Globalization in a New Era: How Investors Weigh the New Capabilities of GoGlobal Companies

Consumer Staples Author: EqualOcean News, Notrice Editor: Lina Peng Sep 08, 2023 09:32 PM (GMT+8)

On August 30, the livestream series "EqualOcean Globalization Channel" invited Mr. Tao Yangfeng, Executive Director of 01VC(零一创投), to share the new trends in Chinese companies' overseas expansion and the new capabilities they possess, receiving enthusiastic feedback.


The following is a review of LIVE content, edited by EqualOcean.

EqualOcean:Hello, viewers in the live stream room! Welcome to the EqualOcean Globalization Channel. Today, we have invited Mr. Tao Yangfeng, the Executive Director of 01VC, as our guest. Before we begin, let me provide a brief introduction: 01VC is an early-stage venture capital firm in China that focuses on "driving industrial internet through supply chain upgrades and promoting cross-border internationalization." They have a deep presence in intelligent manufacturing, logistics technology, industrial digitization, and cross-border overseas expansion tracks. 01VC, as an early-stage investor, has invested in unicorns such as Lalamove(货拉拉), HAI ROBOTICS(海柔创新), XTransfer, Xendit, STAR & SEA Group(辰海集团), OKKI(小满科技), Hibobi, Bangbang Robot(邦邦机器人), and more. In the time ahead, we'd like Mr. Tao to share some insights about 01VC and your personal updates.

Tao Yangfeng: 01VC was founded in 2015, focusing on two areas: supply chain technology and international expansion. Today, we see a lot of overlap and convergence between these two areas as more tech companies are getting involved in overseas business. We are also a dual-currency fund with a total size of around USD 300 million, covering investment stages from angel rounds to pre-Series A. I've been with 01VC for about seven to eight years and have been focusing on cross-border internationalization throughout.

EqualOcean: In the past year, the venture capital industry has seen significant adjustments and fluctuations, and there have even been cases of institutions laying off many employees. Mr. Tao, can you share your insights about this during this period?

Tao Yangfeng: In the past few years, especially in the last year or two, the entire VC industry has undergone significant changes. The changes in institutions holding USD-denominated funds and shifts in sectors like consumer and enterprise services are driven by multiple factors, including objective market conditions, inherent characteristics of sectors, and individual company factors. Many startups face significant challenges, and as investment institutions, we also face corresponding challenges, such as some of our previously invested companies facing difficulties in subsequent funding rounds. Of course, some companies continue to perform well, especially in certain niche areas.

From a broader perspective, in the past, there were many exit options for USD-denominated institutions, such as listing on US and Hong Kong stock exchanges. However, in recent years, the channels for overseas listings have not been so smooth, so I think everyone is indeed facing some difficulties. Currently, there is a greater focus on areas leaning towards hard technology, including the two main directions our institution has been deeply involved in. In the past TMT era, investment institutions did not segment the tracks when investing in the internet and consumer sectors. But in the technology sector, every link and aspect is highly specialized, including semiconductors, robotics, materials, new energy, and more, which presents some challenges for investment.

01VC has always been quite focused, and I've been closely following the above-mentioned areas since I joined in 2015, witnessing the ups and downs in the industry.

EqualOcean: You've experienced the downturn of industry.

Tao Yangfeng: That's right. This year, we talk more about cross-border, and the cross-border field has also experienced its ups and downs from 2016 to the present.

EqualOcean: Indeed, we will also discuss that. I heard from your colleagues that this year, your level of activity and frequency of investments have not changed significantly compared to previous years, while many other institutions have shown a "cliff-like decline" in the number of investments. Why has 01VC been able to remain active in this environment?

Tao Yangfeng: In terms of absolute numbers, we may have slightly fewer investments than before, but it's still similar to previous years, which is related to our consistent investment strategy. We have always steadily focused on a few directions, so we are relatively less affected by the overall environment. Some of the hot sectors in the past few years, such as consumer and education in the last two years, although we had some presence, were not our primary investment targets. Overall, we have maintained our consistent pace.

