who’ve lent her thousands of yuan to treat her daughter’s cancer?

Zhang has responsibilities as a mother, carer, daughter, and takeaway driver. But I notice that the article hardly talks about her husband’s role, apart from mentioning that both have chosen flexibility in their jobs.

The article worries: “Sometimes she forgets about her feminine side.”

Open her photo album and you will find another side: the party girl, selfies with her friends. Her wedding photos and art hanging at home. In one, Xuan Xuan had long hair and was wearing a cute white skirt.”

From the outside, Zhang may look like a gender warrior, fighting for the right to ride. But for her, she becoming a delivery rider was no such choice. Her past self was simply sacrificed while she played her other roles. Perhaps after everything is calm, she will be able to explore what this experience means to her as a person: a capable and strong Zhang Ning in charge of her life. But that time has not yet come.

So are the missing women just avoiding the jobs? Another article makes it clear that discrimination must also play a large part in it. According to Ma Hu, an aspiring postal delivery rider featured on Netease Women’s Gender Equality thread back in 2016, “Some jobs may not be suitable for most women, but that doesn’t mean that they are not suitable for all women.”

Ma was highlighted by Netease Women after winning a prize in the 2015 Women’s Media Awards as an “outstanding woman.”  She received it for successfully suing a postal company for gender discrimination.

Ma studied the arts, but said she wanted to take up a more unusual career. “In her job interview, Ma said she wanted to join the postal delivery profession because she enjoyed meeting many strangers every day and feeling free to travel the city.”

The article says Ma was rejected at interview on the grounds of being female. In January 2016, she took the postal service to court for “violating her personal rights.” Three public hearings later, the Shunyi People’s Court concluded that she had suffered employment discrimination. On Oct. 20, the company was forced to pay her medical fees, appraisal fees, and damages for mental distress.

While Zhang rides her routes and suffers in silence, planning to reflect on what her job choice means to her as a woman when things have settled down, Ma takes a more proactive approach. It is clear that she felt the need to speak up in the hope that things would change. As she put it in the interview, “If no one was making a fuss about these kind of things, how would anyone know the government’s attitude?” According to Netease Women, Ma now works for a social organization: “The more fights she takes on, the more seriously gender issues in the workplace are being taken.”

For Alibaba, Covid-19 isn’t its first encounter with epidemic. This week, TechNode’s translation column looks back at China’s last great epidemic, bringing you the story of how Alibaba launched Taobao during SARS, and how it expanded its online business while its headquarters were quarantined. 

This article was translated and abridged by courtesy of our friends at Huasheng Taolue. TechNode has not independently verified the claims made in this article. 

Editor’s note: This post originally appeared in our members’ only weekly newsletter. Sign up so you don’t miss the next one. 

The battle of Alibaba: Life under SARS

Yang Kai, Huashang Taolue

Feb. 7, 2020

Should we go or should we stay?

It was April 2003 and Jack Ma faced a difficult decision. The 93rd Canton Fair was about to start, and Ma had promised 50 clients he would exhibit their goods for free. But Guangzhou had already been classed as a SARS epidemic zone.

The Guangzhou government said everything was fine, but most exhibitors were reluctant to take the risk. In 2002, the 92nd Canton Fair had seen 135,000 exhibitors trading $19.7 billion in goods. This dropped to 22,000 exhibitors in the year of SARS and only $3.8 billion was traded.

After discussions, he decided Alibaba would meet its obligations to clients and participate as planned. 

On April 11, project leader Song Jie flew to Guangzhou, staying there for seven full days. Alibaba’s brave resolve made the press, and its clients received plenty of international orders. Things seemed to be moving in the right direction.

On April 18, Song Jie returned to Hangzhou, and went to work as usual three days later. Her sore throat, runny nose, and nasal congestion were not taken too seriously. But on April 20, Gao Qiang, Deputy Minister of Health, announced disturbing figures: “1,807 cases of atypical pneumonia have been reported nationwide, 339 in Beijing.” Five days earlier, only 37 cases had been confirmed. Panic spread quickly.

On May 2, Song Jie got a fever. By May 5, it was 39.1 degrees centigrade (about 102.4 degrees Fahrenheit). She was diagnosed with “suspected SARS” and sent to Hangzhou Xixi Hospital for isolation and treatment. When her phone stopped working, she was in complete isolation. Jack Ma sent her a new phone and a CD player. On May 7, she was confirmed as the fourth SARS case in Zhejiang Province.

Song Jie was transferred to the confirmed ward on the fifth floor, witnessing her isolation unit neighbor dying that same night. The 26-year-old was pushed to the brink of death.

Alibaba was at the brink of extinction. Not only were the leadership worried about Song Jie, but they were also concerned about being infected. Not to mention, public opinion had turned on the company for sending its employees to Guangzhou. Other companies in Alibaba’s building saw the firm as a “public enemy” for bringing SARS into their midst. Employees remember that at the time, if they were identified as Alibaba employees, people would shout, “SARS is here, run away!”

Song Jie had come into contact with many people since returning to Hangzhou from the fair. The risk of contagion was huge. All 500 people in the building where she lived with her family were put on lockdown. 100 medical workers and patients were quarantined.

‘Quarantine everyone!’

At 4 p.m. on May 6, Jack Ma announced informed all employees that they would be working from home. The world’s biggest B2B website was under lockdown. Ma never expected SARS to strike his company such a blow. 

In little over two hours, more than 400 employees left headquarters. “There wasn’t even a supervisor in charge. Everyone knew what they were doing,” co-founder Lucy Peng recalled. Technicians made sure every colleague had a solid internet connection at home and access to the system. Reporting processes were hastily revised.

During quarantine, the headquarters were sealed off with a heavy iron chain. A tent was set up downstairs to take charge of diet, temperature checks, disinfection, and care. Jack Ma’s house was guarded night and day. 

As for work, however, everything went on as usual.

The day would begin at 8 a.m. as usual, without the usual group lunch chatter, ending around 8 p.m. Instead of the dinners with teammates, Alibaba staff organized online chat groups. Someone broadcast themselves eating a watermelon. Leaders sang emotional songs. 

The customer service hotline was redirected to staff at home, and their families were asked to answer the phone with, “Hello, this is Alibaba.” Customers may have wondered why old people’s and children’s voices were suddenly on the other end of the line. The first day of remote work was May 7. Alibaba’s business volume set a new record, with more than 12,500 business leads in China alone.

Only six people escaped isolation. Jack Ma had set up a small R&D team to strategize on combatting e-commerce giant eBay. These six quietly left the Huaxing Technology Building and moved to a lakeside apartment to work, bypassing the mass quarantine order.

At 8 o’clock on the evening of May 10, 2003, Alibaba’s “secret weapon” was unveiled. Taobao officially went online—on the fourth day of the quarantine.

At this time, Jack Ma was at home, unable to celebrate with his team. They made a call to raise a glass and “Bless Taobao.” The homepage launched with the slogan: “Think of those who start a business in trying times.”

When the SARS quarantine was lifted on May 19, the iron chains on the headquarters were unlocked. Videos by Sheng Yifei went around and “Friends” by canto pop singer Alan Tan was playing on every computer. “We all cried that night”, recalled Zhou Lan, a former employee. Three days later, Song Jie was the first SARS patient in Hangzhou to be released. 

On April 20, 2005, Jack Ma designated May 10 Alibaba Day. At that point, two years had passed since SARS.

He said, “We should always remember this spirit, not working for ourselves, but working for our shared beliefs and customers.”

During SARS, exhibitions were postponed, traders stopped visiting and orders were cancelled. Traditional business models came up against road blocks—or in Alibaba’s case, chains. 

SMEs were advised by experts to try:

• Online business
• Stationing staff overseas for exhibitions and trade fairs
• Business development through representatives and offices of international buyers in Mainland China

Doing business online was the most viable and safe solution for SMEs at the time and Alibaba aimed to lock in its SME clients. 90% of its 1.9 million members in 2003 were SMEs. 

Alibaba had been expanding rapidly until Song Jie’s infection.

In March 2003, it accumulated 3,500 new members a day, an increase of 50% from the previous quarter. The number of new business opportunities listed daily reached 9,000 to 12,000, a three-fold increase from the previous quarter. The number of Chinese suppliers Alibaba counted as customers was higher than in 2002: over the same period, it doubled.

At the height of the crisis, Mao Linsheng, Hangzhou’s mayor, made a special trip to an Alibaba office that was not under quarantine. He encouraged companies to use e-commerce to beat the financial troubles created by the epidemic. Alibaba lived up to his expectations, boosting its performance by the power of five post quarantine.

In addition to Alibaba’s hard work, SARS was significant in turning hundreds of thousands of Chinese people into online shoppers.

Duncan Clark wrote in “Alibaba: The House That Jack Ma Built”: “For many Chinese, the the SARS outbreak and high-speed domestic travel came by chance, making people realize what they could do at home. The full power of China’s e-commerce boom may not have been felt until years later, but this was indeed the beginning.”

SARS confirmed the effectiveness of digital mobile technology. 

Jack Ma has said that SARS cannot be called an opportunity. But the event saw Alibaba confront and overcome severe challenges, and made Alibaba’s team more committed than ever.

Whether you can survive a crisis is an important measure of a company’s value. And if you can turn a crisis into something positive with new energy and change in the culture, you have a company culture to sustain you for years to come. 

17 years ago, Alibaba was a relatively small enterprise. Now it’s China’s largest internet company. In the face of the current Covid-19 virus threat, Alibaba doesn’t need to think about existential threats, but instead can take on social responsibilities and help resolve the crisis.

While much has changed at Alibaba, and China’s economy has grown in size and strength, the values honed during the SARS crisis are clearly visible today. Just as the behind-the-scenes heroes of the SARS Campaign Zhong Nanshan and Li Lanjuan are still on the front line fighting this new epidemic, Alibaba is there on the sidelines offering all the support it can muster. 

This article originally appeared on TechNode’s Chinese-language sister site, cn.TechNode.com. It was translated by Heather Mowbray.

The story of Meituan is the story of two Wangs: founder Wang Xing, and his old college mate Wang Huiwen. They used the nicknames Brother Xing and Old Wang in the office to avoid confusion. But from December 2020, according to an internal letter to Meituan’s S-team (the senior leadership group), Senior VP Old Wang won’t be confusing his colleagues any more, having decided to quit active management “for a better work-life balance.” (The full text of this announcement appears at the end of this article).

Wang Huiwen will stay on as an honorary consultant on the board, lecturer at Meituan’s “Internet+ University” internal training program, and strategist focused on talent and organizational transition. He said he was determined to “go all out in my work at Meituan, while ensuring an orderly handover.” Meituan is believed to be reshuffling senior talent in preparation for the next ten years.

According to Wang Xing, they had been working on Wang Huiwen’s retirement for a while already, and the company is fully prepared. The CEO said, “I understand Wang’s move, and thank him for all his hard work. He will continue to help in strategic planning, organizational transfer, and talent development, and we wish him well in an exciting new chapter in life.”

Meituan announced a number of new appointments. Guo Qing and Li Shubin were promoted to the S-team. Guo Qing joined Meituan in 2014, responsible for the Meituan accommodation division. Li Shubin joined in 2019 as head of the Meituan platform.

