This post comes following Aziz’s recent research trip to China.

This post comes following Aziz’s recent research trip to China.

I was contacted by Sean Stannard-Stockton, President and CIO at San Francisco-based Ensemble Capital. He asked whether I would be interested in joining a group of investors to visit companies in China. I confirmed instantly! I could have visited China many times in the past as a tourist, but I wanted something more substantial. I wanted to learn how the economy worked. This was the kind of trip I’d been waiting for.

Sean convinced Rui Ma and Ying-Ying Lu, hosts of the wonderful podcast China TechBuzz to organize the trip with the help of local guides. They did a fabulous job. We landed in Beijing a week ago; sixteen investors from all over the world, representing investment firms with a total of $20 billion in assets under management. Over the subsequent week, we met with 28 companies and managed to squeeze in a little bit of sight-seeing to boot.

 Here you go, in no particular order:

 1.       There is a lot more nuance to everything we read and hear about China. Not only because of the size of both its geography and population, but also because of the disparity in income across cities and within them.

 2.       Economically, there are two Chinas. In big cities, it is very much a developed country. In smaller cities, it is a developing one. The disparity is huge. Not only does this impact incomes, but also the habits and characteristics of people. This mental model is essential to understand why things happen and where.

 3.       Another big difference is age. The older generations are very heavy savers. The younger generations have fully embraced consumerism and have become what the older generations refer to as “Months Out People” as in, they live month-to-month.

 4.       The youth are also very nationalistic.

 5.       Young people are hungry for success and work ridiculously long hours. Having moved from smaller cities and villages to the big cities looking for work, many lead lonely lives. They therefore seek community anywhere they can find it. That mostly happens online.

 6.       Young people are obsessed with money, their social capital and standing. The way their peers perceive them drives a lot of their behavior. This generates the need for signaling by consuming a significant amount of luxury goods.

 7.       An average Chinese person spends six hours a day on their smartphone. They shop, make payments, borrow, play games, watch TV, and do everything else on it. China is not “mobile first,” it’s mobile ONLY.

 8.       The scale and speed of everything are without parallel. One of the companies we visited can check what’s popular on social media now, add the item to its mobile store and start accepting orders almost immediately, then manufacture and ship it out to nearby customers within a mere 24 hours.

 9.       The quality of the country’s infrastructure is phenomenal.

 10.   When you start from scratch with no legacy to deal with, you end up in a very different, and arguably much better, place. We observed this in the varied business models and the different methods of monetization compared to Western peers. People often talk about China leapfrogging technologies, but that assumes they moved linearly on the same path as the West. They did not. They’re operating in a three-dimensional board.

 11.   Companies are optimistic and believe that there is a lot of growth ahead of them. They’re also anxious about the slowdown over the past 12 months because of the trade war and expect it to last for a couple of years.

 12.   Technology companies have been mostly left to do their own thing with little interference from the government. They also operate in a sector with no competition.

 13.   In sectors with SOEs, start-ups struggle to compete. All of the credit goes from SOE banks to big SOE companies, neither of which are efficient. The system that has succeeded in lifting hundreds of millions out of poverty over the past 30 years is struggling to move forward. Technology companies are trying to circumvent this by becoming digital banks. They’ve made tremendous strides, especially in consumer finance.

 I learned a lot during this week and these lessons are by no means comprehensive, nor are my insights unique, so please don’t take them as anything more than varied thoughts about China from a single visit. Perhaps the biggest lesson I’ve learned is how little I, and most of what I’ve read about China in the West, truly “gets” this country.