Took this photo with Instagram while in Suzhou, China this weekend with our team. Awesome cloud cover and sunset descending on the 68 story Gate of the Orient building under construction in the Suzhou Industrial Park.
Really fired up to see a terrific article from Hamish Mckenzie (Pando Daily) on China’s Mobile Internet leader UCWeb.
First, we (GGV Capital) have been saying for several years now that it is only a matter of time until the US tech community becomes aware of innovative technology and business models invented in China. UCWeb is one example, YY is another (both are GGV portfolio companies).
Innovation in China is taking pace at a blistering pace. We are now seeing a second generation of web entrepreneurs, having built incredibly successful companies like Alibaba, Baidu, TenCent, Sina, raising venture capital and launching new companies that will be hitting US radar screens a few years down the road.
I might add – by the way – that we are also seeing a massive uptick in active dialogue and efforts by US companies to do business in China. I met with two US players in the mobile space this past week who now have 10% and 16% of their business in China, respectively (and both are still in the “startup” phase – <$20M in revenue).
Second, I was really impressed that Hamish took the time to understand UCWeb. Many US writers will instantly look to write a story that says “______ is the ______ of China…” and not take the time to understand the nuances of the company and its business that are actually radically different from anything in the US (Tudou/Youku is not the “YouTube of China,” RenRen is not the “Facebook of China,” etc.). Kudos to Hamish for a great article.
Good Article by Glenn on VentureBeat: “The Hottest New Internet Companies are Growing Up Outside the US”
Great post by Glenn using data from Cowen & Co. Echoes the point Jenny and I made earlier this summer that US companies need to look overseas for hypergrowth (click here to read our article “Three Markets US Internet Companies Can’t Ignore…” on AllThingsD).
My Partner Jenny Lee and I recently authored an article for the Wall Street Journal’s AllThingsD titled “Three Markets US Internet Companies Can’t Ignore: Social, Mobile and…China.” Click here to read the article!
On Friday, China’s leading Internet search player Baidu announced its $300 million investment in China’s leading travel web site, Qunar. GGV Capital has been an investor in Qunar since 2009, and GGV Capital Partner Jixun Foo played a key role in working with the management team to orchestrate the deal (Jixun also used to serve on the Board of Baidu). Following the transaction, Qunar will remain an independent company and all of its shareholders will retain equity in the new company along with Baidu. We have long believed Qunar was one of the top emerging web properties in China, and the Baidu relationship should only further the company’s lead position in the travel market in China.
I’ve gotten a lot of questions from folks in the US about the Qunar/Baidu deal. I was with Jixun in Shanghai this past weekend, and thought I would post a short Q&A with him to provide some context on Baidu/Qunar.
JR: This is obviously something that has been in the works for some time. What was the genesis of the idea and the conversation between the two companies?
JF: At a high level, two things. 1) There’s a good relationship between the two companies and a lot of mutual respect. 2) There are obvious synergies between what Qunar is doing, and what Baidu wants to do in travel. Both sides see the massive market opportunity, and given the strong relationship and respect, it wasn’t hard to begin a dialogue.
Qunar gets the best of both worlds – a strong alignment and the resources of Baidu plus the opportunity to continue to grow and expand as an independent company.
JR: Can you give us a little perspective on the travel market in China, and why this is a “big deal?”
JF: Historically, the travel market in China has been the opposite of the US. In the US, the majority of the spend is on leisure/vacation travel. In China, it has always been about business travel. As incomes rise in China, we are seeing an increased spend on leisure travel. With 1.3 billion people, it is obviously a market that has huge potential. Fritz and CC were early to see the opportunity, and began building Qunar back in 2005. Six years later, more than 44 million people visit the Qunar web site every month, conducting more than 4 million search queries every day.
If you think of what happened with the travel market online in the US, you have tens of billions of dollars of value created with companies like Expedia, Travelocity, Priceline, Hotwire, HomeAway, Kayak, etc. In China, we’ve had Ctrip and eLong. That’s it. There’s plenty of room for a new player to emerge, and Qunar is poised to do so. The relationship with Baidu should only accelerate this.
To use a US analogy, I guess this would be sort of like Google lining up with one of the top emerging web companies to go after a massive, high-profile category. Travel is much more mature in the US, but perhaps Social or Mobile would be good analogies?
JR: You were an early investor in Baidu and sat on the board for many years. Today Baidu is one of the most valuable technology companies in the world, valued at more than $40 billion. How do you think about Qunar in relation to what you saw in the growth years with Baidu?
JF: Well, for starters, both companies have great management. The founding teams hired great people around them, built great cultures and a ton of momentum in the market. Robin (founder/CEO of Baidu) was an early visionary in the Internet space in China. When he started Baidu, the market for Internet advertising in China was less than $50 million annually. Today it’s more than $5 billion and growing rapidly. The Internet space in China was a bit more mature when the team launched Qunar in 2005, but travel was – and still is – very early. The number of travelers booking online, online travel spend and online travel media are all growing rapidly. It’s still early in the life of Qunar, but the company has a ton of potential, which is why management and the investor group are so pleased we were able to structure a deal where the company remains independent.
JR: I know you played a lead role in helping to structure this deal. It must have felt great to see it come to fruition and have CC publicly thank you for your efforts? (see Weibo post below)
JF: The investor group as a whole – GSR and Tenaya along with GGV – was very supportive and instrumental. Given my prior relationship with Baidu, I was certainly able to help move the ball forward, but CC, Fritz and the Qunar team working in conjunction with the Baidu team made this happen. The investors are all retaining an ownership stake in Qunar, and are very excited to see where it goes from here.
