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Going to sea: In the Western Hemisphere, look for sweeter milk and honey

author:36 krypton

Editor's note: In the article "New Overseas Era: China's Founders, Conquering the World", we introduced an invisible outlet in China's primary market recently: it is no longer an investment supply chain overflow of China's overseas, but an investment in Chinese entrepreneurs, or the spillover of China's venture capital ecology. Among them, as the representative of the new fund, Skyline Ventures Liang Jie also expressed his keen observation of this wind direction.

In the following article, Liang Jie discussed with us in more detail a problem: in the choice of sea region, he believes that there is a region that is despised - the Western Hemisphere, especially Latin American countries. Why? See below.

Wen | Liang Jie, founder of Skyline Ventures

We have entered a time of turmoil and uncertainty. Since the beginning of this year, the attention of the capital market, especially the primary market, to the theme of going to sea has increased significantly, which is closely related to the macro environment.

When we prepared Skyline Ventures more than a year ago to find and determine the theme of the first phase of the fund, we did not anticipate the various black swan events that will occur today. However, there are two things we ask ourselves over and over again and are convinced:

1. China's talent and Knowhow accumulation in digital technology, as well as the export of supply chain advantages to the world, is a certain and long-term event;

2. In the context of the escalation of Sino-US confrontation, supporting Chinese export-oriented or overseas Chinese local entrepreneurship meets the needs of both sides, and the political risk is greatly reduced.

U.S.-China decoupling or confrontation if inevitable; Going overseas or overseas Chinese teams to start local businesses, and the companies that have grown out of them, SHEIN, TikTok, Shopee, J&T, MiHoYo, may be our dollar fund practitioners, the bridge connecting China and the United States (or China and the Western financial system), in this era of few stars.

A lot of people say that we are experiencing a wave of "anti-globalization", and this is an angle. But from the perspective of technological innovation, once the digital age enters, it is irreversible. Facebook, Google, TikTok have brought us into the era of digital globalization. If we look at it from the perspective of a hundred or even hundreds of years, "anti-globalization" is only a small wave in the process of information revolution leading mankind forward.

The 20th century was undoubtedly the American century. By the end of the 19th century, the United States had surpassed the United Kingdom to become the world's largest GDP; But it wasn't until 50 years later, in 1944, that the Bretton Woods system pegged the dollar to gold as a global currency, and the creation of the World Bank and the International Monetary Fund, that the United States was established as a world leader.

Today China is catching up with the U.S. in the world's largest GDP position. The rise of great powers has been accompanied by a large number of commodity and cultural exports, which are already happening in large quantities, and China's globalization can be imagined to be a process that lasts for decades or even hundreds of years.

We even believe that even in the most extreme confrontation, China and the United States still need, and even more so, these market-oriented connections based on their respective needs and comparative advantages. This should be the basic consensus of people in business.

Status quo: comparative advantage

China's accumulated comparative advantages in global competition can be summed up in two sentences:

1. China has the highest level of digital infrastructure and application capabilities in the world - the engineer dividend

2. China has the world's highest level of supply chain and industrial cluster - the industrial chain dividend

These two points are like hardware and software, the two sides of the physical and virtual, which complement each other. The advantages of China's supply chain are much discussed, while the advantages of Chinese engineers seem to be ignored to some extent. China's supply chain produces the most efficient and cost-effective "physical" goods, while Chinese engineers "virtualize" physical goods through digital infrastructure and applications; The two components complement each other to build the highest level of digital economy in the world. E-commerce is the perfect representative of the integration of China's supply chain (hardware) and digital (software) applications, resulting in an exponential chemical reaction.

Going to sea: In the Western Hemisphere, look for sweeter milk and honey

online retail sales

China's e-commerce dominates the world and is inseparable from China's manufacturing center in the world. Amazon as the world's most influential e-commerce, founded in 1994 (1994) before Taobao (2003) nearly ten years, the U.S. population is 1/4 of China, but the U.S. per capita GDP is more than 4 times that of China, why over time Amazon's global transaction scale is now less than half of Taobao Tmall? Considering that Amazon's US traffic accounts for only 47% of the world's total, Amazon's domestic transaction size in the United States is only 1/4 of that of Taobao Tmall.