Classmates, business partners… and best friends

Old Wang was at the heart of Meituan, not just as the man behind Wang Xing, but also as his roommate from university days.

On his first day at Tsinghua University in 1997, Wang Huiwen bumped into Wang Xing, a boy from the southern city of Longyan, who had been sent to study radio engineering. The two became roommates. They became friends while resolutely staying at the bottom of the class. With a computer they saved up to buy together, Wang Haiwen got hooked on gaming. Wang Xing got hooked on business. After graduating in 2001, Wang Xing began a PhD at the University of Delaware but his friend didn’t have the grades to take his studies further.

In the US for two years, the future Meituan founder felt the reverberations of the first internet boom. Facebook was online. Dropping out of his PhD at the end of 2003, Wang Xing started his own business, with two trusted friends, Lai Binqiang—from high school—and Wang Huiwen.

The three of them worked on around 10 projects over two years, from social network sites to input methods, finally deciding to focus on campus social media. The Chinese internet was a barren land, just waiting to be connected to a world of treasures. Put in a bit of hard work and all this new territory would be theirs.

On Dec 8, 2005, the team launched the Xiaonei campus intranet, China’s answer to Facebook, later renamed Renren.com. It took three months for the student startup to secure 30,000 users, many at on-campus events where recruiters handed out chicken drumsticks to new users. But with no money for servers and extra bandwidth, the company was sold. Entrepreneur Chen Yizhou bought it for $2 million.

Wang Huiwen bought a house in Beijing, a house in Dalian, and traveled around Europe and Southeast Asia with Lai Binqiang for a year. Returning to Beijing, they brought on Chen Liang, another secondary school classmate of Wang Xing who would later become a senior Meituan executive.

The team set up Taofang.com, a site that offered second-hand real estate sales and rentals. The site offered space for comments on agents, an innovation at the time. A forerunner of Taobao in a number of ways, the Taofang venture did not go perfectly. During its life, Wang Xing stayed in China, hiring his wife Guo Wanhuai, and more school and Tsinghua friends: Yang Jun, Fu Dongping, Mu Rongjun. With their help, he built two more copy-to-China social media platforms: Twitter-like Fanfo and and Facebook-like Hainei. Fanfo soon closed, so to make work for the newly expanded team, they set up Meituan.com.

Wang Xing gave Wang Huiwen a call in December 2010. “We’re growing fast and I need people. You should come back.” So Wang Huiwen and his group joined Meituan.

He joined during a storm. Group buying fever was at its fiercest. Wang Huiwen led the strategy of “cutting losses while pursuing growth,” using the classic guerrilla tactic of “encircling the cities.” This was crucial to Meituan’s later success.

Meituan broke even at the end of 2012, and went looking for new growth points. It was Wang Huiwen who led the way into the takeaway food market. Competition was no less fierce than in group buying, however. Wang Huiwen put a tight rein on investment, dropping loss-making locations, including Wang Xing’s hometown Longyan, as well as several other fifth tier cities like Yulin and Chifeng. When Baidu Takeaway was bought out by Eleme, the scene was set for a duel.

A key player in expansion

After Meituan and Dazhong merged they began to integrate structurally. In July 2016, Meituan Dianping established a catering platform for restaurants, takeaway distributers, and catering professionals. Wang Huiwen was instrumental in bringing them all under one wing.

In December 2017, Meituan shook up its structure again. Wang Huiwen would lead retail building a team to coordinate fresh food, takeaway, distribution, catering B2B and related sectors. He was also made responsible for travel, bringing Meituan into direct competition with Didi.

Just two months later, Meituan Dianping announced a third structural shift, creating a new “food and beverage (F&B) platform.” The original F&B group, takeaway distribution group, and catering professionals platform were melded into one. Meituan Dianping would have three core businesses: F&B, general (local services other than F&B), and hotels and travel. Wang Huiwen was made president of the F&B platform, and Meituan COO Gan Jiawei, who had led the platform, was put in charge of the newly established “internet plus” online university, gradually leaving the frame.

In October 2018, Meituan made another round of organizational upgrades. The company’s strategy would now focus on catering platform, with “eating” center place, and its user platform would have two business directions, to restaurant and to home. On the new business side, Kuailu and Xiaoxiang continued to conduct business exploration, establishing a location-based services (LBS) platform. Wang Huiwen was in charge of both the user platform and the LBS platform.

Where next for Meituan?

In hindsight, we can see the signs that Wang Huiwen might leave. On Dec 20, 2018, Wang Huiwen stepped down as legal representative, executive director, and manager of Mobike. Earlier, he had stepped down as legal representative of a number of Meituan companies, including ride hailing firm Shanghai Lutuan Technology Co., Ltd. and Shanghai Sankuai Technology Co., Ltd.

The departure of Old Wang will have a significant impact on the Meituan group, but founder Wang Xing is not unprepared. From his statement in the e-mail and rapid personnel changes, it can be seen that this is a long-planned change.

A veteran of e-commerce, Li Shubin, is taking over from Wang Huiwen. Li founded the well-known vertical e-commerce company Hale Buy and served as its CEO.

In the second half of 2019, Meituan achieved two single quarter profits, but a growth ceiling has already appeared. According to the third quarter 2019 financial report released by Meituan GMV growth (total platform transactions), users and merchants has slowed. In the third quarter of 2019, total transaction volume on Meituan Dianping was RMB 194.6 billion (about $28 billion), an increase of 33.6 percent year-on-year, lower than the 40 percent growth of 2018. For the 12 months ending on Sept 30, a total of 5.9 million active merchants were using Meituan, an increase of 8.8 percent year-on-year.

Food delivery, which accounts for 57 percent of Meituan’s quarterly revenue, is the company’s mainstay, and Meituan and Eleme’s rivalry is now entrenched. According to current market data, Meituan still has the advantage, just. For Meituan, hotel-to-shop business is second only to food delivery. Taobao has crowded the market, and the BAT giants have their fingers in many pies, directly or indirectly. In vertical travel, Ctrip and Tongcheng-Elong occupy their own positions. Tongcheng-Elong’s second-quarter revenue grew 21 percent, and net profit grew 60 percent year-on-year. Ctrip’s Q3 financial report shows revenue of RMB 10.5 billion, an increase of 12 percent year-on-year. Of this, international travel achieved a 50 percent year-on-year growth. Other businesses such as Mobike, Xiaoxiang Fresh Food, and online car rental are still at the exploration and development stage. They are not yet of a big help to Meituan.

While exhausting the demographic dividend and weathering a tough climate, Meituan Dianping is riding a slowing train. How to gather traffic and discover a new growth trajectory is the big question for Wang Xing and Wang Huiwen’s successors. Having launched an ambitious plan for the next ten years of the company, we wait expectantly to see what fruits will be borne.

Full text: the email announcing Wang Haiwen’s retirement:

Dear Colleagues,

We are about to celebrate the tenth birthday of Meituan. More importantly, we will usher in a new decade for the company. People are the most important asset of Meituan. In the next ten years, we must continue to fulfill the mission of “helping everyone eat and live well,” and grow our management team. To this end, the company has decided to launch a “Leadership Training Program” to promote talent inventory, rotation, and succession planning, to provide organizational and institutional guarantees for talent training, and to create more opportunities for everyone and good conditions for company growth. 

After careful consideration, the company has decided to add Vice President Guo Qing and Vice President Li Shubin to the S-team. In the future, we will continue to strengthen the S-team to satisfy long-term development needs. 

At the same time, co-founder, S-team member, and senior vice president Wang Huiwen (Old Wang) will withdraw from specific management affairs in December this year and start a new chapter in life. This year, Wang will continue to make every effort to promote the company’s business development, improve organizational capabilities, and will devote more energy to the cultivation of the talent team. Post 2020, he will continue to serve as a company director, and serve as a lifetime honorary consultant for Meituan, a lecturer at the “Internet+ University,” assist in strategic planning, organizational inheritance and talent development.

Elaine Liu, S-team member and senior vice president, will become a senior consultant for personal and family reasons. Elaine Liu will continue to invest time and energy to help the company’s development, especially the construction of human resources system. 

The more ambitious the team, the longer it takes to make a contribution and pass on the energy. Ten years on, the S-team is driving this change. Thanks to Wang Huiwen and Elaine Liu for their outstanding contributions in the development of the company. I look forward to investing more in the “Leadership Training Program” in the coming period. I look forward to working with Guo Qing and Li Shubin for many years. The S-team will make an ever-greater contribution to the company’s development, and I look forward to seeing more managers growing into future leadership roles!

 To the next ten years!

Wang Xing 2020.1.20

This week, translation column China Voices brings TechNode Squared members a unique take on the new retail landscape. TechNode has not independently verified the claims made below.

Convenience stores have given e-commerce giants a choppy ride as they’ve raced to deploy automated “new retail” concepts. Fang Yu, writing at One Billion Customers, argues that they must learn from the real masters of ubiquity: China’s budget snack food chains, which have developed a loosely-managed franchise model that’s allowed them to open ten of thousands of locations across the country.

Do Chinese convenience stores have a chance against the mighty Shaxian Xiaochi?

Fang Yu, One Billion Customers (Shiyi Xiaofeizhe)
Oct 19, 2019

Why Shaxian Xiaochi has no need for big data, AI, or any other tech tricks to play big in China.

Everywhere you look in China’s larger cities, you’ll see convenience stores these days. But how they operate is fairly hidden. Some have started to test their employees’ math skills, with the toughest questions at gaokao level. Other convenience stores, you have to ask yourself how on earth do they make money? It’s really hard to find out.

Not long ago, the author was at a Haolingju (Good Neighbor) convenience chain store conference and overheard some tasty yet unanswerable questions:

• How do you make the most tasty zhajiang noodle sauce?
• How come fennel dumplings have such green wrappings after steaming?
• How hot should the oil be when you fry stuffed buns?

Boring? Fun? Or pretty deep? Well, if you really want to understand how convenience stores work, you should probably choose the third option. Because convenience stores put a lot of work into their formula. And if you think their fresh food offerings are just rice rolls and sandwiches, you’d be surprised. Keep reading.

Convenience stores fear Shaxian Xiaochi

Plenty of people know the trouble convenience stores got into in 2018. Once hotly pursued by capital markets, many have since closed, switched owners, and lost funding. But Beijing Municipal Party Secretary Cai Qi, and gusts of positive wind at a national level, have given the sector new momentum. Since September, convenience store chains can get permits to sell over-the-counter drugs, for example.

The larger chains are stepping up expansion. For example, Xinrui has announced plans to open a thousand new stores. Foreign-backed brands such as Beijing Lawson’s Tianjin Fresh Food Factory are on the rise.

At the end of September, Beijing’s longest-established brand, Haolingju, started offering franchises again after a two-year break, expressing new confidence in the market. But at the company’s recent conference, most of the chatter was not about how to make fast cash through franchising, but how to make snacks. They weren’t talking about the kind of snacks convenience store tended to rely on in the past. These were hot snack meals traditionally served at small restaurants dotted around town.

Why hot snacks? Well, in the past two years, Tao Ye, Haolingju’s GM, has been carefully observing trends and shifts in market consumption. Ye realized his truest competitor was the convenient urban mini meal, or hot snack. The fast food of the nation before fast food chains existed.

