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.