The reason is simple, almost all the supply chains of goods related to people's livelihood are in China. Taking SHEIN as an example, when shipping from China to the United States, the fulfillment cost under the AOV (unit price) of $65 accounts for 30% ($20), and the arrival time is 3-7 days. Pro, do you know the average logistics cost per Taobao shipping to Chinese users? $0.3-0.5 (RMB 2-3), even if the unit price of Taobao customers is $30 (JD is higher, PDD is lower, Taobao Tmall is more representative), logistics costs account for only 1%. That is to say, the manufacturers and consumers of Chinese e-commerce are together, which can be considered basically cost-free. Such a frictionless e-commerce industry that is close to the ideal state can leave the rest of the world farther away in efficiency, as you can imagine.

Going to sea: In the Western Hemisphere, look for sweeter milk and honey

Major platforms GMV

Amazon is the representative of shelf e-commerce, that is, users come to Amazon to have a clear demand. Amazon searched for a transaction ratio of 70-80%, Taobao Tmall only 40%. Users come to Taobao and don't know what to buy, so they go shopping. Most consumers, especially female consumers, have no clear needs and buy them when they are shopping. Taobao talked about the content of this a few years ago, and then today's Vibrato, Kuaishou, Taobao live broadcast these formats. At Amazon you don't know what to buy? Just think about it in the search box and think again. Otherwise, you walk along the shelves, and walk over again. Concubines really have no content.

Wish once had the dream of making an overseas version of non-standard goods of all categories of e-commerce (the American version of Taobao or PDD) to compete with Amazon (the American version of JD), in fact, there are considerable opportunities, but the supply chain is not done well. Today, SHEIN re-challenges Amazon's position as a global e-commerce leader through the high-frequency category of clothing in its own way. The non-standard e-commerce provided by SHEIN is unique in the world. In other words, in order to enjoy the highest level of supply chain and digitalization in China, overseas consumers need to add 30% of the cost of fulfillment and an additional 3-5 days. Even so, the richness and price of goods offered by SHEIN can still crush Zara and H&M, not to mention Amazon.

Speaking of supply chains, in the first half of this year, there were many voices saying that Southeast Asia, represented by Vietnam, would threaten China's manufacturing industry, and I thought that their main expression was not concern about the supply chain, but dissatisfaction with the anti-epidemic policy at that time. Vietnam has a population of 100 million, equivalent to China's Jiangxi + Guangxi, with a per capita GDP of less than $4,000, about half of Jiangxi and Guangxi. A more backward Jiangxi + Guangxi with an annual GDP growth of 10% and a 30% increase in exports is a great threat to China? Looking at the data, the first Vietnamese export growth but the trade surplus is very small (the width and depth of the industry is not enough, most of the incoming processing), the second united states and China are arguing the mouth, but the body is very honest, In 2021, China's exports increased by 21%, in the first half of this year, China's exports increased by 14% to the United States, an increase of 19%, and the recent surplus has reached a new high. In the turbulent years, everyone is talking about replacing China, but the reality is that China's supply chain advantages are still expanding. The chart below shows the trade balances of major countries in May 2022; Is it possible for the general manufacturing industry to return to the United States?

Going to sea: In the Western Hemisphere, look for sweeter milk and honey

Trade balances of major countries

Due to the population of Vietnam is only 100 million, it is determined that the depth of the industry is limited, and it is impossible to compete with China in an all-round way; From a competitive point of view, India may be closer. India's population size is sufficient, the challenges are similar, low-end manufacturing can be done, core components such as chip LCD panel batteries often need to be purchased from China, the transition of these industrial chains often means decades or even decades of manufacturing and Knowhow accumulation, may also need the continuous output of Chinese masters.

Of course, from a longer-term perspective, this is a trend. For China, it is very healthy to climb to the high-end with the transfer of low-end "shallow goods" industries to India and Southeast Asia, as well as the "deep goods" such as brand culture, lifestyle, and digital infrastructure represented by SHEIN/TikTok.