While no convenience store chain has reached the scale of 7-11 globally [translator: 7-11 claims more than 67,000 stores], China’s brand layout has begun to take shape in recent years. We have Meiyijia with 15,559 stores at number three, and Yijie Convenience Stores in top position. Because they started to sell coffee in 2018, they now have a whopping 27,259 stores nationwide.

You shouldn’t be surprised that some chains have secured heavy backing. This comes with support from Japanese and Taiwanese experts. Combined with favorable national policy, it isn’t a surprise that convenience stores have scaled up the way they have.

But you know the cheap and cheerful Shaxian Xiaochi hot snack chain? Just how many restaurants do they have across the country? Well, in 2014 when we had our most authoritative figures, there were over 20,000. Five times more than KFC had in the same year. Lanzhou pulled noodles, with the stated ambition of beating Shaxian Xiaochi at its game, has around 50,000 restaurants worldwide. Unverified statistics say that Shaxian Xiaochi has up to 88,000.

In other words, China’s convenience stores have not been able to follow in the footsteps of 7-11, but Shaxian Xiaochi has found it fairly easy. And the brand isn’t alone. Huangqi chicken rice has also done well. What do they have in common? They stick to their grassroots and franchise like crazy.

The magic of Shaxian Xiaochi is not just its scale, but also its model. Anyone in retailing will tell you about free association chain stores: management is loose, quality is variable, but you get the name above the door. Basically, this is their model.

The honest truth is that convenience stores, with all their capital, technology, and talent, need to learn how Shaxian Xiaochi does it. Why Shaxian Xiaochi doesn’t need big data, artificial intelligence, and cool new technology to have such vitality.

First, Shaxian Xiaochi works more like a government than a company: restaurants are managed by Shaxian county’s snack association, trade groups, and liaison offices originating in the mountains of Fujian. You must be from Shaxian to open a store. Some people have even married into Shaxian families to learn the tricks of the trade. The core of the matter is supply consistency: all ingredients and flavorings are from Shaxian and shipped across the country. Where there are Shaxian Xiaochi stores, you can bet there are ingredient distribution centers. In summary, this is why Shaxian franchises don’t need to be locked in: they rely on a unique taste at the commodity level and specificity at the supply chain level.

There are many specialty foods like this in China, and today, with increasing competitive pressure, large numbers of convenience stores are seeking a way to integrate such products into the system. Convenience stores in Wuhan, for example, are now selling the city’s local dry hot noodles.

Consumers have long favored Lawson’s sweets, Quanjia’s bread, and 7-11’s rice balls, and the reason is simple. They are unique offerings both in terms of ingredients and in production. And it’s no accident. Those sweets have been developed out of intense research, and those rice balls are made with premium rice. And then we have the “Black Egg Legend” of Taiwan’s 7-11. It’s basically a traditional hot snack, the tea-boiled egg, but it has a historic role in how hot snacks made their way into the convenience store. Opposition was fierce at the start: they didn’t look great, and probably couldn’t be trusted, people said. But these eggs, boiled in big rice cookers under the careful attention of store owners, were a runaway hit. In one year 100 million were sold, and account ledgers registered a gross profit margin for the company of 40%.

People are beginning to think about the strategic position of hot snacks in convenience stores. In today’s increasingly fierce competitive landscape, commodification is the key to success. Convenience stores have shifted from seeing hots snacks as simply part of fresh food to seeing them as unique local commodities. And if these can be standardized and become amenable to minimal manual operations, they can do incredibly well.

Emphasizing local specialties is not simply a practice that just happens to have sprouted in cities across China. The government also encourages convenience stores to emphasize Chinese features in food as in other cultural areas. As cities become bigger and bigger, people’s lives are increasingly uprooted. Consumers need something different, something creative yet soothing, and steam-filled snacks fulfill their need. And as China celebrates 70 years since the People’s Republic began, consumers are craving time-honored brands and unique products, such as Guangming’s White Rabbit sweets, which recently witnessed a sales spike of 1170% at Haolingju (Good Neighbor) convenience stores. 

The following is an abridged translation of an unsigned article.

How Airbnb found its way in China: Drama and executive power shuffles

Latepost

October 9, 2019

Outline

Just as Airbnb announces its 2020 IPO ambition, it is going through the biggest personnel shake-up in China since its entry into the market.

China’s guesthouse market was worth RMB 20 billion (about $2.8 billion) in 2018. Airbnb may be one of the big players but it’s not number one. According to Trustdata, its penetration rate for Q1 2019 ranked third at 36%, behind Tujia at 69% and Meituan’s Zhenguo at 43%.

After four years in China, Airbnb China is now a 400-strong company. And until now, the struggle for the right leader for greater China has been incessant.

In June 2017, Ge Hong became China CEO, lasting just four months. He was followed by another year of vacancy.

In September 2018, the local entrepreneur Peng Tao arrived on the scene. This was the third of three power shuffles at Airbnb China. With each leadership change, the company has taken a small step forward.

There is a consensus that foreign companies fail in China is because they haven’t acclimatized to a sometimes brutal business environment. But what is the face of cultural conflict in business?

Chaos kicks off in China

By September 2015, global Airbnb had secured a huge $1.5 billion in financing and ranked global third among unlisted companies, valued at 25.5 billion USD. Nine west-coasters had just landed at Beijing Capital Airport. The founders couldn’t wait to fly their CFO, CMO, and CTO into China to open up the massive market. Fresh off the plane, all three had already downloaded WeChat on their phones. They were set.

Up to this point, there were two diverging opinions on China at Airbnb. Proponents were swayed by China’s staggering growth rate and felt the company should accelerate its rollout. Conservatives worried about Chinese tourist “quality”. Chinese clients would be getting into disputes with landlords across Europe and the US. Airbnb couldn’t take this kind of hit in its bread and butter markets.

Airbnb’s senior execs visited Baidu, Xiaomi and other leading tech firms. They met with Uber’s China head, eBay’s people, and the tech circle entrepreneurs everyone was talking about. And while the visits were a success – in the end, the leaders reported to their Chinese team: “China wants to run fast, and we want to support you” – as for allocating support, they would need to seek resources, authority and space from headquarters, and it would need time.

Slow expansion

In fact, Airbnb had been in China for a while already. In 2013, its Asia-Pacific headquarters moved from Hong Kong to Singapore, and were allocated 2-4 people to expand into China, Japan, Korea and Southeast Asia. In 2014, Robert Hao and Bruce Li moved from Singapore to Beijing and became the first staff resident in China. They rented a floor of an apartment building, and got to work, but things went slowly at first.

Before 2017, unlike Uber, Airbnb was just a minnow. It lacked a driving force and struggled to find a CEO in China with the all-encompassing requirements of:

1. Product and technical background
2. Chinese entrepreneurial experience
3. Good government relations.

In terms of reporting, at the beginning, the China, Japan and South Korea teams reported to the head of North Asia, and then the head of Asia, before eventually gaining the attention of the global COO. By 2017, they reported directly to the founders, meeting with the CEO every month.

Parachuting in the engineers

In the past, the marketing, operations, product teams, and engineering teams for the Chinese market were all headquartered in the US. Headquarters did not have any KPI indicators for China, aiming just to develop the brand.

After 12 rounds of interview, a product leader was found for China, Roc Yu, a man with an Alibaba background. He had to report to the American boss, and his daily counterparts were all in the US. But China’s products were not given high priority and were often queued by colleagues in the States.

To further its China’s strategy, Airbnb’s greater China region took the initiative of proposing a local product technology team. The company had never set up a technology branch outside the United States before. It was felt that technicians from Airbnb headquarters would be best suited with recruiting local engineers. No one expected that the parachuted in engineering troops to bring such change to China were such a contradiction.

Eight Chinese and two Americans were selected. They all spoke Chinese. The leader of the group was Ge Hong, a top student and a workaholic. In the same year Ge Hong was admitted to Tsinghua University’s Computer Science Department as a college entrant and received a Master’s degree from Yale University with top grades. During his time at Facebook, he drove information towards the company’s revenue pillar and was favored by Zuckerberg. Airbnb scooped him up, soon giving him heavy responsibilities.

Inside Airbnb, everyone knows the slogan: “Win China.”

“We only have one goal for 2020 and that is to reach $1 billion in business,” a key insider said three years ago. Company leaders wanted a quarter of these earnings to come from the China market.

In October 2016, the group of ten engineers landed in Beijing. The team did not intend to stay in China for long. In fact, they had an agreement with the headquarters. One year and they’re on a plane back home.

June-October 2017: Ge Hong

Ge Hong had neither local entrepreneurial experience nor a strong government relationship. “He didn’t even have an EMBA,” remarked one insider. Chesky made a strong push for giving Ge Hong leadership power. He valued ​​his pursuit of quality. But Chesky was pretty much his only supporter on Airbnb’s board of directors. Airbnb’s other co-founder, Nathan Blecharczyk, was said to have raised objections.

But Ge Hong got results. The number of Chinese tourists who used Airbnb in 2016 increased 142% year-on-year. In 2017, the number of Airbnb users staying in China increased by 289%. With the rise in China business, Airbnb achieved its first annual profit in 2017.

He became known for having an aggressive and ambitious strategy. Efforts to speed up meant promoting the localization of products, close cooperation with Alibaba, accepting Alipay, swapping Google maps for local app operator Gaode. They did a lot of recruitment, interviewing big numbers every week. Its staff increased from 30 to 200 in 2017.

The local staff had time to go to the gym and got off work at six. The parachuted in tech team was working till 11 p.m., or into the first hours of the morning. Both sides started whispering about fairness, complaining that the other side was making less effort.

Eight months after coming to China, in June 2017, Ge Hong was appointed global vice president in charge of China, reporting directly to Chesky. He stood center stage.

He wanted to prove himself as quickly as possible, not only to repay Chesky’s trust in him, but also to gain broader authority for himself. All too soon, he found he had stepped on too many toes. He left in October, after just four months.

2018-2019: The successor’s blade

Unlike Ge Hong, who was promoted by Chesky, Peng Tao was a professional manager entrusted by Chesky.

In April this year, Peng Tao told reporters that Airbnb first found him through a headhunter, and that as he had just started a business, he wasn’t that interested. Regional leader Bai Siqi had to make a special trip to China to convince him. They talked from 6 to 11pm, and again all morning the next day.

Under the recommendation of Bai Siqi, Peng Tao became the president of China in September 2018, and has been in place for a year now. Unlike Ge Hong, with his engineering background, Peng Tao is a more experienced manager.

“Unlike Ge Hong, he wants to be sure to balance all competing interests,” said one Airbnb resignee.

But Peng Tao had been biding his time. Over the past year, the turnover among management and employees of Airbnb China has been steady. Three of the management members left and one position was cut. Head of Legal, Liu Ze (Derek), and Design Director Vivian Wang left. At the end of 2018, the marketing department was split in two, with half the team now reporting to the growth department. Marketing director Chen Muru (Mia) had her reins shortened, and others in the team left. Then, in a shakeup of operations, Airbnb’s longest-serving executive in China resigned.

In general, there is the view that Peng Tao’s approach should not be overly criticized. Airbnb’s global marketing department has also shifted from branding to growth, given the company’s development stage, as it makes it easier to measure returns on investment. Of course, most people are in a wait-and-see period and cannot say anything conclusively.

