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An investor’s take on the next decade for Chinese tech

Since the start of 2020, innovators have been operating in gruelling market conditions unparalleled in modern times. At the same time, new opportunities for growth have also emerged.

Hundun University posed a deceptively simple question to 15 seasoned investors recently—”Will your sector see positive growth going ahead?” to identify the industries that will leap ahead in a post-COVID-19 world, and future challenges.

The following is a compilation of their insights with slight edits for clarity.

1. Investment Sector, Steven Hu, Founding Partner of INCE Capital

Growing uncertainty about the future of US-China relations and resultant sanctions on smart technology has led to the adoption of more supportive domestic policies to promote scientific and technological innovation, and the market has given this a vote of confidence, with large amounts of capital inflows to sustain growth going forward.

The pandemic has also accelerated existing trends towards greater e-commerce and working from home. As an increasingly large number of company properties are hollowed out, large and capable firms will spy opportunities to further reduce fixed costs and improve their bottom line.

One possible area of growth will be in education. The coronavirus pandemic has accelerated the integration of physical and online education. In the new normal, the ability to conduct lessons online have evolved from a “novelty” into a “necessity.” This means that there is a growing cottage industry promoting online education, with even state schools embracing online lessons. We are now in an optimal period for investment in a sector which can potentially experience revolutionary change going forward.

2. Technological Investment Sector, Zhou Zhifeng, Partner of Qiming Venture Partners

In the post-pandemic era, being able to work from home, and conduct operations and manage work online has become a new normal. Promoting digitization has become a must for all enterprises – a “must have” rather than something “nice to have. The adoption of Artificial Intelligence (AI) in a range of applications have been successful, with notable examples being in ByteDance’s Toutiao or ride-hailing firm Didi. This proven application shows that AI will become one of the major driving forces of growth in many sectors in the coming years.

China is poised to reap the most of this technological revolution due to various factors. Firstly, it already possesses a growing field of intergenerational talent with expertise in areas like AI and semiconductor development, with an increasing number of Chinese nationals educated abroad electing to return to China to work in technological field. It is estimated that the number of engineers in China who are new graduates are nearly twice or triple the number in other major countries.

Capital is another advantage.  Capital investment in China on so-called “deep tech” startups have grown at an annual rate of 80% over the past five years, far surpassing other countries. Finally, there are conducive policies and planning at the national stage. National resources and the development of infrastructure is prioritized for the technological sector, which will reap dividends for the industry going forward.

3. Investment Sector, Partner of IDG Capital

In the era of negative interest rates, investments flow to startups that can best fulfill users’ needs and maximize the value of investments within small units.

4. Investment Sector, Zheng Qingsheng, Partner of Sequoia Capital

With the deepening of digitization efforts, online meetings have become more widely accepted, increasing the productivity of investors and accelerating the digitization of the industry.

In the past, the investment sector was considered one of the most challenging sectors to digitize. Today, however, the ability of investors’ to maximize returns from investments have become tied closely to the ability to improve efficiency, which has aided such efforts.

5. Private Equity Fund of Funds Sector, Zhu Weihao, Founding Partner of The Jiahao Group

With the explosion of the middle class in China, and increasing demands for sound and equitable wealth management, there will be a growth in family-run offices over time. The pandemic has also changed people’s priorities in life, with a greater emphasis on improving the work-life balance, exploring their company’s goals and contribution to the environment.

As a result, ESG investments are likely to become increasingly popular over the time. The key questions facing our industry are how to adapt to such changes and support entrepreneurs, through building confidence and aiding them every step of the way from identifying new investments to exiting from existing ones.

Source: tuchong.com

6. Supply Chains Investment, Zhou Jiale, Partner of Huagai Capital

Before the pandemic, companies were reluctant to share data and more details about the work process on their supply chain and production lines.

However, as orders and supply chains became fragmented during the pandemic, funds were not being paid in advance, while turnaround times stretched into weeks. With the operations of upstream and downstream funds being disrupted or even permanently broken, the demand for greater informatization has greatly increased.