EqualOcean: Mr. Tao, you entered the cross-border field quite early. As it has developed, we rarely use the term "cross-border" anymore, and "going global" has been given a richer meaning: more industries, sectors, and models are going abroad to more diverse destinations. Therefore,EqualOcean prefers to use "globalization" to describe the new era's atmosphere. What is your perception of this change?

Tao Yangfeng: I think it's quite noticeable. In the past, we often talked about cross-border or going global, but today, we often talk about internationalization or globalization, reflecting a change in people's mindset. In the past, many companies expanded overseas to some extent due to passive factors, such as the intense competition among domestic internet giants and the prevalence of "involution." So, how did the earliest wave of cross-border e-commerce start? It started with some overseas students trying to sell small categories and products from China abroad. Even though there were already many billion-dollar sellers on platforms like Amazon, it was not a particularly mainstream direction in the domestic entrepreneurial ecosystem.

Since the pandemic, competition has intensified in various industries in China, so companies have gradually sought to expand their boundaries proactively. When entrepreneurs research the market, they find that from a global perspective, apart from China's massive market with over a billion people, there are many other fields that can be explored abroad. So today, we also see Chinese companies in various industries overseas. For example, we've been talking about cross-border e-commerce for many years. In the past, cross-border e-commerce mainly sold goods on platforms like Amazon, but later, companies started to try independent websites, self-owned brands, and even entered offline channels. Many technology companies ship their products through overseas agents and integrators, such as in the robotics industry.

During the past few years of the pandemic, many retail companies faced challenges in development, but there are still many excellent companies doing well overseas. For example, Miniso(名创优品) and some tea brands. In the enterprise services sector, SaaS may be somewhat exhausting in the domestic market, and revenue reaches a bottleneck at a certain scale, but entrepreneurs have found that payment habits and capabilities in some overseas markets are relatively strong and worth exploring.

Perhaps today, the globalization of many sectors has not yet reached the "blossoming" stage, but many companies have already made the transition from "passive internationalization" to "active internationalization," and the term "going global" reflects the positive attitude of entrepreneurs.

EqualOcean: That's right. Like you mentioned, tea brands, this year we've also seen Luckin(瑞幸咖啡) going to Singapore and HeyTea(喜茶) expanding its overseas franchises.

Tao Yangfeng: Including MIXUE(蜜雪冰城).

EqualOcean: Yes, MIXUE has many offline stores in Southeast Asia, especially in Indonesia, and follows an affordable pricing strategy. In addition, you just mentioned that robotics companies have made going global an important strategic goal this year. So, since last year, in the international market as a whole, including the US and China, we have perceived a clear economic downturn. However, this year, we've noticed an increasingly prominent trend where companies from various industries and at various stages of development are exploring or entering the global market. The expansion of companies' markets and the contraction of the economic environment have formed a stark contrast. Do you think this is a natural progression or a coincidence?

Tao Yangfeng: I think it's a natural progression. Regarding the direction of going global, many people pay attention to export-related data. In May and June of this year, China's export data showed negative year-on-year growth, even reaching around -10%. From a global perspective, the exports of countries like Vietnam, India, and other Southeast Asian nations have also declined this year. Because at the macro level, the economy is not doing particularly well right now, and many industries, especially in some low-end manufacturing sectors, are facing difficulties.

But at the micro level, many companies still have the opportunity to do well. For example, in the automotive sector, in the first quarter of this year, China's automotive exports surpassed Japan, becoming the world's largest automotive exporter, especially in the new energy vehicle sector, where companies are actively seeking international expansion. Despite the macroeconomic challenges, companies are actively expanding into overseas markets, and I think this is a natural process.