What does it take to climb to the top? Engineer Bonus. In the industrial chain, the low-end is the labor dividend, and the high-end is the engineer dividend. SHEIN's analysis is already a lot, and TikTok's success is also representative of the engineer dividend. The matching algorithm between douyin and TikTok's short video content and users involves tens of thousands of markers (that is, manually labeling the content), behind which there are a large number of cheap and high-quality college students and engineers in China. Zoom has a team of more than 500 engineers in China, and the average income is about 1/3 of that in the United States. Silicon Valley already has one of the highest talent densities in the world. But there's been a trend lately where many U.S. tech companies are hiring cheap engineers remotely, and there are even startups that specialize in solving the shortening problem for U.S. engineers. Let's look at the numbers:

Going to sea: In the Western Hemisphere, look for sweeter milk and honey

Global STEM graduates

The number of qualified engineers in China is more than the top 10 other countries combined, which is a monopoly advantage. The high level of digital application in China has given them a training ground. On the one hand, we see the desire of countries and regions represented by the United States for Chinese engineers; On the other hand, we are seeing an outflow of talent from the highly developed digital industry in China. The peak period of China's Internet practitioners is around 20 million, assuming that the adjustment of this wave of Internet companies is 10-20%, there will be millions of Internet engineers who need to find a new direction. Going to sea with the advantages of China's digital technology is a natural choice.

Two chances: They all stand on the overpass and see a completely different world

China's advantages are clear, but what everyone sees is often different. Zhang Yiming said that cognition is the biggest differentiation, because all other factors of talent capital will flow with the trend and insight of the times. When they made headlines, NetEase Sina did not understand them, Baidu did not understand them; When they did Douyin, Tencent did not understand them. In the competition with these people, they were the weak side in terms of talent and financial resources at the beginning.

The same is true in the field of going to sea, and we look at the development history of successful companies that have come out. Let's go back to a clip from 5 years ago. Tiktok was just launched 5 years ago and was a baby. We compared the revenue of SHEIN, Anker, J&T, and Zhiou from 2017-2021.

These companies are successful representatives of overseas clothing, consumer electronics, logistics, and furniture. Interestingly, 5 years ago in 2017, SHEIN and Anker's revenue was very close, both at 3-4 billion. Having heard some of the friends around me who had seen SHEIN earlier, it was impossible to tell that SHEIN would be a better company than Anker or even Jollychic.

Going to sea: In the Western Hemisphere, look for sweeter milk and honey

Shein and Anker

Going to sea: In the Western Hemisphere, look for sweeter milk and honey

J&T and Zhi Ou

This curve is, of course, a posteriometric. SHEIN's competitor at the time was clothing station group player StyleWe, Orderplus; If you put their curves in, you can imagine a parallel line. Everyone's starting point seems to be the same, all of them are selling cheap clothing from China in a certain overseas "flyover" (independent station group, that is, shooting a gun to change a place).

They were all standing on the overpass, and the world they could see was completely different.

Have you ever been deceived by buying goods on the overpass? I have, don't ask me what I bought Ha, anyway the next day you can't find him anymore. SHEIN not only wants to operate in good faith, solve the trust of the general station group sellers (the goods are not on the right board or even do not ship), but also wants to move into the mall opposite the overpass. Through 10 years of hard work, SHEIN not only moved into shopping malls (independent stations and APP), but also turned itself into the largest shopping mall. SHEIN has created an extremely efficient flywheel through digital marketing and digital supply chain, becoming the largest non-standard self-operated e-commerce, and changing the rules of the game in the fast fashion clothing industry.

This is also similar to the contrast between the early PDD and Xu Xianyi rice. The starting point seems to be selling fruits, but the spelling goods say that what I want to do is social e-commerce, and spelling fruit is only the first category of e-commerce that I verify to let users get benefits through social communication. This has been made very clear in the first version of BP. After verification, I continued to operate the platform and then expand the category. More importantly, compared with the huge traffic dividend of Taobao Tmall, Huang Zheng has seen it very clearly in 2015.

Going to sea: In the Western Hemisphere, look for sweeter milk and honey

Pinduoduo

It looks like they are all selling fruit, and the world they see is completely different.

If a company sees only commodity arbitrage, then his path will be narrow. On the contrary, when he thinks about whether he can change an industry through technology or innovation, the road is long and wide.

