I am thinking about this article(Paywalled) today. Whilst in Shanghai and Hong Kong I was able to talk to a few friends who work in the country’s growing tech industry. It’s massive and growing quickly, but while cash burn and revenue/profitability has been the main talk across the seas in Silicon Valley, it has not really started shaking out in China. I wish I were able to say that it will, but I am loathe to make predictions. I am sitting in a coffee shop hyped up on caffeine, so I thought to write something down.

The Big Tech Companies

Big tech companies in China play the proxy war game in a way that I don’t really see US tech companies doing. Google and Microsoft might tangle with each other in getting clients, but for the most part their interactions are mostly characterized as one of cooperation. But the big Chinese companies (they are Alibaba, Tencent and Baidu) go after each other in such ways that would make Sun Tzu proud. Most of it is between Alibaba and Tencent. When the two of them make an investment, the intent is usually:

• Shore up their main moneymaker from attack (Alibaba’s is ecommerce - Taobao, Tencent is messaging - WeChat)

• Attack their opponent’s main moneymaker (Tencent taking 15% ownership share in JD, the second biggest e-commerce site after Alibaba’s Taobao // Alibaba buying 18% of Sina Weibo, which is kind of like the Twitter of the Chinese internet)

• Fight a third enemy muscling onto their turf (Alibaba + Tencent joining forces to fight Uber)

• Carve out their own space out of new, relatively untouched turf - Alibaba + Tencent making digital entertainment.

I wonder why this is the case - why American companies aren’t so outright going after each other. It might be because there is so much employee cross-pollination (you don’t want to burn bridges). Apple and Google might be rivals but they’re also really close by to each other. It is easy for employees of the two companies to meet up and talk face to face. Alibaba and Tencent are in Zhenjiang and Shenzhen, 800 miles away from each other.

Chinese Business Models Feel Familiar

Not to say that all business models have to be different from each other - it is pretty rare to come across a company with a “whoa, that’s smart” business model (Uber and Zenefits come to mind). That being said, after checking out Angelist, I felt like a vast majority of the startups I came across could be classified into buckets:

• “Moving something from one place to another” - Taxis/Trucks and such

• “Connecting people with money to people with knowledge” - expert networks and such

As an American I feel a bit puzzled. Why are there so many of these types of businesses? On one level, I can see the demand:

• “Moving things”: China is a location with crowded roads and straining infrastructure. People will pay for a private solution to their logistics issue (and there is the spectre of Alibaba, the major ecommerce player funding everything related to logistics)

• “Expert networks”: I guess this is because a lot of business in China itself is done through experts and introductions. People learn about things from smarter others, and thus sprouted a business model around making those connections? Maybe this cultural facet is why we see a lot more of these businesses in China than in the US.

On the other hand, why do you need so many of these companies around? Are these fundamentally very regional businesses - meaning that they hard to scale on a global scale?

One thing that Chinese companies are famous for is copying. They copy their American counterparts and they copy each other too, and that leads to conflict.

The Capitalist Thunderdome

I had read a bit about the “go for growth” attitude that Chinese startups but I never really noticed it until recently. I feel like there is just something about China’s startup ecosystem. Something that makes it the most ruthless capitalist thunderdome on the planet.

Here’s an example. Baidu is a rich company with Google like margins. Their core search product is terrible (I had to use it in China) but because it is protected from competition it mints money the same way Google does. I remember reading a hedge fund thesis recommending an investment in Baidu because the company has amazing margins (~60% or something like that). The thesis that was pitched to me was that once the company “finishes investing” and cuts costs then the company’s true profits emerge and the bottom line would soar.

Well, those investments - about $3.2 billion up front with another $500 million coming - are going into a food delivery product called Baidu Takeout. Many times they give you coupons so that every time you buy something from Baidu Takeout, it actually costs less than how it would cost if you went to the actual store. I suppose that Baidu would love to charge more for this but there are so many startups out there doing this that they would lose traction.

I wonder what it is about China that makes its business battles so ruthless. It can’t just only be that the Chinese people are the super ultra holy-smokes competitive (are they the most competitive people on the planet? I am not sure), or that they are totally okay with breaking the beer bottle and diving head first into the bar fight (metaphorically of course) or that their government doesn’t do a good job of being a referee, defusing the battles before they get too intense, or that each of the startups have more money than God. It’s all of that together. Jesus it all comes together and BOOM. No wonder Uber is losing a billion dollars a year.

Where’s All This Money Coming From?

Speaking of UberChina. As I read this I am hearing of news that Didi Kuaidi, a ride hailing company that is in the lead in Uber, has just raised $2B. I think this has been something I have noticed a whole lot more recently - just how much money is in China. Like sheer cash, it subsidizes everything and even leaks out of the country, where it buys up everything and anything. The government has money from its massive sovereign wealth funds ($3.2 trillion last time I checked). Its people has bunches of money from their savings (30% of their disposable income). Its companies (especially its insurance companies) has treeloads of money ($349 billion in premiums annually and $1.85 trillion in total in insurance premiums that have to be invested). And then there’s the Chinese shadow banking system, that weirdass tangle of alternative investment products and who knows how much money’s sloshing around in there.

China always had boatloads of money, but it has seemed lately that all that money has taken the extra effort to hit the rest of the world. It’s no longer bidding up things like oil and commodities (funding despots like Hugo Chavez) - it appears to be hitting companies (anybody remember An Bang?) and especially real estate. It is like a massive money cannon wielded by their government, and they point it at things and suddenly prices go up for everyone else.

I am not sure if this is a good thing - it reminds me of the Japanese real estate bubble, them buying Pebble Beach and Rockefeller center. But China has an unfree government that seems capable of doing utterly insane things - like when they forced companies to buy Chinese stocks to prevent a market crash. They have 1.3 billion people in the world and more money than God. A China like this has never happened before, and I wonder what that means for the rest of the world.