EqualOcean: You mentioned that automotive exports are a systemic project, especially with leading companies playing a strong role in the upstream and downstream. Going back to what we just discussed, with more and more industries and companies joining the trend of going global, as an investor, what adaptations and adjustments do you need to make? Are there any changes in the tracks you focus on?

Tao Yangfeng: Now, as more industries expand internationally, it does present challenges for investment institutions. For example, in the e-commerce sector, we used to focus mainly on certain products, but now the investment logic behind e-commerce may need to transcend e-commerce and cover the entire industry chain, with a more pronounced trend toward specialization. I believe what we can do is to stay focused enough and patient enough to delve deep into our areas of interest, extending our reach both upstream and downstream.

EqualOcean: In the past, cross-border e-commerce was more reliant on a combination of operations and traffic. Now, consumer internationalization is more product-centric, with e-commerce platforms, independent websites, and various offline channels blossoming. Companies are returning to product design, defining their brand, understanding their users, and systematizing their operations, and this requires the attention of investors.

Tao Yangfeng: Yes, it does place different demands on entrepreneurial teams.

EqualOcean: Next, we'd like to discuss more specific topics. In the past two to three years, we've seen dramatic changes in the cross-border e-commerce sector, from a rapid growth phase at the beginning of the pandemic to bankruptcies and transformations. Cross-border giants like SHEIN have also made moves this year, such as acquiring a stake in Forever 21 and trying offline initiatives. How should we understand the reshuffling process in the cross-border e-commerce industry?

Tao Yangfeng: I think cross-border e-commerce is currently undergoing a transition from the concept of "cross-border plus e-commerce" to a more comprehensive "omnichannel retail mindset." In the early days of cross-border e-commerce, even though some companies performed well in sales, as you mentioned earlier, their operational capabilities were strong enough, and they benefited from the traffic dividend at that time. Competition was not as fierce, and product prices were relatively low, so as long as you chose the right category or product, you could increase sales. Therefore, this stage saw the emergence of many so-called "merchandising" companies.

But today, there is more emphasis on product quality, and a shift towards "omnichannel retail thinking" is happening. Many "product-focused" companies, such as Ecovacs(科沃斯) and Dreame(追觅), are expanding their online and offline channels overseas. Even companies like Xiaomi(小米), which are not typically defined as "cross-border" companies, generate half of their revenue from overseas.

On the other hand, when it comes to channels, it's easy to take a polarized view. In the early days, there was a craze for cross-border e-commerce, and at a certain point, people thought cross-border e-commerce was too shallow. In my opinion, e-commerce is just a channel, and it allows companies to enter overseas markets relatively quickly. Theoretically, online stores also have no SKU limitations. But many offline channels have certain barriers and restrictions. To introduce new products, you must remove previous items. The operational model offline is also different and relies more on cash flow. Some channels may take more than two months to receive payments or profits. Therefore, it requires patience and competitive products to do well offline. But overall, I think many e-commerce companies are moving towards omnichannel retail. Currently, many companies have both independent websites and e-commerce platforms online while covering various offline channels, including core retail channels and some niche channels.

Another aspect is brand culture. In the past, companies were more willing to invest in effective marketing or advertising, focusing on data metrics like conversion rates and ROI. But today, many companies are also paying attention to branding, storytelling, content marketing, product seeding, and other new forms.

EqualOcean: That's right. Many early cross-border e-commerce companies benefited from the traffic dividend, like Lightinthebox(兰亭集势), SHEIN, and others. However, SHEIN gradually developed other core capabilities in the later stages, such as the unique "small batch, fast response" flexible production model, which allowed them to have broader development prospects. Now, I'd like to ask Mr. Tao, in the context of the gradual maturation of generative AI technology, has there been any systemic change in the main track you invest in - the cross-border enterprise services sector?