Technology (or innovation)-driven, scalable, and self-augmenting are essential elements of a good business. The superposition of these elements usually has the opportunity to change the nature of the industry. Michael Moritz once said that few companies have the opportunity to become platforms, and their strengths are reinforced by partners who are not on the company's payroll. I translated it into the vernacular: When you lie down, is someone else helping you make money? WeChat, Taobao, Douyin are definitely there, all Chinese are helping them make money every day. Some brands also have distributors who are helping them make money; Chain restaurants seem to be very difficult.

Going to sea: In the Western Hemisphere, look for sweeter milk and honey

The foundation of a good business

He said it in 2013, and he was talking about Stripe. At the time, Stripe was valued at $2b, and his description of Stripe was AWS for Payment, and he had even asserted that Stripe would enter the temple of the epoch-making company in which Sequoia invested. SHEIN/TikTok undoubtedly meet this standard and change the nature of the industry.

J&T is mentioned above because J&T does a seemingly "traditional" logistics business, but it is actually a typical technology-driven self-reinforcing network. The value of this network lies in the coverage density of outlets, the informatization of allocation, etc.; The threshold for starting the network (that is, the establishment of backbone outlets such as trunk lines, warehouses, sorting centers and other backbones + countless terminals) is also quite high, usually starting from 1 billion yuan. J&T can start a network in Southeast Asia and China, in addition to funds, the support of large customers such as Shopee/PDD is also a necessary condition. Through advanced information technology capabilities and more benign cooperation with franchisees, J&T has reduced the fulfillment cost of Southeast Asian e-commerce logistics from $3-4 to $1-1.5 in a few years, which has undoubtedly changed the development process of Logistics and even the e-commerce industry in Southeast Asia.

So, as an entrepreneur, no matter what industry you stand in, do you see a completely different world? Can your presence change the nature or course of the industry to some extent?

Zone 3: Looking ahead, where are the opportunities?

In the global market, Europe, the United States and Australia are developed markets, and others can be called emerging regions. On the theme of going to sea, many institutions basically exclude developed regions and focus directly on emerging markets because emerging markets mean room for growth. I don't agree with this line of thinking, but let's start with emerging markets.

India, which is one of the biggest hits in emerging markets, has been constrained by India's political exclusion of Chinese companies in recent years, and most people and most institutions have become very cautious. Xiaomi, oppo, vivo, and oneplus, which already have a lot of business, have also been greatly affected.

Due to its geographical proximity to China and the success story of Shopee/J&T, Southeast Asia has become the hottest spot for going to sea. Many people regard Southeast Asia as China's proxy, although it is not denied that there will still be great development of Southeast Asia's digital economy in the next few years, but considering the current heat of Southeast Asia and the mismatched valuation level, our institution basically does not look at Southeast Asia. It is not that we are not optimistic, we have no competitive advantage Ha.

We want to make a clear call for everyone to go to Latin America. The reason, compared with Southeast Asia, is a simple four sentences:

1. Larger scale and stronger purchasing power,

2. The digital infrastructure is more backward,

3. More moderate competition,

4. Large companies invest.

Going to sea: In the Western Hemisphere, look for sweeter milk and honey

Comparison of countries

Latin America's GDP size ($4 Trillion) is larger than southeast Asia ($3 Trillion) and India ($3 Trillion); GDP per capita is significantly higher than in Southeast Asia and India, and closer to China. Moreover, in terms of linguistic system, Latin America has only two languages, Spain and Portugal. The absolute scale of Latin American e-commerce is comparable to that of Southeast Asia, and the penetration rate lags behind Southeast Asia, let alone China.

Going to sea: In the Western Hemisphere, look for sweeter milk and honey

E-commerce penetration rate of countries

In terms of the two-legged payment and logistics rates of digital infrastructure, Latin America is the highest in the major markets. With a take rate of 4% and less than 1/10 of its in China, dlocal is one of the world's most profitable payment companies. The cost per order of logistics is $3-3.5, compared with the $42 AOV of Meli, the largest local e-commerce company, and the proportion of logistics in transactions is the highest in the world at 8%. Competitively, latin America's VC financing reached an all-time high ($18b) in 2021, and the ratio of GDP was much lower than that of Southeast Asia ($25b) and India ($38b).