The Weibo (similar to Twitter here in the US) post above is from CC, co-founder and CEO of Qunar. It reads “GGV led the negotiation and made the deal possible, thanks a lot to Jixun,” followed by the deal announcement.
I made a quick trip to Shanghai this past weekend. As always, it consisted of two long plane flights (the 13 hours in “13 Hours to Think”) sandwiched around a massive burst of energy from the pace of Shanghai. On Sunday, Glenn and I had a few hours to kill before our flight and decided to walk around one of the main shopping areas in Pudong. Every luxury brand you can imagine has a store in the Pudong district, but the most crowded store by far was…the Apple store (those are my Instagram’d photos above).
It’s unbelievable. Since opening in July, 2010, the store has been going gangbusters. There must have been 1,000 people in the store when Glenn and I visited. At the Genius Bar, a woman was using a microphone talk to the audience about how to create online photo albums. Store Associates were ringing up sales on their mobile handsets like ticket takers at a Justin Bieber concert. The energy in the place was incredible.
So – what’s the big deal?
Last week I Tweeted about an article in the WSJ that said Mercedes is selling more S class sedans in China than the US and Germany combined. Sales of Mercedes in China grew at 60% over the past year, vs 9% for the rest of the world. The same is happening for BMW, Audi, Buick, etc. And – these are not cheap vehicles – a car that costs $50,000 in the US can cost 2-3 times as much or more in China.
Traditionally focused on the US and Europe, every major luxury brand now sees its biggest channel for growth in China (Chinese consumers buy an estimated 12% of the world’s luxury goods, growing at a rate of 30% per year).
Headlines appear on this subject every day in mainstream US media. But until you spend time in a place like the Apple store in Pudong, it’s hard to grasp the change that is taking place. This change will have massive implications on the US over time. If our economy continues to be flat, and median household income growth continues to just barely exceed the rate of inflation (true since 1990), we will see more and more of the world’s focus shift from Europe and the US to China. This obviously has major implications for the global political landscape, not to mention the business world and equity markets. Make no mistake – if you are buying shares (or your 401K is) in a US brand – such as P&G, Coke or Apple – you are betting on growth in China.
Looking Towards the Internet
I think the same will eventually happen in the Internet space. To date, we have relatively few examples of technology companies that have done well in China, and most of them are in the enterprise or infrastructure space – Microsoft, Cisco, HP, Intel, etc. In the Internet space, most US company efforts in China have fallen flat or worse yet resulted in high-profile misfires. In fact, you could argue with the exception of Yahoo accruing billions of dollars in value from its stake in Alibaba Group (at least one major shareholder believes the Alibaba stake is worth more than Yahoo itself), there aren’t really any good US success stories in the Internet space (disclosure: my firm, GGV Capital, is a longtime investor in Alibaba Group).
There are many reasons for this, including but not limited to government restrictions (Facebook, YouTube, Google, etc.), hyper competition (e-commerce) and less mature advertising and subscription markets.
I think this will change. It won’t happen overnight, but will over the next 5-10 years.
Internet advertising / CPM rates are rising quickly. Tencent (market cap roughly $50 billion), which pioneered the virtual goods model now being replicated by Zynga and others in the US, earns billions from Chinese consumers playing its games and using the QQ platform. E-commerce has grown to more than $30 billion annually in China, much of which is still conducted on Alibaba’s Taobao platform. And the Chinese Internet population continues to rise – to more than 450 million at last count (China surpassed the US in number of Internet users back in 2008/2009).
First, for reasons outlined above, it’s a ridiculously attractive market that US companies simply can’t ignore. Secondly, US companies are learning how to work within the Chinese government’s framework, how to partner with local players, and how to hire local talent. As examples, Zynga, Groupon and other leading US Internet companies are staking out positions in China early in their company’s life cycles (I hear Zynga is doing well; highly publicized mixed results for Groupon).
My firm, GGV Capital, is betting several hundred million dollars on the success of this trend, and our global team is working with a number of our US portfolio companies on this front (providing financing, talent, relationships, “know how,” etc.)
China is undoubtedly the world’s most compelling growth market. Just like Apple, Mercedes and P&G, US Internet companies will find a way to be successful in China.
We’re betting on it.
Rebecca Fannin does a terrific job of covering the Chinese venture market. Interesting post on Forbes yesterday titled “China Venture: It’s Great to Have a Bubble” with notes from her most recent Silicon Dragon conference.
Of particular note is the IPO volume Chinese venture investors have been enjoying (GGV Capital with 9, GSR with 8, Sequoia with 9 in the last year).
This Wednesday I’ll be on an SDForum panel discussing cloud computing in China along with Vivek Mehra from August Capital and Jack Jia from GSR Ventures. Given the global focus on cloud and China’s emerging leadership in the technology IPO market, it should be an entertaining and informed discussion.
The event is from 6:30 – 9:00 pm in Palo Alto (4000 Middlefield Road). More info available on the SDForum web site.
I often say that many people from the US evaluate China as if we are both playing baseball – when in fact China is playing cricket. It looks similar, but it’s slightly different. Good article by Helene Cooper in NYT on Sunday describing how US policymakers want China to act in…the best interest of the US – and why that may not work. Worth reading.