Tao Yangfeng: In a broad sense, every industry is embracing AI, not just cross-border. For example, one financial technology company we've invested in has accumulated more and more data, and as its AI capabilities have grown stronger, its risk control system and level have become more mature. Another company in the compliance services sector has also started using AI capabilities in its products to help customers improve conversion rates. Intelligent customer service companies, too, are enhancing their AI capabilities by calling large models. In addition, marketing is an area where AI is widely applied. Many ToB companies are embracing AI and continually exploring AI's commercialization models.EqualOcean: In the field of intelligent customer service, the company that can establish a viable business model and create a data loop first will have a higher chance of success. You mentioned earlier that 01VC is also very focused on opportunities brought by the upgrade of the domestic supply chain, with investments in intelligent manufacturing, logistics technology, and industrial digitization. Could you please elaborate on this for us?

Tao Yangfeng: We started focusing on the upgrade of the internet industry early on, and many of the robot companies in our portfolio began their expansion in areas such as logistics and manufacturing. For example, we invested in AGV companies like HAI ROBOTICS, logistics technology companies like Lalamove, and 3D vision products related to intelligent manufacturing. Overall, our investments revolve around the industry chain, focusing on areas where there is a common demand and commercialization potential.

EqualOcean: Regarding the three directions mentioned earlier - intelligent manufacturing, logistics technology, and industrial digitization - China's industrial form and ecosystem have distinct characteristics compared to overseas markets. How do these companies adjust when they expand abroad?

Tao Yangfeng: I believe the fundamental logic is quite similar. For example, the logic of robots is to assist or replace human labor to improve efficiency, and this fundamental logic has not changed. That's why many Chinese robot companies, including some in our investment portfolio, generate a significant portion of their revenue from overseas markets, often around half or even higher.

From a business perspective, the logic is also simple. Labor costs are rising, especially in developed regions like Europe, the United States, Japan, and South Korea, where labor costs are even higher. So, the demand in this area is often even stronger, and many robot companies have higher profit margins in overseas markets.

Of course, another challenge is that these products are not like consumer-oriented products that can be used immediately. If I buy a smartphone or a power bank today, I don't need much guidance; I can use them right away. These B2B products often require some pre-sales and after-sales customer service, so localization is necessary.

EqualOcean: Understood. Developed countries face high labor costs, while emerging markets, although they have lower labor costs, often lack a skilled workforce, which creates a high demand for industrial automation and digitization in these regions. You mentioned the trend of companies expanding into regions like the Middle East and Latin America, which were not closely monitored in the past. Could you share the reasons behind this shift?

Tao Yangfeng: I think the logic behind it is also simple. Initially, everyone focused on the European and American markets because they are mature and developed. Then, many people also looked at Southeast Asia because it is close to China. However, over time, people realized that there were some challenges in Southeast Asia, mainly because it is a region with relatively lower per capita income.

People are now looking at regions like the Middle East and Latin America because these countries have strong local consumption power, and they are known to have money. For example, in Latin America, countries like Mexico have a per capita GDP of around USD 10,000, which is similar to China's, and some people have good purchasing power. Additionally, in terms of population, these regions have a significant number of potential customers. For instance, SHEIN generates a significant proportion of its profits in the Middle East, and it has performed well in the region.

We have also seen some leading companies achieve good results in emerging markets, so more and more companies are beginning to enter these markets. I think it's a process. The world is vast, and when companies take their first steps overseas, they usually focus on a specific area, and then they have other choices later on.

EqualOcean: From our observation, on the one hand, companies are no longer simply looking for markets; they are now allocating resources globally. When they enter these new markets, they not only seek potential blue oceans or growth markets but also establish local capabilities, such as finding suitable local partners. The form of going global has changed significantly, which in turn affects the choice of destination for companies. You mentioned earlier that some companies have performed well in emerging markets, including TikTok's popularity in Latin America.