Going to sea: In the Western Hemisphere, look for sweeter milk and honey

Pictured above

Many people are worried that Latin America's digitalization is so backward and the friction is so great, will the flywheel of digitalization not turn up? No, first of all, the digital economy in Latin America has entered the fast lane of development, and major countries such as Brazil have taken very critical steps (such as the Brazilian government's launch of online payment PIX similar to China's UnionPay). In addition, large companies such as Shopee/J&T/SHEIN regard Latin America as the most important new growth point, burning money for infrastructure, so it is only a matter of time before they will do it.

Of course, insufficient investment in talent is indeed an important problem in Latin America in addition to macro fluctuations. A simple comparison of 330 million Chinese in the United States is 550w, and Mexico's 126 million Chinese population is only 20-30w. So, don't just stare at Southeast Asia, bravely go to Latin America.

Finally, let's talk about mature markets in Europe and the United States. North America is actually the most overlooked region, North America is the world's strongest single market with the strongest purchasing power, and there are many Chinese. Only by relying on large supermarkets such as China and the United States in the world can there be a chance to give birth to a company of 100 billion US dollars. The crowns of the sea, SHEIN and TikTok, are also centered on North America. Compared with North America, other overseas markets are second-rate or even third-rate markets.

We were surprised to find that countless Chinese VCs went to sea to see India, Southeast Asia and even Africa, but few institutions said that they should focus on North America. Sequoia China does not look at North America is a geographical reason, even if the Chinese team in North America is not China's territory, Southeast Asia is sequoia India's territory. It's not that you don't want to see it, it's that you don't want to see it This is also a comparative advantage for institutions like us that focus on going to sea.

There is still a lot of room for the digitization process in North America. The contrast between Amazon and Taobao Tmall in the front is typical. The success of SHEIN/TikTok gave the Chinese great confidence that Chinese companies could achieve such great success in mainstream digital commerce in North America, the center of the universe, that even SHEIN took a completely air force rather than land warfare approach. In fact, understanding the difference between Amazon e-commerce and Chinese e-commerce, the emergence of SHEIN/Shopee/Wish is inevitable, and it is a question of who will appear at what time.

Similarly, once TikTok came out and spread, it was definitely a product of Facebook. First of all, the user ceiling of short videos far exceeds the graphics and texts (Douyin 600 million dau, headlines less than 200 million, Weibo 200 million +). Secondly, TikTok is also a much more advanced product than Facebook in business, first of all, the algorithm will give users more accurate content, and secondly, the commercialization efficiency of user instant feedback is the highest. The arpu of the TikTok single mau has surpassed Facebook. The size of the user is larger, and the commercial value of the single user is higher, so there is no doubt that TikTok will be more valuable than Facebook. Note that I'm talking about TikTok> Facebook, not that TikTok is bigger than the Facebook four-piece set Facebook +Instagram+Facebook Messenger+Whatsapp.

And Chinese companies that started local businesses in North America have also come out of successful cases such as Zoom, Doordash, Weee!, and Grubmarket. The Chinese have a fairly obvious advantage in the operational business based on digitalization, application innovation (engineer dividend), and the ultimate pursuit of efficiency (hard-working). Although they founded the company in the early days, most of them were not on the chase list of mainstream U.S. VCs. Zoom founded the Tsinghua Entrepreneurs Association in 2011 with money, and the mainstream VCs represented by Sequoia did not come in until before going public in 2017. Weee! Founded in 2015, the early days are also to take amino, iFly, micron and other Chinese or Chinese VC money.

Today, when the low-hanging fruit has been basically removed, there are still many opportunities to go overseas and do digital infrastructure in the local area. We have a simple summary internally: developed countries do supply, and the global market does infrastructure. Deliver products to developed countries, build infrastructure for the world.

Going to sea: In the Western Hemisphere, look for sweeter milk and honey

Developed countries do supply, and the global market does infrastructure

Whether it is in China, the sea people who are eager to try it on the other side of the ocean; Or the Founders of Chinese who are overseas and expect to enter the mainstream business battlefield as a non-mainstream ethnic group such as Asians; If you are like J&T's Li Jie at the end of 2015, with the intention of not returning to China or not giving up if you do not play a day in the local area, we are waiting for you here.