It is too early to evaluate the current CEO on his actions. His current focus is on promoting localization. Specific tactics include launching mini programs, adjusting the collection model and going deeper into the market. According to Airbnb official statistics, business in China in the second half of 2018 and the first half of 2019 has nearly tripled.

This week, our source was Southern Weekly, where we came across this mind bending look into the use of ecommerce platforms to sell fruits and produce, and all the ways around it.

From Southern Weekend’s Gao Yizhen

Linyi county is one of the biggest fruit producing regions in China. In April 2018, it was dubbed a “slow-selling” zone online. On the screen, mountains of apples piled up, tree branches were savagely cut to the ground, and fruit farmers were in tears.

Pulling the “pity sales” card succeeded in emptying Linyi’s warehouses. But it cost the village a lot of future profit. The emotion-driven campaign also succeeded in depleting whatever stock of compassion was there at the start.

According to China’s Workers Daily newspaper, from 2013 to the first half of 2017, the number of unsellable agricultural products reached 1,612 cases nationwide. This slow-moving logistical disaster has been taking place across 31 provinces and has spread to 314 local cities.

The Yuncheng Basin, where the Linyi county is located, is in southwestern Shanxi Province, at an elevation of around 400-600 meters. With ample light and warmth, early-maturing apple varieties have a unique advantage. Of 550 natural villages in the county, 70% of cultivated land is planted with fruit trees, 70% of farmers are engaged in fruit industry, and 70% of farmers’ income comes from fruit.

In Shijie, a village in the area, most of the 333 households and 1,333 villagers work in fruit production, and with an income that averages RMB 10,000 a year, the cost of growing apples is counted out on the fingers. RMB 180 to tend to the trees, 8 fen to bag each apple against worms and birds and 8 fen to take the bag off again. With all the watering, fertilizing, bagging and tree trimming, the cost per kilo of apples easily rises to RMB 2.

Among the merchants and farmers of Shijie village, no one knows where “pity sales” protagonist Wang Haixia has disappeared. But while marketing on misery has got a bad reputation outside the area, it hasn’t yet shaken the small center.

As director of Linyi County Fruit Development Office, Wang was responsible for authorizing sales certificates. Having given out one particular e-commerce sales certificate, she became a player in the 2018 “pity sales” marketing scandal.

According to officials, the Shijie village e-commerce platform falsely used a charity certificate – with which to indicate oversupply – which was reported to the media. When the real situation was found to differ so much from reality, everything came crashing down for Wang.

Market price fluctuations, affected by variety and quality, mean that apples can cost RMB 1.4 to 1.7 per kilo, while others can earn 3.6 to 4.4. In the end, most farmers earn just a few cents per kilo.

Apples have long storage times and a sales period lasting for months. Every year from September to November, apples are harvested, and new products flood the market. Prices are relatively low. From December to February, demand increases and prices gradually rise. From March to April, cold storage apples are relied on and prices fall. In May, the only fruit left are old, and what remains is sold to juice factories as concentrate. In June, early-maturing fruit go on the market and the new sales cycle begins.

Du Lei, a cold storage manager at Shijie village, said that apples are generally stored in November. For a low cost, they can stay in cold storage until June the following year.

Last year, Du Xiao bought up apples at the end of the season and stored them for more than four months. Born in the 1980s, he is a college student who had returned to his family’s business in Shijie village. It was then that he thought up the idea of “pity sales,” and went on a dramatic sales push.

“Fruit farmers are weeping! 70 year olds are selling 20 kilos of apples for just RMB 12. That’s just RMB 0.6 a kilo! An extensive visit reveals 20,000 kilos of apples going to waste. Time passes, but now is the time to share this information!”. The three exclamation marks are a brilliant addition to this social media post in April 2018.

The article described the situation as critical. As snow and ice were about the block the route, merchants had evacuated the area. The apple surplus was soon to become unsellable. If no buyer were found by May 1, the apples would be dumped. There was an accompanying video: under the lens, carts were crammed with branches. The filmmaker asks pointedly, “But why are all the tree branches being cut down?”

It wasn’t entirely fake. The fruit tree branches on the ground were actually being thinned, and fruit growers had to ensure good environmental conditions, which meant cutting off some branches was a normal step. Due to the replacement of varieties, aging trees, and over-planting, Linyi did have to chop down trees on acres of orchard land every year. But this year, the branches had become props to a sophisticated marketing campaign.

In just 18 days, the e-commerce platform sold 1.17 million boxes of Linyi apples; almost 5 million kilos.

On delivery, many of the Linyi apples proved to be ugly, with scars, pitting, black spots or cracks. They were not from this year’s crop.

“This had a major impact on us.” Yang Yong, director of the Linyi County Fruit Industry Development Center, told Southern Weekend that most fruit farmers have no brand awareness. The “sad sales” marketing campaign was not strictly carried out. In reality, the quality of the delivered apples was highly variable, so consumers got a really bad impression.

The fruit industry: a broken supply chain

With tight-knit village relationships, outside businessmen and local farmers do not have direct contact, but rather they go through the local agents. These agent merchants tend to be from the village, setting up fixed spots to buy goods. According to the traditional model, the farmer first sells their product to a local wholesaler, and from here viamultiple intermediaries, it reaches the outside market.

Du Xiao knowns this traditional model well. His father is one of these merchants. The family runs a large-scale fruit operation and Du Xiao’s phone number is printed on the billboard outside. He is no stranger to the e-commerce model, and knows how to get his produce onto large-scale e-commerce platforms, leveraging the story of local fruit farmers opening their own online retail channels, taking charge of the process of transporting produce by logistics companies.

This apple case is not a one off. Recent social media cases include broccoli, cabbage, slow-selling Guangdong pineapples, Sichuan pears, Yanyuan apples, Yongxing oranges, and Henan slow-moving garlic.

The Linyi County Fruit Industry Development Center provides a set of data. It is known that the purchase price of apples is about RMB 2 per kilo, and the sales price is about RMB 7.2 per kilo. If costs are removed, the e-commerce site can earn at least RMB 2 per kilo. However, the platform explicitly states that buying from these farmers is a kind of social responsibility action. The platform has helped solve problems of unsellable agricultural products all over: Shaanxi dates, Henan purple skinned onion, Hubei potatos and Minqin honeydew melons.

Chen Jun, a professor of logistics management at Chongqing Jiaotong University who studies industry chain management of agricultural products, points out that e-commerce platforms need to guarantee a basic price to farmers, invest in labor costs, freight, packaging and other costs, and bear the losses in transportation logistics, before they can profit. Behind a large number of social responsibility campaigns, there is no supervision to determine whether or not products are actually slow-selling or not.

Yang Yong is more worried that the “sad sales” direction will have a devastating impact on the entire industry. Purchasers will question everything, and you won’t be able to sell any goods any more. So why plant? This campaign was short-term and only partially rolled out, increasing income for only a small number of fruit farmers. Overall and long-term, the brand image of local apples and fruit in general has been damaged.

Any discussion of Frankenstein in the context of genetic-editing quickly risks running into the realm of paranoia. Still, there are plenty of reasons to exercise caution at the vanguard of bio-tech today.

On November 26, news headlines around the world declared: “China gives birth to the world’s first genetically edited babies with AIDS immunity.”

He Jiankui, an associate professor at Southern University of Science and Technology, had just revealed the remarkable birth of his creations. In a process only one step longer than IVF, he had used CRISPR/Cas9 technology to locate and modify the gene in question—CCR5.

The CCR5 gene works as a signpost for the HIV virus, showing it where it can invade human immune cells. If a human has no CCR5 gene, the HIV virus can neither locate nor destroy cells. This is how two newborns now come to have “AIDS immunity.”

It is the kind of technological advance you would think everyone would celebrate. After all, AIDS has been an exasperating disease for experts and medical practitioners. There is still no straightforward way to stop it. But while the matter quickly caught the attention of experts, scholars, and practitioners, it quickly snowballed into accusation, criticism, and strong condemnation.

Scientists stand united

More than 100 scientists signed a “Joint Statement by Scientists” in opposition to the research. The statement said, “The biomedical ethics review for this so-called research was practically meaningless. Directly experimenting on people can only be described as madness.”

Since then, 140 AIDS researchers have also issued a statement expressing their united objection. China’s Technology Daily posed four issues about the “gene-edited babies,” and dxy.com, an online physicians’ community, issued a series of “ethical questions.”

On November 27, US biologist and Nobel Laureate Professor David Baltimore told the Second International Summit on Human Genome Editing at Hong Kong University that the birth of gene-edited babies was an unfortunate turn of events.

Most responses to the research contain two key questions: First, does the research violate ethics? Second, does further pursuit of this technology trigger unpredictable risks?

Southern University of Science and Technology is officially “unaware” and “unsupportive” of Associate Professor He’s  research. According to [state broadcaster] China Central Television, the Shenzhen Medical Ethics Committee initiated an investigation into the ethical implications for Shenzhen and the Shenzhen Harmonicare Women’s and Children’s Hospital (the hospital involved).

The gene-edited babies story continues to cause a furor. Contrary to current condemnation, when People’s Daily reported earlier research carried out at Sun Yat-sen University that compared HIV carriers’ and the general public’s awareness of and attitudes toward gene-editing, more than 60% expressed support.

A survey of 2,537 US adults by the Pew Research Center showed that 60% of Americans supported gene-editing of unborn babies to reduce the risk of major illness.

It is clear that current criticism has gone beyond the medical ethics field. It has spread to government and scientists who are concerned about unstable factors, sensitivities, and techniques that have traditionally been treated with extreme caution. It is this fanfare that has brought the case back for treatment.

Gene-editing angst

Gene-editing technology is hardly new, having been tested in the lab for decades already. So given the speed of human scientific and technological development, why do we still not have sci-fi style genetic realities? The main reason is that we want to avoid opening Pandora’s box and risking widespread human tragedy. But why are we so cautious and anxious about this?

As we understand it, gene-editing is a technology that mutates DNA, allowing us to change, add or delete genetic material at specific points of a genome. Scientists have devised several methods for editing genomes. The latest baby case used the CRISPR/Cas9 method.

Other methods include:

• Homologous recombination, developed in the late 1970s. This involves the exchange of genetic information between two similar DNA strands. This method has been shown to be inefficient and have a low degree of accuracy.
• Zinc finger nuclease (ZFN), developed in the 1990s. Researchers began using ZFN to increase the specificity of gene-editing and reduce off-target results. This method has a higher success rate, but is hard and time-consuming to carry out.
• Transcriptional activator-like effector nucleases (TALENs), developed in 2009. TALENs are capable of binding specific DNA sequences by targeting them. For those who understand it, TALENs has clear advantages over ZFN.
• CRISPR, which discovers, excises, and replaces specific parts of DNA through a specially programmed enzyme called Cas9. This technology can change the color of mice skin, and produce mosquitoes unable to transmit malaria and insect-resistant crops. This method is efficient, accurate, inexpensive, easy to use, and extremely powerful.

Gene-editing is of enormous significance in the prevention and treatment of human disease. At the moment, most research is conducted on cells and animals. Scientists expend considerable energy determining if gene-editing is safe, effective and applicable to people.