The pandemic has made the need to coordinate between different nodes a supply chain more acute, with only those that can quickly communicate quickly and respond quickly to disruptions being able to withstand the storm. Innovative companies that can enable high-speed communication and introduce in-depth production management processes to reduce operating costs and improve capital turnover will be the center of our focus going forward.

7. Private Equity Secondary Market Sector, Wang Daizong, Partner of Xincheng Investment

The pandemic has led to a sharp fall in liquidity available for firms, and companies and their partners face huge cashflow risks. Unlike the primary market the secondary market in private equity is a huge emerging market with potential opportunities for rapid growth.

From an investment perspective, the pandemic has accelerated digitization, informatization, and the adoption of new technologies and work processes online, and more investors will prioritize investment opportunities in these areas and projects to develop relevant digital infrastructure.

There is also an acceleration in the capital market. The launch of the technology innovation board (STAR market) last June and the liberalization of the listing process for firms have introduced new investment streams for the tech sector, and usher in a golden era for equity investment in China over the coming decade.

8. Investment Sector, Xiong Sanmu, Partner of Whales Capital

One area of optimism before the coronavirus outbreak was the growth in live broadcasts on e-commerce platforms. The pandemic has become a catalyst for this trend, just as it was for the rise of internet e-commerce in 2003 during the Severe Acute Respiratory Syndrome (SARS) Outbreak.

This area is well poised to grow, with back-end aspects like the supply chain for e-commerce and logistical coordination having developed to a point of maturity. At the front-end, there is widespread acceptance of using live broadcasts in a wide variety of applications, from education, entertainment, to e-sports.

Live broadcasts will grow as a medium to market products in the post-pandemic era in two ways. Online influencers like Li Jiaqi, Wei Ya, Xin Youzhi, and even Luo Yonghao will accumulate a larger online audience; while on the other end, small restaurants and shops can increasingly tap on live broadcasts as a conventional marketing tool

The realities of the pandemic has also broken through the last barrier to the transformation of the education sector. With traditional opponents of online education in the government and state schools being forced to promote online education, new companies providing online education services have a window to emerge and offer new services as barriers to entry come down.

For example, Ban Yu (Ipalfish) has developed a free English picture book app to attract new users. Such platforms are able to reach new customers at a fraction of other traditional advertising mediums’ costs.

Online education has honed this skill into an operational advantage, from tapping on social media to reach a large audience at low costs. This has the effect of reducing promotion costs to a tenth, or even less than 5% of the original sum.

Firms will have to start embracing such methods to attract new customers in a digital age. Another area where digitization is poised to reap dividends for potential investors is the food delivery sector, with online tools enabling firms to analyze consumer data, design and optimize the promotion and distribution of products, and better respond to consumers’ ever-changing needs.

9. Investment Sector, Sun Xin, Vice-General Manager of the Shanghai Technological Innovation Fund (Shanghai International Group)

The pandemic has led to a widespread acceptance of online services. The acceleration of digitization traditional industries, and the application of new technology in all walks of life will create new opportunities for tech enterprises in China.

The worsening of Sino-US relations, have resulted in more domestic opportunities for the birth of new tech start-ups, as national policies are adopted favoring import-substitution for technological devices and raw materials. As more talent leave large tech firms to launch their own start-ups, and new liquidity flows into the sector via the STAR board, excellent investment opportunities will start to emerge.

Source: tuchong.com

10. Medium-term Investments, Tian Jiangchuan, Partner of Chuxin Capital

The pandemic has led to the growth of online closed ecosystems for business operations, as employees are forced to work from home, and there has been an explosion in demand for remote assistance from home. The clamor for the use of online collaborative working platforms like Shi Mo, have grown fivefold, for example. While businesses have recognized the efficiency of using such platforms for the sharing and editing of files, many have resisted change to avoid disruptive change.