This year, we have seen many manufacturing companies doing well in these two regions. We know that the Middle East is very interested in our new energy industry, as well as digital infrastructure related to cloud computing and AI in pharmaceuticals, which are cutting-edge fields, and they are willing to introduce Chinese companies to establish local subsidiaries. In Latin America, many Chinese solar companies are considering establishing factories there. You mentioned that Mexico has excellent natural resources for photovoltaics, and they have introduced favorable policies. Additionally, entering Mexico can provide access to the North American Free Trade Agreement (NAFTA) and its tax benefits, so some companies want to enter the U.S. market through this route.

During our previous interview, the Chairman of the Hofusan Industrial Park(华富山工业园) in Mexico mentioned that companies that have relocated from the United States to Mexico have already established basic infrastructure, so in emerging markets, the industrial infrastructure is relatively good. Could you please share what traits you have observed that make companies more successful in localization among the many companies that operate on a global scale?

Tao Yangfeng: I think a key point is how to truly localize and how to effectively use local people and manage local teams. There are many different paths to achieving this. My advice to many startup companies is to do localization, and the CEO should go and see for themselves first, to truly feel the local environment. We should not just stay in China. Even though the information gap is not large now, relying solely on reading a few reports and watching videos online will not be effective. You should go to the local area in person to see and experience it.

For example, in 2016, when Chinese companies were investing in Southeast Asian internet companies, all the reports said, "High 4G coverage, high internet penetration." Reading all these reports gave a positive impression, but actually experiencing it locally was different. Southeast Asia has significant regional differences.

For example, in terms of network coverage, although the overall 4G network coverage rate is high, the signal quality is poor in many places, resulting in a poor overall experience for watching short videos, especially for heavy content. Therefore, user retention for short video apps was low in those areas.

EqualOcean: You're absolutely right. Having a firsthand experience is crucial. In Southeast Asia, e-commerce has been thriving in recent years, but the local consumption landscape is still primarily offline. As you mentioned earlier, founders should definitely spend some time on the ground, and perhaps even live in the area for a while – we completely agree with this approach. Some founders may choose to find a local partner or hire an overseas business manager, but these methods also come with their fair share of risks. Founders may not need to be directly involved in every operation, but they must have genuine insights and a feel for the market during the decision-making process. We've also observed that many people have been venturing abroad since the end of last year, conducting market research and exploring opportunities.

Tao Yangfeng: I think that's quite accurate. From a company management perspective, decisions often require the CEO or the partners to make, especially in startups. In many aspects of the business, if the CEO lacks a strong understanding of the local context, decision-making can be challenging, and the decisions made might be based on guesswork. For instance, one person may suggest one approach, while another suggests something different – who do you listen to? This is why many companies struggle with localization, as they face difficulty in assessing the accuracy of information during the decision-making process, often maintaining a perspective rooted in their home country.

Another important aspect is having a localized team. Many companies adopt a model similar to Huawei's(华为) expatriation approach. However, a common issue arises when employees sent abroad still predominantly interact with people from their home country due to language and communication barriers. Despite being physically located abroad, they remain within their comfort zone, failing to truly immerse themselves in the overseas environment. In summary, if anyone is serious about localization, my advice is twofold: first, spend time on the ground to gain a firsthand experience, and second, engage extensively with the local people.

EqualOcean: You're absolutely right. The ultimate goal for a company entering a foreign market should always be to integrate into the mainstream market. It's best to initiate this process as early as possible. As for the final question today, we believe that in this era of China and the United States operating in parallel, China is bound to produce a wave of consumer brands and technology companies over the next decade that will truly possess global influence and reputation. What are your thoughts on this trend, Mr. Tao?

Tao Yangfeng: China still holds a significant advantage in many fields, including supply chains and innovation. We have industrial clusters, skilled engineers, and a labor force that enables us to produce high-quality products at a lower cost. From this perspective, I am quite supportive of this trend. The only thing to watch out for is how we can take each step firmly and diligently.

EqualOcean: Thank you, Mr. Tao, for sharing your insights. We look forward to your continued contributions in sharing insights about expanding into foreign markets in the future.

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