CRISPR/Cas9 technology is a huge step toward offering treatment solutions for human disease, but there are many ethical, social, and legal concerns. Mutations to the human genetic makeup are hard to predict, so studies have been published that call for the wholesale prohibition of human gene-editing technology.

In an article on “Human Germline Genome Editing” in the American Journal of Human Genetics, a survey conducted by the National Academy of Sciences, the National Academy of Medicine, the Chinese Academy of Sciences, the Japanese Gene Therapy Society, and the International Stem Cell Research Institute, reports that most respondents believe basic research may be carried out on gene editing, but at least in the short term, clinical applications should be avoided.

This should be until we are sure that gene-editing methods such as CRISPR/Cas9 will not change human embryonic genes for good, will not alter off-target genes, and will not lead to modified genes being passed down from generation to generation.

Bringing gene-editing into the clinic will change the human gene pool. “Once the modified gene sequence is introduced into the human population, genetic changes will be difficult to reverse,” said Professor Baltimore. And it is likely to move swiftly into the market, used to enhance human characteristics such as height or intelligence.

As a result, many national and industry experts are against the editing of human embryonic genes. According to the National Institutes of Health official website, a 2014 study showed that 29 of the 39 countries under review banned the editing of human reproductive genes. In April 2015, the Chinese National Institute of Health issued a statement reaffirming that it would not provide any funding for genetic editing of human embryos due to ethical and safety concerns.

Crossing red lines

The statement says editing human genes was a red line that should not be crossed, and that there was no reliable medical evidence to prove it was ethical to use CRISPR/Cas9 on embryos. The UK government has approved the editing of human embryos in the lab, but only if they are destroyed after seven days.

Furthermore, Sun Yat-sen University scientists announced that they would continue to carry out gene-editing on three-nuclear fertilized human eggs (fertilized eggs that cannot develop normally) using CRISPR/Cas9 technology. Although the university has said it will not allow embryos to develop, their actions have triggered heated discussion.

Gene-editing and allowing these two babies to be born clearly breaks the principles that scientists and the industry have maintained between themselves. This has given rise to the concern that has accompanied these two babies into the world, turning it into panic and distress. If safety and ethical issues are not satisfactorily addressed, gene-edited babies will not convince the public of the need for such medical experimentation. As for the future of these two babies, who knows?

Perhaps as they grow up, this technology will gain more stable prospects. We do need to recognize that gene-editing is a technology for future use, but we need to recognize what is missing in the case in question today.

As for customizing babies wholesale, Zhang Feng, a pioneer in CRISPR/Cas9 gene-editing technology said in an interview with Atlantic Monthly: “We’re still a ways from that. Designer babies and so forth, I think those are even further out. We don’t even understand biology enough to even contemplate what those things would be. We can’t even treat a single mutation that causes sickle-cell disease right now.”

So, while labelling the science as like something from “Frankenstein” makes it slightly horrifying, in the field of genetic editing, being cautious is not a bad thing.

Translated by Heather Mowbray. This article originally appeared in our Chinese-language sister website. 

From shanzhai city “the home of fakes” to China’s “innovation capital,” Shenzhen has gone through more than its fair share of changes to become the sleek modern city it is today. On 20 November, the Director of Nanshan District’s Science and Technology Innovation Bureau, Liu Shiming, spoke to participants of TechCrunch Shenzhen 2018 about the district’s tech journey.

“As a promoter of Shenzhen innovation and entrepreneurship, this event is right up my alley,” said Director Liu. “I see myself more as a spokesman than as an official—someone who serves industry and science. This informal cooperative environment is the just the kind of place to get across my message.”

Talking about how Shenzhen has changed over the past four or five years, Liu Shiming does not characterize development as either fast or slow, but rather as a set of responses to changing societal conditions.

“China’s reform agenda is now 40 years old,” Liu said. “We’ve had a rapid growth spurt, beginning right here in Shenzhen.”

Liu believes that Nanshan has become the hub it now is thanks to municipal government support.

“We have upgraded from being a city that develops in stops and starts to one that is confident enough to transition away from traditional sectors,” he said. “We are now able to reduce the excess capacity left over from the 1990s, a strategic yet risky move.”

Liu added: “We’ve transitioned boldly and rapidly, and now find ourselves with a booming high-tech sector. The city government plans are aligned with those of the Nanshan high-tech zone. We are fully tuned into our opportunities. It is based on everyone’s dreams that we’ve built our success.”

“It didn’t happen all at once,” he said. “It has been a long-term process, and we’ve ridden the wave of opportunity.”

‘One more, one less’

For the government, dealing with entrepreneurs and investment bodies, what is the biggest difference between Nanshan District and other local authorities? Director Liu Shiming summed up as “one more, one less.”

The “more” refers to increased IP protection. The emphasis on strong intellectual property rights protection has helped turn Shenzhen from “rip-off central” to “innovation city,” but it has not been easy. People have the idea that the Huaqiang North area only manufactures knockoffs, but actually, there’s more to it.

“First of all, Huaqiang North did not begin with shanzhai culture. It began with the chip. When I was in technology 10 or 20 years ago, I came to Shenzhen. Not for Window of the World [tourist spot] or the zoo, but for the innovative atmosphere of Huaqiang North.”

This is what it was famous for, and where prototypes of high-tech businesses and supply chains were incubated. Later, the development of new machinery and electronic products resulted in a period of rapid imitation. For a while, shanzhai was what everyone did. As a form of adaptability, why not? Soon people realized they needed an atmosphere in which IP was protected.

They realized that quality suffered. As the economy grew up, shanzhai culture passed away. The government crackdown and the emerging generation of talented innovators left no place for piracy here. Consumers also abandoned shanzhai, and this is an important factor. For Nanshan, success followed this transformation.”

The “less” refers to less government control. “Some local governments put a lot of emphasis on management. We don’t. We are all about service,” he said.

“The government is not about managing people but about serving them. It sets up public platforms and services. Through these services and trust mechanisms, a good market environment can develop. Everything we make, all our competitiveness, relies on cultivating a strong market. With this, we can win in China and abroad,” said Liu.

Liu added: “We work with Shenzhen Investment Holdings to set up five centers for entrepreneur services in a 30,000 square meter space. The government has invested more than two billion yuan to build a joined-up science and technology exhibition center, administrative service hall and public security office. This will support innovation and IPR, and safeguard employees’ livelihoods.”

Rapid economic development has led to rising housing prices, as well as rising costs of starting a business. This is the major problem for entrepreneurs and Liu did not skirt the issue. He agreed that improving the entrepreneurship environment would inevitably grow the value chain and have other positive effects. Although many factors are responsible for rising house prices, the government is consistent in applying countermeasures, he said.

“First, we will insist that state-owned enterprises give preferential treatment to private businesses. Second, we need to ensure that the government rents out empty spaces at between 50% and 30% of their market value. If your company is doing well, we will support you in this way. We will also contribute by increasing the space available, using ‘hubs’ to incubate labor-intensive industries in an orderly fashion. Inside the city, we have applied subsidies to reduce costs to businesses.”

He said that in recent years, Nanshan District rarely touched the market. Beyond regulations, everything was down to market demand.

“Nanshan District gives more than 4 billion yuan (around $575.3 million) a year in rent subsidies. We have also introduced talent hothouses and tried to reduce the pressure on entrepreneurs through various means. Only by working together with entrepreneurs, markets, society and government, and state-owned enterprises can we solve entrepreneurs’ problem once and for all. Through our support, we can reduce the hardships of starting a business,” said Liu.

Billionaires in sneakers

When it comes to internationalization, many people first think of Shanghai. Liu believes that Shanghai and Nanshan are very different from each other. He joked that while Shanghai is seen as the city of the besuited multinational company, Shenzhen is full of billionaires in sneakers.

“Nanshan may not compare with Shanghai (in terms of multinational companies), but the products we make here reach the whole world. At the annual US electronic expo, Shenzhen firms are ambassadors of Chinese private business, making us proud. Although our university can’t compare with those in Shanghai, our research institutes are up there with the best in China,” Liu said.

He believes that Shenzhen’s internationalization is reflected in its companies’ global vision. Their research and development capabilities are truly international.

“Our internationalization is all about entering and being accepted by the market. No matter which country you come from, Shenzhen welcomes everyone. It is this openness and inclusiveness that fosters internationalization. We don’t need to be in the Top 500 to be global. Being open to the world is represented in culture, products and the system of innovation we have built. We want to host more world-class summits and help more organizations settle here. This TechNode summit is a good example. I believe these are ways to show how international we are at heart. [In] Practical ways,” he said.

Liu may be busy, but he often takes the time to talk to entrepreneurs. He is most happy when he sees them flourish.

“I have many entrepreneurial friends who share their stories with me. Their growth, their sales, the awards they’ve won. I am happy when they get results. I may not be young, but I take a lot of energy from young people,” he said.

How does he see Nanshan District developing? Liu wants there to be better services for entrepreneurs:

“After two or three years, the ecology for innovation and entrepreneurship is going to be much richer than it is today. It will also be more diverse, with more foreign countries represented. We’ll have more allies, more innovation parks, and more service platforms. What we lack now is a comprehensive public service platform, which means costs for entrepreneurs are overly high. Besides free space and rent subsidies, we will help people speed up their own business development. We are all about helping to reduce costs and improve efficiency.”

Translated by Heather Mowbray.

At 2018 TechCrunch Shenzhen 2018, Huami Corporation’s Chairman and CEO Wang Huang, spoke on the future of wearable devices. Huami, a Xiaomi eco-chain company, listed on the New York Stock Exchange in February this year. As of last year, Huami shipped 18.1 million units of smart wearable devices globally, and had recorded a total register use base of 56.1 million.

Wang Huang told participants that Huami has produced smart bands since 2014. The third generation Mi Band 3 is equipped with Near Field Communication (NFC) technology that can be used on bus and subway networks in over 160 cities across China, and can also open smart locks.

“Wearable devices have rapidly entered the ecosystem, most significantly in healthcare,” he said. “I believe that one day smart watches will take the place of smartphones.”

While it is true that there has been a craze for smartwatches has gone up over the years, but still when it comes to making a style statement a watch under $200 is more than sufficient to bring out class and complete an attire of a person.

Wang Huang introduced Huami’s self-developed smart wearable AI chip, Huangshan-1, created using open instruction set architecture ISA RISC-V.

“This chip enables Huami to deliver heart rate monitoring, and check for a number of heart complaints,” Wang said. It draws on cloud-based AI to screen for diseases on something as small as a wristband or watch. Even when you are not online, it updates your health stats, he added.

Wang discussed Huami’s market positioning as a company that collects physical data on its clients. As a user-oriented smart device business, Huami collects health data and suggests further services in a closed loop business model.  He said that until the recent Singles’ Day (November 11) shopping festival, Huami had sold more than 30 million units of its Mi Band 2. In the last five months, it has shipped more than 10,000 Mi Band 3s.

Wang said Huami had grown even faster overseas than in China. Europe is now the company’s second largest market. Europeans’ love of sport is a key contributing factor, he said.

Huami is seeking out various partners across the world. The company is working with Israeli firms to develop algorithms, and with Norwegian university research institutes to develop med tech. On a global level, Huami collaborates with Google and other top firms, and is able to leverage channels opened by its partner Xiaomi.