This is therefore a watershed for the adoption of new online products and evolution of existing ones as businesses and consumers recognize the necessity of embracing digitization. The increasing popularity of Xigua City, an online computer programming education platform for children is an indication of the necessity parents prescribe to having coding skills in this new era.

11. Private Equity Sector, Pu Xiaoyan, Partner of Sequoia Capital

The pandemic has accelerated shocks to the private equity sector by sharply reducing overall capital levels available for funds, while hurting investors’ confidence in long-term deals. It is likely that we will see a large reduction in the number of fund managers in the sector over the coming months and years, and a degree of business consolidation is inevitable. The talent pool and network being cultivated by large institutions have to an extent become a shock absorber for such short-term hits.

At the same time, huge opportunities have also emerged. Our fund’s main strategy has centered on firms embracing the digitization process, especially its use to integrate businesses vertically, such as in areas like AI and medical technology. While offline sectors such as hospitality, traditional retail and aviation have been battered during the pandemic, others like virtual healthcare and education, as well as remote office providers have achieved rapid growth with low customer acquisition costs.

There is no turning back in the short-term, and even if demand for such platforms fall as the economy reopens, we expect a permanent paradigm shift in favor of digitization in a repeat of 2003.

12. Investment Sector, Huang Shaodong, Founding Partner of North Beta Capital

The economic impact of the coronavirus pandemic is still reverberating around the world, from the volatility in the stock market, high unemployment rates, and depressed crude oil prices. The aftershocks of this economic earthquake will be felt in all aspects of business operations in years to come.

Being able to secure one’s cash flow is a necessity in this environment, and companies must focus more on core businesses and cutting unnecessary expenses in this uncertain market. If this means taking an ax to other short-term investments and non-core businesses, then so be it, for survival is key.

Kazuo Inamori, the Japanese management guru and former CEO of Kyocera and Japan Airlines, formerly said: “Make a recession a springboard for future growth.” The same principle applies in this crisis. Businesses must also ensure they do not let this crisis go to waste, by embracing digitization to remedy existing obstacles to efficient work processes and make their companies more agile.

Source: tuchong.com

13. Seed Funding/Technological Investment Sector, Cheng Peng, Partner of THG Ventures

The pandemic has cast a spotlight on the reach and necessity of online businesses today, from our largescale dependence on it. Businesses will have to face up to the inefficiencies in their existing operations, and the lack of high-quality companies and charismatic entrepreneurs remains a problem that has become apparent in this crisis.

14. Investment Sector, Xu Weiya, Partner of  Danhua Capital

In the midst of a crisis, only the fittest will survive, as only self-made entrepreneurs with grit and ability will stand the test and cope with risks. Investment-wise, this crisis has been a baptism by fire, as just like 2008, funds are operating in a challenging environment with limited returns and investment arsenals.

Crisis can create pitfalls and opportunities. Everyone is put under the same pressure, which allows new dynamic firms and startups to emerge. Companies that have showcased their utility in areas like online education and shown their ability to survive in this crisis have the potential to become the next billion-dollar investment opportunity.

Ultimately, the real test lies in transforming an investment philosophy into an executable methodology that can evolve and tap on data. As my mantra goes: “In math, we trust!”

15. Investment Sector, Yang Cheng, Partner of BA Capital

The cost of attracting customers for growing companies have been significantly reduced by up to 10 times owning to behavioral changes caused by the pandemic. A renewed focus on education among consumers will stimulate sectors such as the market for medical and health supplements, as well as consumer goods in greater demand at home.

The key question is whether new consumption habits online will take hold, even after pandemic conditions ease. Some areas of potential growth include appliances for self-grooming and massage at home, as well as disinfecting the house. Additionally, there will be greater clamoring for specialty convenient foods, such as self-heating hotpots and luosifen (a noodle dish originating from Guangxi province made with river snails) instant noodles. Finally, virtual clinics and education options, especially those catering for children will become increasingly popular.

The original article was written by Hundun University, KrASIA is granted to translate and publish.