In China, Huami focuses on cooperation with investors and app developers. Wang Huang talked about a maker of smart watches and bands that can monitor elderly care home residents, and about marathon runners who use Huami to monitor their progress at 3-kilometer intervals.

Wang spoke of Huami’s relationship with Xiaomi, its second largest shareholder and main market channel.

“Huami positions itself as a sports and health sector big data firm. Xiaomi positions itself further upstream, as a major IoT platform,” Huang said referring to Internet of Things. The companies work closely together, and have interconnected ecosystems.

Wang said the tech world should watch out for a “revolutionary” new wearable smart device that Huami will launch in 2019.

This story is a translation from TechNode’s Chinese-language sister site. Translator: Heather Mowbray. With contributions from Runhua Zhao. 

In recent months, the world’s media has lit up in celebration of the tenth anniversary of the App Store. But did anyone stop to notice another app with a 1 billion-plus user base, WeChat, celebrating a milestone of its own, for its arguably less flashy applet store?

WeChat mini-games are getting bigger, in a small (no pun intended!) but significant way. The company has just announced that maximum file size of its in-app microgames will double from 4 MB to 8 MB, and code packages will be upgraded so that users can load the enhanced games with minimal lag time. It’s a hard balancing act to satisfy demands for better quality and deeper content while addressing anti-addiction and data security concerns. But it hasn’t stopped developers diving into content, gameplay, optimization, and releasing new games. Each Monday, game speeds are rejigged and updates released. With mini-games monetizing fast via advertising and in-app purchases, WeChat has announced in-game ad daily transaction volumes of up to RMB 10 million.

WeChat has signed contracts with several mini-game content provider firms, building a product matrix that draws in players who in turn energize the new sector. The recently launched features—mini program toolbar, brand search and product type search, and open applet—and tablet version performance upgrades, include loading support for independent performance packs and optimization. Helping to lower the development threshold for advertising monetization, enhancements include a self-service ad placement app.

100 days after the launch of mini-games, WeChat published its commercialization statistics: daily ad views on its platform were over 10 million, eCPM (earnings on every 1000 ad views) were more than RMB 80. From just 17 mini-games initially (exemplified by the game Tiao Yi Tiao), there are now over 2000 mini-games. Latest statistics released shows that of the top ten mini programs, 6 were mini-games, with top place going to Tiao Yi Tiao. In second place was the massive hit Haidao Laile or Pirates Ahoy! Now with 8 MB to play with, mini-games are even more appealing to developers and investors.

Official figures show there are now more than a million mini programs in circulation. The sector is awash with over 1.5 million developers. Average users open these applications four times a day, showing that mobile users have made checking mini programs as much of a daily habit as checking moments or using voice chat. Given this, how open will mini programs remain going forward?

On July 9, WeChat opened its advertising channel to mini programs (including mini games). Programs with a minimum user volume (UV) of 1000 and no serious violations on their record could apply for advertising space via the mini program backend. In terms of ad sharing, for games with fewer than 100,000 daily users, earnings are split 50:50; for games with more than 100,000 users, they are split 30:70, with the platform taking the lion’s share.

Android users may also make in-game purchases, with WeChat earning 60:40 along the way. An RMB 500k subsidy policy has also been adopted to support games with fewer than 500,000 transactions in 2018. For successful applicants, WeChat promised to waive its 40% cut on in-game purchases. As of the end of June 2018, hundreds of partners have signed up.

Currently, most cash is flowing into banner ads and incentive videos, of which the latter cost more and have a greater impact. According to the mini games team, the next step is to open mini games to select custom ads and integrate ads into game content. McDonalds’ product placement in Tiao Yi Tiao, putting its logo on the springboard, was the first trial.

Taking advantage of WeChat’s open lecture series, we talked one-on-one with the director of WeChat mini-games and developer of the mini program ecosystem, Li Qing.

From his point of view, in terms of business model evolution, games have always been the most mature segment of the commercial web. Besides direct moneymaking options, he feels there are plenty of other untapped opportunities. Take traditional offline chain stores for example: you can play a game while waiting in line and earn a discount coupon to spend in a nearby restaurant. To this end, mini programs have done a great service to traditional commerce, despite having started as being pure “fun”. Zhang Xiaolong’s hope is that mini programs will go on to solve needs in a range of scenarios.

At present, mini-games have deep access points, and users need to use search, WeChat games, or recent apps to find them. Li Qing says that mini-games will decentralize in line with WeChat’s overall strategy. “To become decentralized, it’s best to not have a single entry point.” Currently, mini-games have “friends playing” and “select” functions, legacies of the initial launch, but these may be phased out in the future.

Some mini games are already attracting more than 100 million monthly players. According to data provided by Hortor’s CEO Cao Xiaogang, leading mini game Haidao Laile! has daily users numbering 20 million, and more than 100 million a month. Two leading mini-game companies are competing head-to-head: Beijing Hortor Games and Shanghai Aiwei Games. The former brought out viral hits Haidao Laile!, Fengwan Caitu (Crazy Images), and Tounao Wangzhe (Brain King), and the latter Sunyou Quan (Friend Loss), Kuaile Liubianxing (Happy Hexagon), and Mengquan Bianbianbian (Cute Dog Change). All have had success in H5 games and can leverage this to draw in players interchangeably from both formats.

At the recently concluded TechCrunch summit in Hangzhou, many investors pointed out where the richest mini program investment opportunities lie: O2O, content payments, social e-commerce, and mini-games, with mini-games their overriding favorite at present. Out of all mini programs on the Aladdin Top 100 list, the fastest growing are mini games. A year ago in September 2017, game applets made up just 4% of the Top 100. Now they have risen to 33%.

Mini programs are deepening cooperation with the offline retail ecosystem. WeChat applets can lower usage thresholds for plug-ins, especially for smaller weaker businesses. WeChat login, payment, full-page plug-ins, etc., provide developers with services to better support offline retail, including membership points, coupons, and returns on purchases. “The mini program is a perfect membership carrier,” Li Xiang, head of e-commerce at Baiguoyuan, said in a WeChat open lecture. Baiguoyuan used the mini program function to develop its own options, raising the average daily customer flow to more than 20,000, with a nearly 40% secondary conversion rate, and about 15% new users.

Official WeChat press releases have revealed that users now open an average of 4 mini programs daily, of which up to 54% are actively clicked on. It’s clear that the previously misunderstood mini program is already changing the O2O shopping ecosystem.

Is there one particular way to work with mini games (everyone loves playing them)?

With social gameplay worked in, mini games are perfect for our time and capabilities. We have real examples to share. I can recommend two games Haidao Laile! and Board Game, but how to factor this in from an R&D perspective? Mini-games are a sub-category of the gaming industry, but they don’t need a completely new playbook. I’m sure there are innovative gameplays out there, but we’re not at that stage yet.

Looking at the whole gaming industry, are mini-games going to become a major channel for new releases?

I think it’s really up to the developer. In my position, of course I’m going to say they’re really important. My feeling is that if we spoke to a developer, they would use mini games as a tool no matter what their end goal was. They’re a good way of testing new products. We don’t think that’s wrong. Any developer who uses mini games to achieve something is a full member of our ecosystem and deserves the very best service. As for lowering the production threshold, our vision is that any middle school student, any kid even, can put together a mini game. It may just be for their mom, their dad, or a bunch of friends, but if it works, that’s an outcome we’ll celebrate. But whether a game will grow or be sustainable over the long run, it’s not something we can plan, but more a choice everyone makes together.

Has WeChat given the mini-games department internal KPIs?

No, we haven’t had any KPIs set as a department. One point I’ve just mentioned: the advertising flow factor, one side of which is having someone willing to supply traffic, and the other is having someone willing to buy with real money. The incentive videos I mentioned are a good source of supply because all developers need to use this to make a numerical analysis of gameplay, and many developers are willing to access and use it for supplying traffic.

The essence of mini games is that they are “small”, something well suited to the “small is beautiful” camp of development. Do you think new giants will emerge in this field?

Whether or not new giants emerge I don’t know, but I do know that games require a degree of expertise, and with the research that goes into career game developers’ work on gameplay, they can more easily break into the market and experience a fast growth curve amid strong competition.

If I have a good idea, I can implement it and have room to grow on my own. One situation like this is with the developer of Rexue Guanlan (The Dunk of Death). I remember there were four or five people in the company. They made a good product, and thus its market positioning and scale were set in motion. In other words, as long as you have a clear understanding of your market positioning, no matter how large your existing team, it will not affect the success of your next product. This is what is meant by giving mini game developers more opportunities.

Have any foreign gaming developers or world-renowned gaming developers taken part? As for custom mini-game products, could this encourage more developers to enter the ecosystem?

We are doing some translation work on development guidelines and have a few case studies already. On the side of development tools, our R&D team is also doing some things relative to the layer of development tools, so we feel that for overseas developers, there is a place to find public information. We can develop testing grounds, but we will still have to comply with national laws and regulations because games are cultural products. In addition, there are some things we will not customize. We won’t be using our official voice to tell people what to do, as this doesn’t sit well with our company ethics. So I’ll just emphasize that as long as it is in compliance, the platform belongs to everyone. The less intervention, the better.

After mini programs were launched, there were many naysayers. The change has been huge. What have you had to go through in terms of getting recognition for mini-game products?

We find it greatly encouraging that there are people in the ecosystem who are willing to spend their cash supporting this kind of development. This really keeps our team going. This is quite interesting and we are going to put more effort into this aspect going forward.

You ask what we’ve experienced as a team? I’ll share a story. There was a discussion in the first team to work on mini games, well before the official launch, about how to innovate. What kind of mini games would be offered to consumers? At the time everyone’s mind turned to making money, and that without it, there was no way forward. Games development was all about riding this wave. In the process, it was hard to shift direction on this, so the team started to take it a bit lighter. Maybe anyone can play, and we don’t know how to make money anyway. We were getting a bit lost, so in mid to late April and May, I got everyone together again. What was it we wanted to do? To my surprise, everyone was completely open. We knew one thing: that the commercialization of game content was directly proportional to the strength of the platform. In the current situation, advertising revenue would support the survival of a small team. They would only need to work on the innovation of the content itself. I started thinking there was a big chance here, and that a flourishing ecosystem would drive good game content by itself.

Blocks, viral videos, accusations, and lawsuits: controversies surrounding short video sites in China continue to mount. The protagonists? Toutiao’s Douyin and Tencent’s WeChat.

A post dated May 22 on Douyin’s public WeChat account, “Sorry, Douyin fans”, accused Tencent of discrimination by taking down a lot of individual “healthy” video posts, while simultaneously accusing the company of itself hosting vulgar content. Tencent PR replied sarcastically with: “All bow down to the next drama queen, Douyin.”

Soon after, Douyin CEO Zhang Nan took to WeChat moments to accuse Tencent of being “monopolist and manipulative, exploiting its market position and channels to obstruct users and damage the user experience.” He wrote it was “really beneath them, and has wiped out all the respect I’ve built up for them over the years.”

Since then both companies have taken the spat to court.

Video Sensations

Looking at the big picture, this isn’t the first time WeChat and Douyin have got into scrapes, and it clearly won’t be the last. In just two years, the list of companies with a grievance against Toutiao has gotten extremely long. To give just a few examples:

• August 10, 2017 – Weibo claimed that a third party platform had directly fetched content from Weibo accounts without the company’s knowledge or authorization. Due to the serious nature of this infraction, Weibo suspended the platform’s interface. This “third-party news platform” was indeed Toutiao.
• March 8, 2018 – It appeared that WeChat moments were not showing Douyin content, and indeed for a period of time, Douyin content was blocked to other viewers.
• Evening, March 10, 2018 – some Douyin users found that forwarded Douyin links on WeChat would not appear on their individual pages or news feeds and were only visible to themselves. One user cut to the chase, “Douyin had been blocked on WeChat.”
• April 11 – On the grounds of “cleaning up” short videos, Tencent instructed QQ and WeChat to stop displaying Toutiao videos.
• May 14 – A post on Q&A platform Zhihu, “Toutiao and the Trojan Horse,” led to Toutiao suing Zhihu and the post’s author for RMB 1 million in reputational damages. Coming down from the brink, Toutiao accepted an apology and withdrew its claim.
• May 15 – Weibo penalized Xiaomi, Douyin and other sites for “data skimming” search optimization tactics.
• Toutiao sued Baidu for its subsidiary Haokan Video’s unauthorized use of the copyrighted program, Yiguohui.
• May 18 – WeChat officially announced an upgrade to its redirect chain management rules, insisting that partners without audiovisual licenses would not be allowed to post video content to WeChat. According to incomplete data, at least 21 products have been affected. News of the “blocking of Toutiao” spread fast. On May 21, WeChat announced the terms of its “immediate deletion” campaign, and said that the platform and developers would continue to seek a solution to manage the sector better for all.
• June 1 – Tencent files RMB 1 lawsuit against Bytedance (parent of Toutiao and Douyin) for unfair competition
• June 2 – Toutiao fires back with RMB 90 million suit for anti-competitive practices.

As Toutiao grows, and Douyin continues to rise, such competition and friction will only increase.

Tencent’s Counterattack

A 3 billion RMB incentive system, a team of celebrity influencers, QQ social sharing and a “Produce 101” music reality show have all drawn in new users. When the whirlwind Tencent makes a move these days, its offensives are massive in terms of both influence and content.

Tencent’s advantage is traffic, and CEO Pony Ma is in the position to hand out slices of the pie. By the time Weishi was launched, Tencent had already opened QQ, QQ Space, WeChat, Tencent News, Kuaibao and other products, all drawing in heavy traffic. Weishi’s official account pushes content to certain QQ users every day. Some say that the young average age of Weishi’s users is due to its success in attracting QQ users.

Despite the power wielded by traffic giant WeChat, Tencent has insisted on fair treatment, but it is hard to imagine Tencent will not give preference to its own offspring. Given recent regulatory hurdles, strictly speaking, Tencent’s shutting down of short video sharing has complied with regulations. But it has also helped Tencent contain its rivals while cultivating its own video platform, Weishi.

Tencent then went one step further, publishing stringent rules for “upgrading its redirect chain management system.” This means WeChat will only permit content that has an official Information and Video Distribution License issued under Information Network law. Many short video platforms are affected by this regulation, including Douyin, Volcano, Xigua, and Miaopai. On the grounds that it is too sweeping and controversial, Tencent withdrew the rules and said it would work with developers on how to manage quality and compliance in video content sharing.

Attention-grabbing techniques have also came into play in the quest for traffic volume. Online idol Huang Zitao became Tencent Weishi’s first celebrity recruit, and on May 20, (China’s online Valentine’s day), Jason Zhang followed suit. Tencent Video then launched its authorized take on Korean reality show “Produce 101”, in which 101 women compete for places in a girl band. This all took place on Weishi with a new hot function – a voting mechanism.

On the content side, Tencent has developed an open source content pool. Its Penguin Platform draws Weishi closer into the Tencent content family, enabling simultaneous posts on multiple platforms, including WeChat official accounts, Weishi, and Kuaibao.

Tencent is also working to attract high-quality, talented content producers, using generous cash incentives as a lure. This has involved a strict offline screening mechanism and collaboration on content with original short video producers and MCN sites worldwide. Content developers and groups have been offered attractive bonuses.

Media reports about the RMB 3 billion incentive plan suggest Tencent will hand out large rewards to Weishi premium content producers between April and August this year. Three levels of bonuses will be on offer: S-class at RMB 1,500/post, A-class at RMB 500/post, and B-class at RMB 140/post.

For many short video entrepreneurs, this kind of bonus hits the spot, and there is the feeling that now is the time to get on board. Many Douyin idols on Star TV have opened Weishi accounts. Live-streamers have also begun shifting to Weishi. These incentives have been enough for many to achieve profitability. Weishi is still looking out for commercial partners and agents, to bring in even more hot personalities and trends.

What about user-generated content (UGC)?

Tencent’s inspiration here comes from WeChat Moments. On May 21, WeChat on Android pushed a 6.6.7 beta version to users. One new feature was WeChat authorized users who were logged into Weishi would be able to post videos automatically, and WeChat videos would be shown directly on their Weishi account. WeChat later said it had not intended to go public with this function just yet.

Behind Tencent’s big maneuvers has been the increasingly important position of Weishi inside Tencent – not just its short video products but more importantly its role as a content matrix distributed by Tencent. In Tencent’s 2018 Q1 financial report, Weishi was specifically mentioned, along with user content and Tencent’s digital data library. Weishi content can also be distributed through vertical information streams such as mobile QQ browsers.

Tencent’s President Liu Chiping said during a conference call that the company would invest heavily in Weishi and had full confidence in its prospects.

In just over a month, applications for Weishi public and group accounts have rocketed.

According to the app download ranking by Qimai, April and May 2018 saw a leap in Weishi app downloads. In the short video download list, it ranked second after Douyin. Weishi was used on 3.37 million unique devices in April, according to iResearch. Currently ranked 16th in short video, prospects are good, with a clear upward trend. Kuaishou and Douyin are however still racing far ahead.

A Storm of Giants

As Tencent races on, other giants are rounding the bend. First, we had Weishi’s talent subsidies. Then Nani micro video, a project of Baidu Tieba’s incubator, used a combination of Baidu-driven traffic and enticing incentives to set off a subsidy war. With salaries and bonuses similar to those of Douyin and Weishi, super users who post six or more top picks receive an “S-class” base salary of RMB 5,500. On May 11, Taobao Short Video held an internal press conference, announcing the launch of a short video app called Social Beta, understood to benchmark Douyin. Weibo announced an RMB 500 million investment, and an ambitious aim of creating a user base of 1,000 users with over a million fans, further enriching the short video content ecology.

Nani micro video was only born in December 2017. It supports short videos of up to 15 seconds long and includes stickers and beautification features. The style is very similar to Musical.ly, Douyin, and Weishi. Nani is said to be welcoming “strategic” support from within the Baidu system. It is reported that Baidu will not use Nani as a strategic product at least for now, and internal sources said that in June other apps will be launched in a similar vein to Douyin.

Also in the exploratory phase is Alibaba. Taobao’s short video press conference aside, where it has announced the launch of its own short video app, “Social Beta,” benchmarking Douyin, in March, Tudou.com announced it would spend RMB 2 billion transitioning to short video, ploughing further money into the sector.

When it isn’t busy blocking Douyin links, Weibo is also investing in short video. RMB 500 million has been put into its “million fan stories”, while it also quietly develops short video site Yixia. Faced with the Douyin offensive, the star who once controlled the short video field appears to be treading water. In April last year, Huangka, its music short video platform, launched as a stand-alone app. However, soon after, Huangka was shuttered as an independent app, leaving the scene on tiptoes. Yixia staff revealed to Technode the not inconsiderable pressure Yixia was facing. It is currently in testing mode, and more will come out with new products in June or July.

As you can see, given this storm of interest, no one wants to lag behind. According to statistics, high levels of investment and financing were still going into China’s short video industry in 2017, with a total of 91 targets and a total spend of RMB 5.4 billion. The China Internet Copyright Industry Development Report (2018) published by the National Copyright Administration’s Network Copyright Industry Research Base on April 23 shows that in 2017, live streaming was worth nearly RMB 40 billion. Short video grew rapidly to more than 410 million users, an increase of 115% YoY. The outflow of user traffic and advertising value in the short video market is expected to reach RMB 35 billion by 2020.

However, in this fiercely competitive market, even if the user scale has expanded rapidly, the industry needs to shake down some more. We may recall the boom in live/short video platforms two or three years ago. Hundreds of live-streaming apps came in with the tide of capital, only to later retreat. Content duplication and worryingly poor quality outputs are still major weak points in the industry. The more lively the market, the more obvious this becomes. This trend will continue in the near future as more and more similar short video apps appear on the horizon, right up until there is a wave of consolidation.

—Translated by Heather Mowbray

“You recognize that the world has changed, but you know that to adapt and change your company’s culture you need to defeat a layer of inertia. It’s like setting broken bones, painful and hard.” —Wang Xiaochuan

For Sogou, November 9, 2017, was a very good day – the company had made it onto the New York Stock Exchange. Wang Xiaochuan, who had waited 14 years for that moment, was the one who set Sogou on a new course, the one that had led them to Wall Street and a massive change of fortunes.

In 2003, when Wang Xiaochuan founded Sogou, he hoped search would boost his might against internet forerunner Baidu, established in 2000. But Sogou drifted far from its original goal, so much so that in 2010 and again in 2013, they were nearly bought out by Qihoo 360. But now, not only has Sogou become the most popular Chinese input method on the market, their market share in search had risen dramatically. According to CNZZ data, in April 2013, Sogou search had only 9.15% market share. By the end of March 2018, iResearch puts Sogou’s mobile search market share at 18.2%, making it the second largest in China.

How did Wang Xiaochuan tough it out during this long fallow period? Where will Sogou position itself in the new AI environment? Where will Sogou make its breakthrough? We interviewed Wang Xiaochuan to find out.

Growing against the wind

According to iResearch data, Sogou’s star product, its pinyin input method, is universally used in China, with a market share of 99% in 2018. Its daily active users rank it as the third largest mobile app in China. Sogou’s mobile search market share reached 18.2% by the end of March 2018, second in China.

Search has taken far longer to mature than the pinyin input method, but Wang Xiaochuan never gave up. Even in 2010 and 2013, when it was rumored that Qihoo 360 made two failed acquisition attempts, Wang Xiaochuan came back and, saved by Alibaba and Tencent, he was able to keep his baby. Even after Tencent became Sogou’s largest shareholder, Wang Xiaochuan still maintains ultimate control of Sogou.

Over the course of Sogou’s development, Wang Xiaochuan has dealt with dramatic turnarounds many times, so he’s well-practiced at facing up to trouble. He puts this down to two things:

“First, I’m used to going against the wind. The harder the conditions, the more I know what to do. If you focus, you’ll think up a hundred ways to solve a problem. Downwind, and you’re lost,” he told us, confessing that he works best when things are tough, and when he’s being attacked he feels most compelled to improve. He’s also convinced that Sogou’s work has value, and this keeps him going. “If you’re making something that no one wants,  no matter how hard to try, it won’t work. But if you’re doing something that makes sense, you’ll be rewarded every time.”

Of course, as CEO, Wang Xiaochuan cannot just play “against the wind.” He also has to forge a path of development that suits Sogou. And that means AI.

A clear AI strategy

Despite being far smaller than rival Baidu, Sogou has done some impressive work in artificial intelligence. The company has gained kudos for its dictation and simultaneous interpretation tools, Sogou travel translation app, and Sogou translation pen, but most of all for its clear and focused AI strategy. Wang Xiaochuan says they aren’t just going where it’s hot, but actually stepping back to see where their strengths lie and deploying AI technology in those areas.

To understand Sogou’s strategy here, we need to first understand Sogou’s “dual turbo” model of pinyin input method and search. During Sogou’s “triple turbo” period, the search engine was Sogou’s main route to commercial success, but in the “dual turbo” period, Wang Xiaochuan believes input can be independently commercialized. This has given rise to Sogou’s AI strategy. Sogou first plans to make AI useful in search and second make the input method more natural.

Sogou has long developed image-based search based on image recognition. On the input side, Sogou derives AI functions such as speech recognition, shorthand, translation, and lip recognition based on Sogou input.

Previously, Sogou introduced a search product that could identify dog breeds, a sort of canine facial recognition software. Since it could recognize dogs, surely it could identify people too? Sogou had the chance to get into facial recognition technology, security appliances, or even autopilot functions. But Wang Xiaochuan made it clear Sogou would not step into those areas right now because, in his words, “Sogou does not currently have the security clearance or the environment to test automatic driving properly.”

The advantages of Sogou AI

Speech recognition, semantic understanding, and related technologies are becoming the crown jewels of Sogou’s AI strategy. But no matter which field, Sogou is by no means the only player in an industry that also includes iFlytek and Baidu.

“It’s really not about data, our voice technology works in the context of pinyin input, and this is an advantage.” In the face of competition, Wang Xiaochuan believes that relying solely on technology is not enough to beat the competition. The real key is having somewhere to use it: market share. Although companies such as Baidu and iFlytek are also developing input method products, Wang Xiaochuan believes their market shares are too small for them to catch up. Sogou’s dominance in pinyin input gives Wang great confidence. “We have a peak daily speech recognition call volume of 360 million, more than all the others put together,” he said.

People say Wang Xiaochuan has such belief in where he’s headed because of his experience in Sogou search. “When we started in search, we thought that if the technology was better than Baidu’s, we would be able to grab market share. What we discovered was that it wasn’t actually a matter of technology. When a business forms a closed-loop, it is not something that can be disrupted by technology alone, unless your technology is truly disruptive.”

The arrival of AI

Search and input was where Sogou’s AI capabilities were first put to the test. In seeking more fields, Sogou turned to smart hardware. Sogou has launched the Teemo smartwatch for kids, Teemo household robots, and Sogou translation pen among other items of smart hardware. Regarding the distinction between the two brands, Wang Xiaochuan said Teemo will focus on kids, while Sogou will focus on smart technology.

It is widely known that Baidu is also stepping up its efforts in AI. However, unlike Baidu’s investment strategy, and its “buy buy buy” approach to gaining hardware R&D expertise, Sogou’s smart products are developed by their in-house team of engineers.

“I recognize that acquisition may be the best route. It can cost less than internal development, and definitely saves time.” Wang Xiaochuan says he is not against gaining smart hardware through acquisitions, but in terms of the volume Sogou is after, it’s hard to find good targets. “Of course, we also have the advantage of doing our own thing. We can certainly integrate things better.”

While Baidu is working on platform products such as DuerOS and Apollo, Wang Xiaochuan tells TechNode that Sogou is not interested in developing platforms at the moment.

“Opening up solves diversification and cost issues, but only a closed system can help with innovation.” Wang Xiaochuan believes that in the start-up or early phase of a business, a closed loop makes the best products. “It’s best to open up slowly until you make it.” To illustrate this point, Wang Xiaochuan gave the example of IBM: “When IBM made computers, everything including the screens was made by them. Amazon did the same thing in sound. Only after they had finished making the product did Amazon open up.”

Wang Xiaochuan did tell TechNode, however, that by the end of the year, Sogou would be bringing out a new hardware product. He didn’t say what it would be, but he did say it wasn’t a smart speaker. “Smart speakers are quite a good direction to take, but too many people are doing it now, and the price is being shredded everywhere you look. And it takes us too far away from our purpose. The core logic of speakers is to broadcast music, which is not our forté.”

Wang Xiaochuan did note another major feature of the Sogou brand: “We like to stay close to our users and improve their convenience in communicating. Voice interaction is the very heart of what we do.”

If companies don’t move forward, they risk losing everything.

We’ve mentioned Sogou’s advantages. So to be prepared for the future, where might Sogou’s crises come from?

Wang Xiaochuan thinks that everything is changing way too fast. To keep pace with change, a company has to upgrade constantly, otherwise, it can only retreat. “You recognize that the world has changed, but you know that to adapt and change your company’s culture you need to defeat a layer of inertia. It’s like setting broken bones, painful and hard.”

In order to confront such crisis points in the future, Wang Xiaochuan says it is essential for the company to keep dissembling parts of itself, adjusting organizational structures and keeping up constant reform.

—Translated by Heather Mowbray

Putting an end to longstanding rumors that Huya was getting ready for its independent IPO, the live streaming site is now China’s first independent listed live stream gaming platform (strictly speaking Huya is a spin-off of parent company YY). According to the SEC prospectus, Huya listed on NYSE on May 11, 2018, 11pm Beijing time.

These revised documents gave Huya an advisory share price of $10-12 and an initial offering of 15 million ABS shares. According to sources quoted by Reuters, Huya set its IPO price at US$12 per share, the upper end of the scale, and raised US$180 million. Trading under the name HUYA, lead underwriters include Credit Suisse, Goldman Sachs, and UBS.

Huya’s parent company YY holds 48.3% of shares and YY President David Li Xueling holds 3.7% as the first shareholder. Tencent-owned Linen Invest Limited holds 34.6% of its outstanding shares as its $460 million B round investor. As head of two publicly listed livestreaming platforms, Li Xueling also holds 16.6% of the controlling shares issued by YY as well as 82% of the company’s voting rights.

Luck depends on the interplay of risk and opportunity

Setting it apart from YY’s IPO listing, media attention this time was on the company’s future profitability.

Huya was officially launched in February 2012, focusing on live stream gaming, but also covering live streaming entertainment, outdoor adventure, and sports among others. Although video live stream revenues have been growing fast, Huya has yet to turn a profit. In 2017, Huya’s net operating income was RMB 2.185 billion. Taking away advertising and other business, live streaming brought in around RMB 2.07 billion. Revenue from live streaming services increased 161.3% YoY to RMB 2.06 billion, but with gross profits of $39.2 million, Huya had net losses of $15.5 million.

YY, one step ahead, brought in the bulk of its revenue via online games. Its latest quarterly earnings report showed that in Q4 2017, live streaming accounted for RMB 3.36 billion of its total income of RMB 3.625 billion, a massive 92.9%. Of this, YY made RMB 2.67 billion, while Huya made RMB 692.7 million from live streaming. Online gaming earned RMB 128.1 million, and member services earned RMB 50.5 million. Other revenue (mainly from online advertising) earned the company RMB 80 million.

Reassuringly, the financial reports show that Huya’s livestreaming debts have narrowed. This may be a sign that it is on the route to profitability.

Overseas, Huya can benchmark companies such as Twitch. Why does China have a company like this to benchmark? Huya took control of its own talent management and used common sense to gain its foothold in game streaming. It caught the upsurge of PlayerUnknown’s Battlegrounds “chicken dinner” games. During Q4 2017 and Q1 2018, Huya’s livestreaming saw a major user volume spike, and its Q1 earnings pushed it to a historic break-even, one of the driving factors behind its IPO bid in the US.

Other big games companies have discovered new value in live streaming platforms and live streaming games to extend the lifespan of their products. This has also given a financial injection to live streaming platforms and closed the loop resulting in more profitable operations. With more and more live stream gamers, their role in the entire gaming industry chain is also increasingly important. Because they come into direct contact with players, channels are increasingly relied on by games publishers. With the cooperation of games hosts, independent games that had not found their place in the market earlier were able to boost their influence and their subsequent download rates. On the other hand, live games provide players with a platform for daily communication and recreation, forming a user base for esports in general. Live streaming works in a similar way to the Premier League and NBA, and this is why it has received so much attention inside and outside the industry. Of course, the eyes of Wall Street are included.

One problem that can’t be ignored is the scarcity of live streaming broadcasters in online gaming. High costs for hiring popular hosts are now a core part of the fierce competition for the first and second place between Huya and Douyu. Popular anchors Queen MISS, Wei Shen, and LPL spring championship winner UZI, have all made lucrative transfers between platforms in the past. There is clearly competition for “high cost” talent in the marketplace. And this is a problem that won’t be easy to fix. So from now on, Huya will keep accumulating users and revenue at a rapid rate, while profit margins hover around break-even point. This is likely to be a major obstacle to maintaining post-IPO profitability.

Backed by Tencent, benchmarking Twitch

The challenge faced by Huya is obvious—how to establish its own specific advantage in game streaming?

Frost & Sullivan reported that in terms of monthly active users (MAU), Q4 2016 and 2017 saw most active users spend the most time on mobile apps. Measured alongside most active anchors, Huya has the most active live stream gaming community in China.

Considering a report by Jiguang, as of February 2018, the three apps with the highest livestreaming penetration rates are Douya (4.25%), Huya (3.61%), and YY (3.33%).

In spite of this, compared with Twitch’s dominance overseas, Huya still needs more time to mature. To give a little of Twitch’s history, its predecessor Justin.tv discovered that its popularity rested on live stream gaming alone, after which it spun Twitch off to make its own way. Four years of independent development and operations had kicked up a storm, but this is not enough to survive. Despite being situated in innovation central, Silicon Valley, Twitch needed backers and capital to become the company it is today. Twitch resisted being bought by Google but ended up in the clutches of Amazon. This is the path Twitch took to reach its strong position in gaming today!

Huya has gotten much more interest from capital markets than Twitch. And now Tencent has thrown its own scale and capital into the ring to help it rise rapidly. Almost $1.1 billion worth of investment in Douyu and Huya captured the entire game streaming market. Huya is seen as a strategic investment and the plan is clear. Gaming is Tencent’s main source of revenue, so it naturally has more traffic, channels, and users. Regardless of how you see it, for Huya, the investment is a great help. As for future returns, they depend on whether Huya’s post-IPO strategy and market performance bring value back to Tencent. But the general direction seems to indicate solid future success.

According to an earlier PricewaterhouseCoopers report on trends in the sector, China and the Asia-Pacific region are becoming the largest consumer markets for online gaming and will maintain a steady compound annual growth rate (13.9%), with total revenue for the sector reaching US$195 million by 2021. Looking at the driving force behind this propulsion in value, PricewaterhouseCoopers predicts that by 2021, the value of advertising from live stream media will reach US$84 million, and events revenue will reach US$54 million. Player fees alone will net US$31 million. Ultimately, the rise of eSports in China is related to the booming video game market. In 2016, the Chinese video game sector was worth US$15.4 billion. By 2021, it is expected to challenge today’s largest market, the US, for first place, with expected revenues of $26.2 billion.

All this goes to show that the economic benefits of game live streaming should not be underestimated.

—Translated by Heather Mowbray